Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

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

#### ** **

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

##### ** **

**(Mark One)**
| **x****Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**                                                                                                                                            |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                              |
| **For the  Quarter Ended September 30, 2008**                                                                                                                                                                                                      |
| ** **                                                                                                                                                                                                                                              |
| **or**                                                                                                                                                                                                                                                  |
| ** **                                                                                                                                                                                                                                              |
| **o****Transition Report Pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934**                                                                                                                                            |
| ** **                                                                                                                                                                                                                                              |
| **For the  transition period from                     to                   ** |
| ** **                                                                                                                                                                                                                                              |
| **Commission  File Number 000-09273**                                                                                                                                                                                                                   |

 

**MOCON, INC.**

(Exactname of registrant as specified in its charter)

 

| **Minnesota**                                                                                                                                                                    | ** ** | **41-0903312**      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                                                                                                                                                  |       | (I.R.S. employer    |
| incorporation or organization)                                                                                                                                                   |       | identification no.) |
|                                                                                                                                                                             |       |                |
| **7500 Boone Avenue North, Minneapolis,  Minnesota 55428**(Address of principal executive  offices)           (Zip  code) |

 

**(763) 493-6370**

(Registrant’s telephone number, including area code)

 

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

 

YES x  NO o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| Large  accelerated filer o | Accelerated filer o | Non-accelerated filer  o  (do not check if a smaller reporting company) | Smaller reporting company x |
|----------------------------|---------------------|------------------------------------------------------------------------------|-----------------------------|

 

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

 

YES o   NO x

 

5,598,501Common Shares were outstanding as of October 31, 2008.

 

 

 

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Table of Contents

 

MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter Ended September 30,2008

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

 

*Inthis report, references to “MOCON,” “the Company,” “we,” “our,” or “us,” unlessthe context otherwise requires, refer to MOCON, Inc. and its subsidiaries.*

 

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

 

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PART I. FINANCIAL INFORMATION

 

Item 1.  FinancialStatements

 

MOCON, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 
| ** **                                                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2008**               | ** ** | **2007**              | ** ** |
|                                                                                                                                              |       |                   |       |                  |       |
| ASSETS                                                                                                                                            |       |                   |       |                  |       |
| Current assets:                                                                                                                                   |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                         |       | $                      | 4,194,031  |                  | $          | 5,207,105 |   |
| Marketable securities, current                                                                                                                    |       | 5,930,140              |       | 7,028,812             |       |
| Trade accounts receivable, less allowance  for doubtful accounts of $128,131 in 2008 and $125,797 in 2007                                         |       | 4,387,920              |       | 4,291,224             |       |
| Other receivables                                                                                                                                 |       | 217,087                |       | 186,273               |       |
| Inventories                                                                                                                                       |       | 4,577,049              |       | 3,965,446             |       |
| Prepaid expenses                                                                                                                                  |       | 826,396                |       | 335,104               |       |
| Deferred income taxes                                                                                                                             |       | 329,304                |       | 291,943               |       |
| Total current assets                                                                                                                              |       | 20,461,927             |       | 21,305,907            |       |
|                                                                                                                                              |       |                   |       |                  |       |
| Marketable securities, noncurrent                                                                                                                 |       | 6,076,229              |       | 2,788,964             |       |
| Property, plant and equipment, net of  accumulated depreciation of $4,186,500 in 2008 and $4,290,311 in 2007                                      |       | 1,586,844              |       | 1,583,387             |       |
|                                                                                                                                              |       |                   |       |                  |       |
| Other assets:                                                                                                                                     |       |                   |       |                  |       |
| Goodwill                                                                                                                                          |       | 3,096,317              |       | 3,096,317             |       |
| Technology rights and other intangibles,  net                                                                                                     |       | 571,551                |       | 572,675               |       |
| Deferred income taxes                                                                                                                             |       | 272,076                |       | 252,729               |       |
| Other                                                                                                                                             |       | 76,100                 |       | 73,518                |       |
| Total other assets                                                                                                                                |       | 4,016,044              |       | 3,995,239             |       |
|                                                                                                                                              |       |                   |       |                  |       |
| TOTAL ASSETS                                                                                                                                      |       | $                      | 32,141,044 |                  | $          | 29,673,497 |   |
|                                                                                                                                              |       |                   |       |                  |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                         |       |                   |       |                  |       |
| Current liabilities:                                                                                                                              |       |                   |       |                  |       |
| Accounts payable                                                                                                                                  |       | $                      | 1,955,472  |                  | $          | 1,591,306 |   |
| Accrued compensation and vacation                                                                                                                 |       | 1,265,426              |       | 1,340,500             |       |
| Other accrued expenses                                                                                                                            |       | 269,557                |       | 304,750               |       |
| Accrued product warranties                                                                                                                        |       | 225,889                |       | 201,373               |       |
| Accrued income taxes                                                                                                                              |       | —                 |       | 68,670                |       |
| Dividends payable                                                                                                                                 |       | 475,873                |       | 442,244               |       |
| Total current liabilities                                                                                                                         |       | 4,192,217              |       | 3,948,843             |       |
|                                                                                                                                              |       |                   |       |                  |       |
| Obligations to former employees                                                                                                                   |       | 59,239                 |       | 60,387                |       |
| Accrued income taxes                                                                                                                              |       | 276,900                |       | 279,000               |       |
| Total noncurrent liabilities                                                                                                                      |       | 336,139                |       | 339,387               |       |
|                                                                                                                                              |       |                   |       |                  |       |
| Total liabilities                                                                                                                                 |       | 4,528,356              |       | 4,288,230             |       |
|                                                                                                                                              |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                        |       |                   |       |                  |       |
| Capital stock – undesignated – authorized  3,000,000 shares                                                                             |       | —                 |       | —                |       |
| Common stock – $0.10 par value. Authorized  22,000,000 shares; issued and outstanding 5,598,501 shares in 2008 and  5,528,051 shares in 2007 |       | 559,850                |       | 552,805               |       |
| Capital in excess of par value                                                                                                                    |       | 2,861,731              |       | 2,127,183             |       |
| Retained earnings                                                                                                                                 |       | 23,731,267             |       | 22,106,178            |       |
| Accumulated other comprehensive gain                                                                                                              |       | 459,840                |       | 599,101               |       |
| Total stockholders’ equity                                                                                                                   |       | 27,612,688             |       | 25,385,267            |       |
|                                                                                                                                              |       |                   |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                   |       | $                      | 32,141,044 |                  | $          | 29,673,497 |   |

 

See accompanying notes to consolidated financial statements.

 

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MOCON, INC. ANDSUBSIDIARIES

 

CONSOLIDATED STATEMENTS OFINCOME

(Unaudited)

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                    | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Sales:                                        |       |                             |       |                            |       |   |   |   |   |
| Products                                      |       | $                                | 6,985,047  |                            | $          | 6,386,056 |   | $ | 21,010,620 |   | $ | 19,010,517 |   |
| Consulting services                           |       | 444,191                          |       | 433,944                         |       | 1,259,774 |   | 1,343,918 |   |
| Total sales                                   |       | 7,429,238                        |       | 6,820,000                       |       | 22,270,394 |   | 20,354,435 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Cost of sales:                                |       |                             |       |                            |       |   |   |   |   |
| Products                                      |       | 2,602,113                        |       | 2,658,791                       |       | 8,256,538 |   | 7,922,843 |   |
| Consulting services                           |       | 264,426                          |       | 238,439                         |       | 742,886 |   | 741,481 |   |
| Total cost of sales                           |       | 2,866,539                        |       | 2,897,230                       |       | 8,999,424 |   | 8,664,324 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Gross profit                                  |       | 4,562,699                        |       | 3,922,770                       |       | 13,270,970 |   | 11,690,111 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Selling, general and administrative  expenses |       | 2,586,565                        |       | 2,117,652                       |       | 7,610,490 |   | 6,444,582 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Research and development expenses             |       | 433,630                          |       | 469,132                         |       | 1,460,594 |   | 1,439,232 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Operating income                              |       | 1,542,504                        |       | 1,335,986                       |       | 4,199,886 |   | 3,806,297 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Other income                                  |       | 134,051                          |       | 146,406                         |       | 422,665 |   | 414,312 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Income before income taxes                    |       | 1,676,555                        |       | 1,482,392                       |       | 4,622,551 |   | 4,220,609 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Income taxes                                  |       | 595,000                          |       | 527,000                         |       | 1,604,000 |   | 1,500,000 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Net income                                    |       | $                                | 1,081,555  |                            | $          | 955,392 |   | $ | 3,018,551 |   | $ | 2,720,609 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Net income per common share:                  |       |                             |       |                            |       |   |   |   |   |
| Basic                                         |       | $                                | 0.19       |                            | $          | 0.17 |   | $ | 0.54 |   | $ | 0.50 |   |
| Diluted                                       |       | $                                | 0.19       |                            | $          | 0.17 |   | $ | 0.53 |   | $ | 0.48 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares outstanding:          |       |                             |       |                            |       |   |   |   |   |
| Basic                                         |       | 5,579,932                        |       | 5,515,050                       |       | 5,555,078 |   | 5,492,409 |   |
| Diluted                                       |       | 5,700,069                        |       | 5,672,172                       |       | 5,672,630 |   | 5,681,236 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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MOCON, INC. ANDSUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                                                            | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                            | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                            | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                                                                 |       |                            |       |   |   |
| Net income                                                                                                            |       | $                               | 3,018,551  |   | $ | 2,720,609 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:   Share-based compensation expense |       | 227,929                         |       | 298,810 |   |
| Loss on disposition of long-term assets                                                                               |       | 31,776                          |       | 22,364 |   |
| Depreciation and amortization                                                                                         |       | 433,482                         |       | 431,394 |   |
| Deferred income taxes                                                                                                 |       | (56,708                         | )          | (37,464 | ) |
| Excess tax benefit from employee stock  plans                                                                         |       | (24,570                         | )          | — |   |
| Changes in operating assets and  liabilities:                                                                         |       |                            |       |   |   |
| Trade accounts receivable                                                                                             |       | (191,663                        | )          | (196,949 | ) |
| Other receivables                                                                                                     |       | (33,377                         | )          | (2,845 | ) |
| Inventories                                                                                                           |       | (629,838                        | )          | 58,195 |   |
| Prepaid expenses                                                                                                      |       | (505,210                        | )          | (20,114 | ) |
| Accounts payable                                                                                                      |       | 435,423                         |       | (312,631 | ) |
| Accrued compensation and vacation                                                                                     |       | (69,365                         | )          | (169,619 | ) |
| Other accrued expenses                                                                                                |       | (33,901                         | )          | (78,581 | ) |
| Accrued product warranties                                                                                            |       | 25,216                          |       | 16,779 |   |
| Accrued income taxes                                                                                                  |       | (55,846                         | )          | (177,421 | ) |
| Net cash provided by operating activities                                                                             |       | 2,571,899                       |       | 2,552,527 |   |
|                                                                                                                  |       |                            |       |   |   |
| Cash flows from investing activities:                                                                                 |       |                            |       |   |   |
| Purchases of marketable securities                                                                                    |       | (7,658,216                      | )          | (7,286,148 | ) |
| Proceeds from maturities of marketable  securities                                                                    |       | 5,450,686                       |       | 7,600,319 |   |
| Cash paid for acquisitions                                                                                            |       | —                          |       | (574,568 | ) |
| Purchases of property and equipment                                                                                   |       | (348,626                        | )          | (273,742 | ) |
| Proceeds from sale of property and  equipment                                                                         |       | 7,817                           |       | — |   |
| Purchases of patents and trademarks                                                                                   |       | (112,775                        | )          | (94,890 | ) |
| Other                                                                                                                 |       | (2,582                          | )          | 99,395 |   |
| Net cash used in investing activities                                                                                 |       | (2,663,696                      | )          | (529,634 | ) |
|                                                                                                                  |       |                            |       |   |   |
| Cash flows from financing activities:                                                                                 |       |                            |       |   |   |
| Proceeds from the exercise of stock options                                                                           |       | 491,062                         |       | 427,065 |   |
| Purchases and retirement of common stock                                                                              |       | (1,968                          | )          | — |   |
| Excess tax benefit from employee stock  plans                                                                         |       | 24,570                          |       | — |   |
| Dividends paid                                                                                                        |       | (1,359,833                      | )          | (1,261,916 | ) |
| Net cash used in financing activities                                                                                 |       | (846,169                        | )          | (834,851 | ) |
|                                                                                                                  |       |                            |       |   |   |
| Effect of exchange rate changes on cash                                                                               |       | (75,108                         | )          | 210,967 |   |
|                                                                                                                  |       |                            |       |   |   |
| Net (decrease) increase in cash and cash  equivalents                                                                 |       | (1,013,074                      | )          | 1,399,009 |   |
|                                                                                                                  |       |                            |       |   |   |
| Cash and cash equivalents:                                                                                            |       |                            |       |   |   |
| Beginning of period                                                                                                   |       | 5,207,105                       |       | 3,549,042 |   |
| End of period                                                                                                         |       | $                               | 4,194,031  |   | $ | 4,948,051 |   |
|                                                                                                                  |       |                            |       |   |   |
| Supplemental disclosures of cash flow  information:                                                                   |       |                            |       |   |   |
| Cash paid during the period for income  taxes                                                                         |       | $                               | 1,752,228  |   | $ | 1,724,841 |   |
|                                                                                                                  |       |                            |       |   |   |
| Supplemental schedule of noncash investing  and financing activities:                                                 |       |                            |       |   |   |
| Unrealized holding gain on  available-for-sale securities                                                             |       | $                               | —     |   | $ | 2,279 |   |
| Amortization of cumulative unrealized gain  on marketable securities                                                  |       | $                               | (18,937    | ) | $ | — |   |
| Dividends accrued                                                                                                     |       | $                               | 475,873    |   | $ | 441,890 |   |

 

See accompanying notes to consolidated financialstatements.

 

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MOCON,INC. AND SUBSIDIARIES

 

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 – Consolidated Financial Statements

 

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

 

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted.  It is suggested that theseconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and notes included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007, previously filed with theSecurities and Exchange Commission.

 

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

 

*Principles of Consolidation*

 

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

 

*Foreign Currency Translation*

* *

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

* *

*Use of Estimates*

 

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

 

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*New Accounting Pronouncements*

* *

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

 

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

 

InOctober 2008, the FASB issued FSP No. FAS 157-3, *Determiningthe Fair Value of a Financial Asset When the Market for That Asset Is NotActive* which clarifies the application of SFAS 157 in an inactivemarket and illustrates how an entity would determine fair value when the marketfor a financial asset is not active.  TheStaff Position is effective immediately and applies to prior periods for whichfinancial statements have not been issued, including interim or annual periodsending on or before September 28, 2008. The implementation of FAS 157-3 did not have a material impact on ourconsolidated financial statements.

 

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

 

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

 

InDecember 2007, the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements* (SFAS 160).  SFAS 160 clarifies that a noncontrollinginterest in a subsidiary should be 

 

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reportedas equity in the consolidated financial statements.  Consolidated net income should include thenet income for both the parent and the noncontrolling interest with disclosureof both amounts on the consolidated statement of income.  The calculation of earnings per share willcontinue to be based on income amounts attributable to the parent.  SFAS 160 is effective for us beginning in2009.  We currently do not have anysubsidiaries in which we hold a noncontrolling interest and, therefore, webelieve this pronouncement will have no impact on our consolidated financialstatements.

 

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

 

InApril 2008, the FASB issued FSP No. FAS 142-3, *Determinationof the Useful Life of Intangible Assets*.  FSP FAS 142-3 amends the factors that shouldbe considered in developing renewal or extension assumptions used to determinethe useful life of a recognized intangible asset under SFAS No. 142, *Goodwill and Other Intangible Assets*.  FSP FAS 142-3 is effective for us beginningin 2009. We are currently evaluating the impact of FSP FAS 142-3 on ourconsolidated financial statements.

 

Note 2 – Inventories

 

Inventories consist of the following:

 
| ** **             | ** ** | **September 30,  2008** | ** **    | **December 31,  2007** | ** ** |
|------------------------|------------|------------------------------|---------------|-----------------------------|------------|
| Finished products |       | $                            |  750,137 |                        | $          |  687,979 |   |
| Work-in-process        |       | 1,539,525                    |          | 1,391,620                   |       |
| Raw  materials         |       | 2,287,387                    |          | 1,885,847                   |       |
|                   |       | $                            | 4,577,049     |                        | $          | 3,965,446 |   |

 

Note 3 – Net Income Per Common Share

 

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

 

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

 

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| ** **                                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted  shares of common stock outstanding – basic               |       | 5,579,932                                            |       | 5,515,050                                           |       | 5,555,078 |   | 5,492,409 |   |
| Weighted  shares of common stock assumed upon exercise of stock options |       | 120,137                                              |       | 157,122                                             |       | 117,552 |   | 188,827 |   |
| Weighted  shares of common stock outstanding – diluted             |       | 5,700,069                                            |       | 5,672,172                                           |       | 5,672,630 |   | 5,681,236 |   |

 

Note 4 – Goodwill and Intangible Assets

 

Asof both September 30,2008 and December 31, 2007, unamortized goodwill totaled $3,096,317.  Other identifiable intangible assets (all ofwhich are being amortized except projects in process) are as follows:

 
| ** **                  | ** ** | **As of September 30, 2008** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|
| ** **                  | ** ** | **Carrying  Amount**                             | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                     |       | $                                                | 832,384    |   | $ | (354,267 | ) | $ | 478,117 |   | 10 to 17  years |   |
| Trademarks  and trade names |       | 455,351                                          |       | (361,917 | ) | 93,434 |   | 5 to 17  years |   |
|                        |       | $                                                | 1,287,735  |   | $ | (716,184 | ) | $ | 571,551 |   |   |   |

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

 

Totalamortization expense for the three- and nine-month periods ended September 30,2008 and 2007 was $29,293 and $85,755, and $36,090and $118,827,respectively.  Projects in process arenot amortized until the patent or trademark is granted by the regulatoryagency.  Estimated amortization expensefor the remainder of 2008 and each of the four succeeding fiscal years andthereafter based on the intangible assets as of September 30,2008 is as follows:

 
| ** **          | ** ** | **Estimated  Expense** | ** ** |
|---------------------|------------|------------------------|------------|
| 2008                |       | $                      | 28,871     |   |
| 2009                |       | $                      | 48,158     |   |
| 2010                |       | $                      | 40,631     |   |
| 2011                |       | $                      | 26,860     |   |
| 2012                |       | $                      | 20,916     |   |
| 2013 and thereafter |       | $                      | 108,585    |   |

 

### Note 5 – Marketable Securities

###  

As of January 1, 2008, the method of accountingfor our marketable securities was changed from available-for-sale toheld-to-maturity.  This change was madedue to our positive intent and ability to hold these securities until maturityor the call date as the case may be. Currently, all of our marketable securities mature within twoyears.  Under the prior method, thesesecurities were recorded at fair value and the unrealized holding gains andlosses were excluded from income and reported as a separate 

 

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component of stockholders’ equity untilrealized.  Held-to-maturity securitiesare measured at amortized cost and are adjusted for the amortization oraccretion of premiums or discounts.  Forthe debt securities that were outstanding at December 31, 2007, there wasapproximately $25,000 of unrealized gain that was recorded in stockholders’equity, which is being amortized over the remaining life of thesecurities.  At September 30,2008 and 2007, the net cumulative unrealized gain was $6,345 and $802,respectively.

 

Note 6 – Comprehensive Income

 

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

 
| ** **                                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                           | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net  income                                                          |       | $                                                    | 1,081,555  |                                                | $          | 955,392 |   | $ | 3,018,551 |   | $ | 2,720,609 |   |
| Foreign  currency translation adjustment                             |       | (450,679                                             | )          | 203,263                                             |       | (120,324 | ) | 266,335 |   |
| Net  unrealized gain on marketable securities                        |       | —                                               |       | 4,471                                               |       | — |   | 2,279 |   |
| Amortization  of cumulative unrealized gain on marketable securities |       | (4,475                                               | )          | —                                              |       | (18,937 | ) | — |   |
| Comprehensive  income                                                |       | $                                                    | 626,401    |                                                | $          | 1,163,126 |   | $ | 2,879,290 |   | $ | 2,989,223 |   |

 

Note 7 – Warranty

 

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

 

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

 

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

 
| ** **           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------|------------|-----------------------------------------------------|------------|
| ** **           | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Beginning  balance   |       | $                                                   | 201,373    |   | $ | 246,737 |   |
| Warranty  provisions |       | 284,346                                             |       | 314,435 |   |
| Warranty  claims     |       | (259,830                                            | )          | (291,242 | ) |
| Ending  balance      |       | $                                                   | 225,889    |   | $ | 269,930 |   |

 

Note 8 – Income Taxes

 

The Company adopted the provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement No. 109* (FIN 48) on January 1, 2007.  This interpretation clarifies the accountingfor uncertainty in income taxes recognized in an entity’s financial statementsin accordance with SFAS 109, *Accounting for Income Taxes*.  It prescribes a recognition 

 

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threshold and measurement attribute for financial statement disclosureof tax positions taken or expected to be taken on a tax return.  As of December 31, 2007, the liabilityfor gross unrecognized tax benefits was $220,000, which included potentialbenefits of $157,000 that if recognized would affect the effective tax rate onincome from continuing operations. During the three months ended September 30, 2008, there were nosignificant changes to the total gross unrecognized tax benefits.  It is expected that the amount ofunrecognized tax benefits for positions which we have identified will notchange significantly in the next twelve months.

 

In August 2008, the Internal Revenue Service completed itsexamination of the Company’s 2006 Federal tax return.  This resulted in an assessment of anadditional $37,000 in tax and interest, which had no impact on our effectivetax rate.

 

MOCON, Inc. or one of its subsidiaries filesincome tax returns in the U.S. Federal jurisdiction, several statejurisdictions and Germany.  With limitedexceptions, we are no longer subject to income tax examinations by taxingauthorities for taxable years before 2005.

 

Note 9 – Share-Based Compensation

 

As of September 30, 2008, we have reserved 322,525 shares of commonstock for options and other share-based incentive awards that are stillavailable for grant under our 2006 stock incentive plan, and 759,112 shares foroptions that have been granted under either the 2006 stock incentive plan orthe 1998 stock option plan but have not yet been exercised.  We issue new shares of common stock uponexercise of stock options.  There were no options granted in the thirdquarter of 2008.

 

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

 
| ** **                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Total  cost of share-based compensation                     |       | $                                                    | 73,862     |                                                | $          | 96,809 |   | $ | 227,929 |   | $ | 298,810 |   |
| Amount  capitalized in inventory and property and equipment |       | —                                               |       | —                                              |       | — |   | — |   |
| Amounts  charged against income, before income taxes        |       | 73,862                                               |       | 96,809                                              |       | 227,929 |   | 298,810 |   |
| Amount  of income tax benefit recognized in earnings        |       | (8,256                                               | )          | (13,700                                             | )          | (38,435 | ) | (42,344 | ) |
| Amount  charged against net income                          |       | $                                                    | 65,606     |                                                | $          | 83,109 |   | $ | 189,494 |   | $ | 256,466 |   |

 

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

 

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A summary of the optionactivity for the first nine months of 2008 is as follows:

 
| ** **                              | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price per  Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding  at December 31, 2007  |       | 856,437                    |       | $                                                      | 8.73       |                                                | 5.4        |                            | $          | 2,061,171 |   |
| Options  granted                        |       | —                     |       | —                                                 |       | —                                              |       |                            |       |
| Options  cancelled                      |       | (12,549                    | )          | $                                                      | 10.95      |                                                | —     |                            |       |   |
| Options  expired                        |       | (6,593                     | )          | $                                                      | 10.87      |                                                | —     |                            |       |   |
| Options  exercised                      |       | (78,183                    | )          | $                                                      | 7.07       |                                                | —     |                            |       |   |
| Outstanding  at September 30, 2008 |       | 759,112                    |       | $                                                      | 8.84       |                                                | 4.9        |                            | $          | 1,510,265 |   |
|                                    |       |                       |       |                                                   |       |                                                |       |                            |       |
| Exercisable  at September 30, 2008 |       | 609,607                    |       | $                                                      | 8.35       |                                                | 4.6        |                            | $          | 1,459,081 |   |

 

The total intrinsic value of options exercised was $154,901 and $63,085during the three-month periods ended September 30,2008 and 2007, respectively, and $296,689 and $201,713 during the first ninemonths of 2008 and 2007, respectively.

 

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

 
| ** **                           | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|--------------------------------------|------------|----------------------------|------------|---------------------------------------------------------|------------|
| Unvested  at December 31, 2007  |       | 185,542                    |       | $                                                       | 2.93       |   |
| Options  granted                     |       | —                     |       | —                                                  |       |
| Options  cancelled                   |       | (10,912                    | )          | $                                                       | 2.83       |   |
| Options  vested                      |       | (25,125                    | )          | $                                                       | 3.21       |   |
| Unvested  at September 30, 2008 |       | 149,505                    |       | $                                                       | 2.89       |   |

 

As of September 30,2008, there was $431,343 of total unrecognized compensation cost related tounvested share-based compensation granted under our plans.  That cost is expected to be recognized over aweighted-average period of 1.0 years. The total fair value of option shares vested during the three-monthperiods ended September 30,2008 and 2007 was $26,883 and $41,527, respectively, and $80,651 and $124,866during the nine-month periods ended September 30,2008 and 2007, respectively.

 

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Item2.    Management’s Discussion andAnalysis of Financial Condition and Results of Operations

 

This Management’sDiscussion and Analysis provides material historical and prospectivedisclosures intended to enable investors and other users to assess ourfinancial condition and results of operations. Statements that are not historical are forward-looking and involve risksand uncertainties discussed below under the caption “Forward-LookingStatements.”  The following discussion ofthe results of operations and financial condition of MOCON should be read inconjunction with our consolidated financial statements and the related notesthereto included elsewhere in this report.

 

### ***Overview***

### ** **

MOCON, Inc. designs, manufactures, markets and services productsand provides consulting services primarily in the measurement and analyticalinstrument and services markets.  Ourproducts include instruments that detect, measure and monitor gases andchemical compounds.  Although some of themarkets for our products are maturing, we continually seek growth opportunitiesthrough technological and product improvement, by acquiring and developing new products,and by acquiring new companies.

 

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

 

Historically, a significant portion of our revenues have come frominternational customers.  In this regard,we acquired our subsidiary in Germany in 2004 to solidify our presence andopportunities in Europe.  Similarly, in2007, we opened our office in Shanghai, China, to better serve our Asiancustomers.

 

Our current plans for growth include continued funding for research anddevelopment at levels consistent with amounts spent on these activities inrecent periods to foster new product development, together with strategicacquisitions where appropriate.

 

### ***Results of Operations***

### ** **

The following table sets forth the relationship between variouscomponents of our results of operations, stated as a percent of sales, for thethree- and nine-month periods ended September 30,2008 and 2007:

 
|                                          |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------|--------|------------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                          |   | **2008**                                             |   | **2007**                                            |   | **2008** |   | **2007** |   |
| Sales                                         |   | 100.0                                                |   | 100.0                                               |   | 100.0 |   | 100.0 |   |
| Cost  of sales                                |   | 38.6                                                 |   | 42.5                                                |   | 40.4 |   | 42.6 |   |
| Gross  profit                                 |   | 61.4                                                 |   | 57.5                                                |   | 59.6 |   | 57.4 |   |
| Selling,  general and administrative expenses |   | 34.8                                                 |   | 31.0                                                |   | 34.2 |   | 31.6 |   |
| Research  and development expenses            |   | 5.8                                                  |   | 6.9                                                 |   | 6.5 |   | 7.1 |   |
| Operating  income                             |   | 20.8                                                 |   | 19.6                                                |   | 18.9 |   | 18.7 |   |
| Other  income                                 |   | 1.8                                                  |   | 2.1                                                 |   | 1.9 |   | 2.0 |   |
| Income  before income taxes                   |   | 22.6                                                 |   | 21.7                                                |   | 20.8 |   | 20.7 |   |
| Income  taxes                                 |   | 8.0                                                  |   | 7.7                                                 |   | 7.2 |   | 7.3 |   |
| Net  income                                   |   | 14.6                                                 |   | 14.0                                                |   | 13.6 |   | 13.4 |   |

 

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### *Comparison of Financial Results for the Three- andNine-Month Periods Ended September 30, 2008 and 2007*

### * *

### *Sales*

###  

Sales for the three-month period ended September 30, 2008 were$7,429,238, up 9% compared to $6,820,000for the same period in 2007.  On aproduct line basis, this increase was primarily the result of increased salesof our gas analyzer and packaging products, primarily into our foreign markets.This increase was partially offset by a decline in sales of permeationequipment and services which was a result of slower domestic demand.  We also benefitted from a weaker U.S. dollarin the three-month period ended September 30, 2008 compared to the sameperiod in 2007, which made our products and services more attractive in theEuropean market.  On a geographicalbasis, total sales increased 24% in our foreign markets and decreased 9% domestically.

 

Sales for the nine-month period ended September 30, 2008 were$22,270,394, up 9% compared to $20,354,435 for the same period in 2007.  On a product line basis, this increase wasprimarily the result of increased sales of our permeation products and services,packaging products, and gas analyzer instruments and sensors.  We also benefitted from a weaker U.S. dollarin the nine-month period ended September 30, 2008 as compared to sameperiod in 2007, which made our products and services more attractive in theEuropean market.  On a geographicalbasis, total sales increased 20% in our foreign markets, partially offset by a2% decrease in our domestic markets. There were no significant price increases or decreases during either thethird quarter or first nine months of 2008, compared to the same periods in2007.

 

On a geographical basis, domestic and foreign sales accounted for 38%and 62%, respectively, of our consolidated third quarter sales in  2008, and 45% and 55% of our consolidatedsales, respectively, for the same period in 2007.  Domestic and foreign sales accounted for 44%and 56% of our consolidated sales for the first nine months of 2008, and 49%and 51% of our consolidated sales, respectively, for the same period in 2007.

 

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

 
| ** **                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Permeation  products and services                         |       | $                                                    | 3,814,399  |                                                | $          | 3,946,713 |   | $ | 12,050,577 |   | $ | 10,793,545 |   |
| Gas,  headspace, and other analyzer products and services |       | 3,395,414                                            |       | 2,614,772                                           |       | 9,175,977 |   | 8,595,820 |   |
| Other  instruments and services                           |       | 219,425                                              |       | 258,515                                             |       | 1,043,840 |   | 965,070 |   |
| Total  sales                                              |       | $                                                    | 7,429,238  |                                                | $          | 6,820,000 |   | $ | 22,270,394 |   | $ | 20,354,435 |   |

 

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The following table sets forth the relationship between various componentsof domestic and foreign sales for the three- and nine-month periods ended September 30,2008 and 2007:

 
| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **           | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Domestic  sales      |       | $                                                    | 2,812,010  |                                                | $          | 3,081,370 |   | $ | 9,760,948 |   | $ | 9,911,946 |   |
| Foreign  sales:      |       |                                                 |       |                                                |       |   |   |   |   |
| Europe               |       | 1,992,022                                            |       | 1,921,438                                           |       | 5,765,695 |   | 4,364,121 |   |
| Asia                 |       | 1,781,861                                            |       | 1,350,393                                           |       | 4,706,561 |   | 4,308,634 |   |
| Other                |       | 843,345                                              |       | 466,799                                             |       | 2,037,190 |   | 1,769,734 |   |
| Total  foreign sales |       | 4,617,228                                            |       | 3,738,630                                           |       | 12,509,446 |   | 10,442,489 |   |
| Total  sales         |       | $                                                    | 7,429,238  |                                                | $          | 6,820,000 |   | $ | 22,270,394 |   | $ | 20,354,435 |   |

 

***PermeationProducts and Services*** – Sales of our permeationproducts and services, which accounted for approximately 51% and 58% of ourconsolidated third quarter sales in 2008 and 2007, respectively, decreased 3%during the third quarter 2008 compared to the same period in 2007.  This decrease, which was exclusively in ourdomestic markets, was due primarily to decreased demand for our core permeationinstruments.  International sales ofpermeation products and services accounted for 75% of the total sales of thisproduct group in the third quarter 2008.

 

Sales of our permeation products and services, which accounted forapproximately 54% and 53% of our consolidated sales during the first ninemonths in 2008 and 2007, respectively, increased 12% during the first ninemonths of 2008 compared to the same period in 2007.  This increase, which was exclusively in ourforeign markets, was due primarily to increased demand for instruments andtesting services.  International sales ofpermeation products and services accounted for 69% of the total sales of thisproduct group in the first nine months of 2008.

 

***Gas,Headspace, and Other Analyzer Products and Services*****– Sales of our gas, headspace, and otheranalyzer products and services, which accounted for 46% and 38% of ourconsolidated third quarter sales in 2008 and 2007, respectively, increased 30%during the third quarter 2008 compared to the same period in 2007.  Within this group, sales of our gas analyzerproducts through our Baseline subsidiary increased 49% due primarily to salesof Model 8900 gas chromatographs to the environmental monitoring and oil andgas drilling markets.

 

Sales of our packaging products, which includes headspace analyzers andleak detection equipment, increased 17% during the third quarter 2008 comparedto the same period in 2007.  Weexperienced an increase in foreign orders for leak detection equipment(primarily in Europe) due to continued acceptance of the new Lippke 4000product line introduced mid-2007.  Thiswas offset by a slight reduction in domestic orders for leak detectionequipment while sales of headspace analyzers increased domestically, more thanoffsetting a slight decline in the international markets.

 

Sales of our gas, headspace, and other analyzer products, whichaccounted for 41% and 42% of our consolidated sales during the first ninemonths in 2008 and 2007, respectively, increased 7% during the first ninemonths of 2008 compared to the same period in 2007.  Within this group, sales of our gas analyzerproducts through our Baseline subsidiary increased 6% due primarily to greatertotal hydrocarbon analyzer and sensor shipments.

 

Sales of our packaging products increased 9% during the first ninemonths of 2008 compared to the same period in 2007.  This increase was due primarily to continuedmarket acceptance of our PAC CHECK® series of analyzers and growthin shipments of our Lippke 4000 leak detection instruments.

 

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** **

***OtherInstruments and Services*****–Sales in our other instruments and services category, which accounted for 3% and4% of our consolidated third quarter sales in 2008 and 2007, respectively,decreased 15% in the third quarter 2008, compared to the same period in2007.  This decrease was due primarily toa reduction in contract manufacturing of sample preparation products, reducedsales of non-MOCON products by our German subsidiary and decreased demand forour gas chromatography analyzer products and consulting services.

 

For both the nine months ended September 30, 2008 and 2007, salesof other instruments and services accounted for 5% of our consolidated sales,increasing 8% in the first nine months of 2008 as compared to the same periodin 2007.  The increase was primarily dueto higher sales of sample preparation products which we manufacture under anexclusive contract and also the sales of non-MOCON products by our Germansubsidiary, partially offset by decreased sales of our consulting services.

 

### *Gross Profit*

###  

The gross profit margins for our product sales were 62.7% and 58.4% forthe three-month periods ended September 30, 2008 and 2007,respectively.  This increase wasprimarily due to the mix of products shipped, a price increase on gaschromatographs, and efficiencies gained by longer production runs of our gasanalyzer instruments.

 

The gross profit margins for our consulting services were 40.5% and45.1%, respectively, for the three-month periods ended September 30, 2008and 2007.  This decrease was primarilydue to the varying margins between consulting service projects.

 

For the nine months ended September 30, 2008 and 2007, the grossprofit margins for our products were 60.7% and 58.3%, respectively.  The higher margin for the first nine monthsof 2008 was due primarily to the increased percentage of permeation and leakdetection equipment sold, which generally carry a higher gross margin, as wellas a shift in product mix in our gas analyzer line to higher margin items.

 

For the nine months ended September 30, 2008 and 2007, the grossprofit margins for our consulting services were 41.0% and 44.8%, respectively.  This decrease was primarily due to decreaseddemand for our consulting and analytical testing services which reduced theability to fully absorb the related fixed overhead costs, and also the varyingmargins between consulting service projects.

 

*Selling, General and Administrative Expenses*

 

Selling, general and administrative (SG&A) expenses in thethree-month period ended September 30, 2008 were $2,586,565, or 34.8% ofsales, compared to $2,117,652, or 31.0% of sales in the third quarter2007.  The $468,913 increase in SG&Aexpenses was primarily the result of higher professional fees, increasedpersonnel costs, relocation costs of our German office, and higher travel andmarketing expenses.

 

SG&A expenses were $7,610,490, or 34.2% of sales, during the firstnine months of 2008, compared to $6,444,582, or 31.6% of sales, for the sameperiod in 2007.  The increase in SG&Aexpenses was primarily due to increased personnel costs, increased marketingand travel expense, and higher professional fees.

 

### *Research and Development Expenses*

###  

Research and development (R&D) expenses were $433,630, or 5.8% ofsales in the third quarter 2008, compared to $469,132, or 6.9% of sales, in thesame period of 2007.  This level ofexpense is slightly below our planned range of R&D expenditures.

 

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R&D expenses were $1,460,594 and $1,439,232, or 6.5% and 7.1% ofsales for the nine-month periods ended September 30, 2008 and 2007,respectively.  For the foreseeablefuture, we expect to allocate on an annual basis approximately 6% to 8% ofsales to research and development.

 

### *Other Income*

###  

Other income for the third quarter ended September 30, 2008 of$134,051 consisted of interest income of $149,408, partially offset by a lossof $15,357 on foreign currency exchange. Other income for the third quarter ended September 30, 2007 of$146,406 consisted of interest income of $144,437 and miscellaneous otherincome of $1,969.

 

For the nine months ended September 30, 2008, other income of$422,665 consisted of interest income of $429,686 and miscellaneous otherincome of $2,543, partially offset by a loss of $9,564 on foreign currencyexchange.  For the nine months ended September 30,2007, other income of $414,312 consisted of interest income of $418,991 andmiscellaneous other income of $1,630, partially offset by a loss of $6,309 onforeign currency exchange.  Interestincome increased for the third quarter and nine months ended September 30,2008, compared to the same periods in 2007, due to higher average interestbearing investments, partially offset by lower average yields.

 

### *Income Tax Expense*

###  

Our provision for income taxes was 35.5% of income before income taxesfor the third quarter ended September 30, 2008, compared to 35.6% ofincome before income taxes for the third quarter ended September 30,2007.  Based on current operatingconditions and income tax laws, we expect the tax rate for the remainder of2008 to be in the range of 31% to 36%. This rate fluctuates over time based on the income tax rates in thevarious jurisdictions in which we operate, and also the level of profits inthose jurisdictions.

 

For the nine months ended September 30, 2008, our provision forincome taxes was 34.7% of income before income taxes compared to 35.5% ofincome before income taxes for the nine months ended September 30,2007.  The lower effective rate in thecurrent year period was due primarily to the increased amount of tax-exemptinterest earned by the Company in 2008 and lower statutory tax rates inGermany.

 

### *Net Income*

###  

Net income was $1,081,555 in the third quarter 2008, compared to$955,392 in the third quarter 2007. Diluted net income was $0.19 and $0.17 per share in the third quartersof 2008 and 2007, respectively.  For thenine months ended September 30, 2008, net income was $3,018,551, or $0.53per diluted share, compared to net income of $2,720,609, or $0.48 per dilutedshare in the prior year.

 

*Liquidity and Capital Resources*

 

We have historically financed our operations, capital expenditures andother liquidity needs through our cash flows generated from operations.  Total cash, cash equivalents and marketablesecurities increased $1,175,519 during the first nine months of 2008 to$16,200,400 as of September 30, 2008, compared to $15,024,881 at December 31,2007.  Our working capital as of September 30,2008 decreased $1,087,354 to $16,269,710, as compared to $17,357,064 at December 31,2007.  This decrease  was primarily due to a shift in theinvestment strategy of some marketable securities to longer than one yearmaturities.  Our investment in marketablesecurities consists primarily of municipal bonds, certificates of deposits andU.S. treasury obligations.  We do notcurrently have any funds invested in auction rate certificates.  We believe that a combination of our existingcash, cash equivalents and marketable securities, plus an expected continuationof cash flow from operations, will continue to be adequate to fund ouroperations, capital expenditures, dividend payments and authorized stockrepurchases for at 

 

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least the next twelve months. Purchases of property and equipment were relatively constant between thetwo periods mentioned above, and we had no material commitments for capitalexpenditures as of September 30, 2008 except for expected renovation costsfor our Colorado building of approximately $350,000 which we expect will befully incurred by the end of 2008.

 

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

 

*Cash Flow*

 

Cash Flow from Operating Activities

 

Our primary source of funds is cash provided by operating activitieswhich totaled $2,571,899 and $2,552,527 in the first nine months of 2008 and2007, respectively.  The key componentsof the cash provided by operating activities in 2008 were the net income andincreased accounts payable, primarily offset by increases in inventories,prepaid expenses and accounts receivable.

 

### Cash Flow from Investing Activities

###  

Cash used in investing activities totaled $2,663,696 and $529,634 inthe first nine months of 2008 and 2007, respectively.  The primary reasons for cash usage in 2008were net purchases of marketable securities of $2,207,530 and purchases ofproperty and equipment.  For 2007, theprimary reasons for the cash usage were the final earn-out payment of $574,568made for the Lippke acquisition and purchases of property and equipment,partially offset by the impact of net proceeds from the maturity of marketablesecurities of $314,171.  We presently donot believe that any significant property, plant and equipment expenditures arerequired to accommodate our current level of operations except for the buildingrenovation at our Colorado facility mentioned above.

 

Cash Flow from Financing Activities

 

Cash used in financing activities totaled $846,169 and $834,851 in thefirst nine months of 2008 and 2007, respectively.  During the first nine months of 2008 and2007, we made dividend payments to our shareholders of $1,359,833 and$1,261,916, respectively.  Partially offsetting the impact of thesepayments were the proceeds from the exercise of stock options in the amounts of$491,062 and $427,065 in the first nine months of 2008 and 2007, respectively.

 

Our Board of Directors has authorized, depending upon market conditionsand other factors, the repurchase of up to a total of $2,000,000 of our commonstock.  As of September 30, 2008, wehad repurchased an aggregate of 41,725 shares of MOCON common stock under theprogram at a total cumulative cost of $365,094, leaving $1,634,906 remaining inthis authorization at that date.

 

***Contractual Obligations***

** **

We refer you to our Annual Report on Form 10-K for the year ended December 31,2007 for a summary of our contractual obligations.  There has been no material change in thisinformation.

 

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### ***Off-Balance Sheet Arrangements***

### ** **

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

 

***New Accounting Pronouncements***

*** ***

In September 2006,the Financial Accounting Standards Board (FASB) issued the Statement ofFinancial Accounting Standard (SFAS) No. 157, *Fair ValueMeasurement* (SFAS 157).  Thisstatement did not require any new fair value measurements, but rather, itprovided enhanced guidance to other pronouncements that require or permitassets or liabilities to be measured at fair value.  The changes to current practice resultingfrom the application of this statement related to the definition of fair value,the methods used to estimate fair value, and the requirement for expandeddisclosures about estimates of fair value. This statement became effective for us beginning in 2008.  The effective date for this statement for allnon-financial assets and non-financial liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring bases, has been delayed by one year. We adopted the provisions of SFAS 157 related to financial assets andfinancial liabilities on January 1, 2008. The partial adoption of this statement did not have an impact on ourconsolidated financial statements.  It isexpected that the remaining provisions of this statement will not have amaterial effect on our consolidated financial statements.

 

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

 

In October 2008,the FASB issued FSP No. FAS 157-3, *Determining the Fair Valueof a Financial Asset When the Market for That Asset Is Not Active*which clarifies the application of SFAS 157 in an inactive market andillustrates how an entity would determine fair value when the market for afinancial asset is not active.  The StaffPosition is effective immediately and applies to prior periods for whichfinancial statements have not been issued, including interim or annual periodsending on or before September 28, 2008. The implementation of FAS 157-3 did not have a material impact on ourconsolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an amendment of FASBStatement 115* (SFAS 159). This statement permits entities to choose to measure many financialinstruments and certain other items at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  SFAS 159 was effective for us beginning in2008 and was to be applied prospectively. As we did not elect to measure existing assets and liabilities at fairvalue, the adoption of this statement did not have an effect on ourconsolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), *BusinessCombinations* (SFAS 141(R)). SFAS 141(R) retains the fundamental requirements of the originalpronouncement requiring that the purchase method be used for all businesscombinations.  SFAS 141(R) definesthe acquirer as the entity that obtains control of one or more businesses inthe business combination, establishes the acquisition date as the date that theacquirer achieves control and requires the acquirer to recognize the assetsacquired, liabilities assumed and any noncontrolling interest at their fairvalues as of the 

 

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acquisitiondate.  SFAS 141(R) also requiresthat acquisition-related costs be recognized separately from theacquisition.  SFAS 141(R) becomeseffective for business combinations occurring on or after January 1, 2009,and early adoption is prohibited.

 

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

 

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

 

In April 2008,the FASB issued FSP No. FAS 142-3, *Determination of theUseful Life of Intangible Assets*. FSP FAS 142-3 amends the factors that should be considered in developingrenewal or extension assumptions used to determine the useful life of arecognized intangible asset under SFAS No. 142, *Goodwill andOther Intangible Assets*.  FSPFAS 142-3 is effective for us beginning in 2009.  We are currently evaluating the impact of FSPFAS 142-3 on our consolidated financial statements.

 

***Critical Accounting Policies***

*** ***

Our significant accounting policies are described in Note 1 to ourconsolidated financial statements.  ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations is based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America.  Thepreparation of these consolidated financial statements requires management tomake 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.

 

*Revenuerecognition* – We recognize revenue when it is realized orrealizable and earned.  In accordancewith the Securities and Exchange Commission Staff Accounting Bulletin 104 (SAB104), *Revenue Recognition,*weconsider revenue realized or realizable when persuasive evidence of anarrangement exists, the product has been shipped or the services have beenprovided to the customer, title and risk of loss of products has passed to thecustomer, the sales price is fixed or determinable, and collectibility isreasonably assured.  Our terms are F.O.B.shipping point with no right of return, and 

 

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customer acceptance of ourproducts is not required.  The revenuerecognition policy does not differ among the various product lines, themarketing venues, or various geographic destinations.  We do not have distributors who stock ourequipment.  We do not offer rebates,price protection, or other similar incentives, and discounts when offered arerecorded as a reduction in revenue.

 

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

 

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

 

*Allowancefor doubtful accounts and sales returns* – Our allowancefor doubtful accounts and sales returns is for accounts receivable balancesthat are estimated to be uncollectible as well as anticipated salesreturns.  The reserve is based on anumber of factors, including:  (1) ananalysis of customer accounts and (2) our historical experience withaccounts receivable write-offs and sales returns.  The analysis includes the age of thereceivable, the financial condition of a customer or industry and generaleconomic conditions.  We believe ourfinancial results could be materially different if historical trends do notreflect actual results or if economic conditions worsened for ourcustomers.  In the event we determinedthat a smaller or larger allowance for doubtful accounts is appropriate, wewould record a credit or charge to selling, general and administrative expensein the period that we made such a determination.  As of September 30,2008, we had $128,131 reserved against our accounts receivable for doubtfulaccounts and sales returns.

 

*Accrualfor excess and obsolete inventories*–**We perform an analysis to identify excessand obsolete inventory.  We record acharge to cost of sales for amounts identified. Our analysis includes inventory levels, the nature of the finishedproduct and its inherent risk of obsolescence and the on-hand quantitiesrelative to the sales history of that finished product.  We believe that our financial results couldbe materially different if historical trends do not reflect actual results orif demand for our products decreased because of economic or competitiveconditions or otherwise.  As of September 30,2008, we had $606,746 accrued for excess and obsolete inventories.

 

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

 

*Accruedproduct warranties*–**Our products are generally covered by a warranty, withwarranty periods ranging from ninety days to one year from the date ofsale.  Estimated warranty costs areaccrued in the same period in which the related revenue is recognized, based onanticipated parts and labor costs, utilizing historical experience.  Additional warranty reserves are also accruedfor major rework campaigns.  We periodicallyassess the adequacy of our warranty reserves based on changes in these factorsand record any necessary adjustments if actual claim experience indicates that 

 

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adjustments are necessary. Although we believe the likelihood to be relatively low, warranty claimsexperience could be materially different from actual results due tomanufacturing changes that could impact product quality, a change in ourwarranty policy in response to industry trends, as yet unrecognized defects inproducts sold, or other factors.  As of September 30,2008, we had $225,889 accrued for future estimated warranty claims.

 

*Incometaxes*–**Inthe preparation of our consolidated financial statements, management is requiredto estimate income taxes in each of the jurisdictions in which we operate.  This process involves estimating actualcurrent tax exposures together with assessing temporary differences resultingfrom differing treatment of items for tax and accounting purposes.  These differences result in deferred taxassets and liabilities, which are included in our Consolidated Balance Sheets.

 

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

 

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

### ** **

This quarterlyreport on Form 10-Q contains or incorporates by reference not onlyhistorical information, but also forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended, and are subject to the safeharbor created by those sections.  Inaddition, we or others on our behalf may make forward-looking statements fromtime to time in oral presentations, including telephone conferences and/or webcasts open to the public, in press releases or reports, on our website orotherwise.  All statements other thanstatements of historical facts included in this report that address activities,events or developments that we expect, believe or anticipate will or may occurin the future are forward-looking statements including, in particular, thestatements about our plans, objectives, strategies and prospects regarding,among other things, our financial condition, results of operations andbusiness.  We have identified some ofthese forward-looking statements with words like “believe,” “may,” “could,” “might,”“forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,”“plan,” “predict,” “anticipate,” “estimate,” “approximate” or “continue” andother words and terms of similar meaning. These forward-looking statements may be contained in the notes to ourconsolidated financial statements and elsewhere in this report, including underthe heading “Management’s Discussion and Analysis of Financial Condition andResults of Operations.”

 

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

 

·                  Increases in prices for rawmaterials;

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

·                  Fluctuations in foreigncurrency exchange rates and interest rates;

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

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

·                  Incurrence of additional debt,contingent liabilities and expenses in connection with future acquisitions;

 

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·                  The effects of the globaleconomic downturn and decreases in capital spending by our customers that mayoccur as a result;

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

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

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

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

·                  Loss of customers;

·                  Failure to retain seniormanagement or replace lost senior management;

·                  Employee slowdowns, strikesor similar actions;

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

·                  Effects of any pending orthreatened litigation;

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

·                  Changes in generallyaccepted accounting principles; or

·                  Conditions and changes ingeneral economic and business conditions.

 

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

 

Wewish to caution readers not to place undue reliance on any forward-lookingstatement that speaks only as of the date made and to recognize thatforward-looking statements are predictions of future results, which may notoccur as anticipated.  Actual resultscould differ materially from those anticipated in the forward-lookingstatements and from historical results, due to the risks and uncertaintiesdescribed above, as well as others that we may consider immaterial or do notanticipate at this time. Although we believe that the expectations reflected inour forward-looking statements are reasonable, we do not know whether ourexpectations will prove correct.  Theexpectations reflected in our forward-looking statements can be affected byinaccurate assumptions we might make or by known or unknown risks anduncertainties, including those described above. The risks and uncertainties described above are not exclusive andfurther information concerning us and our business, including factors thatpotentially could materially affect our financial results or condition, mayemerge from time to time.  We assume noobligation to update forward-looking statements to reflect actual results orchanges in factors or assumptions affecting such forward-lookingstatements.  We advise you, however, toconsult any further disclosures we make on related subjects in our quarterlyreports on Form 10-Q and current reports on Form 8-K we file with orfurnish to the Securities and Exchange Commission.

 

Item 3.                                Quantitativeand Qualitative Disclosures About Market Risk

 

*EquityPrice and Interest Rate Risk*

 

Substantiallyall of our marketable securities, the majority of which are insured by theFDIC, are at fixed interest rates and mature within two years; therefore, webelieve that the market risk arising from the holding of these financialinstruments is minimal.

 

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### *Foreign Currency Risk*

###  

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

 

Item 4T.          Controls and Procedures

 

*Evaluation of Disclosure Controlsand Procedures*

 

Wemaintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) that are designed to ensure that information required to bedisclosed by us in the reports we file or submit under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized, and reported,within the time periods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, werecognize that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and we necessarily are required to apply our judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  Our management evaluated,with the participation of our Chief Executive Officer and Chief FinancialOfficer, the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the period covered in this QuarterlyReport on Form 10-Q.  Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end ofsuch period, to provide reasonable assurance that information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized, andreported within the time periods specified in the SEC’s rules and forms,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*

 

Therewas no change in our internal control over financial reporting that occurredduring our quarter ended September 30,2008 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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PART II.       OTHER INFORMATION

 

Item 1A.         Risk Factors

 

We are affected by risksspecific to us as well as factors that affect all businesses operating in aglobal market.  The significant factorsknown to us that could materially adversely affect our business, financialcondition or operating results are described in our annual report on Form 10-Kfor the fiscal year ended December 31, 2007 under the heading “Part I— Item 1A. Risk Factors.”  Other than asset forth below, there has been no material change in those risk factors.

 

*Currentworldwide economic conditions may adversely affect our business, operatingresults and financial condition, as well as further decrease our stock price.*

* *

General worldwide economicconditions have experienced a downturn due to the effects of the subprimelending crisis, general credit market crisis, collateral effects on the financeand banking industries, concerns about inflation, slower economic activity,decreased consumer confidence, reduced corporate profits and capital spending,adverse business conditions and liquidity concerns.  Our business is not immune.  The current worldwide economic crisis mayresult in our customers decreasing their capital expenditures, which in turnmay result in us selling less product.

 

The worldwide economiccrisis also may have other adverse implications on our business.  For example, our customers’ and distributors’ability to borrow money from their existing lenders or to obtain credit fromother sources to purchase our products may be impaired.  Although we maintain allowances for doubtfulaccounts for estimated losses resulting from the inability of our customers tomake required payments and such losses have historically been within ourexpectations and the provisions established, we cannot guarantee that we willcontinue to experience the same loss rates that we have in the past, especiallygiven the current turmoil in the worldwide economy.  A significant change in the liquidity orfinancial condition of our customers could cause unfavorable trends in ourreceivable collections and additional allowances may be required, which couldadversely affect our operating results. In addition, the worldwide economic crisis may adversely impact oursuppliers’ ability to provide us with materials and components, which couldadversely affect our business and operating results.  Like many other stocks, our stock price hasdecreased recently and if investors have concerns that our business, operatingresults and financial condition will be negatively impacted by a worldwideeconomic downturn, our stock price could further decrease.

 

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

 

*UnregisteredSales of Equity Securities*

 

We did not sell any equitysecurities of MOCON, Inc. during the third quarter ended September 30,2008 that were not registered under the Securities Act of 1933.

 

*IssuerRepurchases of Equity Securities*

 

Other than the withholdingof 7,508 shares of our common stock in connection with the cashless netexercise of stock options to pay the exercise price of such options, we did notpurchase any shares of our common stock or other equity securities during thethree months ended September 30, 2008.

 

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Item 6.            Exhibits

 

The following exhibits are being filed or furnished with this quarterlyreport on Form 10-Q:

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

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.

 

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

 

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MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED SEPTEMBER 30,2008

 

EXHIBIT INDEX

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

 

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