**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

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

**FORM 10-Q**
| **(Mark One)**                                                                                                                                                                                                                                         |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                             |
| **ý****Quarterly Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                                            |
| ** **                                                                                                                                                                                                                                             |
| **For the  Quarter Ended March 31, 2007**                                                                                                                                                                                                              |
| ** **                                                                                                                                                                                                                                             |
| **or**                                                                                                                                                                                                                                                 |
| ** **                                                                                                                                                                                                                                             |
| **o****Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                                                |
| ** **                                                                                                                                                                                                                                             |
| **For the  transition period from                     to                  ** |

 

**CommissionFile Number 000-09273**

**MOCON, INC.**

(Exact name 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 executive offices)      (Zip  code) |

 

**(763) 493-6370**

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

YES x  NOo

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer:  o                  Acceleratedfiler:  o                            Non-accelerated filer:  x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

YES o  NOx

5,482,129Common Shares were outstanding as of April 30, 2007.

 

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MOCON, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

For the Quarter Ended March31, 2007
|                                                                                                              | ** ** | **Page  Number** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------|
| PART I. FINANCIAL  INFORMATION                                                                               |       |             |
|                                                                                                         |       |             |
| Item 1. Financial  Statements                                                                                |       |             |
| Consolidated Balance  Sheets  March 31, 2007 (Unaudited) and December 31, 2006                          |       | 1                |
|                                                                                                         |       |             |
| Consolidated  Statements of Income (Unaudited)   Three months ended March 31, 2007 and 2006                  |       | 2                |
|                                                                                                         |       |             |
| Consolidated  Statements of Cash Flows (Unaudited)  Three months ended March 31, 2007 and 2006               |       | 3                |
|                                                                                                         |       |             |
| Notes to  Consolidated Financial Statements (Unaudited)                                                      |       | 4-10             |
|                                                                                                         |       |             |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations          |       | 11-20            |
|                                                                                                         |       |             |
| Item 3. Quantitative  and Qualitative Disclosures About Market Risk                                          |       | 20               |
|                                                                                                         |       |             |
| Item 4. Controls and  Procedures                                                                             |       | 20-21            |
|                                                                                                         |       |             |
|                                                                                                         |       |             |
| PART II. OTHER INFORMATION                                                                                   |       |             |
|                                                                                                         |       |             |
| Item 1A. Risk Factors                                                                                        |       | 22               |
|                                                                                                         |       |             |
| Item 2. Unregistered  Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity  Securities |       | 22               |
|                                                                                                         |       |             |
| Item 6. Exhibits                                                                                             |       | 23               |
|                                                                                                         |       |             |
| Signatures                                                                                                   |       | 24               |
|                                                                                                         |       |             |
| Exhibit  Index                                                                                               |       | 25               |

 

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

*All trademarks or trade namesreferred to in this report are the property of their respective owners.*

----

PART I.  FINANCIAL INFORMATION

Item 1.       Financial Statements

MOCON, INC. AND SUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS
| ** **                                                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                        | ** ** | **(Unaudited)**    | ** ** | **(Audited)**         | ** ** |
| ASSETS                                                                                                                                            |       |               |       |                  |       |
| Current assets:                                                                                                                                   |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                        |       | $                  | 3,479,620  |                  | $          | 3,549,042 |   |
| Marketable  securities, current                                                                                                                   |       | 8,523,213          |       | 8,710,390             |       |
| Trade accounts  receivable, less allowance for doubtful accounts of $158,149 in 2007 and  $179,861 in 2006                                        |       | 4,688,529          |       | 4,384,808             |       |
| Other  receivables                                                                                                                                |       | 171,535            |       | 166,697               |       |
| Inventories                                                                                                                                       |       | 3,494,051          |       | 3,619,644             |       |
| Prepaid expenses                                                                                                                                  |       | 247,688            |       | 251,953               |       |
| Deferred income  taxes                                                                                                                            |       | 340,125            |       | 340,125               |       |
| Total current  assets                                                                                                                             |       | 20,944,761         |       | 21,022,659            |       |
|                                                                                                                                              |       |               |       |                  |       |
| Marketable  securities, noncurrent                                                                                                                |       | 265,000            |       | 377,118               |       |
|                                                                                                                                              |       |               |       |                  |       |
| Property, plant  and equipment, net of accumulated depreciation of $4,604,582 in 2007 and  $4,496,696 in 2006                                     |       | 1,544,972          |       | 1,556,984             |       |
|                                                                                                                                              |       |               |       |                  |       |
| Other assets:                                                                                                                                     |       |               |       |                  |       |
| Goodwill                                                                                                                                          |       | 3,096,317          |       | 3,096,317             |       |
| Technology  rights and other intangibles, net                                                                                                     |       | 600,458            |       | 624,917               |       |
| Other                                                                                                                                             |       | 210,257            |       | 199,251               |       |
| Total other  assets                                                                                                                               |       | 3,907,032          |       | 3,920,485             |       |
|                                                                                                                                              |       |               |       |                  |       |
| TOTAL ASSETS                                                                                                                                      |       | $                  | 26,661,765 |                  | $          | 26,877,246 |   |
|                                                                                                                                              |       |               |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                        |       |               |       |                  |       |
| Current  liabilities:                                                                                                                             |       |               |       |                  |       |
| Accounts payable                                                                                                                                  |       | $                  | 1,344,968  |                  | $          | 1,688,846 |   |
| Accrued  compensation and vacation                                                                                                                |       | 1,012,000          |       | 1,286,316             |       |
| Earnout payable                                                                                                                                   |       | —             |       | 574,568               |       |
| Other accrued  expenses                                                                                                                           |       | 348,823            |       | 320,797               |       |
| Accrued product  warranties                                                                                                                       |       | 233,279            |       | 246,737               |       |
| Accrued income  taxes                                                                                                                             |       | 609,707            |       | 289,895               |       |
| Dividends  payable                                                                                                                                |       | 411,038            |       | 410,196               |       |
| Total current  liabilities                                                                                                                        |       | 3,959,815          |       | 4,817,355             |       |
|                                                                                                                                              |       |               |       |                  |       |
| Noncurrent  liabilities:                                                                                                                          |       |               |       |                  |       |
| Obligations to  former employees                                                                                                                  |       | 100,915            |       | 99,918                |       |
|                                                                                                                                              |       |               |       |                  |       |
| Total  liabilities                                                                                                                                |       | 4,060,730          |       | 4,917,273             |       |
|                                                                                                                                              |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                                       |       |               |       |                  |       |
| Capital stock –  undesignated – authorized 3,000,000 shares                                                                             |       | —             |       | —                |       |
| Common stock –  $0.10 par value. Authorized 22,000,000 shares; issued and outstanding  5,480,504 shares in 2007 and 5,469,275 shares in 2006 |       | 548,051            |       | 546,928               |       |
| Capital in  excess of par value                                                                                                                   |       | 1,405,462          |       | 1,218,115             |       |
| Retained  earnings                                                                                                                                |       | 20,459,181         |       | 20,036,869            |       |
| Accumulated  other comprehensive gain                                                                                                             |       | 188,341            |       | 158,061               |       |
| Total  stockholders’ equity                                                                                                                  |       | 22,601,035         |       | 21,959,973            |       |
|                                                                                                                                              |       |               |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                  |       | $                  | 26,661,765 |                  | $          | 26,877,246 |   |

 

See accompanying notes to consolidated financial statements.

1

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MOCON, INC. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF INCOME

(Unaudited)
| ** **                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **March 31,**               | ** ** |
| ** **                                             | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                   |       |                             |       |   |   |
| Sales:                                                 |       |                             |       |   |   |
| Products                                               |       | $                                | 6,487,171  |   | $ | 6,081,098 |   |
| Consulting services                                    |       | 389,378                          |       | 437,814 |   |
| Total sales                                            |       | 6,876,549                        |       | 6,518,912 |   |
|                                                   |       |                             |       |   |   |
| Cost of sales:                                         |       |                             |       |   |   |
| Products                                               |       | 2,677,641                        |       | 2,475,246 |   |
| Consulting services                                    |       | 258,533                          |       | 225,545 |   |
| Total cost of sales                                    |       | 2,936,174                        |       | 2,700,791 |   |
|                                                   |       |                             |       |   |   |
| Gross profit                                           |       | 3,940,375                        |       | 3,818,121 |   |
|                                                   |       |                             |       |   |   |
| Selling, general  and administrative expenses          |       | 2,228,887                        |       | 1,919,140 |   |
|                                                   |       |                             |       |   |   |
| Research and  development expenses                     |       | 535,520                          |       | 453,519 |   |
|                                                   |       |                             |       |   |   |
| Operating income                                       |       | 1,175,968                        |       | 1,445,462 |   |
|                                                   |       |                             |       |   |   |
| Other income                                           |       | 127,383                          |       | 155,297 |   |
|                                                   |       |                             |       |   |   |
| Income from continuing operations before income  taxes |       | 1,303,351                        |       | 1,600,759 |   |
|                                                   |       |                             |       |   |   |
| Income taxes                                           |       | 470,000                          |       | 488,225 |   |
|                                                   |       |                             |       |   |   |
| Income from continuing operations                      |       | 833,351                          |       | 1,112,534 |   |
|                                                   |       |                             |       |   |   |
| Gain from  discontinued operations, net of tax         |       | —                           |       | 22,225 |   |
|                                                   |       |                             |       |   |   |
| Net income                                             |       | $                                | 833,351    |   | $ | 1,134,759 |   |
|                                                   |       |                             |       |   |   |
| Basic net income  per common share:                    |       |                             |       |   |   |
| Income from continuing operations                      |       | $                                | 0.15       |   | $ | 0.21 |   |
| Gain from discontinued operations                      |       | —                           |       | — |   |
| Basic net income per common share:                     |       | $                                | 0.15       |   | $ | 0.21 |   |
|                                                   |       |                             |       |   |   |
| Basic weighted average common shares outstanding       |       | 5,473,018                        |       | 5,404,917 |   |
|                                                   |       |                             |       |   |   |
| Diluted net  income per common share:                  |       |                             |       |   |   |
| Income from continuing operations                      |       | $                                | 0.15       |   | $ | 0.21 |   |
| Gain from discontinued operations                      |       | —                           |       | — |   |
| Diluted net income per common share:                   |       | $                                | 0.15       |   | $ | 0.21 |   |
|                                                   |       |                             |       |   |   |
| Diluted weighted  average common shares outstanding    |       | 5,697,248                        |       | 5,404,917 |   |

 

See accompanying notes to consolidated financial statements.

2

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MOCON, INC. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)
| ** **                                                                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                          | ** ** | **March 31,**               | ** ** |
| ** **                                                                          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                              |       |                             |       |   |   |
| Net income                                                                          |       | $                                | 833,351    |   | $ | 1,134,759 |   |
| Gain from discontinued operations, net of tax                                       |       | —                           |       | (22,225 | ) |
| Income from continuing operations                                                   |       | 833,351                          |       | 1,112,534 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:  |       |                             |       |   |   |
| Share-based compensation expense                                                    |       | 101,430                          |       | 45,369 |   |
| Loss (gain) on disposition of long-term assets                                      |       | 6,101                            |       | (92,345 | ) |
| Depreciation and amortization                                                       |       | 146,856                          |       | 189,197 |   |
| Deferred income taxes                                                               |       | (12,171                          | )          | (16,690 | ) |
| Changes in operating assets and liabilities, net of  effect of divestiture in 2006: |       |                             |       |   |   |
| Trade accounts receivable                                                           |       | (300,677                         | )          | 127,812 |   |
| Other receivables                                                                   |       | (4,573                           | )          | (5,358 | ) |
| Inventories                                                                         |       | 129,124                          |       | 56,913 |   |
| Prepaid expenses                                                                    |       | 4,305                            |       | 41,956 |   |
| Accounts payable                                                                    |       | (343,328                         | )          | (84,829 | ) |
| Accrued compensation and vacation                                                   |       | (277,247                         | )          | (198,194 | ) |
| Other accrued expenses                                                              |       | 27,915                           |       | 77,818 |   |
| Accrued product warranties                                                          |       | (14,250                          | )          | (21,000 | ) |
| Accrued income taxes                                                                |       | 321,956                          |       | 195,422 |   |
| Net cash provided by operating activities                                           |       | 618,792                          |       | 1,428,605 |   |
|                                                                                |       |                             |       |   |   |
| Cash flows from  investing activities:                                              |       |                             |       |   |   |
| Proceeds from sale of subsidiary                                                    |       | —                           |       | 478,721 |   |
| Purchases of marketable securities                                                  |       | (1,741,656                       | )          | (1,586,664 | ) |
| Proceeds from sales or maturities of marketable  securities                         |       | 2,039,919                        |       | 2,010,560 |   |
| Cash paid for acquisitions                                                          |       | (574,568                         | )          | (433,339 | ) |
| Purchases of property and equipment                                                 |       | (91,026                          | )          | (121,017 | ) |
| Proceeds from sale of property and equipment                                        |       | —                           |       | 18,858 |   |
| Purchases of patents and trademarks                                                 |       | (24,004                          | )          | (22,966 | ) |
| Other                                                                               |       | (1,718                           | )          | (1,718 | ) |
| Net cash (used in) provided by continuing operations                                |       | (393,053                         | )          | 342,435 |   |
| Net cash provided by discontinued operations                                        |       | —                           |       | 22,225 |   |
| Net cash (used in) provided by investing activities                                 |       | (393,053                         | )          | 364,660 |   |
|                                                                                |       |                             |       |   |   |
| Cash flows from  financing activities:                                              |       |                             |       |   |   |
| Proceeds from the exercise of stock options                                         |       | 87,039                           |       | 260,518 |   |
| Purchases and retirement of common stock                                            |       | —                           |       | (258,125 | ) |
| Dividends paid                                                                      |       | (410,196                         | )          | (405,533 | ) |
| Net cash used in financing activities                                               |       | (323,157                         | )          | (403,140 | ) |
|                                                                                |       |                             |       |   |   |
| Effect of  exchange rate changes on cash                                            |       | 27,996                           |       | 23,706 |   |
|                                                                                |       |                             |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                               |       | (69,422                          | )          | 1,413,831 |   |
|                                                                                |       |                             |       |   |   |
| Cash and cash  equivalents:                                                         |       |                             |       |   |   |
| Beginning of period                                                                 |       | 3,549,042                        |       | 2,889,323 |   |
| End of period                                                                       |       | $                                | 3,479,620  |   | $ | 4,303,154 |   |
|                                                                                |       |                             |       |   |   |
| Supplemental disclosures  of cash flow information:                                 |       |                             |       |   |   |
| Cash paid during the period for income taxes                                        |       | $                                | 160,216    |   | $ | 309,322 |   |
|                                                                                |       |                             |       |   |   |
| Supplemental  schedule of noncash investing and financing activities:               |       |                             |       |   |   |
| Unrealized holding loss on available-for-sale  securities                           |       | $                                | (1,032     | ) | $ | (2,342 | ) |
| Dividends  accrued                                                                  |       | $                                | 411,038    |   | $ | 405,532 |   |

 

See accompanying notes to consolidated financial statements.

3

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MOCON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited)

Note 1 – Consolidated Financial Statements

Theconsolidated balance sheet as of March 31, 2007, and the consolidatedstatements of income and cash flows for the three-month periods ended March 31,2007 and 2006 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 March 31, 2007, and for all periods presented, have beenmade.  The results of operations for thethree-month period ended March 31, 2007 are not necessarily indicative ofoperating results for the full year.

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted. It is suggested that these consolidated financial statements be read inconjunction with the consolidated financial statements and notes included inour Annual Report on Form 10-K for the fiscal year ended December 31,2006, previously filed with the Securities and Exchange Commission.

We operate in a singleindustry segment:  the developing,manufacturing, and marketing of measurement, analytical and monitoring productsused to detect, measure, and analyze gases and chemical compounds for, andproviding related consulting services to, customers in the barrier packaging,food, pharmaceutical, and other industries throughout the world.

*Principles of Consolidation*

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

*Foreign Currency Translation*

The financialstatements for operations outside the United States are maintained in theirlocal 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*

The preparationof consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

4

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*NewAccounting Pronouncements*

In June 2006, the FASBratified the Emerging Issues Task Force (EITF) consensus on EITF Issue 06-3, *How Taxes Collected From Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement*(that is,gross versus net presentation) (EITF 06-3). The scope of EITF 06-3 includes any tax assessed by a governmentalauthority that is directly imposed on a revenue-producing transaction between aseller and a customer, and provides that a company may adopt a policy ofpresenting taxes either gross within revenue or on a net basis.  For any such taxes that are reported on agross basis, a company should disclose the amounts of those taxes for eachperiod for which an income statement is presented if those amounts aresignificant.  This statement is effectivefor financial reports for interim and annual reporting periods beginning afterDecember 15, 2006.  EITF 06-3 becameeffective for us as of January 1, 2007. We collect various sales and value-added taxes on certain products andservice sales, which are accounted for on a net basis.

In September 2006, the FASBissued SFAS 157, *Fair Value Measurement* (SFAS157).  The standard provides guidance forusing fair value to measure assets and liabilities.  SFAS 157 clarifies the principle that fairvalue should be based on the assumptions market participants would use whenpricing an asset or liability and establishes a fair value hierarchy thatprioritizes the information used to develop those assumptions.  Under the standard, fair value measurementswould be separately disclosed by level within the fair value hierarchy.  The statement is effective for us beginningin 2008; however, early adoption is permitted. We have not yet determined the impact, if any, that the implementationof SFAS 157 will have on our financial position, results of operations or cashflows.

In February 2007, the FASBissued SFAS 159, *The Fair Value Option for Financial Assetsand Financial Liabilities – Including an amendment of FASB Statement 115*(SFAS159).  This statement permits entities tochoose to measure many financial instruments and certain other items at fairvalue. The objective is to improve financial reporting by providing entitieswith the opportunity to mitigate volatility in reported earnings caused bymeasuring related assets and liabilities differently without having to applycomplex hedge accounting provisions. SFAS 159 is effective as of the beginning of fiscal years that beginafter November 15, 2007.  We have not yetdetermined the impact, if any, that the implementation of SFAS 159 will have onour financial position, results of operations or cash flows.

*Prior Period Revisions*

 

Certain prior period amounts in the Consolidated Statement of CashFlows for the quarter ended March 31, 2006 have been revised to conform to thecurrent period presentation.  Theserevisions increased cash flows from operating activities by $433,339 anddecreased cash flows from investing activities by the same amount.  In addition, we will revise the 2005 and 2006Consolidated Statements of Cash Flows in future SEC filings.  Specifically, net cash provided by operatingactivities previously reported in the Consolidated Statement of Cash Flows forthe year ended December 31, 2005, will increase by $223,432 to $3,331,325, andnet cash used in investing activities will increase by $223,432 to$1,865,771.  Net cash provided byoperating activities previously reported in the Consolidated Statement of CashFlows for the year ended December 31, 2006, will decrease by $21,379 to $4,956,818,and net cash used in investing activities will decrease by $21,379 to$3,311,152.  These revisions are beingmade to correct errors in the classification of certain annual earnout paymentsmade in 2005, 2006 and the first quarter of 2007 in connection with anacquisition completed in January 2004. The amounts were previously reported as a component of cash flow fromoperations rather than cash flow from investing activities.  These corrections have no effect on theConsolidated Balance Sheets or Consolidated Statements of Income for any priorperiods involved.

 

Note 2 – Inventories

Inventories consist of the following:
|                    | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------|------------|--------------------------|------------|-----------------------------|------------|
| Finished  products |       | $                        | 455,416    |                        | $          | 526,918 |   |
| Work-in-process    |       | 1,206,779                |       | 1,261,119                   |       |
| Raw materials      |       | 1,831,856                |       | 1,831,607                   |       |
|               |       | $                        | 3,494,051  |                        | $          | 3,619,644 |   |

 

Note 3 – Net Income Per Common Share

Basic net income per commonshare is computed by dividing net income by the weighted average number ofshares of common stock outstanding during the period.  Diluted net income per common

5

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share is computed using thetreasury stock method to compute the weighted average common stock outstandingassuming the conversion of potential dilutive common shares.

The following table presentsa reconciliation of the denominators used in the computation of net income percommon share – basic, and net income per common share – diluted, for the firstquarters ended March 31, 2007 and 2006:
|                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                              | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Weighted shares  of common stock outstanding – basic               |       | 5,473,018                                        |       | 5,404,917 |   |
| Weighted shares  of common stock assumed upon exercise of stock options |       | 224,230                                          |       | — |   |
| Weighted shares of  common stock outstanding – diluted             |       | 5,697,248                                        |       | 5,404,917 |   |

 

Note 4 – Goodwill and Intangible Assets

As of March 31,2007 and December 31, 2006, unamortized goodwill amounted to$3,096,317.  Other identifiableintangible assets (all of which are being amortized except projects in process)are as follows:
| ** **                  | ** ** | **As of March 31, 2007** | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|
| ** **                  | ** ** | **Carrying  Amount**                         | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                     |       | $                                            | 725,408    |   | $ | (299,193 | ) | $ | 426,215 |   | 10  to 17 years |   |
| Trademarks and  trade names |       | 399,886                                      |       | (252,149 | ) | 147,737 |   | 5  to 17 years |   |
| Technology  rights          |       | 184,008                                      |       | (179,627 | ) | 4,381 |   | 7  to 10 years |   |
| Other  intangibles          |       | 698,596                                      |       | (676,471 | ) | 22,125 |   | Less  than 1 year to 5 years |   |
|                        |       | $                                            | 2,007,898  |   | $ | (1,407,440 | ) | $ | 600,458 |   |   |   |

 
| ** **                  | ** ** | **As of December 31, 2006** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **Carrying  Amount**                            | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                     |       | $                                               | 710,549    |   | $ | (289,430 | ) | $ | 421,119 |   | 10  to 17 years |   |
| Trademarks and  trade names |       | 397,338                                         |       | (233,993 | ) | 163,345 |   | 5  to 17 years |   |
| Technology  rights          |       | 184,008                                         |       | (173,055 | ) | 10,953 |   | 7  to 10 years |   |
| Other  intangibles          |       | 698,596                                         |       | (669,096 | ) | 29,500 |   | Less  than 1 year to 5 years |   |
|                        |       | $                                               | 1,990,491  |   | $ | (1,365,574 | ) | $ | 624,917 |   |   |   |

 

Totalamortization expense for the three-month periods ended March 31, 2007 and 2006was $42,362 and $71,714, respectively. Estimated amortization expense for the remainder of 2007 and each of thefour succeeding fiscal years based on the intangible assets as of March 31,2007 is as follows:

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|                      | ** ** | **Estimated  Expense** | ** ** |
|----------------------|------------|------------------------|------------|
| 2007                 |       | $                      | 111,392    |   |
| 2008                 |       | $                      | 108,579    |   |
| 2009                 |       | $                      | 40,156     |   |
| 2010                 |       | $                      | 32,629     |   |
| 2011                 |       | $                      | 19,052     |   |
| 2012 and  thereafter |       | $                      | 89,974     |   |

 

### Note 5 – Marketable Securities

Available-for-salesecurities are recorded at fair value. Unrealized holding gains and losses on available-for-sale securities areexcluded from income and are reported as a separate component of stockholders’equity until realized.  At March 31, 2007and March 31, 2006, this resulted in a net cumulative unrealized loss of $2,509and $9,474, respectively, within stockholders’ equity.  A decline in the market value of anyavailable-for-sale security below cost that is deemed other than temporary ischarged to income resulting in the establishment of a new cost basis for thesecurity.

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.
|                                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Net income                                    |       | $                                                | 833,351    |   | $ | 1,134,759 |   |
| Foreign currency  translation adjustment      |       | 31,312                                           |       | 33,459 |   |
| Net unrealized  loss on marketable securities |       | (1,032                                           | )          | (2,342 | ) |
| Comprehensive income                          |       | $                                                | 863,631    |   | $ | 1,165,876 |   |

 

Note 7 – Warranty

We provide a warranty formost of our products.  Warranties are forperiods ranging from ninety days to one year, and cover parts and labor fornon-maintenance repairs, at our location. Operator abuse, improper use, alteration, damage resulting fromaccident, or failure to follow manufacturer’s directions are excluded fromwarranty coverage.

Warranty expense is accruedat the time of sale based on historical claims experience.  Special warranty reserves are also accruedfor special rework campaigns for known major product modifications.  We also offer service contracts for selectproducts when the factory warranty period expires.

Warranty provisions andclaims for the three-month periods ended March 31, 2007 and 2006 were asfollows:

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|                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Beginning  balance           |       | $                                                | 246,737    |   | $ | 327,015 |   |
| Warranty  provisions         |       | 34,326                                           |       | 118,538 |   |
| Warranty claims              |       | (47,784                                          | )          | (138,610 | ) |
| Decrease due to  sale of LCI |       | —                                           |       | (33,248 | ) |
| Ending balance               |       | $                                                | 233,279    |   | $ | 273,695 |   |

 

Note 8 – Income Taxes

In June 2006, the FASBissued Interpretation 48, *Accounting for Uncertaintyin Income Taxes* (FIN 48). This interpretation, as required to be adopted on January 1, 2007,clarifies the accounting for uncertainty in income taxes recognized in anentity’s financial statements in accordance with SFAS 109, *Accountingfor Income Taxes*.  Itprescribes a recognition threshold and measurement attribute for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn.  Implementation of FIN 48 onJanuary 1, 2007 resulted in no adjustment to the liability for unrecognized taxbenefits.  As of the date of adoption,the total amount of unrecognized tax benefits was $204,000, all of which wouldfavorably impact the effective income tax rate in future periods if recognized.  Included in this liability for unrecognizedtax benefits is an estimate for interest and penalties totaling $60,000, bothof which we classify as a component of income tax expense.   It is expected that the amount ofunrecognized tax benefits for positions which we have identified will notchange significantly in the next twelve months.

MOCON, Inc. or one of itssubsidiaries files income tax returns in the U.S. Federal jurisdiction andvarious state  and foreign jurisdictions.  With limited exceptions, we are no longersubject to income tax examinations by taxing authorities for taxable yearsbefore 2003 in the case of a U.S. Federal examination or state examinations.

Note 9 – Share-BasedCompensation

Asof March 31, 2007, we have reserved 398,800 shares of common stock for optionsand other share-based incentive awards that are still available for grant underour 2006 stock incentive plan, and 840,846 shares for options that have beengranted under either the 2006 stock incentive plan, the 1998 stock option planor the 1992 stock option plan but have not yet been exercised.  We issue new shares of common stock uponexercise of stock options.  There were no options granted in the firstquarter 2007.

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

|                                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Total cost of  share-based compensation                     |       | $                                                | 101,430    |   | $ | 45,369 |   |
| Amount  capitalized in inventory and property and equipment |       | —                                           |       | — |   |
| Amounts charged  against income, before income taxes        |       | 101,430                                          |       | 45,369 |   |
| Amount of income  tax benefit recognized in earnings        |       | (13,126                                          | )          | — |   |
| Amount charged against  net income                          |       | $                                                | 88,304     |   | $ | 45,369 |   |

 

8

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| Impact on net income per  common share: |   |   |   |   |   |
|-----------------------------------------|--------|--------|--------|--------|--------|
| Basic                                   |   | $      | 0.02   |   | $      | 0.01 |   |
| Diluted                                 |   | $      | 0.02   |   | $      | 0.01 |   |

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholesoption-pricing model (Black-Scholes).  Weuse historical data to estimate the expected price volatility, expected optionlife and expected forfeiture rate.  Webase our estimate of expected volatility for awards granted on daily historicaltrading data of our common stock for a period equivalent to the expected termof the award.  The risk-free interestrate is based on the U.S. Treasury yield curve in effect at the time of grantfor the estimated life of the option.  Weestimate the expected term consistent with historical exercise and cancellationactivity of our previous share-based grants with a ten-year contractualterm.  Forfeitures are based onhistorical experience.  The dividendyield is calculated based upon the dividend payments made during the prior fourquarters as a percent of the average stock price for that period.

A summary of the optionactivity for the first three months of 2007 is as follows:
|                                   | ** ** | ** **         | ** ** | **Weighted-**      | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|-----------------------------------|------------|--------------------|------------|--------------------|------------|-----------------|------------|---------------|------------|
| ** **                        | ** ** | ** **         | ** ** | **average**        | ** ** | **average**     | ** ** | ** **    | ** ** |
| ** **                        | ** ** | ** **         | ** ** | **Exercise**       | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                        | ** ** | **Number of** | ** ** | **Price per** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                        | ** ** | **Shares**         | ** ** | **Share**          | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at  December 31, 2006 |       | 853,875            |       | $                  | 8.52       |            | 6.6        |          | $          | 3,359,907 |   |
| Options granted                   |       | —             |       | —             |       | —          |       |          |       |
| Options cancelled                 |       | (1,800             | )          | 10.24              |       | —          |       |          |       |
| Options expired                   |       | —             |       | —             |       | —          |       |          |       |
| Options exercised                 |       | (11,229            | )          | 7.75               |       | —          |       |          |       |
| Outstanding at  March 31, 2007    |       | 840,846            |       | $                  | 8.53       |            | 6.4        |          | $          | 3,593,194 |   |
|                              |       |               |       |               |       |            |       |          |       |
| Exercisable at March  31, 2007    |       | 619,687            |       | $                  | 7.70       |            | 5.4        |          | $          | 3,159,967 |   |

 

The total intrinsic value ofoptions exercised was $53,720 and $72,649 during the first quarters of 2007 and2006, respectively.

A summary of the status ofour unvested option shares as of March 31, 2007 is as follows:
|                                | ** ** | ** **         | ** ** | **Weighted-**       | ** ** |
|--------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                     | ** ** | ** **         | ** ** | **Average**         | ** ** |
| ** **                     | ** ** | **Number of** | ** ** | **Grant-Date**      | ** ** |
| ** **                     | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
| Unvested at  December 31, 2006 |       | 235,209            |       | $                   | 2.95       |   |
| Options granted                |       | —             |       | —              |       |
| Options cancelled              |       | (1,800             | )          | 2.72                |       |
| Options vested                 |       | (12,250            | )          | 3.39                |       |
| Unvested at March 31,  2007    |       | 221,159            |       | $                   | 2.93       |   |

 

As of March 31, 2007, therewas $648,172 of total unrecognized compensation cost related to unvestedshare-based compensation granted under our plans.  That cost is expected to be recognized over aweighted-average period of 1.5 years. The total fair value of option shares vested during the first three-monthperiods ended March 31, 2007 and 2006 was $41,528 and $6,300, respectively.

9

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Note 10 – Sale of Subsidiary

In February 2006, we soldall the outstanding common stock of Lab Connections, Inc. (LCI), a wholly-ownedsubsidiary.  Pursuant to the saleagreement, we received a net cash payment of approximately $479,000 in exchangefor all the outstanding shares of LCI. As a result of the sale, we recognized an after-tax gain ofapproximately $92,000 in the first quarter 2006.  This gain was reflected in the other incomeline on the consolidated statements of income.

Note 11 – Discontinued Operations

In July 2005, we soldsubstantially all of the assets used in our discontinued Vaculok productline.  Pursuant to the sale agreement, wereceived an up-front payment of $125,000, along with the right to receive anadditional amount upon the occurrence of certain post-closing events.  In the first quarter 2006, we received anadditional $35,000 related to this previous sale.  The after-tax effect of this additionalpayment is a gain of $22,225 which is reflected on the gain from discontinuedoperations line of the consolidated statements of income.

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Resultsof 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 one in Germany.  We use a direct sales force and independentsales representatives to market our products and services in the United States,Canada and Germany and use a network of independent sales representatives tomarket and service our products and services in other foreign countries.

Prior to 1998, we expanded our business primarilythrough internally developing new products and technologies and licensingproducts and technology.  Since 1998, wehave supplemented our internal growth through acquisitions that have providedus with additional technologies, products and product developmentexpertise.  During the last two years, wedivested two product lines to allow us to better concentrate on our coreproduct lines, particularly our gas detection and measurement products.

We completed our most recent acquisition effectiveJanuary 1, 2004, by acquiring Paul Lippke Handels-GmbH Prozess- undLaborsysteme (Lippke), which is located in Germany.  We acquired all of the shares of Lippke for abase purchase price plus three earnout payments based on the net profits ofLippke in each of the years 2004, 2005 and 2006, with a minimum payment amountof 100,000 euros per year.  We made thefinal earnout payment in the first quarter 2007 in the amount of $574,568.

In February 2006, we sold the capital stock of LabConnections, Inc. for approximately $479,000 in cash. As a result of the sale,we recognized an after-tax gain of approximately $92,000 in the first quarter2006.

Effective January 1, 2006, we adopted Statement ofFinancial Accounting Standards 123 (revised), *Share-BasedPayment* (SFAS 123 (R)) which requires the measurement andrecognition of compensation expense for all share-based payment awards made toemployees and directors.  As a result, in2006 and 2007 our results of operations reflected compensation expense for newstock options granted and vested during those years and the unvested portion ofprevious stock option grants which vested after January 1, 2006.  The total amount charged to operations in thethree-month periods ended March 31, 2007 and 2006 was $88,304 and $45,369,respectively.

### ***Results ofOperations***

The following table sets forth the relationshipbetween various components of our results of operations, stated as a percent ofsales, for the three-month periods ended March 31, 2007, and 2006.

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|                                                        | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **March 31,**               | ** ** |
| ** **                                             | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Sales                                                  |       | 100.0                            |       | 100.0 |   |
| Cost of sales                                          |       | 42.7                             |       | 41.4 |   |
| Gross profit                                           |       | 57.3                             |       | 58.6 |   |
| Selling, general  and administrative expenses          |       | 32.4                             |       | 29.4 |   |
| Research and  development expenses                     |       | 7.8                              |       | 7.0 |   |
| Operating income                                       |       | 17.1                             |       | 22.2 |   |
| Other income                                           |       | 1.8                              |       | 2.4 |   |
| Income from continuing operations before income  taxes |       | 18.9                             |       | 24.6 |   |
| Income taxes                                           |       | 6.8                              |       | 7.5 |   |
| Income from continuing operations                      |       | 12.1                             |       | 17.1 |   |
| Gain from  discontinued operations, net of tax         |       | —                           |       | 0.3 |   |
| Net income                                             |       | 12.1                             |       | 17.4 |   |

 

### *Comparisonof Financial Results for the Three-Month Periods Ended March 31, 2007 and 2006*

### *Sales*

Sales for the three-month period ended March 31,2007 were $6,876,549, up 5% compared to $6,518,912 for the sameperiod in 2006.  On a geographical basis,sales increased 8% in our foreign markets and 3% in our domestic markets.  On a product line basis, this increase wasprimarily due to increased sales of our gas analyzer and headspace products,offset somewhat by a decrease in sales of our weighing and pharmaceuticalproducts.  There were no significantprice increases or decreases during the first quarter 2007 compared to the sameperiod in 2006.

The following tablesummarizes total sales by product line for the three-month periods ended March31, 2007 and 2006.
|                                                           | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **March 31,**               | ** ** |
| ** **                                                | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Permeation  Products and Services                         |       | $                                | 3,459,165  |   | $ | 3,496,238 |   |
| Gas, Headspace,  and Other Analyzer Products and Services |       | 3,072,014                        |       | 2,631,765 |   |
| Other  Instruments and Services                           |       | 345,370                          |       | 390,909 |   |
| Total sales                                               |       | $                                | 6,876,549  |   | $ | 6,518,912 |   |

 

The following table setsforth the relationship between various components of domestic and foreign salesfor the three-month periods ended March 31, 2007 and 2006.

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|                     | ** ** | **Three Months Ended** | ** ** |
|---------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **March 31,**               | ** ** |
| ** **          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Domestic sales      |       | $                                | 3,195,933  |   | $ | 3,100,384 |   |
| Foreign sales:      |       |                             |       |   |   |
| Europe              |       | 1,294,827                        |       | 1,524,400 |   |
| Asia                |       | 1,706,000                        |       | 1,398,046 |   |
| Other               |       | 679,789                          |       | 496,082 |   |
| Total foreign sales |       | 3,680,616                        |       | 3,418,528 |   |
| Total sales         |       | $                                | 6,876,549  |   | $ | 6,518,912 |   |

 

*Permeation Products and Services* – Sales of our permeationproducts and services, which accounted for approximately 50% and 54% of ourconsolidated first quarter sales in 2007 and 2006, respectively, decreased 1%during the first quarter 2007 compared to the same period in 2006.  Although total sales were comparable betweenthe two quarterly periods, our domestic shipments declined by 12% but wereoffset by an increase in foreign shipments. International sales of permeation products and services accounted for70% of the total sales of this product group in the first quarter 2007.

*Gas, Headspace and Other Analyzer Products and Services*– Sales of ourgas, headspace, and other analyzer products, which accounted for 45% and 40% ofour consolidated first quarter sales in 2007 and 2006, respectively, increased17% during the first quarter 2007 compared to the same period in 2006.  Within this group, sales of our gas analyzerproducts through our Baseline subsidiary increased 48% due in part to shipmentsof our total hydrocarbon analyzers and gas chromatographs sold primarily forwell-logging and indoor air quality applications.  In addition, sales of our new BevAlertTM product for the carbonated beverage industrycontributed to the sales increase.

Sales of our packaging products, which includeheadspace analyzers and leak detection equipment, increased 22% for the firstquarter 2007 compared to the same quarter in 2006.  The increase was primarily in our domestic marketsand was largely attributable to sales of our PAC CHECK® series of analyzers.  In addition, sales of our new PAC CHECK® 800 series for the food industry contributedto the sales increase.

Sales of our weighing and pharmaceutical productsdecreased 48% as a result of decreased demand in both domestic and foreignmarkets.  Our weighing and pharmaceuticalproducts group consists of a relatively fewer number of higher priced productscompared to our other product groups and will typically experience significantfluctuations in demand.

*Other Instruments and Services*– Sales in our otherinstruments and services category, which accounted for 5% and 6% of ourconsolidated first quarter sales in 2007 and 2006, respectively, decreased 12%in the first quarter 2007 compared to the same quarter in 2006.  The decrease was primarily due to a lowerdemand for our consulting and analytical testing services.

On a geographical basis, domestic and foreign salesaccounted for 46% and 54%, respectively, of our consolidated first quartersales in 2007, and 48% and 52%, respectively, for the same period in 2006.

### *GrossProfit*

The gross profit margins for our products were 58.7%and 59.3% for the three-month periods ended March 31, 2007 and 2006,respectively.  The slightly lower marginfor the first quarter 2007 was due in part to an increase in the expenserelated to excess and obsolete inventory in the first quarter 2007 and also dueto the higher percentage of our gas analyzer products that were sold in thefirst quarter 2007 which typically carry a 

13

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lower profit margin.

The gross profit margins for our consulting serviceswere 33.6% and 48.5%, respectively, for the first quarters ended March 31, 2007and 2006.  This decrease was primarilydue to decreased demand for our consulting and analytical testing serviceswhich reduced the ability to fully absorb the related fixed overhead costs.

*Selling,General and Administrative Expenses*

### Selling,general and administrative (SG&A) expenses in the three-month period endedMarch 31, 2007 were $2,228,887, or 32.4% of sales, compared to $1,919,140, or29.4% of sales in the first quarter 2006. The increase in SG&A expenses was primarily due to increased costsin the first quarter 2007 for stock option expensing, expenses related toopening an office in China,  andincreased foreign sales and marketing expenses.

### *Researchand Development Expenses*

Research and development (R&D) expenses were$535,520, or approximately 7.8% of sales, in the first quarter 2007, comparedto $453,519, or approximately 7.0% of sales, in the same period of 2006.  This planned increase in R&D expendituresis considered by management to be necessary to develop new products to expandin our niche markets.  For theforeseeable future, we expect to allocate on an annual basis approximately 6%to 8% of sales to research and development.

### *OtherIncome*

Other income for the first quarter ended March 31,2007 of $127,383 consisted of interest income of $134,605, offset by a loss of$7,222 on foreign currency exchange. Other income for the three months ended March 31, 2006 consisted of a$92,345 gain on the sale of Lab Connections, interest income of $80,977 andother income of $1,287, offset by a loss on foreign currency exchange of$19,312.  Interest income increased forthe first quarter ended March 31, 2007 compared to the same period in 2006 dueto higher average yields and higher average interest bearing investments.

### *Income TaxExpense*

Our provision for income taxes from continuingoperations was 36.1% of income before income taxes for the first quarter endedMarch 31, 2007, compared to 30.5% of income before income taxes for the firstquarter ended March 31, 2006.  The ratefor the first quarter 2006 was favorably impacted by the resolution of aproposed income tax assessment in the state of New Jersey, which reduced incometax expense by approximately $50,000. Also, because the sale of Lab Connections generated a taxable loss,there was no tax provision applicable to the $92,345 gain that was realized inthe first quarter 2006.  During the firstquarter 2007, we implemented FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes* (FIN 48).  This implementation did not have an impact onearnings.  Based on current operatingconditions and income tax laws, we expect the tax rate for the remainingquarters of 2007 to be in the range of 33% to 37%.  This rate fluctuates over time based on theincome tax rates in the various jurisdictions in which we operate, and based onthe level of profits in those jurisdictions.

### *Net Income*

Net income was $833,351 in the first quarter 2007,compared to $1,134,759 in the first quarter 2006.  Diluted net income was $0.15 per share in thefirst quarter 2007 compared to $0.21 per share in the first quarter 2006.

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*Liquidityand 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 decreased $368,717 during the firstquarter 2007 to $12,267,833 as of March 31, 2007, compared to $12,636,550 atDecember 31, 2006.  This slightdecrease was due in part to the final earnout payment of $574,568 made inconnection with the Lippke acquisition and dividend payments in the firstquarter 2007 of $410,196.  Our workingcapital as of March 31, 2007 increased $779,642 to $16,984,946, as compared to$16,205,304 at December 31, 2006. We believe that a combination of our existing cash, cash equivalents andmarketable securities, plus an expected continuation of cash flow fromoperations, will continue to be adequate to fund our operations, capitalexpenditures, dividend payments and stock repurchases, for at least the nexttwelve months.  Purchases of property andequipment were relatively constant between the two periods mentioned above, andwe had no material commitments for capital expenditures as of March 31, 2007.

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.

As noted above, we adopted FIN 48, *Accounting for Uncertainty in Income Taxes,*as of January 1,2007.  At the date of adoption, we hadapproximately $204,000 of total gross unrecognized tax benefits.  The timing of any payments which could resultfrom these unrecognized tax benefits will depend on a number of factors.  Accordingly, we cannot make reasonablyreliable estimates of the amount and period of potential cash settlements, ifany, with taxing authorities.

*Cash Flow*

Cash Flow from OperatingActivities

Our primary source of funds is cash provided byoperating activities which totaled $618,792 and $1,428,605 in the first threemonths of 2007 and 2006, respectively. In the first three months of 2007, the cash provided by operatingactivities decreased by $809,813 compared to the first three months of2006.  The key components of the decreasein 2007 were lower net income, the increase in accounts receivable, and thereduction of accounts payable and accrued compensation.  Offsetting these decreases in cash providedby operating activities were the reduction in inventory and increase in accruedincome taxes.

### Cash Flow from Investing Activities

Cash (used in) provided by investing activities ofcontinuing operations totaled $(393,053) and $364,660 in the first three monthsof 2007 and 2006, respectively.  Theprimary reasons for the lower amount in 2007 were due to the $478,721 proceeds fromthe sale of Lab Connections in the first quarter 2006 as well as higher netproceeds from the purchase and sale of marketable securities in 2006.  We presently do not believe that anysignificant property, plant and equipment expenditures are required toaccommodate our current level of operations.

Cash Flow from Financing Activities

Cash used in financing activities of continuingoperations totaled $323,157 and $403,140 in the first three months of 2007 and2006, respectively.  During the firstthree months of 2007 and 2006, we made dividend payments to our shareholders of$410,196 and $405,533, respectively.  During the first three months of 2006 werepurchased outstanding common stock in the amount of $258,125.  Partially offsetting these payments were theproceeds from the exercise of stock options in the amount

15

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of $87,039 and $260,518 in the first three months of2007 and 2006, 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 ofMarch 31, 2007, we had repurchased an aggregate of 41,500 shares of MOCONcommon stock under the program at a total cumulative cost of $363,125.  There were no shares of common stockrepurchased in the quarter ended March 31, 2007 and there was $1,636,875remaining in this authorization at that date.

***Contractual Obligations***

We refer you to our Annual Report on Form 10-K forthe year ended December 31, 2006 for a summary of our contractualobligations.  Except for the earnoutpayment paid in connection with the Lippke acquisition, there has been nomaterial change in this information.

### ***Off-BalanceSheet Arrangements***

Except foroperating leases entered into in the ordinary course of business and customaryindemnification obligations under certain of our agreements entered into in theordinary course of business, we do not have any material off-balance sheetarrangements.

***New Accounting Pronouncements***

In June 2006, the FASBratified the Emerging Issues Task Force (EITF) consensus on EITF Issue 06-3, *How Taxes Collected From Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement*(that is,gross versus net presentation) (EITF 06-3). The scope of EITF 06-3 includes any tax assessed by a governmentalauthority that is directly imposed on a revenue-producing transaction between aseller and a customer, and provides that a company may adopt a policy ofpresenting taxes either gross within revenue or on a net basis.  For any such taxes that are reported on agross basis, a company should disclose the amounts of those taxes for eachperiod for which an income statement is presented if those amounts aresignificant.  This statement is effectivefor financial reports for interim and annual reporting periods beginning afterDecember 15, 2006.  EITF 06-3 becameeffective for us as of January 1, 2007. We collect various sales and value-added taxes on certain products andservice sales, which are accounted for on a net basis.

InJune 2006, the FASB issued Interpretation 48, *Accountingfor Uncertainty in Income Taxes* (FIN 48).  FIN 48 clarifies the accounting for incometaxes by prescribing the minimum recognition threshold a tax position isrequired to meet before being recognized in the financial statements.  FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. The requirements are effective for fiscal years beginning after December15, 2006.  Adoption of FIN 48 did nothave a material effect on our financial position, results of operations or cashflows.

InSeptember 2006, the FASB issued SFAS 157, *FairValue Measurement* (SFAS 157).  The standard provides guidancefor using fair value to measure assets and liabilities.  SFAS 157clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing an asset or liability andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions.  Under thestandard, fair value measurements would be separately disclosed by level withinthe fair value hierarchy.  The statementis effective for us beginning in 2008; however, early adoption is permitted. We have not yet determined the impact, if any, that the implementation ofSFAS 157 will have on our financial position, results of operations or cashflows.

In February 2007, the FASBissued SFAS 159, *The Fair Value Option for Financial Assetsand Financial Liabilities – Including an amendment of FASB Statement 115*(SFAS159).  This statement permits entities tochoose to measure many financial instruments and certain other items at fairvalue.

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The objective is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  SFAS 159 is effective as ofthe beginning of fiscal years that begin after November 15, 2007.  We have not yet determined the impact, ifany, that the implementation of SFAS 159 will have on our financial position,results of operations or cash flows.

***Critical Accounting Policies***

Our significant accounting policies are described inNote 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.

*Revenue recognition* – We recognizerevenue when it is realized or realizable and earned.  In accordance with the Securities andExchange Commission Staff Accounting Bulletin 104 (SAB 104), *Revenue Recognition,*we consider revenuerealized or realizable when persuasive evidence of an arrangement exists, theproduct has been shipped or the services have been provided to the customer,title and risk of loss of products has passed to the customer, the sales priceis fixed or determinable, and collectibility is reasonably assured.  Our terms are F.O.B. shipping point with noright of return, and customer acceptance of our products is not required.  The revenue recognition policy does notdiffer among the various product lines, the marketing venues, or variousgeographic destinations.  We do not havedistributors who stock our equipment.  Wedo not offer rebates, price protection, or other similar incentives, anddiscounts when offered are recorded as a reduction in revenue.

Revenue for preventive maintenance agreementsis recognized on a per visit basis and extended warranties on a straight-linebasis over the life of the contracts, in accordance with FASB TechnicalBulletin 90-1, *Accounting for Separately Priced ExtendedWarranty and Product Maintenance Contracts*.

Emerging Issues Task Force (EITF) Issue00-21, *Revenue Arrangements with Multiple Deliverables*,provides revenue recognition guidance for arrangements with multipledeliverables, and the criteria to determine if items in a multiple deliverableagreement should be accounted for separately. The elements of our sales transactions are clearly and separately statedand sufficient evidence of their fair value exists to separately account forthe elements.

*Allowance for doubtful accounts and sales returns* – Ourallowance for doubtful accounts and sales returns is for accounts receivablebalances that are estimated to be uncollectible as well as sales returns.  The reserve is based on a number of factors,including:  (1) an analysis of customeraccounts and (2) our historical experience with accounts receivable write-offsand sales returns.  The analysis includesthe age of the receivable, the financial condition of a customer or industry,and general economic conditions.  Webelieve our financial results could be materially different if historicaltrends do not reflect 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 March 31, 2007, we had $158,149reserved against our accounts receivable for

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doubtful accounts andsales returns.

*Allowance for 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 March 31, 2007, we had $613,294 accruedfor excess and obsolete inventories.

*Recoverability of long-lived assets –*We assess therecoverability of goodwill and other long-lived assets annually or wheneverevents or changes in circumstances indicate that expected future undiscountedcash flows might not be sufficient to support the carrying amount of anasset.  We deem an asset to be impairedif a forecast of undiscounted future operating cash flows is less than anasset’s carrying amount.  If an asset isdetermined to be impaired, the loss is measured as the amount by which thecarrying value of the asset exceeds its fair value.  Changes in our business strategies, changesin the economic environment in which we operate, competitive conditions, andother factors could result in future impairment charges.

*Accrued product warranties*–**Our products are generally covered by awarranty, with warranty periods ranging from ninety days to one year from thedate of sale.  Estimated warranty costsare accrued in the same period in which the related revenue is recognized,based on anticipated parts and labor costs, utilizing historical experience.  Special 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 ofMarch 31, 2007, we had $233,279 accrued for future estimated warranty claims.

*Income taxes –*In the preparation of ourconsolidated financial statements, management is required to estimate incometaxes in each of the jurisdictions in which we operate. This process involvesestimating actual current tax exposures together with assessing temporarydifferences resulting from differing treatment of items for tax and accountingpurposes. These differences result in deferred tax assets and liabilities,which are included in our consolidated balance sheets.

We have significant amounts of deferred taxassets.  Management reviews the deferredtax assets for recoverability on a quarterly basis and assesses the need forvaluation allowances.  These deferred taxassets are evaluated by considering historical levels of income, estimates offuture taxable 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 March 31, 2007, we provided a valuationallowance in the approximate amount of $238,000 against our net deferred taxassets.

### ***Forward-LookingStatements***

This quarterlyreport on Form 10-Q contains or incorporates by reference not only historicalinformation, but also forward-looking statements within the meaning of Section27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, and are subject to the safe harborcreated by those sections.  In addition,we or others on our behalf may make forward-looking statements from time totime in oral presentations, including telephone conferences and/or web castsopen to the public, in press releases or reports, on our website orotherwise.  All statements other thanstatements of historical facts included in this report that address activities,events or developments

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that we expect, believeor anticipate will or may occur in the future are forward-looking statementsincluding, in particular, the statements about our plans, objectives,strategies and prospects regarding, among other things, our financialcondition, results of operations and business. We have identified some of these forward-looking statements with wordslike “believe,” “may,” “could,” “might,” “forecast,” “possible,” “potential,”“project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,”“anticipate,” “estimate,” “approximate” or “continue” and other words and termsof similar meaning.  Theseforward-looking statements may be contained in the notes to our consolidatedfinancial statements and elsewhere in this report, including under the heading“Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

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.

·                  Increasesin prices for raw materials;

·                  Risksinherent in operating internationally and selling and shipping our products andpurchasing our products and components internationally;

·                  Fluctuationsin foreign currency exchange rates and interest rates;

·                  Failureto develop new products and technologies, delays in new product introductionand lack of market acceptance of new products;

·                  Failureto effect strategic acquisitions and integrate effectively newly acquiredoperations;

·                  Incurrenceof additional debt, contingent liabilities and expenses in connection withfuture acquisitions;

·                  Decreasesin capital spending by our customers;

·                  Exposureto assertions of intellectual property claims and failure to protect ourintellectual property;

·                  Disruptionin our ability to manufacture our products or the ability of our key suppliersto provide us products or components or raw materials for products resulting inour inability to supply market demand for our products;

·                  Relianceon independent sales distributors and sales associates to market and sell ourproducts;

·                  Highlycompetitive nature of the markets in which we sell our products and theintroduction of competing products;

·                  Lossof customers;

·                  Failureto retain senior management or replace lost senior management;

·                  Employeeslowdowns, strikes or similar actions;

·                  Relianceon our management information systems for inventory management, distributionand other functions;

·                  Effectsof any pending or threatened litigation;

·                  Failureto comply with applicable laws and regulations and adverse changes inapplicable laws or regulations;

·                  Changesin generally accepted accounting principles; or

·                  Conditions andchanges in general 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 in ourforward-looking statements or otherwise could materially adversely affect ourbusiness, financial condition or operating results, see our annual report onForm 10-K for the fiscal year ended December 31, 2006 under the heading “Part I– Item 1A.  Risk Factors” on pages 8through 13 of such report.

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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 results, which may not occur asanticipated.  Actual results could differmaterially from those anticipated in the forward-looking statements and fromhistorical results, due to the risks and uncertainties described above, as wellas others that we may consider immaterial or do not anticipate at this time.Although we believe that the expectations reflected in our forward-lookingstatements are reasonable, we do not know whether our expectations will provecorrect.  The expectations reflected inour forward-looking statements can be affected by inaccurate assumptions wemight make or by known or unknown risks and uncertainties, including thosedescribed above.  The risks anduncertainties described above are not exclusive and further informationconcerning us and our business, including factors that potentially couldmaterially affect our financial results or condition, may emerge from time totime.  We assume no obligation to updateforward-looking statements to reflect actual results or changes in factors orassumptions affecting such forward-looking statements.  We advise you, however, to consult anyfurther disclosures we make on related subjects in our quarterly reports onForm 10-Q and current reports on Form 8-K we file with or furnish to theSecurities and Exchange Commission.

Item3.       Quantitativeand Qualitative Disclosures About Market Risk

*Equity Price and Interest RateRisk*

Substantiallyall of our marketable securities are at fixed interest rates and all of ourmarketable securities mature within two years or less; therefore, we believethat the market risk arising from the holding of these financial instruments isminimal.

### *ForeignCurrency Exchange Risk*

Because ourproducts are manufactured or sourced primarily from the United States, astronger U.S. dollar generally has a negative impact on our results fromoperations outside of the United States while a weaker dollar generally has apositive effect.  We currently sell ourproducts and services in United States dollars or the local currency of ourforeign subsidiary (euros).  Accordingly,our foreign operations expose us to foreign currency exchange risk when theeuro currency results of operations are translated to United States dollars.  While we historically have not experiencedany material foreign currency translation losses, we may engage in hedgingactivity in the future to minimize this risk. Our net investment in foreign subsidiary translated into U.S. dollars isnot hedged.

Item 4.       Controls and Procedures

*Evaluation of Disclosure Controlsand Procedures*

We maintaindisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-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’srules and forms and that such information is accumulated and communicated toour management, including our principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions 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 cost-benefit relationship of possible controls andprocedures.  Our management evaluated,with the participation of our Chief Executive Officer and Chief FinancialOfficer, the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the period covered in this

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QuarterlyReport on Form 10-Q.  Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end ofsuch period, to provide reasonable assurance that information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized, andreported within the time periods specified in the SEC’s rules and forms, andthat material information relating to our Company and our consolidatedsubsidiaries is made known to management, including our Chief ExecutiveOfficer, and Chief Financial Officer, particularly during the period when ourperiodic reports are being prepared.

*Changes in Internal Control OverFinancial Reporting*

There was nochange in our internal control over financial reporting that occurred duringour quarter ended March 31, 2007 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

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PART II.   OTHER INFORMATION

Item1A.    Risk Factors

Weare affected by risks specific to us as well as factors that affect allbusinesses operating in a global market. The significant factors known to us that could materially adverselyaffect our business, financial condition or operating results are described inour annual report on Form 10-K for the fiscal year ended December 31, 2006under the heading “Part I – Item 1A. Risk Factors.”  There has been no material change in thoserisk factors.

Item 2.       Unregistered Sales of Equity Securities, Use of Proceeds and IssuerPurchases of Equity Securities

*UnregisteredSales of Equity Securities*

Wedid not sell any equity securities of MOCON, Inc. during the first quarterended March 31, 2007 that were not registered under the Securities Act of 1933.

*IssuerRepurchases of Equity Securities*

Wedid not repurchase any equity securities of MOCON, Inc. during the firstquarter ended March 31, 2007.

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Item 6.  Exhibits

The following exhibitsare 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 SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned hereunto duly authorized.
|                    | MOCON, INC.                                  |   |
|--------------------|----------------------------------------------|--------|
|               |                                         |   |
|               |                                         |   |
| Date: May 21, 2007 | /s/ Robert L. Demorest                       |   |   |
|               | Robert L. Demorest                           |   |
|               | Chairman, President and Chief                |   |
|               | Executive Officer                            |   |
|               | (Principal Executive Officer)                |   |
|               |                                         |   |
|               |                                         |   |
| Date: May 21, 2007 | /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 FORM10-Q

QUARTER ENDEDMARCH 31, 2007

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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