**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(MarkOne)**

**x Quarterly ReportPursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

**For theQuarter Ended June 30, 2006**

**or**

**o Transition ReportPursuant 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 itscharter)

| **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 such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES xNO o

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-acceleratedfiler: x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

YES oNO x

5,429,925Common Shares were outstanding as of July 31, 2006.

 

 

----

MOCON, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

For the Quarter Ended June30, 2006
|                                                                                                                                                                                                                     | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I. FINANCIAL INFORMATION                                                                                                                                                                                       |     |
|                                                                                                                                                                                                                |     |
| Item 1. Financial Statements                                                                                                                                                                                        |     |
| Condensed  Consolidated Balance Sheets   June 30, 2006 (Unaudited) and December 31, 2005                                                                                                                       | 1        |
|                                                                                                                                                                                                                |     |
| Condensed  Consolidated Statements of Income (Unaudited)   Three months and six months ended June 30, 2006 and 2005                                                                                                 | 2        |
|                                                                                                                                                                                                                |     |
| Condensed  Consolidated Statements of Cash Flows (Unaudited)   Six months ended June 30, 2006 and 2005                                                                                                              | 3        |
|                                                                                                                                                                                                                |     |
| Notes  to Condensed 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                                                                                                        | 22-23    |
|                                                                                                                                                                                                                |     |
| Item  4. Submission of Matters to a Vote of Security Holders                                                                                                                                                        | 23       |
|                                                                                                                                                                                                                |     |
| Item 6. Exhibits                                                                                                                                                                                                    | 23       |
|                                                                                                                                                                                                                |     |
| Signatures                                                                                                                                                                                                          | 24       |
|                                                                                                                                                                                                                |     |
| Exhibit  Index                                                                                                                                                                                                      | 25       |
|                                                                                                                                                                                                                |     |
| *In this report, references to “MOCON,” “the  Company,” “we,” “our,” or “us,” unless the context otherwise requires, refer  to MOCON, Inc. and its subsidiaries.* | * * |
| * *                                                                                                                                                                                                            | * * |
| * All  trademarks or trade names referred to in this report are the property of  their respective owners.*                                                                                                     | * * |

 

----

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

MOCON, INC. AND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED BALANCE SHEETS
| ** **                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                        | ** ** | **(Unaudited)**   | ** ** | **(Audited)**         | ** ** |
| ASSETS                                                                                                                                            |       |              |       |                  |       |
| Current assets:                                                                                                                                   |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                        |       | $                 | 3,711,042  |                  | $          | 2,889,323 |   |
| Marketable  securities, current                                                                                                                   |       | 6,634,791         |       | 5,961,793             |       |
| Trade accounts  receivable, less allowance for doubtful accounts of $172,482 in 2006 and  $192,446 in 2005                                        |       | 3,899,098         |       | 4,237,240             |       |
| Other  receivables                                                                                                                                |       | 107,791           |       | 124,403               |       |
| Inventories                                                                                                                                       |       | 3,892,738         |       | 4,057,514             |       |
| Prepaid expenses                                                                                                                                  |       | 213,044           |       | 313,042               |       |
| Deferred income  taxes                                                                                                                            |       | 585,208           |       | 582,948               |       |
| Assets held for  sale                                                                                                                             |       | —            |       | 90,809                |       |
| Total current  assets                                                                                                                             |       | 19,043,712        |       | 18,257,072            |       |
|                                                                                                                                              |       |              |       |                  |       |
| Marketable  securities, noncurrent                                                                                                                |       | 370,029           |       | 170,253               |       |
|                                                                                                                                              |       |              |       |                  |       |
| Property, plant  and equipment, net of accumulated depreciation of $4,606,111 in 2006 and  $4,460,559 in 2005                                     |       | 1,470,212         |       | 1,551,883             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Other assets:                                                                                                                                     |       |              |       |                  |       |
| Software  development costs, net of accumulated amortization of $977,931 in 2006 and  $943,743 in 2005                                            |       | 28,490            |       | 62,678                |       |
| Goodwill                                                                                                                                          |       | 2,641,599         |       | 2,641,599             |       |
| Technology  rights and other intangibles, net                                                                                                     |       | 703,146           |       | 808,266               |       |
| Other                                                                                                                                             |       | 168,572           |       | 165,137               |       |
| Total other  assets                                                                                                                               |       | 3,541,807         |       | 3,677,680             |       |
|                                                                                                                                              |       |              |       |                  |       |
| TOTAL ASSETS                                                                                                                                      |       | $                 | 24,425,760 |                  | $          | 23,656,888 |   |
|                                                                                                                                              |       |              |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                        |       |              |       |                  |       |
| Current  liabilities:                                                                                                                             |       |              |       |                  |       |
| Accounts payable                                                                                                                                  |       | $                 | 1,663,993  |                  | $          | 1,847,133 |   |
| Accrued  compensation and vacation                                                                                                                |       | 1,023,514         |       | 995,528               |       |
| Other accrued  expenses                                                                                                                           |       | 321,986           |       | 440,510               |       |
| Accrued product  warranties                                                                                                                       |       | 265,595           |       | 327,015               |       |
| Accrued income  taxes                                                                                                                             |       | 164,234           |       | 402,285               |       |
| Dividends  payable                                                                                                                                |       | 406,945           |       | 405,268               |       |
| Total current  liabilities                                                                                                                        |       | 3,846,267         |       | 4,417,739             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Obligations to  former employees                                                                                                                  |       | 99,330            |       | 93,735                |       |
| Minimum earnout  payable                                                                                                                          |       | —            |       | 107,514               |       |
| Deferred income  taxes                                                                                                                            |       | 205,902           |       | 239,282               |       |
| Total noncurrent  liabilities                                                                                                                     |       | 305,232           |       | 440,531               |       |
|                                                                                                                                              |       |              |       |                  |       |
| Total  liabilities                                                                                                                                |       | 4,151,499         |       | 4,858,270             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                                       |       |              |       |                  |       |
| Capital stock –  undesignated – authorized 3,000,000 shares                                                                             |       | —            |       | —                |       |
| Common stock –  $0.10 par value. Authorized 22,000,000 shares; issued and outstanding  5,429,925 shares in 2006 and 5,403,573 shares in 2005 |       | 542,993           |       | 540,357               |       |
| Capital in  excess of par value                                                                                                                   |       | 776,534           |       | 592,796               |       |
| Retained  earnings                                                                                                                                |       | 18,943,125        |       | 17,759,120            |       |
| Accumulated  other comprehensive gain (loss)                                                                                                      |       | 11,609            |       | (93,655               | )          |
| Total  stockholders’ equity                                                                                                                  |       | 20,274,261        |       | 18,798,618            |       |
|                                                                                                                                              |       |              |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                  |       | $                 | 24,425,760 |                  | $          | 23,656,888 |   |

See accompanying notes tocondensed consolidated financial statements.

1

----

MOCON,INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Sales:                                                |       |                             |       |                           |       |   |   |   |   |
| Products                                              |       | $                                | 5,863,719  |                           | $          | 5,823,945 |   | $ | 11,944,817 |   | $ | 11,936,032 |   |
| Consulting services                                   |       | 476,804                          |       | 558,357                        |       | 914,618 |   | 890,665 |   |
| Total sales                                           |       | 6,340,523                        |       | 6,382,302                      |       | 12,859,435 |   | 12,826,697 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Cost of sales:                                        |       |                             |       |                           |       |   |   |   |   |
| Products                                              |       | 2,434,639                        |       | 2,604,607                      |       | 4,909,885 |   | 5,246,187 |   |
| Consulting services                                   |       | 243,468                          |       | 240,418                        |       | 469,013 |   | 482,038 |   |
| Total cost of sales                                   |       | 2,678,107                        |       | 2,845,025                      |       | 5,378,898 |   | 5,728,225 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Gross profit                                          |       | 3,662,416                        |       | 3,537,277                      |       | 7,480,537 |   | 7,098,472 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Selling, general  and administrative expenses         |       | 2,031,958                        |       | 2,074,736                      |       | 3,951,098 |   | 4,157,324 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Research and development  expenses                    |       | 456,187                          |       | 397,224                        |       | 909,706 |   | 817,852 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Operating income                                      |       | 1,174,271                        |       | 1,065,317                      |       | 2,619,733 |   | 2,123,296 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Other income                                          |       | 162,623                          |       | 106,684                        |       | 317,920 |   | 197,889 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Income from continuing operations before income taxes |       | 1,336,894                        |       | 1,172,001                      |       | 2,937,653 |   | 2,321,185 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Income taxes                                          |       | 474,000                          |       | 387,461                        |       | 962,225 |   | 611,021 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Income from continuing operations                     |       | 862,894                          |       | 784,540                        |       | 1,975,428 |   | 1,710,164 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| (Loss) gain from  discontinued operations, net of tax |       | —                           |       | (9,500                         | )          | 22,225 |   | (140,953 | ) |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Net income                                            |       | $                                | 862,894    |                           | $          | 775,040 |   | $ | 1,997,653 |   | $ | 1,569,211 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Basic net income  per common share:                   |       |                             |       |                           |       |   |   |   |   |
| Income from continuing operations                     |       | $                                | 0.16       |                           | $          | 0.15 |   | $ | 0.37 |   | $ | 0.32 |   |
| Loss from discontinued operations                     |       | —                           |       | (0.01                          | )          | — |   | (0.03 | ) |
| Basic net income per common share:                    |       | $                                | 0.16       |                           | $          | 0.14 |   | $ | 0.37 |   | $ | 0.29 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Basic weighted average common shares outstanding      |       | 5,424,877                        |       | 5,356,438                      |       | 5,414,897 |   | 5,347,808 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Diluted net  income per common share:                 |       |                             |       |                           |       |   |   |   |   |
| Income from continuing operations                     |       | $                                | 0.16       |                           | $          | 0.14 |   | $ | 0.36 |   | $ | 0.31 |   |
| Loss from discontinued operations                     |       | —                           |       | —                         |       | — |   | (0.03 | ) |
| Diluted net income per common share:                  |       | $                                | 0.16       |                           | $          | 0.14 |   | $ | 0.36 |   | $ | 0.28 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Diluted weighted average common shares outstanding    |       | 5,514,540                        |       | 5,531,082                      |       | 5,500,888 |   | 5,525,538 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

2

----

MOCON,INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
| ** **                                                                                                  | ** ** | **Six Months**          | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                  | ** ** | **Ended June 30,** | ** ** |
| ** **                                                                                                  | ** ** | **2006**                     | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                                      |       |                         |       |   |   |
| Net income                                                                                                  |       | $                            | 1,997,653  |   | $ | 1,569,211 |   |
| (Gain) loss from discontinued operations, net of tax                                                        |       | (22,225                      | )          | 140,953 |   |
| Income from continuing operations                                                                           |       | 1,975,428                    |       | 1,710,164 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities of continuing operations: |       |                         |       |   |   |
| Stock-based compensation expense                                                                            |       | 97,666                       |       | — |   |
| Gain on disposition of long-term assets                                                                     |       | (152,149                     | )          | (40,286 | ) |
| Depreciation and amortization                                                                               |       | 377,499                      |       | 536,409 |   |
| Deferred income taxes                                                                                       |       | (35,640                      | )          | (33,380 | ) |
| Changes in operating assets and liabilities, net of  effect of divestitures in 2006 and 2005:               |       |                         |       |   |   |
| Trade accounts receivable                                                                                   |       | 283,955                      |       | 678,278 |   |
| Other receivables                                                                                           |       | 17,118                       |       | (90,202 | ) |
| Inventories                                                                                                 |       | 34,396                       |       | (454,685 | ) |
| Prepaid expenses                                                                                            |       | 99,153                       |       | 9,379 |   |
| Accounts payable                                                                                            |       | (272,469                     | )          | (169,680 | ) |
| Accrued compensation and vacation                                                                           |       | 22,655                       |       | (138,974 | ) |
| Other accrued expenses                                                                                      |       | (246,139                     | )          | (242,418 | ) |
| Accrued product warranties                                                                                  |       | (31,000                      | )          | — |   |
| Accrued income taxes                                                                                        |       | (238,865                     | )          | (388,603 | ) |
| Net cash provided by continuing operations                                                                  |       | 1,931,608                    |       | 1,376,002 |   |
| Net cash provided by discontinued operations                                                                |       | —                       |       | 27,904 |   |
| Net cash provided by operating activities                                                                   |       | 1,931,608                    |       | 1,403,906 |   |
|                                                                                                        |       |                         |       |   |   |
| Cash flows from  investing activities:                                                                      |       |                         |       |   |   |
| Proceeds from sale of subsidiary                                                                            |       | 478,721                      |       | — |   |
| Purchases of marketable securities                                                                          |       | (4,182,113                   | )          | (3,995,079 | ) |
| Proceeds from sales or maturities of marketable  securities                                                 |       | 3,305,922                    |       | 2,530,218 |   |
| Purchases of property and equipment                                                                         |       | (166,310                     | )          | (144,563 | ) |
| Proceeds from sale of property and equipment                                                                |       | 118,215                      |       | 96,073 |   |
| Purchases of patents and trademarks                                                                         |       | (39,305                      | )          | (26,154 | ) |
| Other                                                                                                       |       | (3,435                       | )          | (17,926 | ) |
| Net cash used in continuing operations                                                                      |       | (488,305                     | )          | (1,557,431 | ) |
| Net cash provided by discontinued operations                                                                |       | 22,225                       |       | — |   |
| Net cash used in investing activities                                                                       |       | (466,080                     | )          | (1,557,431 | ) |
|                                                                                                        |       |                         |       |   |   |
| Cash flows from  financing activities:                                                                      |       |                         |       |   |   |
| Proceeds from the exercise of stock options                                                                 |       | 451,833                      |       | 270,208 |   |
| Purchases and retirement of common stock                                                                    |       | (363,125                     | )          | — |   |
| Dividends paid                                                                                              |       | (811,970                     | )          | (747,678 | ) |
| Net cash used in financing activities of continuing  operations                                             |       | (723,262                     | )          | (477,470 | ) |
|                                                                                                        |       |                         |       |   |   |
| Effect of  exchange rate changes on cash                                                                    |       | 79,453                       |       | (93,742 | ) |
|                                                                                                        |       |                         |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                       |       | 821,719                      |       | (724,737 | ) |
|                                                                                                        |       |                         |       |   |   |
| Cash and cash  equivalents:                                                                                 |       |                         |       |   |   |
| Beginning of period                                                                                         |       | 2,889,323                    |       | 2,648,879 |   |
| End of period                                                                                               |       | $                            | 3,711,042  |   | $ | 1,924,142 |   |
|                                                                                                        |       |                         |       |   |   |
| Supplemental  disclosures of cash flow information:                                                         |       |                         |       |   |   |
| Cash paid during the period for income taxes                                                                |       | $                            | 1,242,438  |   | $ | 703,725 |   |
|                                                                                                        |       |                         |       |   |   |
| Supplemental  schedule of noncash investing and financing activities:                                       |       |                         |       |   |   |
| Unrealized holding loss on available-for-sale  securities                                                   |       | $                            | (3,417     | ) | $ | (1,170 | ) |
| Dividends  accrued                                                                                          |       | $                            | 406,945    |   | $ | 376,886 |   |

 

See accompanying notes to condensed consolidated financial statements.

3

----

MOCON, INC. AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Condensed Consolidated Financial Statements

The condensed consolidated balance sheet as of June30, 2006, the condensed consolidated statements of income for the secondquarters and six-month periods ended June 30, 2006 and 2005, and the condensedconsolidated statements of cash flows for the six-month periods ended June 30,2006 and 2005 have been prepared by us, without audit.  However, all adjustments (consisting solelyof normal recurring adjustments) which are, in the opinion of management,necessary to present fairly the financial position, results of operations andcash flows at June 30, 2006, and for all periods presented, have been made.  The results of operations for the secondquarter and six-month periods ended June 30, 2006 are not necessarilyindicative of operating results for the full year.

Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted.  It issuggested that these condensed 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 31,2005, previously filed with the Securities and Exchange Commission.

We operate in a single industry segment:  the development, manufacturing, and marketingof measurement, analytical, monitoring and consulting products used to detect,measure, and analyze gases and chemical compounds for customers in the barrierpackaging, food, pharmaceutical, and other industries throughout the world.

*Principles of Consolidation*

The condensed consolidated financial statementsinclude the accounts of MOCON, Inc. and our subsidiaries after elimination ofinter-company transactions and accounts.

*Foreign Currency Translation*

The financial statements for operations outside theUnited States are maintained in their local currency.  All assets and liabilities of our foreignsubsidiary are translated to United States dollars at period-end exchangerates, while revenue and expense accounts are translated at the averageexchange 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 preparation of consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

4

----

*Share-Based Compensation Expense*

Effective January 1, 2006, we adopted Statement ofFinancial Accounting Standards No. 123 (revised 2004), *Share-Based Payment* (SFAS 123(R)) whichrequires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors.  SFAS 123(R) supersedes our previousaccounting under Accounting Principles Board Opinion No. 25, Accounting forStock Issued to Employees (APB 25).

We adopted the modified prospective transition methodof applying SFAS 123(R) which requires the application of the standard as ofJanuary 1, 2006.   As a result, as ofJune 30, 2006, our results of operations reflected compensation expense for newstock options granted and vested during the first six months of 2006 and theunvested portion of previous stock option grants vested during the first sixmonths of 2006.  Our consolidatedfinancial statements for prior periods have not been restated to reflect, anddo not include, the impact of SFAS 123(R).

Amounts recognized in the consolidated financialstatements related to stock-based compensation are as follows:
|                                                             | ** ** | **Second Quarter  Ended  June 30,  2006** | ** ** | **Six Months  Ended  June 30,  2006** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|
| Total cost of  stock-based compensation                     |       | $                                                   | 52,297     |                                            | $          | 97,666 |   |
| Amount  capitalized in inventory and property and equipment |       | —                                              |       | —                                          |       |
| Amounts charged  against income, before income taxes        |       | 52,297                                              |       | 97,666                                          |       |
| Amount of income  tax benefit recognized in earnings        |       | —                                              |       | —                                          |       |
| Amount charged  against net income                          |       | $                                                   | 52,297     |                                            | $          | 97,666 |   |
|                                                        |       |                                                |       |                                            |       |
| Impact on net  income per common share:                     |       |                                                |       |                                            |       |
| Basic                                                       |       | $                                                   | 0.01       |                                            | $          | 0.02 |   |
| Diluted                                                     |       | $                                                   | 0.01       |                                            | $          | 0.02 |   |

Stock-basedcompensation expense was reflected in the statements of income for the secondquarter and first six months of 2006 as follows:

|                                               | ** ** | **Second Quarter  Ended  June 30,  2006** | ** ** | **Six Months  Ended  June 30,  2006** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|
| Cost of sales                                 |       | $                                                   | 14,768     |                                            | $          | 28,148 |   |
| Selling, general  and administrative expenses |       | 30,853                                              |       | 57,465                                          |       |
| Research and  development expenses            |       | 6,676                                               |       | 12,053                                          |       |
|                                          |       | $                                                   | 52,297     |                                            | $          | 97,666 |   |

 

Priorto January 1, 2006, we accounted for stock-based employee compensationarrangements in accordance with the provisions and related interpretations ofAPB 25, using the intrinsic-value method. Under the guidelines of APB 25 compensation cost for stock-basedemployee compensation plans is recognized based on the difference, if any,between the quoted market price of the stock on the date of grant and theamount an employee must pay to acquire the stock.  We had adopted the disclosure-only provisionsfor employee stock-based compensation, and therefore, had not recordedcompensation cost in our financial statements.  Had compensation cost for stock-based compensation been 

5

----

determinedconsistent with SFAS 123(R), net income and net income per share would havebeen adjusted to the following pro forma amounts:
|                                                                                                                                               | ** ** | **Second Quarter  Ended  June 30,  2005** | ** ** | **Six Months  Ended  June 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|
| Net income – as  reported                                                                                                                |       | $                                                   | 775,040    |                                            | $          | 1,569,211 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (27,892                                             | )          | (56,721                                         | )          |
| Net income – pro  forma                                                                                                                  |       | $                                                   | 747,148    |                                            | $          | 1,512,490 |   |
|                                                                                                                                          |       |                                                |       |                                            |       |
| Net income per  common share – as reported:                                                                                              |       |                                                |       |                                            |       |
| Basic                                                                                                                                         |       | $                                                   | 0.14       |                                            | $          | 0.29 |   |
| Diluted                                                                                                                                       |       | $                                                   | 0.14       |                                            | $          | 0.28 |   |
| Net income per  common share – pro forma:                                                                                                |       |                                                |       |                                            |       |
| Basic                                                                                                                                         |       | $                                                   | 0.14       |                                            | $          | 0.28 |   |
| Diluted                                                                                                                                       |       | $                                                   | 0.14       |                                            | $          | 0.27 |   |

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model (Black-Scholes).  We use historical data to estimate theexpected price volatility,  expectedoption life and expected forfeiture rate. The risk-free interest rate is based on the U.S. Treasury yield curve ineffect at the time of grant for the estimated life of the option.  The dividend yield is calculated based uponthe dividend payments made during the prior four quarters as a percent of theaverage stock price for that period.  Thefollowing assumptions were used to estimate the fair value of options granted duringthe first six months of 2006 and 2005 using the Black-Scholes model:
|                              | ** ** | **Second Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                          | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Stock options:               |       |                                              |       |                                          |       |   |   |   |   |
| Volatility                   |       | 31                                                | %          | 32                                            | %          | 31 | % | 32 | % |
| Risk-free interest rate      |       | 4.0                                               | %          | 3.4                                           | %          | 4.0 | % | 3.4 | % |
| Expected option life (years) |       | 7.9                                               |       | 7.8                                           |       | 7.9 |   | 7.8 |   |
| Dividend yield               |       | 3.0                                               | %          | 3.1                                           | %          | 3.0 | % | 3.1 | % |

Asummary of the option activity for the first six months of 2006 is as follows:
|                                   | ** ** | ** **         | ** ** | **Weighted-**      | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|-----------------------------------|------------|--------------------|------------|--------------------|------------|-----------------|------------|---------------|------------|
| ** **                        | ** ** | ** **         | ** ** | **average**        | ** ** | **average**     | ** ** | ** **    | ** ** |
| ** **                        | ** ** | ** **         | ** ** | **Exercise**       | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                        | ** ** | **Number of** | ** ** | **Price per** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                        | ** ** | **Shares**         | ** ** | **Share**          | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at  December 31, 2005 |       | 850,449            |       | $                  | 7.70       |            | 6.7        |          |       |   |
| Options granted                   |       | 3,000              |       | 8.90               |       | 9.5             |       |          |       |
| Options cancelled                 |       | (29,587            | )          | 9.15               |       | —          |       |          |       |
| Options expired                   |       | —             |       | —             |       | —          |       |          |       |
| Options exercised                 |       | (79,425            | )          | 7.10               |       | —          |       |          |       |
| Outstanding at  June 30, 2006     |       | 744,437            |       | $                  | 7.72       |            | 6.4        |          | $          | 1,405,215 |   |
|                              |       |               |       |               |       |            |       |          |       |
| Exercisable at June 30,  2006     |       | 580,312            |       | $                  | 7.47       |            | 5.8        |          | $          | 1,254,296 |   |

 

6

----

Therewere no options granted in the second quarter of 2006.  The weighted average grant date fair valuebased on the Black-Scholes model for options granted in the first six months of2006 was $2.10.  There were no optionsgranted in the first six months of 2005. We issue new shares of common stock upon exercise of stock options.  The total intrinsic value of optionsexercised was $86,504 and $159,686 during the second quarters 2006 and 2005,respectively, and $159,153 and $169,567 during the first six months of 2006 and2005, respectively.

A summary of the status of our unvested optionshares as of June 30, 2006 is as follows:
|                                | ** ** | ** **         | ** ** | **Weighted-**       | ** ** |
|--------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                     | ** ** | ** **         | ** ** | **average**         | ** ** |
| ** **                     | ** ** | **Number of** | ** ** | **Grant-Date**      | ** ** |
| ** **                     | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
|                           |       |               |       |                |       |
| Unvested at  December 31, 2005 |       | 175,887            |       | $                   | 2.26       |   |
| Options granted                |       | 3,000              |       | 2.10                |       |
| Options cancelled              |       | (11,637            | )          | 2.30                |       |
| Options vested                 |       | (3,125             | )          | 2.11                |       |
| Unvested at June 30,  2006     |       | 164,125            |       | $                   | 2.26       |   |

Asof June 30, 2006, there was $279,670 of total unrecognized compensation costrelated to unvested share-based compensation granted under our plans.  That cost is expected to be recognized over aweighted-average period of 1.6 years. The total fair value of option shares vested was $284 during the secondquarter 2006 and $6,584 for the first six months of 2006.

*New Accounting Pronouncements*

In September 2005,the FASB issued SFAS No. 154, *AccountingChanges and Error Corrections — a replacement of APB No. 20 and SFAS No. 3*(SFAS154).* *SFAS 154 provides guidance on the accounting for and reportingof accounting changes and error corrections. It establishes, unlessimpracticable, retrospective application as the required method for reporting achange in accounting principle in the absence of explicit transitionrequirements specific to the newly adopted accounting principle.  SFAS 154 also provides guidance fordetermining whether retrospective application of a change in accountingprinciple is impracticable and for reporting a change when retrospective applicationis impracticable.  The correction of anerror in previously issued financial statements is not an accountingchange.  However, the reporting of anerror correction involves adjustments to previously issued financial statementssimilar to those generally applicable to reporting an accounting changeretrospectively. Therefore, the reporting of a correction of an error byrestating previously issued financial statements is also addressed by SFAS154.  SFAS 154 is required to be adoptedin fiscal years beginning after December 15, 2005.  Accordingly, we have adopted SFAS 154 in ourfiscal year beginning January 1, 2006. Adoption of SFAS 154 did not have a material effect on our financialposition, results of operations or cash flows.

InNovember 2004, the FASB issued SFAS No. 151, *Inventory Costs*, an amendment of ARB No. 43, Chapter 4 (SFAS151) to clarify that abnormal amounts of idle facility expense, freight,handling costs, and wasted material (spoilage) should be recognized as currentperiod charges, and that fixed production overheads should be allocated toinventory based on normal capacity of production facilities.  This statement is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005.  Accordingly, we have adopted SFAS 151 in ourfiscal year beginning January 1, 2006. Adoption of SFAS 151 did not have a material effect on our financialposition, results of operations or cash flows.

*Reclassifications*

Certain 2005 amounts havebeen reclassified to conform to the 2006 presentation.

7

----

Note 2 – Inventories

Inventories consistof the following:

|                    | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished  products |       | $                       | 514,572    |                        | $          | 656,587 |   |
| Work-in-process    |       | 1,514,537               |       | 1,511,314                   |       |
| Raw materials      |       | 1,863,629               |       | 1,889,613                   |       |
|               |       | $                       | 3,892,738  |                        | $          | 4,057,514 |   |

Note3 – Net Income Per Common Share

Basic net income per common share is computed bydividing net income by the weighted average number of shares of common stockoutstanding during the period.  Dilutednet income per common share is computed using the treasury stock method tocompute the weighted average common stock outstanding assuming the conversionof potential dilutive common shares.

The following table presents a reconciliation of thedenominators used in the computation of net income per common share – basic,and net income per common share – diluted, for the second quarter and six-monthperiods ended June 30, 2006and 2005:
|                                                                         | ** ** | **Second Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                          | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted shares  of common stock outstanding – basic               |       | 5,424,877                                         |       | 5,356,438                                     |       | 5,414,897 |   | 5,347,808 |   |
| Weighted shares  of common stock assumed upon exercise of stock options |       | 89,663                                            |       | 174,644                                       |       | 85,991 |   | 177,730 |   |
| Weighted shares of  common stock outstanding – diluted             |       | 5,514,540                                         |       | 5,531,082                                     |       | 5,500,888 |   | 5,525,538 |   |

Note4 – Goodwill and Intangible Assets

As of June 30, 2006 and December 31, 2005,unamortized goodwill amounted to $2,641,599. Other identifiable intangible assets are as follows
| ** **                  | ** ** | **As of June 30, 2006** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **Carrying  Amount**                        | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                     |       | $                                           | 665,276    |   | $ | (269,903 | ) | $ | 395,373 |   | 10  to 17 years | ** ** |
| Trademarks and  trade names |       | 386,125                                     |       | (196,148 | ) | 189,977 |   | 5  to 17 years |   |
| Technology  rights          |       | 184,008                                     |       | (159,912 | ) | 24,096 |   | 7  to 10 years |   |
| Other  intangibles          |       | 701,596                                     |       | (607,896 | ) | 93,700 |   | Less  than 1 year to  5 years |   |
|                        |       | $                                           | 1,937,005  |   | $ | (1,233,859 | ) | $ | 703,146 |   |   |   |

 

8

----

 
|                             | ** ** | **As of December 31, 2005** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **Carrying**                                    | ** ** | **Accumulated** | ** ** | ** ** | ** ** | **Estimated** | ** ** |
| ** **                  | ** ** | **Amount**                                      | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Useful Lives** | ** ** |
| Patents                     |       | $                                               | 614,594    |   | $ | (249,713 | ) | $ | 364,881 |   | 10  to 17 years |   |
| Trademarks and trade  names |       | 385,053                                         |       | (160,069 | ) | 224,984 |   | 5  to 17 years |   |
| Technology rights           |       | 184,008                                         |       | (146,768 | ) | 37,240 |   | 7  to 10 years |   |
| Other intangibles           |       | 715,043                                         |       | (533,882 | ) | 181,161 |   | Less  than 1 year to 5  years |   |
|                        |       | $                                               | 1,898,698  |   | $ | (1,090,432 | ) | $ | 808,266 |   |   |   |

 

Total amortization expense for the second quarter andsix months ended June 30, 2006 was $73,098 and $144,812, respectively.  Estimated amortization expense for theremainder of 2006 and each of the four succeeding fiscal years based on theintangible assets as of June 30, 2006 is as follows:

 

|      | ** ** | **Estimated  Expense** | ** ** |
|------|------------|------------------------|------------|
| 2006 |       | $                      | 130,985    |   |
| 2007 |       | $                      | 164,603    |   |
| 2008 |       | $                      | 107,871    |   |
| 2009 |       | $                      | 45,031     |   |
| 2010 |       | $                      | 29,411     |   |

###  

### 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 June 30, 2006and June 30, 2005, this resulted in a net cumulative unrealized loss of $10,549and $3,930, 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

Other comprehensive income pertains to net unrealizedgains and losses on marketable securities and foreign currency translationadjustments that are not included in net income but rather are recordeddirectly in stockholders’ equity.

|                                                      | ** ** | **Second Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **June 30,**                  | ** ** | **June 30,**              | ** ** |
| ** **                                           | ** ** | **2006**                           | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                           |       | $                                  | 862,894    |                           | $          | 775,040 |   | $ | 1,997,653 |   | $ | 1,569,211 |   |
|                                                 |       |                               |       |                           |       |   |   |   |   |
| Foreign currency  translation adjustment             |       | 75,222                             |       | (88,321                        | )          | 108,681 |   | (147,006 | ) |
| Net unrealized (loss)  gain on marketable securities |       | (1,075                             | )          | 2,695                          |       | (3,417 | ) | (1,170 | ) |
| Comprehensive income                                 |       | $                                  | 937,041    |                           | $          | 689,414 |   | $ | 2,102,917 |   | $ | 1,421,035 |   |

 

9

----

Note 7 – Warranty

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

Warranty expense is accrued at the time of salebased on historical claims experience. Special warranty reserves are also accrued for special rework campaignsfor known major product modifications. We also offer service contracts for select products when the factorywarranty period expires.

Warranty provisions and claims for the six-monthperiods ended June 30, 2006 and 2005 were as follows:

|                              | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Beginning balance            |       | $                                             | 327,015    |   | $ | 352,634 |   |
| Warranty provisions          |       | 167,302                                       |       | 145,178 |   |
| Warranty claims              |       | (195,474                                      | )          | (153,620 | ) |
| Decrease due to sale of  LCI |       | (33,248                                       | )          | — |   |
| Ending balance               |       | $                                             | 265,595    |   | $ | 344,192 |   |

 

Note 8 – Sale of Subsidiary

In February 2006, we sold all the outstanding commonstock of Lab Connections, Inc. (LCI), a wholly-owned subsidiary of ours.  Pursuant to the sale agreement, we received anet cash payment of $478,721 in exchange for all the outstanding shares ofLCI.  As a result of the sale, werecognized an after-tax gain of approximately $92,000 in the first quarter of2006.  This gain was reflected in theother income line on the condensed consolidated statements of income.  In addition, we have signed a manufacturingagreement with the purchaser which provides that we will be the exclusivemanufacturer/supplier of the LCI equipment for at least one year.

Note 9 – 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 of 2006, we received anadditional $35,000 related to this previous sale.  The after-tax effect of this additional paymentis a gain of $22,225 which is reflected on the (loss) gain from discontinuedoperations line of the condensed consolidated statements of income.

10

----

Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

This Management’s Discussion and Analysis providesmaterial historical and prospective disclosures intended to enable investorsand other users to assess our financial condition and results ofoperations.  Statements that are nothistorical are forward-looking and involve risks and uncertainties discussedbelow under the caption “Forward-Looking Statements.”  The following discussion of the results ofoperations and financial condition of MOCON should be read in conjunction withour condensed consolidated financial statements and the related notes theretoincluded elsewhere in this report.

### ***Overview***

MOCON,Inc. designs, manufactures, markets and services products and providesconsulting services primarily in the measurement and analytical instrument andservices markets.  Our products includeinstruments that detect, measure and monitor gases and chemical compounds.  Although some of the markets for our productsare maturing, we continually seek growth opportunities through technologicaland product improvement, by acquiring and developing new products, and byacquiring new companies.

Wehave three primary operating locations in the United States – Minnesota,Colorado and Texas – and one in Germany. We use a direct sales force and independent sales representatives to marketour products and services in the United States, Canada and Germany and use anetwork of independent sales representatives to market and service our productsand services in other foreign countries.

Priorto 1998, we expanded our business primarily through internally developing newproducts and technologies and licensing products and technology.  Since 1998, we have supplemented our internalgrowth through acquisitions that have provided us with additional technologies,products and product development expertise. During the last twelve months, we divested two product lines to allow usto better concentrate on our core product lines, particularly our gas detectionand measurement products.

Wecompleted our most recent acquisition effective January 1, 2004, by acquiringPaul Lippke Handels-GmbH Prozess- und Laborsysteme (Lippke), which is locatedin Germany.  We acquired all of theshares of Lippke for a base purchase price plus three earnout payments based onthe net profits of Lippke in each of the years 2004, 2005 and 2006, with aminimum payment amount of 100,000 euros per year.  It is anticipated that the remaining earnoutpayment will be made at or near the end of the first quarter of 2007.  The earnout payment due for 2005 based onLippke’s 2005 net profits in the amount of $433,339 was paid during the firstquarter 2006.

InMarch 2005, we committed to a plan to discontinue production of our Vaculok®vacuum insulated panels and exit this product line as the result of the poorfinancial performance since it was acquired in November 2003.  We recorded a one-time pre-tax charge toearnings in our first quarter 2005, totaling approximately $207,000, to reflectthe results of operations and asset impairment write-down associated with thediscontinuation of our Vaculok business. The $207,000 charge included a non-cash asset impairment charge of$162,000 relating to equipment and inventory used in the Vaculok business.  The after-tax loss reflected in the firstquarter 2005 was $131,453.  We sold theassets associated with the vacuum insulated panel product line in July 2005 inexchange for an up front payment of $125,000, along with the right to receiveup to an additional amount upon the occurrence of certain post-closing events.  As a result of the sale, we recognized apre-tax gain of approximately $69,000 in the third quarter 2005.  We received an additional $35,000 in thefirst quarter 2006, which resulted in an after-tax gain of $22,225. The resultsof this line of business are shown in the discontinued operations section ofour consolidated statements of income.

InFebruary 2006, we sold the capital stock of Lab Connections, Inc. in exchangefor $517,296 in cash, subject to a purchase price adjustment based on theamount of Lab Connections’ net tangible assets as of the closing date. As aresult of the sale, after recognition of the purchase price adjustment, we 

11

----

recognizedan after-tax gain of approximately $92,000 in the first quarter 2006.

EffectiveJanuary 1, 2006, we adopted Statement of Financial Accounting Standards No.123(revised), *Share-Based Payment*(SFAS 123 (R)) which requires the measurement and recognition of compensationexpense for all share-based payment awards made to employees anddirectors.  As a result, as of June 30,2006, our results of operations reflected compensation expense for new stockoptions granted and vested during the first six months of 2006 and the unvestedportion of previous stock option grants which will vest during 2006.  The total amount charged to  operations in the second quarter andsix-month periods ended June 30, 2006 was $52,297 and $97,666, respectively.

### ***Results ofOperations***

Thefollowing table sets forth the relationship between various components of ourresults of operations, stated as a percent of sales, for the second quarter andsix-month periods ended June 30, 2006, and 2005.

|                                                        | ** ** | **Second Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                          | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Sales                                                  |       | 100.0                                             |       | 100.0                                         |       | 100.0 |   | 100.0 |   |
| Cost of sales                                          |       | 42.2                                              |       | 44.6                                          |       | 41.8 |   | 44.7 |   |
| Gross profit                                           |       | 57.8                                              |       | 55.4                                          |       | 58.2 |   | 55.3 |   |
| Selling, general and  administrative expenses          |       | 32.1                                              |       | 32.5                                          |       | 30.7 |   | 32.4 |   |
| Research and  development expenses                     |       | 7.2                                               |       | 6.2                                           |       | 7.1 |   | 6.4 |   |
| Operating income                                       |       | 18.5                                              |       | 16.7                                          |       | 20.4 |   | 16.5 |   |
| Other income                                           |       | 2.6                                               |       | 1.6                                           |       | 2.4 |   | 1.6 |   |
| Income from  continuing operations before income taxes |       | 21.1                                              |       | 18.3                                          |       | 22.8 |   | 18.1 |   |
| Income taxes                                           |       | 7.5                                               |       | 6.1                                           |       | 7.4 |   | 4.8 |   |
| Income from  continuing operations                     |       | 13.6                                              |       | 12.2                                          |       | 15.4 |   | 13.3 |   |
| (Loss) gain from  discontinued operations, net of tax  |       | —                                            |       | (0.1                                          | )          | 0.1 |   | (1.1 | ) |
| Net income                                             |       | 13.6                                              |       | 12.1                                          |       | 15.5 |   | 12.2 |   |

### * *

### *Comparisonof Financial Results for the Second Quarter and Six Months Ended June 30, 2006and 2005*

### *Sales*

Salesfor the second quarter 2006 were $6,340,523, down 1% compared to $6,382,302 forthe same period in 2005.  On a productline basis, this decrease was primarily due to decreased sales of our weighingand pharmaceutical products, headspace analyzer and gas analyzer products,offset somewhat by an increase in sales of our permeation and leak detectionproducts.  Sales for the first six monthsof 2006 were $12,859,435, consistent with $12,826,697 for the same period in2005.  On a product line basis, thisincrease was primarily due to increased sales of our weighing and pharmaceuticalproducts, gas chromatography and headspace analyzer products, offset somewhatby a decrease in sales of our sample preparation and leak detectionproducts.  The reduction in samplepreparation products was due to the sale of Lab Connections which occurred inthe first quarter 2006.  There were nosignificant price increases or decreases during either the second quarter 2006or the first six months of 2006 compared to the same respective periods in2005.

The following table summarizes total sales byproduct line for the second quarter and six-month periods 

12

----

ended June 30, 2006 and 2005.

|                                              | ** ** | **Second Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                  | ** ** | **June 30,**              | ** ** |
| ** **                                   | ** ** | **2006**                           | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Permeation Products and  Services            |       | $                                  | 3,734,412  |                           | $          | 3,495,579 |   | $ | 7,230,650 |   | $ | 7,333,911 |   |
| Gas, Headspace, and  Other Analyzer Products |       | 2,188,947                          |       | 2,436,760                      |       | 4,820,712 |   | 4,587,472 |   |
| Other Instruments and  Services              |       | 417,164                            |       | 449,963                        |       | 808,073 |   | 905,314 |   |
| Total sales                                  |       | $                                  | 6,340,523  |                           | $          | 6,382,302 |   | $ | 12,859,435 |   | $ | 12,826,697 |   |

 

Thefollowing table sets forth the relationship between various components ofdomestic and foreign sales for the second quarter and six-month periods endedJune 30, 2006 and 2005.

|                      | ** ** | **Second Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------|------------|------------------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **June 30,**                  | ** ** | **June 30,**              | ** ** |
| ** **           | ** ** | **2006**                           | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Domestic sales       |       | $                                  | 2,508,746  |                           | $          | 3,432,697 |   | $ | 5,609,130 |   | $ | 6,537,499 |   |
| Foreign sales:       |       |                               |       |                           |       |   |   |   |   |
| Europe               |       | 2,025,742                          |       | 1,492,634                      |       | 3,550,142 |   | 3,013,298 |   |
| Asia                 |       | 1,339,152                          |       | 912,333                        |       | 2,732,504 |   | 2,299,330 |   |
| Other                |       | 466,883                            |       | 544,638                        |       | 967,659 |   | 976,570 |   |
| Total foreign  sales |       | 3,831,777                          |       | 2,949,605                      |       | 7,250,305 |   | 6,289,198 |   |
| Total sales          |       | $                                  | 6,340,523  |                           | $          | 6,382,302 |   | $ | 12,859,435 |   | $ | 12,826,697 |   |

 

Salesof our permeation products and services, which accounted for approximately 59%and 55% of our consolidated second quarter sales in 2006 and 2005,respectively, increased 7% during the second quarter 2006 compared to the sameperiod in 2005.  This increase resultedfrom a 37% increase in international shipments due primarily to increased salesto our European, Asian and South American markets.  Offsetting this increase in foreign sales wasa 41% decrease in domestic shipments.  Webelieve the domestic packaging market was impacted by higher raw material costsfor plastic resins in the second quarter 2006 compared to the same period in2005, resulting in a decline in capital equipment spending domestically.  We believe this caused some of our customersto purchase raw materials from suppliers overseas during second quarter 2006,resulting in increased demand for our products from those internationalsuppliers.  We expect to see animprovement in domestic sales going forward as we are expecting new productintroductions to have a positive impact.

Salesof our permeation products and services, which accounted for approximately 56%and 57% of our consolidated sales during the first six months of 2006 and 2005,respectively, decreased 1% during the first six months of 2006 compared to thesame period in 2005.  This decreaseresulted from a 25% decrease in our domestic shipments, offset by a 12%increase in our foreign shipments.

Sales of our gas, headspace, and other analyzer products, whichaccounted for 34% and 38% of our consolidated second quarter sales in 2006 and2005, respectively, decreased 10% during the second quarter 2006 compared tothe same period in 2005.  Within thisgroup, sales of our weighing and pharmaceutical products decreased 50%, whichdecrease was evenly spread between domestic and foreign markets, and was due todecreased demand.  Our weighing andpharmaceutical products group consists of a relatively fewer number of productscompared to our other product groups and will typically experience significantfluctuations in demand.  Sales of our headspace

13

----

analyzerproducts decreased 13% in the second quarter 2006 compared to the same quarterin 2005, which was primarily the result of a decrease in domestic sales.  One reason for the decrease in sales of ourheadspace analyzer products was due to the strong demand for our handheld unitsin the same period in 2005, shortly after their introduction.  Sales of our gas analyzer products throughour Baseline subsidiary decreased 4% in the second quarter 2006 compared to thesame quarter in 2005 primarily as a result of a 28% decrease in domestic sales,partially offset by a 76% increase in shipments of equipment and sensors intoour foreign markets.  As a result ofincreased demand primarily in our foreign markets, sales of our leak detectionproducts increased 47% during the second quarter 2006 compared to the sameperiod in 2005.

Salesof our gas, headspace, and other analyzer products, which accounted for 37% and36% of our consolidated sales for the first six months of 2006 and 2005,respectively, increased 5% during the first six months of 2006 compared to thesame period in 2005.  Within this group,sales of our weighing and pharmaceutical products increased by 41%, whichincrease was evenly spread between our domestic and foreign markets, and wasdue to increased demand.  Sales of ourheadspace analyzer products increased 6% in the first six months of 2006compared to the same period in 2005 primarily as a result of a 10% increase indomestic sales, partially offset by a small decrease in foreign sales.  Sales of our gas analyzer products increasedslightly over 1% for the first six months of 2006 compared to the same periodin 2005 primarily as a result of a significant increase in foreign sales,partially offset by a 26% decrease in domestic sales. Sales of our leakdetection products decreased 14% for the first six months of 2006 compared tothe same period in 2005, primarily as a result of decreased foreign anddomestic sales during the first quarter 2006 compared to the same period in2005 and partially offset by increased foreign sales during the second quarter2006 compared to the same period in 2005.

Salesin our other instruments and services category decreased 7% in the secondquarter 2006 compared to the same quarter in 2005 due to reduced foreignsales.  This product group accounted for7% of our consolidated sales in both second quarter periods.

Salesin our other instruments and services category accounted for 7% of ourconsolidated sales for the first six months of both 2006 and 2005, anddecreased 11% in the first six months of 2006 compared to the same period in2005 due to reduced foreign demand.

On ageographical basis, domestic and foreign sales accounted for 40% and 60%,respectively, of our consolidated second quarter sales in 2006, and 54% and46%, respectively, for the same period in 2005. Domestic and foreign sales accounted for 44% and 56%, respectively, ofour sales for the first six months of 2006, and 51% and 49% for the same periodin 2005.

### *GrossProfit*

Thegross profit margins for our products were 58.5% and 55.3% for the secondquarters 2006 and 2005, respectively. The higher margin for second quarter 2006 was primarily due to a shiftin the product mix to higher margin items, the elimination of productioninefficiencies due to the sale of our Lab Connections subsidiary, and movingproduction of certain products in-house.

Thegross profit margins for our consulting services were 48.9% and 56.9%,respectively, for the second quarters ended June 30, 2006 and 2005.  This decrease was primarily due to highercontract analytical testing services in the prior period, which produced highermargins.

Thegross profit margins for our products for the six-month periods ended June 30,2006 and 2005 were 58.9% and 56.0%, respectively.  The higher margin for the first six months of2006 was primarily due to the elimination of production inefficiencies due tothe sale of our Lab Connections subsidiary, moving production of certainproducts in-house, and a shift in product mix to higher margin items.

Thegross profit margins for our consulting services were 48.7% and 45.9% for thesix-month periods ended June 30, 2006 and 2005, respectively.  This increase was primarily due to increasedcontract analytical testing services in the current period, combined with areduction in related costs.

14

----

*Selling, General and Administrative Expenses*

### Selling, general andadministrative (SG&A) expenses in the second quarter 2006 were $2,031,958,or 32.1% of sales, compared to $2,074,736, or 32.5% of sales in the secondquarter 2005.  The decrease in SG&Aexpenses was primarily due to lower headcount in 2006, reduced operating costsin our Lab Connections subsidiary which was sold during the first quarter 2006,and reduced consulting costs related to Sarbanes-Oxley Act of 2002 compliancein the second quarter 2006 compared to the same period in 2005.

### SG&A expenses were$3,951,098, or 30.7% of sales, during the first six months of 2006, compared to$4,157,324, or 32.4% of sales, for the same period in 2005.  The decrease in SG&A expenses wasprimarily due to lower headcount in 2006 and reduced operating costs in our LabConnections subsidiary which was sold during the first quarter 2006.

### *Researchand Development Expenses*

Researchand development (R&D) expenses were $456,187, or approximately 7.2% ofsales, in the second quarter 2006, compared to $397,224, or approximately 6.2%of sales, in the same period of 2005. R&D expenses were 7.1% and 6.4% for the six-month periods ended June30, 2006 and 2005, respectively.  Thisplanned increase in R&D expenditures is considered by management to benecessary to develop new products to expand in our niche markets.  For the foreseeable future, we expect toallocate on an annual basis approximately 6% to 8% of sales to research anddevelopment.

### *OtherIncome*

Otherincome for the second quarter ended June 30, 2006 consisted of interest incomeof $93,614, gain on sale of fixed assets of $60,804, gain on foreign currencyexchange of $7,882 and other income of $323. Other income for the second quarter ended June 30, 2005 consisted ofinterest income of $45,303, gain on sale of fixed assets of $41,898, gain onforeign currency exchange of $15,432 and other income of $4,051.  For the six months ended June 30, 2006, otherincome consisted of interest income of $174,591, a $92,345 gain on the sale ofLab Connections, gain on sale of fixed assets of $60,804 and other income$1,610, offset by a loss on foreign currency exchange of $11,430.  For the six months ended June 30, 2005, otherincome consisted of interest income of $83,230, gain on foreign currencyexchange of $57,001, gain on sale of fixed assets of $41,898 and other incomeof $15,760.  Interest income increasedfor the second quarter and six months ended June 30, 2006 compared to the samerespective periods in 2005 due both to higher average yields and higher averagecash balances.

### *Income TaxExpense*

Ourprovision for income taxes from continuing operations was 35.5% of incomebefore income taxes for the second quarter ended June 30, 2006, compared to33.1% of income before income taxes for the second quarter ended June 30, 2005.

Forthe six months ended June 30, 2006, our provision for income taxes fromcontinuing operations was 32.8% of income before income taxes compared to 26.3%of income before income taxes for the six months ended June 30, 2005.  The rate for the first six months of 2006 wasfavorably impacted by the resolution of a proposed income tax assessment in thestate of New Jersey, which reduced income tax expense by approximately$50,000.  Also, because the sale of LabConnections generated a taxable loss, there was no tax provision applicable tothe $92,345 gain that was realized in the first quarter 2006. The rate for thefirst six months of 2005 was favorably impacted by the finalization of anInternal Revenue Service examination, which reduced income tax expense byapproximately $156,000 in the first quarter 2005 as well as benefiting from thenewly enacted tax law.  Based on currentoperating conditions and income tax laws, we expect the tax rate for the remainingquarters of 2006 to 

15

----

bein the range of 33% to 36%.

### *Net Income*

Netincome was $862,894 in the second quarter 2006, compared to $775,040 in thesecond quarter 2005.  Diluted net incomewas $0.16 per share in the second quarter 2006 compared to $0.14 per share inthe second quarter 2005.  For the sixmonths ended June 30, 2006, net income was $1,997,653, or $0.36 per dilutedshare, compared to net income of $1,569,211, or $0.28 per diluted share in theprior year.

*Liquidity and Capital Resources*

We havehistorically financed our operations, capital expenditures and other liquidityneeds through our cash flows generated from operations.  Total cash, cash equivalents and marketablesecurities increased $1,694,493 during the first six months of 2006 to $10,715,862as of June 30, 2006, compared to $9,021,369 at December 31, 2005, due inpart to a significant reduction in trade accounts receivable, the receipt ofthe net proceeds from the sale of Lab Connections of $478,721, and the exerciseof stock options.  Our working capital asof June 30, 2006 increased $1,358,112 to $15,197,445, as compared to$13,839,333 at December 31, 2005. 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, stock repurchases, and the final requiredearnout payment to the former parent company of Lippke, for at least the nexttwelve months.  However, one of ourstrategic objectives is, as market and business conditions warrant, to consideracquisitions of businesses, products or technologies.  We may need to fund such activities, shouldthey arise, with debt and/or equity financing, although no assurance can begiven that such debt and/or equity financing will be available at reasonableterms or at all.

*Cash Flow*

CashFlow from Operating Activities

Ourprimary source of funds is cash provided by operating activities of continuingoperations which totaled $1,931,608 and $1,376,002 in the first six months of2006 and 2005, respectively.  In thefirst six months of 2006, the cash provided by operating activities increasedby $555,606, or 40%, compared to the first six months of 2005.  The key components of the increases in 2006were net income of $1,975,428, the decrease in accounts receivable of $283,955and the add-back of non-cash depreciation and amortization of $377,499.  Offsetting these increases were reductions inaccounts payable, accrued income taxes and other accrued expenses of $272,469,$238,865 and $246,139, respectively, and the gain on disposition of long-termassets of $152,149.

### Cash Flow from Investing Activities

Cashused in investing activities of continuing operations totaled $488,305 and$1,557,431 in the first six months of 2006 and 2005, respectively.  The proceeds from sale of subsidiary of$478,721 in the first six months of 2006 related to the sale of Lab Connectionsin the first quarter.  Purchases ofmarketable securities, net of proceeds, were $876,191 in the first six monthsof 2006.  Purchases of property, plantand equipment totaled $166,310 in the same period, primarily for additions ofoffice, manufacturing and laboratory equipment, as compared to $144,563 in thefirst half of 2005.  We had no materialcommitments for capital expenditures as of June 30, 2006.  We presently do not believe that anysignificant property, plant and equipment expenditures are required toaccommodate our current level of operations.

16

----

CashFlow from Financing Activities

Cashused in financing activities of continuing operations consists primarily of thepayment of dividends to our shareholders. During the first six months of 2006 and 2005, we made dividend paymentsto our shareholders of $811,970 and $747,678, respectively, and purchases ofour common stock in the amount of $363,125 in 2006.  Offsetting thesepayments were the proceeds from the exercise of stock options in the amount of$451,833 and $270,208 in the first six months of 2006 and 2005, respectively.

OurBoard of Directors has authorized, depending upon market conditions and otherfactors, the repurchase of up to a total of $2,000,000 of our commonstock.  As of June 30, 2006, we hadrepurchased an aggregate of 41,500 shares of MOCON common stock under theprogram at a total cumulative cost of $363,125. Therefore, as of June 30, 2006, $1,636,875 was remaining in thisauthorization.

***ContractualObligations***

Werefer you to our Annual Report on Form 10-K for the year ended December 31,2005 for a summary of our contractual obligations.  Except for the earnout payment paid inconnection with the Lippke acquisition, there has been no material change inthis information.

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

Except for operating leases entered into in theordinary course of business and customary indemnification obligations undercertain of our agreements entered into in the ordinary course of business, wedo not have any material off-balance sheet arrangements.

***New Accounting Pronouncements***

In June 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (FIN 48). FIN 48clarifies the accounting for income taxes by prescribing the minimumrecognition threshold a tax position is required to meet before being recognizedin the financial statements. FIN 48 also provides guidance on derecognition,measurement, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The requirements are effective for fiscalyears beginning after December 15, 2006. Although we are still evaluating theimpact that the adoption of FIN 48 will have on our consolidated financialstatements, we do not believe it will have a material impact.

***Critical AccountingPolicies***

Oursignificant accounting policies are described in Note 1 to our condensedconsolidated financial statements.  ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations is based upon our condensed consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States of America.  Thepreparation of these condensed consolidated financial statements requiresmanagement to make estimates and judgments that affect the reported amount of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  The Securities andExchange Commission has defined a company’s most critical accounting policiesas those that are most important to the portrayal of its financial conditionand results of operations, and which require the company to make its mostdifficult and subjective judgments, often as a result of the need to makeestimates of matters that are inherently uncertain.  Based on this definition, we have identifiedthe following critical accounting policies. Although we believe that our estimates and assumptions are reasonable,they are based upon information available when they are made.  Actual results may differ significantly fromthese estimates under different assumptions or conditions.

*Allowance for doubtful accounts and sales returns* – Our allowance fordoubtful accounts and sales returns is for accounts receivable balances thatare 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 June 30, 2006, we had $172,482 reservedagainst our accounts receivable for doubtful accounts and sales returns.

17

----

*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 analysis includesinventory levels, the nature of the finished product and its inherent risk ofobsolescence and the on-hand quantities relative to the sales history of thatfinished product.  We believe that ourfinancial results could be materially different if historical trends do notreflect actual results or if demand for our products decreased because ofeconomic or competitive conditions or otherwise.

*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 an asset’scarrying 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 aregenerally covered by a warranty, with warranty periods ranging from ninety daysto one year from the date of sale. Estimated warranty costs are accrued in the same period in which therelated revenue is recognized, based on anticipated parts and labor costs,utilizing historical experience.  Specialwarranty reserves are also accrued for major rework campaigns.  We periodically assess the adequacy of ourwarranty reserves based on changes in these factors and record any necessaryadjustments if actual claim experience indicates that adjustments arenecessary.  Although we believe thelikelihood to be relatively low, warranty claims experience could be materiallydifferent from actual results due to manufacturing changes that could impactproduct quality, a change in our warranty policy in response to industrytrends, as yet unrecognized defects in products sold, or other factors.  As of June 30, 2006, we had $265,595 accruedrelated to future estimated warranty claims.

*Income taxes –*In the preparation of our consolidatedfinancial statements, management is required to estimate income taxes in eachof the jurisdictions in which we operate. This process involves estimatingactual current tax exposures together with assessing temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which areincluded in our consolidated balance sheet.

Wehave significant amounts of deferred tax assets. Management reviews thedeferred tax assets for recoverability on a quarterly basis and assesses theneed for valuation allowances. These deferred tax assets are evaluated byconsidering historical levels of income, estimates of future taxable incomestreams and the impact of tax planning strategies. A valuation allowance isrecorded to reduce deferred tax assets when it is determined that it is morelikely than not that we would not be able to realize all or part of itsdeferred tax assets. We carried no valuation allowance against our net deferredtax assets at either June 30, 2006 or 2005.

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

This quarterly report on Form 10-Q contains not onlyhistorical information, but also forward-looking statements within the meaningof Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934, and are subject to the safe harbor created bythose statutes.  In addition, we orothers on our behalf may make forward-looking statements from time to time inoral presentations, including telephone conferences and/or web casts open tothe public, in press releases or reports, on our internet website orotherwise.  Statements that are nothistorical are forward-looking and reflect expectations and assumptions.  We try to identify forward-looking statementsin this report and elsewhere by using words such as “may,” “will,” “should,” “expects,”“anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,”“potential” or “continue” or the negative of these or similar terms.  Examples of forward-looking statements inthis report include, but are not limited to, 

18

----

statements regarding our expectation of improveddomestic sales due to new product introductions, our allocation of 6% to 8% ofour sales to research and development expenses, our expected tax rate for theremaining quarters of 2006 being in the range of 33% to 36%, our belief that nosignificant future capital expenditures are required to accommodate our currentlevel of operations, our expectations regarding future cash expenditures, andthe effect of new accounting pronouncements on our financial position, resultsof operations and cash flows.

Forward-looking statements are based on currentexpectations about future events affecting us and are subject to uncertaintiesand factors that affect all businesses operating in a global market as well asmatters specific to MOCON.  Theseuncertainties and factors are difficult to predict and many of them are beyondour control. The following are some of the uncertainties and factors known tous that could cause our actual results to differ materially from what we haveanticipated in our forward-looking statements:

·                  Increases in pricesfor raw materials;

·                  Risks inherent inoperating internationally and selling and shipping our products and purchasingour products and components internationally;

·                  Fluctuations inforeign currency exchange rates and interest rates;

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

·                  Failure to effectstrategic acquisitions and integrate effectively newly acquired operations;

·                  Incurrence ofadditional debt, contingent liabilities and expenses in connection with futureacquisitions;

·                  Decreases in capitalspending;

·                  Exposure toassertions of intellectual property claims and failure to protect our intellectualproperty;

·                  Disruption in ourability to manufacture our products or the ability of our key suppliers toprovide us products or components or raw materials for products resulting inour inability to supply market demand for our products;

·                  Reliance onindependent sales distributors and sales associates to market and sell ourproducts;

·                  Highly competitivenature of the markets in which we sell our products and the introduction ofcompeting products;

·                  Loss of customers;

·                  Failure to retainsenior management or replace lost senior management;

·                  Employee slowdowns,strikes or similar actions;

·                  Reliance on ourmanagement information systems for inventory management, distribution and otherfunctions;

·                  Effects of anypending or threatened litigation;

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

·                  Changes in generallyaccepted accounting principles; or

·                  Conditions andchanges in general economic and business conditions.

For more information regarding these and otheruncertainties and factors that could cause our actual results to differmaterially from what we have anticipated in our forward-looking statements orotherwise could materially adversely affect our business, financial conditionor operating results, see our annual report on Form 10-K for the fiscal yearended December 31, 2005 under the heading “Part I – Item 1A.  Risk Factors” on pages 8 through 13 of suchreport.

All forward-looking statements included in this reportare expressly qualified in their entirety by the 

19

----

foregoing cautionary statements.  We wish to caution readers not to place unduereliance on any forward-looking statement that speaks only as of the date madeand to recognize that forward-looking statements are predictions of futureresults, which may not occur as anticipated. Actual results could differ materially from those anticipated in theforward-looking statements and from historical results, due to the risks anduncertainties described below, as well as others that we may considerimmaterial or do not anticipate at this time. Although we believe that theexpectations reflected in our forward-looking statements are reasonable, we donot know whether our expectations will prove correct.  Our expectations reflected in ourforward-looking statements can be affected by inaccurate assumptions we mightmake or by known or unknown uncertainties and factors, 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.

Item 3.  Quantitativeand Qualitative Disclosures About Market Risk

*Equity Price and Interest RateRisk*

Substantially all of our marketable securities are atfixed interest rates and all of our marketable securities mature within twoyears or less; therefore, we believe that the market risk arising from theholding of these financial instruments is minimal.

### *ForeignCurrency Exchange Risk*

Because our products are manufactured or sourcedprimarily from the United States, a stronger U.S. dollar generally has anegative impact on our results from operations outside of the United Stateswhile a weaker dollar generally has a positive effect.  We currently sell our products and servicesin United States dollars or the local currency of our foreign subsidiary(euros).  Accordingly, our foreignoperations expose us to foreign currency exchange risk when the euro currencyresults 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.  Any changes in foreigncurrency exchange rates will be reflected as a foreign currency translationadjustment, a component of accumulated other comprehensive income instockholders’ equity, and would not impact our net income.

Item 4.  Controls and Procedures

*Evaluation of Disclosure Controlsand Procedures*

We maintain disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed toensure that information required to be disclosed by us in the reports we fileor submit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized, and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms and that such informationis accumulated and communicated to our management, including our principalexecutive and principal financial officers, or persons performing similarfunctions, as appropriate to allow timely decisions regarding requireddisclosure.  In designing and evaluatingour disclosure controls and procedures, we recognize that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the 

20

----

desired control objectives, and we necessarily arerequired to apply our judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.  Ourmanagement evaluated, with the participation of our Chief Executive Officer andChief Financial Officer, the effectiveness of the design and operation of ourdisclosure controls and procedures as of the end of the period covered in thisQuarterly Report on Form 10-Q.  Based onthat evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of theend of such period, to provide reasonable assurance that information requiredto be disclosed in our Exchange Act reports is recorded, processed, summarized,and reported within the time periods specified in the SEC’s rules and forms,and that 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 no change in our internal control overfinancial reporting that occurred during our quarter ended June 30, 2006 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

21

----

PART II.  OTHER INFORMATION

Item1A.  Risk Factors

We are affected by risks specific to us as well asfactors that affect all businesses operating in a global market.  The significant factors known to us thatcould materially adversely affect our business, financial condition oroperating results are described in our annual report on Form 10-K for thefiscal year ended December 31, 2005 under the heading “Part I — Item 1A. RiskFactors.”  There has been no materialchange in those risk factors.

Item2.  Unregistered Sales of EquitySecurities, Use of Proceeds and Issuer Purchases of Equity Securities

*UnregisteredSales of Equity Securities*

We did not sell any equity securities of MOCON, Inc.during the second quarter ended June 30, 2006 that were not registered underthe Securities Act of 1933.

*IssuerRepurchases of Equity Securities*

The following table shows our stock repurchaseactivity during the second quarter ended June 30, 2006:
| **Period**                            | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price  Paid Per  Share** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly  Announced  Plans or  Programs** | ** ** | **Maximum  Amount of  Authorization  Remaining  Under the  Plan** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| April 1, 2006  through April 30, 2006 |       | 12,000                                           | (1)        | $                                        | 8.75       |                                                                                                                 | 12,000     |                                                                        | $          | 1,636,875 |   |
| May 1, 2006  through May 31, 2006     |       | 6,335                                            | (2)        | 9.65                                     |       | —                                                                                                               |       | 1,636,875                                                                   |       |
| June 1, 2006 through  June 30, 2006   |       | 5,238                                            | (2)        | 9.73                                     |       | —                                                                                                               |       | 1,636,875                                                                   |       |
|                                       |            |                                                  |            |                                          |            |                                                                                                                      |            |                                                                             |            |  |  |

 

----

(1)          On November 9, 2005, our Board of Directorsauthorized the repurchase of up to a total of $2,000,000 of our commonstock.  This program has no expirationdate, but may be suspended or discontinued at any time by our Board ofDirectors.  We purchased 12,000 sharesduring the period indicated above under this program.

(2)          Consists of shares repurchased from employees in connection with thetender of previously acquired shares in payment of the exercise price of stockoptions.  These transactions do notaffect the amount available for stock repurchases in the future.

22

----

Exceptas set forth in the table above, we did not purchase any shares of our commonstock or other equity securities of ours registered pursuant to Section 12 ofthe Securities Exchange Act of 1934, as amended, during the second quarterended June 30, 2006.

Item4.  Submission of Matters to a Vote ofSecurity Holders

(a)   Our Annual Meeting ofShareholders was held on May 18, 2006.

(b)   The results of theshareholder votes were as follows:          
| ** **                                                                                                                                                  | ** ** | **For**   | ** ** | **Against/Withhold** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|----------------------|------------|-------------|------------|-----------------------|------------|
| 1.                  Election  of Directors                             |       |      |       |                 |       |        |       |                  |       |
| Robert L. Demorest                                                                                                                                          |       | 5,086,397 |       | 32,747               |       | —      |       | —                |       |
| Dean B. Chenoweth                                                                                                                                           |       | 5,074,643 |       | 44,501               |       | —      |       | —                |       |
| J. Leonard Frame                                                                                                                                            |       | 5,023,956 |       | 95,188               |       | —      |       | —                |       |
| Robert F. Gallagher                                                                                                                                         |       | 5,084,161 |       | 34,983               |       | —      |       | —                |       |
| Richard A. Proulx                                                                                                                                           |       | 5,082,734 |       | 36,410               |       | —      |       | —                |       |
| Tom C. Thomas                                                                                                                                               |       | 5,010,766 |       | 108,378              |       | —      |       | —                |       |
| Ronald A. Meyer                                                                                                                                             |       | 5,068,080 |       | 51,064               |       | —      |       | —                |       |
| Daniel W. Mayer                                                                                                                                             |       | 5,086,397 |       | 32,747               |       | —      |       | —                |       |
| 2.                  Approval  of MOCON, Inc. 2006 Stock Incentive Plan |       | 2,226,971 |       | 449,729              |       | 126,828     |       | 2,315,616             |       |
| 3.      Ratification  of Independent Registered Public Accounting Firm                                                             |       | 5,092,518 |       | 6,428                |       | 20,198      |       | —                |       |

Broker non-votes are not considered to be entitled to vote on ProposalTwo, and therefore were not counted in determining the votes cast on thematter.

Item6.  Exhibits

Thefollowing exhibits are being filed or furnished with this quarterly report onForm 10-Q:
| Exhibit  No. | ** ** | **Description**                                                                                     |
|--------------|------------|-----------------------------------------------------------------------------------------------------|
| 10.1         |       | MOCON, Inc. 2006 Stock Incentive Plan                                                               |
|         |       |                                                                                                |
| 10.2         |       | Form of Incentive Stock Option Agreement under the  MOCON, Inc. 2006 Stock Incentive Plan           |
|         |       |                                                                                                |
| 10.3         |       | Form of Non-Statutory Stock Option Agreement under  the MOCON, Inc. 2006 Stock Incentive Plan       |
|         |       |                                                                                                |
| 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-OxleyAct of 2002  |
|         |       |                                                                                                |
| 32.2         |       | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-OxleyAct of 2002  |

 

23

----

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: August 14, 2006 | /s/ Robert L. Demorest                       |   |
|                  | Robert L. Demorest                           |   |
|                  | Chairman, President and Chief                |   |
|                  | Executive Officer                            |   |
|                  | (Principal Executive Officer)                |   |
|                  |                                         |   |
|                  |                                         |   |
| Date: August 14, 2006 | /s/ Darrell B. Lee                           |   |
|                  | Darrell B. Lee                               |   |
|                  | Vice President, Treasurer and Chief          |   |
|                  | Financial Officer                            |   |
|                  | (Principal Financial and Accounting Officer) |   |

 

24

----

MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED JUNE 30, 2006

EXHIBITINDEX
| Exhibit  No. | ** ** | **Description**                                                                                          | ** ** | **Method of  Filing**                                                                                                                                                                   |
|--------------|------------|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1         |       | MOCON, Inc. 2006 Stock Incentive Plan                                                                    |       | Incorporated by  reference to Exhibit 10.1 to MOCON, Inc.’s Current Report on Form 8-K as  filed with the Securities and Exchange Commission on May 23, 2006 (File No.  000-09273) |
|         |       |                                                                                                     |       |                                                                                                                                                                                    |
| 10.2         |       | Form of Incentive Stock Option Agreement under the  MOCON, Inc. 2006 Stock Incentive Plan                |       | Incorporated by  reference to Exhibit 10.2 to MOCON, Inc.’s Current Report on Form 8-K as  filed with the Securities and Exchange Commission on May 23, 2006 (File No.  000-09273) |
|         |       |                                                                                                     |       |                                                                                                                                                                                    |
| 10.3         |       | Form of Non-Statutory Stock Option Agreement under  the MOCON, Inc. 2006 Stock Incentive Plan            |       | Incorporated by  reference to Exhibit 10.3 to MOCON, Inc.’s Current Report on Form 8-K as  filed with the Securities and Exchange Commission on May 23, 2006 (File No.  000-09273) |
|         |       |                                                                                                     |       |                                                                                                                                                                                    |
| 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                                                                                                                                                                     |

 

25

----