**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

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

##### **FORM10-Q**

| **(Mark One)**                                                                                                                                  |
|-------------------------------------------------------------------------------------------------------------------------------------------------|
| **x**** Quarterly Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                    |
| ** **                                                                                                                                      |
| **For the  Quarter Ended June 30, 2007**                                                                                                        |
| ** **                                                                                                                                      |
| **or**                                                                                                                                          |
| ** **                                                                                                                                      |
| **o**** Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                   |
| ** **                                                                                                                                      |
| **For the  transition period from                     to** |
| ** **                                                                                                                                      |
| **Commission  File Number 000-09273**                                                                                                           |

**MOCON, INC.**

(Exact name of registrant as specified in its charter)

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

**(763) 493-6370**

(Registrant’s telephone number, including area code)

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

YES x  NO o

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

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

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

YES o  NO x

5,506,972 Common Shareswere outstanding as of July 31, 2007.

 

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MOCON, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

For the Quarter Ended June30, 2007
|                                           | ** **                                                                                               | **Page   Number** |
|-------------------------------------------|----------------------------------------------------------------------------------------------------------|-------------------|
| PART I.  FINANCIAL  INFORMATION |                                                                                                     |              |
|                                      |                                                                                                     |              |
| Item 1.                                   | Financial  Statements                                                                                    |              |   |
|                                      | Consolidated  Balance Sheets  June 30, 2007 (Unaudited) and December 31, 2006                       |              | 1 |
|                                      |                                                                                                     |              |   |
|                                      | Consolidated Statements  of Income (Unaudited)  Three months and six months ended June 30, 2007 and 2006 |              | 2 |
|                                      |                                                                                                     |              |   |
|                                      | Consolidated  Statements of Cash Flows (Unaudited)  Six months ended June 30, 2007 and 2006              |              | 3 |
|                                      |                                                                                                     |              |   |
|                                      | Notes to  Consolidated Financial Statements (Unaudited)                                                  |              | 4-10 |
|                                      |                                                                                                     |              |   |
| Item 2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations              |              | 11-21 |
|                                      |                                                                                                     |              |   |
| Item 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                              |              | 21 |
|                                      |                                                                                                     |              |   |
| Item 4.                                   | 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 4.                                   | Submission  of Matters to a Vote of Security Holders                                                     |              | 23 |
|                                      |                                                                                                     |              |   |
| Item 6.                                   | Exhibits                                                                                                 |              | 24 |
|                                      |                                                                                                     |              |   |
| Signatures                                |                                                                                                     | 25                |
|                                      |                                                                                                     |              |
| Exhibit  Index                            |                                                                                                     | 26                |

 

*In this report, references to “MOCON,” “theCompany,” “we,” “our,” or “us,” unless the context otherwise requires, refer toMOCON, Inc. and its subsidiaries.*

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

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

MOCON, INC. ANDSUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
| ** **                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                        | ** ** | **(Unaudited)**   | ** ** | **(Audited)**         | ** ** |
| ASSETS                                                                                                                                            |       |              |       |                  |       |
| Current assets:                                                                                                                                   |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                        |       | $                 | 3,645,916  |                  | $          | 3,549,042 |   |
| Marketable  securities, current                                                                                                                   |       | 8,093,455         |       | 8,710,390             |       |
| Trade accounts  receivable, less allowance for doubtful accounts of $128,012 in 2007 and  $179,861 in 2006                                        |       | 4,791,213         |       | 4,384,808             |       |
| Other  receivables                                                                                                                                |       | 263,618           |       | 166,697               |       |
| Inventories                                                                                                                                       |       | 3,648,659         |       | 3,619,644             |       |
| Prepaid expenses                                                                                                                                  |       | 199,182           |       | 251,953               |       |
| Deferred income  taxes                                                                                                                            |       | 340,125           |       | 340,125               |       |
| Total current  assets                                                                                                                             |       | 20,982,168        |       | 21,022,659            |       |
|                                                                                                                                              |       |              |       |                  |       |
| Marketable  securities, noncurrent                                                                                                                |       | 634,362           |       | 377,118               |       |
|                                                                                                                                              |       |              |       |                  |       |
| Property, plant  and equipment, net of accumulated depreciation of $4,677,075 in 2007 and  $4,496,696 in 2006                                     |       | 1,504,591         |       | 1,556,984             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Other assets:                                                                                                                                     |       |              |       |                  |       |
| Goodwill                                                                                                                                          |       | 3,096,317         |       | 3,096,317             |       |
| Technology  rights and other intangibles, net                                                                                                     |       | 583,320           |       | 624,917               |       |
| Other                                                                                                                                             |       | 306,262           |       | 199,251               |       |
| Total other  assets                                                                                                                               |       | 3,985,899         |       | 3,920,485             |       |
|                                                                                                                                              |       |              |       |                  |       |
| TOTAL ASSETS                                                                                                                                      |       | $                 | 27,107,020 |                  | $          | 26,877,246 |   |
|                                                                                                                                              |       |              |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                        |       |              |       |                  |       |
| Current  liabilities:                                                                                                                             |       |              |       |                  |       |
| Accounts payable                                                                                                                                  |       | $                 | 1,298,166  |                  | $          | 1,688,846 |   |
| Accrued  compensation and vacation                                                                                                                |       | 1,078,466         |       | 1,286,316             |       |
| Earnout payable                                                                                                                                   |       | —            |       | 574,568               |       |
| Other accrued  expenses                                                                                                                           |       | 244,927           |       | 320,797               |       |
| Accrued product  warranties                                                                                                                       |       | 238,023           |       | 246,737               |       |
| Accrued income  taxes                                                                                                                             |       | 230,366           |       | 289,895               |       |
| Dividends  payable                                                                                                                                |       | 440,517           |       | 410,196               |       |
| Total current  liabilities                                                                                                                        |       | 3,530,465         |       | 4,817,355             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Noncurrent  liabilities:                                                                                                                          |       |              |       |                  |       |
| Obligations to  former employees                                                                                                                  |       | 101,975           |       | 99,918                |       |
|                                                                                                                                              |       |              |       |                  |       |
| Total  liabilities                                                                                                                                |       | 3,632,440         |       | 4,917,273             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                                       |       |              |       |                  |       |
| Capital stock –  undesignated – authorized 3,000,000 shares                                                                             |       | —            |       | —                |       |
| Common stock –  $0.10 par value. Authorized 22,000,000 shares; issued and outstanding  5,506,472 shares in 2007 and 5,469,275 shares in 2006 |       | 550,647           |       | 546,928               |       |
| Capital in  excess of par value                                                                                                                   |       | 1,754,584         |       | 1,218,115             |       |
| Retained  earnings                                                                                                                                |       | 20,950,408        |       | 20,036,869            |       |
| Accumulated  other comprehensive gain                                                                                                             |       | 218,941           |       | 158,061               |       |
| Total  stockholders’ equity                                                                                                                  |       | 23,474,580        |       | 21,959,973            |       |
|                                                                                                                                              |       |              |       |                  |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                  |       | $            | 27,107,020 |                  | $     | 26,877,246 |   |

 

See accompanying notes toconsolidated financial statements.

1

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MOCON, INC. ANDSUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF INCOME

(Unaudited)
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                             | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Sales:                                                 |       |                             |       |                           |       |   |   |   |   |
| Products                                               |       | $                                | 6,137,290  |                           | $          | 5,863,719 |   | $ | 12,624,461 |   | $ | 11,944,817 |   |
| Consulting services                                    |       | 520,596                          |       | 476,804                        |       | 909,974 |   | 914,618 |   |
| Total sales                                            |       | 6,657,886                        |       | 6,340,523                      |       | 13,534,435 |   | 12,859,435 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Cost of sales:                                         |       |                             |       |                           |       |   |   |   |   |
| Products                                               |       | 2,586,411                        |       | 2,434,639                      |       | 5,264,052 |   | 4,909,885 |   |
| Consulting services                                    |       | 244,509                          |       | 243,468                        |       | 503,042 |   | 469,013 |   |
| Total cost of sales                                    |       | 2,830,920                        |       | 2,678,107                      |       | 5,767,094 |   | 5,378,898 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Gross profit                                           |       | 3,826,966                        |       | 3,662,416                      |       | 7,767,341 |   | 7,480,537 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Selling, general  and administrative expenses          |       | 2,098,043                        |       | 2,031,958                      |       | 4,326,930 |   | 3,951,098 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Research and  development expenses                     |       | 434,580                          |       | 456,187                        |       | 970,100 |   | 909,706 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Operating income                                       |       | 1,294,343                        |       | 1,174,271                      |       | 2,470,311 |   | 2,619,733 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Other income                                           |       | 140,523                          |       | 162,623                        |       | 267,906 |   | 317,920 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Income from continuing operations before income  taxes |       | 1,434,866                        |       | 1,336,894                      |       | 2,738,217 |   | 2,937,653 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Income taxes                                           |       | 503,000                          |       | 474,000                        |       | 973,000 |   | 962,225 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Income from continuing operations                      |       | 931,866                          |       | 862,894                        |       | 1,765,217 |   | 1,975,428 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Gain from  discontinued operations, net of tax         |       | —                           |       | —                         |       | — |   | 22,225 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net income                                             |       | $                                | 931,866    |                           | $          | 862,894 |   | $ | 1,765,217 |   | $ | 1,997,653 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Basic net income  per common share:                    |       |                             |       |                           |       |   |   |   |   |
| Income from continuing operations                      |       | $                                | 0.17       |                           | $          | 0.16 |   | $ | 0.32 |   | $ | 0.37 |   |
| Gain from discontinued operations                      |       | —                           |       | —                         |       | — |   | — |   |
| Basic net income per common share:                     |       | $                                | 0.17       |                           | $          | 0.16 |   | $ | 0.32 |   | $ | 0.37 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Basic weighted average common shares outstanding       |       | 5,489,160                        |       | 5,424,877                      |       | 5,481,089 |   | 5,414,897 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Diluted net  income per common share:                  |       |                             |       |                           |       |   |   |   |   |
| Income from continuing operations                      |       | $                                | 0.16       |                           | $          | 0.16 |   | $ | 0.31 |   | $ | 0.36 |   |
| Gain from discontinued operations                      |       | —                           |       | —                         |       | — |   | — |   |
| Diluted net income per common share:                   |       | $                                | 0.16       |                           | $          | 0.16 |   | $ | 0.31 |   | $ | 0.36 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Diluted weighted  average common shares outstanding    |       | 5,696,456                        |       | 5,514,540                      |       | 5,688,666 |   | 5,500,888 |   |

 

See accompanying notes toconsolidated financial statements.

2

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MOCON, INC. ANDSUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)
| ** **                                                                          | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                          | ** ** | **June 30,**              | ** ** |
| ** **                                                                          | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                              |       |                           |       |   |   |
| Net income                                                                          |       | $                              | 1,765,217  |   | $ | 1,997,653 |   |
| Gain from discontinued operations, net of tax                                       |       | —                         |       | (22,225 | ) |
| Income from continuing operations                                                   |       | 1,765,217                      |       | 1,975,428 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:  |       |                           |       |   |   |
| Share-based compensation expense                                                    |       | 202,001                        |       | 97,666 |   |
| Loss (gain) on disposition of long-term assets                                      |       | 14,589                         |       | (152,149 | ) |
| Depreciation and amortization                                                       |       | 294,041                        |       | 377,499 |   |
| Deferred income taxes                                                               |       | (24,696                        | )          | (35,640 | ) |
| Changes in operating assets and liabilities, net of  effect of divestiture in 2006: |       |                           |       |   |   |
| Trade accounts receivable                                                           |       | (390,554                       | )          | 190,970 |   |
| Other receivables                                                                   |       | (95,768                        | )          | 17,118 |   |
| Inventories                                                                         |       | (19,204                        | )          | 34,396 |   |
| Prepaid expenses                                                                    |       | 52,929                         |       | 99,153 |   |
| Accounts payable                                                                    |       | (401,851                       | )          | 146,341 |   |
| Accrued compensation and vacation                                                   |       | (211,754                       | )          | 22,655 |   |
| Other accrued expenses                                                              |       | (76,399                        | )          | (138,625 | ) |
| Accrued product warranties                                                          |       | (10,346                        | )          | (31,000 | ) |
| Accrued income taxes                                                                |       | (101,401                       | )          | (238,865 | ) |
| Net cash provided by operating activities                                           |       | 996,804                        |       | 2,364,947 |   |
|                                                                                |       |                           |       |   |   |
| Cash flows from  investing activities:                                              |       |                           |       |   |   |
| Proceeds from sale of subsidiary                                                    |       | —                         |       | 478,721 |   |
| Purchases of marketable securities                                                  |       | (3,220,418                     | )          | (4,182,113 | ) |
| Proceeds from sales or maturities of marketable  securities                         |       | 3,577,917                      |       | 3,305,922 |   |
| Cash paid for acquisitions                                                          |       | (574,568                       | )          | (433,339 | ) |
| Purchases of property and equipment                                                 |       | (156,557                       | )          | (166,310 | ) |
| Proceeds from sale of property and equipment                                        |       | —                         |       | 118,215 |   |
| Purchases of patents and trademarks                                                 |       | (55,729                        | )          | (39,305 | ) |
| Other                                                                               |       | (3,435                         | )          | (3,435 | ) |
| Net cash used in continuing operations                                              |       | (432,790                       | )          | (921,644 | ) |
| Net cash provided by discontinued operations                                        |       | —                         |       | 22,225 |   |
| Net cash used in investing activities                                               |       | (432,790                       | )          | (899,419 | ) |
|                                                                                |       |                           |       |   |   |
| Cash flows from  financing activities:                                              |       |                           |       |   |   |
| Proceeds from the exercise of stock options                                         |       | 299,480                        |       | 451,833 |   |
| Purchases and retirement of common stock                                            |       | —                         |       | (363,125 | ) |
| Dividends paid                                                                      |       | (821,357                       | )          | (811,970 | ) |
| Net cash used in financing activities                                               |       | (521,877                       | )          | (723,262 | ) |
|                                                                                |       |                           |       |   |   |
| Effect of  exchange rate changes on cash                                            |       | 54,737                         |       | 79,453 |   |
|                                                                                |       |                           |       |   |   |
| Net increase in  cash and cash equivalents                                          |       | 96,874                         |       | 821,719 |   |
|                                                                                |       |                           |       |   |   |
| Cash and cash  equivalents:                                                         |       |                           |       |   |   |
| Beginning of period                                                                 |       | 3,549,042                      |       | 2,889,323 |   |
| End of period                                                                       |       | $                              | 3,645,916  |   | $ | 3,711,042 |   |
|                                                                                |       |                           |       |   |   |
| Supplemental  disclosures of cash flow information:                                 |       |                           |       |   |   |
| Cash paid during the period for income taxes                                        |       | $                              | 1,098,647  |   | $ | 1,242,438 |   |
|                                                                                |       |                           |       |   |   |
| Supplemental  schedule of noncash investing and financing activities:               |       |                           |       |   |   |
| Unrealized holding loss on available-for-sale  securities                           |       | $                              | (2,192     | ) | $ | (3,417 | ) |
| Dividends accrued                                                                   |       | $                              | 440,517    |   | $ | 406,945 |   |

 

See accompanying notes toconsolidated financial statements.

3

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MOCON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited)

Note 1 – Consolidated Financial Statements

Theconsolidated balance sheet as of June 30, 2007, and the consolidated statementsof income and cash flows for the three- and six-month periods ended June 30,2007 and 2006 have been prepared by us, without audit.  However, all adjustments (consisting solelyof normal recurring adjustments) which are, in the opinion of management,necessary to present fairly the financial position, results of operations andcash flows at June 30, 2007, and for all periods presented, have beenmade.  The results of operations for thethree- and six-month periods ended June 30, 2007 are not necessarily indicativeof operating results for the full year.

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

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

*Principles of Consolidation*

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

*Foreign Currency Translation*

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

*Use of Estimates*

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

4

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*NewAccounting Pronouncements*

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

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

In February 2007, the FASBissued SFAS 159, *The Fair Value Option for Financial Assetsand Financial Liabilities – Including an amendment of FASB Statement 115*(SFAS159).  This statement permits entities tochoose to measure many financial instruments and certain other items at fairvalue.  The objective is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  SFAS 159 is effective as ofthe beginning of fiscal years that begin after November 15, 2007.  We have not yet determined the impact, ifany, that the implementation of SFAS 159 will have on our financial position,results of operations or cash flows.

In May 2007, the FASB issuedFASB Staff Position (FSP) FIN 48-1, *Definition of Settlementin FASB Interpretation No. 48.* This FSP amends FIN 48,*Accounting for Uncertaintyin Income Taxes*, to provide guidance about how an enterprise should determine whethera tax position is effectively settled for the purpose of recognizing previouslyunrecognized tax benefits.  Under theFSP, a tax position is considered to be effectively settled if the taxingauthority completed its examination, the company does not plan to appeal, andit is remote that the taxing authority would reexamine the tax position in thefuture.  FSP FIN 48-1 is effective for usas of January 1, 2007, the date of adoption of FIN 48.  The adoption of FSP FIN 48-1 did not have asignificant impact on our financial position, results of operations orcash flows.

*Prior Period Revisions*

Certain prior period amountsin the Consolidated Statement of Cash Flows for the six months ended June 30,2006 have been revised to conform to the current period presentation.  These revisions increased cash flows fromoperating activities by $433,339 and decreased cash flows from investingactivities by the same amount.  Inaddition, we will revise the 2005 and 2006 Consolidated Statements of CashFlows in future SEC filings. Specifically, net cash provided by operating activities previouslyreported in the Consolidated Statement of Cash Flows for the year endedDecember 31, 2005, will increase by $223,432 to $3,331,325, and net cash used ininvesting activities will increase by $223,432 to $1,865,771.  Net cash provided by operating activitiespreviously reported in the Consolidated Statement of Cash Flows for the yearended December 31, 2006, will decrease by $21,379 to $4,956,818, and net cashused in investing activities will decrease by $21,379 to $3,311,152.  These 

5

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revisions are being made tocorrect errors in the classification of certain annual earnout payments made in2005, 2006 and the first quarter of 2007 in connection with an acquisitioncompleted in January 2004.  The amountswere previously reported as a component of cash flow from operations ratherthan cash flow from investing activities. These corrections have no effect on the Consolidated Balance Sheets orConsolidated Statements of Income for any prior periods involved.

Note 2 – Inventories

Inventories consist of the following:
|                    | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished  products |       | $                       | 559,116    |                        | $          | 526,918 |   |
| Work-in-process    |       | 1,246,464               |       | 1,261,119                   |       |
| Raw materials      |       | 1,843,079               |       | 1,831,607                   |       |
|               |       | $                       | 3,648,659  |                        | $          | 3,619,644 |   |

 

Note 3 – Net Income Per Common Share

Basic net income per commonshare is computed by dividing net income by the weighted average number ofshares of common stock outstanding during the period.  Diluted net income per common share iscomputed using the treasury stock method to compute the weighted average commonstock outstanding assuming the conversion of potential dilutive common shares.

The following table presentsa reconciliation of the denominators used in the computation of net income percommon share – basic, and net income per common share – diluted, for the three-and six-month periods ended June 30,2007 and 2006:
|                                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                              | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted shares  of common stock outstanding – basic               |       | 5,489,160                                       |       | 5,424,877                                     |       | 5,481,089 |   | 5,414,897 |   |
| Weighted shares  of common stock assumed upon exercise of stock options |       | 207,296                                         |       | 89,663                                        |       | 207,577 |   | 85,991 |   |
| Weighted shares of  common stock outstanding – diluted             |       | 5,696,456                                       |       | 5,514,540                                     |       | 5,688,666 |   | 5,500,888 |   |

 

Note 4 – Goodwill and Intangible Assets

As of June 30,2007 and December 31, 2006, unamortized goodwill amounted to$3,096,317.  Other identifiableintangible assets (all of which are being amortized except projects in process)are as follows:

6

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| ** **                  | ** ** | **As of June 30, 2007** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **Carrying  Amount**                        | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                     |       | $                                           | 745,741    |   | $ | (308,985 | ) | $ | 436,756 |   | 10  to 17 years |   |
| Trademarks and trade  names |       | 402,790                                     |       | (270,976 | ) | 131,814 |   | 5  to 17 years |   |
| Technology  rights          |       | 184,008                                     |       | (184,008 | ) | — |   | 7  to 10 years |   |
| Other  intangibles          |       | 698,596                                     |       | (683,846 | ) | 14,750 |   | Less  than 1 year to 5 years |   |
|                        |       | $                                           | 2,031,135  |   | $ | (1,447,815 | ) | $ | 583,320 |   |   |   |

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

 

Totalamortization expense for the three- and six-month periods ended June 30, 2007and 2006 was $40,375 and $82,737, and $73,098 and $144,812, respectively.  Estimated amortization expense for theremainder of 2007 and each of the four succeeding fiscal years based on theintangible assets as of June 30, 2007 is as follows:
|                      | ** ** | **Estimated  Expense** | ** ** |
|----------------------|------------|------------------------|------------|
| 2007                 |       | $                      | 153,916    |   |
| 2008                 |       | $                      | 110,319    |   |
| 2009                 |       | $                      | 41,896     |   |
| 2010                 |       | $                      | 34,368     |   |
| 2011                 |       | $                      | 20,786     |   |
| 2012 and  thereafter |       | $                      | 89,711     |   |

 

### Note 5 – Marketable Securities

Available-for-salesecurities are recorded at fair value. Unrealized holding gains and losses on available-for-sale securities areexcluded from income and are reported as a separate component of stockholders’equity until realized.  At June 30, 2007and 2006, this resulted in a net cumulative unrealized loss of $3,669 and$10,549, respectively, within stockholders’ equity.  A decline in the market value of anyavailable-for-sale security below cost that is deemed other than temporary ischarged to income resulting in the establishment of a new cost basis for thesecurity.

Note 6 – Comprehensive Income

Othercomprehensive income pertains to net unrealized gains and losses on marketablesecurities and foreign currency translation adjustments that are not includedin net income but rather are recorded directly in stockholders’ equity.

7

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|                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                    |       | $                                               | 931,866    |                                          | $          | 862,894 |   | $ | 1,765,217 |   | $ | 1,997,653 |   |
| Foreign currency  translation adjustment      |       | 31,760                                          |       | 75,222                                        |       | 63,072 |   | 108,681 |   |
| Net unrealized  loss on marketable securities |       | (1,160)                                         |       | (1,075)                                       |       | (2,192) |   | (3,417) |   |
| Comprehensive income                          |       | $                                               | 962,466    |                                          | $          | 937,041 |   | $ | 1,826,097 |   | $ | 2,102,917 |   |

 

Note 7 – Warranty

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

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

Warranty provisions andclaims for the six-month periods ended June 30, 2007 and 2006 were as follows:
|                              | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Beginning  balance           |       | $                                             | 246,737    |   | $ | 327,015 |   |
| Warranty  provisions         |       | 133,335                                       |       | 167,302 |   |
| Warranty claims              |       | (142,049                                      | )          | (195,474 | ) |
| Decrease due to  sale of LCI |       | —                                        |       | (33,248 | ) |
| Ending balance               |       | $                                             | 238,023    |   | $ | 265,595 |   |

 

Note 8 – Income Taxes

In June 2006, the FASBissued Interpretation 48, *Accounting for Uncertaintyin Income Taxes* (FIN 48). This interpretation, as required to be adopted on January 1, 2007,clarifies the accounting for uncertainty in income taxes recognized in anentity’s financial statements in accordance with SFAS 109, *Accountingfor Income Taxes*.  Itprescribes a recognition threshold and measurement attribute for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn.  Implementation of FIN 48 onJanuary 1, 2007 resulted in no adjustment to the liability for unrecognized taxbenefits.  As of the date of adoption,the total amount of unrecognized tax benefits was $289,000, all of which wouldfavorably impact the effective income tax rate in future periods if recognized.  Included in this liability for unrecognizedtax benefits is an estimate for interest and penalties totaling $60,000, bothof which we classify as a component of income tax expense.  It is expected that the amount ofunrecognized tax benefits for positions which we have identified will notchange significantly in the next twelve months.

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

8

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Note 9 – Share-BasedCompensation

Asof June 30, 2007, we have reserved 398,800 shares of common stock for optionsand other share-based incentive awards that are still available for grant underour 2006 stock incentive plan, and 811,291 shares for options that have beengranted under either the 2006 stock incentive plan, the 1998 stock option planor the 1992 stock option plan but have not yet been exercised.  We issue new shares of common stock uponexercise of stock options.  There were no options granted in the first twoquarters of 2007.

Amountsrecognized in the consolidated financial statements related to share-basedcompensation are as follows:
| ** **                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Total cost of  share-based compensation                     |       | $                                               | 100,571    |                                          | $          | 52,297 |   | $ | 202,001 |   | $ | 97,666 |   |
| Amount  capitalized in inventory and property and equipment |       | —                                          |       | —                                        |       | — |   | — |   |
| Amounts charged against  income, before income taxes        |       | 100,571                                         |       | 52,297                                        |       | 202,001 |   | 97,666 |   |
| Amount of income  tax benefit recognized in earnings        |       | (15,518                                         | )          | —                                        |       | (28,644 | ) | — |   |
| Amount charged  against net income                          |       | $                                               | 85,053     |                                          | $          | 52,297 |   | $ | 173,357 |   | $ | 97,666 |   |
|                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Impact on net income  per common share:                     |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                       |       | $                                               | 0.02       |                                          | $          | 0.01 |   | $ | 0.03 |   | $ | 0.02 |   |
| Diluted                                                     |       | $                                               | 0.02       |                                          | $          | 0.01 |   | $ | 0.03 |   | $ | 0.02 |   |

 

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

A summary of the optionactivity for the first six months of 2007 is as follows:
|                                   | ** ** | **Number of   Shares** | ** ** | **Weighted-  average   Exercise   Price per   Share** | ** ** | **Weighted-  average   Remaining   Contractual   Term** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding at  December 31, 2006 |       | 853,875                          |       | $                                                                         | 8.52       |                                                                   | 6.6        |                                        | $          | 3,359,907 |   |
| Options granted                   |       | —                           |       | —                                                                    |       | —                                                                 |       |                                        |       |
| Options cancelled                 |       | (5,387                           | )          | 10.41                                                                     |       | —                                                                 |       |                                        |       |
| Options expired                   |       | —                           |       | —                                                                    |       | —                                                                 |       |                                        |       |
| Options exercised                 |       | (37,197                          | )          | 8.05                                                                      |       | —                                                                 |       |                                        |       |
| Outstanding at  June 30, 2007     |       | 811,291                          |       | $                                                                         | 8.53       |                                                                   | 6.2        |                                        | $          | 2,473,874 |   |
|                              |       |                             |       |                                                                      |       |                                                                   |       |                                        |       |
| Exercisable at June 30,  2007     |       | 605,694                          |       | $                                                                         | 7.77       |                                                                   | 5.2        |                                        | $          | 2,256,846 |   |

 

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The total intrinsic value ofoptions exercised was $84,908 and $86,504 during the second quarters of 2007and 2006, respectively, and $138,628 and $159,153 during the first six monthsof 2007 and 2006, respectively.

A summary of the status ofour unvested option shares as of June 30, 2007 is as follows:
|                                | ** ** | **Number of   Shares** | ** ** | **Weighted-  average   Grant-Date   Fair Value** | ** ** |
|--------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------------|------------|
| Unvested at  December 31, 2006 |       | 235,209                          |       | $                                                               | 2.95       |   |
| Options granted                |       | —                           |       | —                                                          |       |
| Options cancelled              |       | (4,987                           | )          | 2.76                                                            |       |
| Options vested                 |       | (24,625                          | )          | 3.38                                                            |       |
| Unvested at June 30,  2007     |       | 205,597                          |       | $                                                               | 2.91       |   |

 

As of June 30, 2007, therewas $597,484 of total unrecognized compensation cost related to unvestedshare-based compensation granted under our plans.  That cost is expected to be recognized over aweighted-average period of 1.3 years. The total fair value of option shares vested during the three-monthperiods ended June 30, 2007 and 2006 was $41,811 and $284, respectively, and$83,339 and $6,584 during the six-month periods ended June 30, 2007 and 2006,respectively.

Note 10 – Sale of Subsidiary

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

Note 11 – Discontinued Operations

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

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Item 2.  Management’sDiscussion and Analysis 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 andservices products and provides consulting services primarily in the measurementand analytical instrument and services markets. Our products include instruments that detect, measure and monitor gasesand chemical compounds.  Although some ofthe markets for our products are maturing, we continually seek growthopportunities through technological and product improvement, by acquiring anddeveloping new products, and by acquiring new companies.

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

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

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

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

Effective January 1, 2006, we adopted Statement ofFinancial Accounting Standards 123 (revised), *Share-BasedPayment* (SFAS 123 (R)) which requires the measurement andrecognition of compensation expense for all share-based payment awards made toemployees and directors.  As a result, in2006 and 2007 our results of operations reflected compensation expense for newstock options granted and vested during those years and the unvested portion ofprevious stock option grants which vested after January 1, 2006.  The total amounts net of tax charged to operationsin the six-month periods ended June 30, 2007 and 2006 were $173,357 and$97,666, respectively.

### ***Results ofOperations***

The following table sets forth the relationshipbetween various components of our results of operations, stated as a percent ofsales, for the three- and six-month periods ended June 30, 2007, and 2006:

11

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|                                                       | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                              | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Sales                                                 |       | 100.0                                                 |       | 100.0                                               |       | 100.0 |   | 100.0 |   |
| Cost of sales                                         |       | 42.5                                                  |       | 42.2                                                |       | 42.6 |   | 41.8 |   |
| Gross profit                                          |       | 57.5                                                  |       | 57.8                                                |       | 57.4 |   | 58.2 |   |
| Selling, general  and administrative expenses         |       | 31.5                                                  |       | 32.1                                                |       | 32.0 |   | 30.7 |   |
| Research and  development expenses                    |       | 6.6                                                   |       | 7.2                                                 |       | 7.2 |   | 7.1 |   |
| Operating income                                      |       | 19.4                                                  |       | 18.5                                                |       | 18.2 |   | 20.4 |   |
| Other income                                          |       | 2.2                                                   |       | 2.6                                                 |       | 2.0 |   | 2.4 |   |
| Income from continuing operations before income taxes |       | 21.6                                                  |       | 21.1                                                |       | 20.2 |   | 22.8 |   |
| Income taxes                                          |       | 7.6                                                   |       | 7.5                                                 |       | 7.2 |   | 7.4 |   |
| Income from continuing operations                     |       | 14.0                                                  |       | 13.6                                                |       | 13.0 |   | 15.4 |   |
| Gain from  discontinued operations, net of tax        |       | —                                                |       | —                                              |       | — |   | 0.1 |   |
| Net income                                            |       | 14.0                                                  |       | 13.6                                                |       | 13.0 |   | 15.5 |   |

 

### *Comparisonof Financial Results for the Three- and Six-Month Periods Ended June 30, 2007and 2006*

### *Sales*

Sales for the three-month period ended June 30, 2007were $6,657,886, up 5% compared to $6,340,523 for the sameperiod in 2006.  On a geographical basis,sales increased 45% in our domestic markets and decreased 21% in our foreignmarkets.  On a product line basis, thisincrease was primarily due to increased sales of our gas analyzer products anddomestic sales of our permeation products, offset somewhat by a decrease inforeign sales of our permeation products. Sales for the six-month period ended June 30, 2007 were $13,534,435, up5% compared to $12,859,435 for the same period in2006.  On a geographical basis, salesincreased 22% in our domestic markets and decreased 8% in our foreignmarkets.  On a product line basis, theincrease was primarily due to increased sales of our gas analyzer products anddomestic sales of our permeation products, offset somewhat by a decrease inforeign sales of our permeation products and also a decrease in sales of ourweighing and pharmaceutical products. There were no significant price increases or decreases during either thesecond quarter or the first six months of 2007 compared to the same periods in2006.

The following tablesummarizes total sales by product line for the three- and six-month periodsended June 30, 2007 and 2006:
|                                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Permeation  Products and Services                         |       | $                                               | 3,387,667  |                                          | $          | 3,734,412 |   | $ | 6,846,832 |   | $ | 7,230,650 |   |
| Gas, Headspace,  and Other Analyzer Products and Services |       | 2,909,034                                       |       | 2,188,947                                     |       | 5,981,048 |   | 4,820,712 |   |
| Other  Instruments and Services                           |       | 361,185                                         |       | 417,164                                       |       | 706,555 |   | 808,073 |   |
| Total sales                                               |       | $                                               | 6,657,886  |                                          | $          | 6,340,523 |   | $ | 13,534,435 |   | $ | 12,859,435 |   |

 

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The following table sets forth the relationshipbetween various components of domestic and foreign sales for the three- andsix-month periods ended June 30, 2007 and 2006:
|                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **          | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Domestic sales      |       | $                                               | 3,634,643  |                                          | $          | 2,508,746 |   | $ | 6,830,576 |   | $ | 5,609,130 |   |
| Foreign sales:      |       |                                            |       |                                          |       |   |   |   |   |
| Europe              |       | 1,147,856                                       |       | 2,025,742                                     |       | 2,442,683 |   | 3,550,142 |   |
| Asia                |       | 1,252,241                                       |       | 1,339,152                                     |       | 2,958,241 |   | 2,732,504 |   |
| Other               |       | 623,146                                         |       | 466,883                                       |       | 1,302,935 |   | 967,659 |   |
| Total foreign sales |       | 3,023,243                                       |       | 3,831,777                                     |       | 6,703,859 |   | 7,250,305 |   |
| Total sales         |       | $                                               | 6,657,886  |                                          | $          | 6,340,523 |   | $ | 13,534,435 |   | $ | 12,859,435 |   |

 

***Permeation Products and Services*** – Sales of ourpermeation products and services, which accounted for approximately 51% and 59%of our consolidated second quarter sales in 2007 and 2006, respectively,decreased 9% during the second quarter 2007 compared to the same period in2006.  This decrease in sales was aresult of a decline in orders from our international customers, primarily inEurope, partially offset by an increase in domestic orders.

Sales of our permeation products and services, which accounted forapproximately 51% and 56% of our consolidated sales during the first six monthsin 2007 and 2006, respectively, decreased 5% during the first six months of2007 compared to the same period in 2006. As noted above, this decrease in sales was a result of a decline inorders from our international customers, primarily in Europe, partially offsetby an increase in domestic orders.

***Gas, Headspace, and Other Analyzer Products andServices****–* Sales of our gas,headspace, and other analyzer products, which accounted for 44% and 34% of ourconsolidated second quarter sales in 2007 and 2006, respectively, increased 33%during the second quarter 2007 compared to the same period in 2006.  Within this group, sales of our gas analyzerproducts through our Baseline subsidiary increased 64% due in part to shipmentsof our total hydrocarbon analyzers and gas chromatographs, which are soldprimarily for oil and gas well-logging and indoor air quality applications.

Sales of our packaging products, which includeheadspace analyzers and leak detection equipment, increased 6% for the secondquarter 2007 compared to the same quarter in 2006.  The increase was primarily in our domesticmarkets and was largely attributable to sales of our PAC CHECK® series of analyzers.  In addition, sales of our new PAC CHECK® 800 series for the food industry contributedto the sales increase.

Sales of our weighing and pharmaceutical productsdecreased 25% for the second quarter ended June 30, 2007 compared to the samequarter in 2006 as a result of decreased demand in both domestic and foreignmarkets.  Our weighing and pharmaceuticalproducts group consists of a relatively fewer number of higher priced productscompared to our other product groups and will typically experience significantfluctuations in demand.

Sales of our gas, headspace, and other analyzerproducts, which accounted for 44% and 38% of our consolidated sales during thefirst six months in 2007 and 2006, respectively, increased 24% during the firstsix months of 2007 compared to the same period in 2006.  Within this group, sales of our gas analyzerproducts through our Baseline subsidiary increased 57% due in part to shipmentsof our total hydrocarbon analyzers and gas chromatographs as well as sales ofour new BevAlertTM product for the carbonated beverage industry.

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Sales of our packaging products increased 15% duringthe first six months of 2007 compared to the same period in 2006.  As noted above, this increase was dueprimarily to continued market acceptance of our PAC CHECK® series of analyzers.

Sales of our weighing and pharmaceutical productsdecreased 42% during the first six months of 2007 compared to the same periodin 2006 as a result of decreased demand in both our domestic and foreignmarkets.

***Other Instruments and Services –*******Sales in ourother instruments and services category, which accounted for 5% and 7% of ourconsolidated sales in the second quarters 2007 and 2006, respectively,decreased 13% in the second quarter 2007, compared to the same period in2006.  The decrease was primarily due toa lower demand for our consulting and analytical testing services.  For the six months ended June 30, 2007 and2006, sales of other instruments and services accounted for 5% and 6% of ourconsolidated sales, respectively, decreasing 13% in the first six months of2007 as compared to the same period in 2006.

On a geographical basis, domestic and foreign salesaccounted for 55% and 45%, respectively, of our consolidated second quartersales in 2007, and 40% and 60%, respectively, for the same period in 2006.  Domestic and foreign sales each accounted for50% of our consolidated sales for the first six months of 2007, and 44% and56%, respectively, of our consolidated sales for the same period in 2006.

### *GrossProfit*

The gross profit margins for our products were 57.9%and 58.5% for the three-month periods ended June 30, 2007 and 2006,respectively.  The slightly lower marginfor the second quarter 2007 was due primarily to the higher percentage of ourgas analyzer products that were sold in the second quarter 2007 which typicallycarry a lower profit margin than our other products.  As a partial offset, our allowance for excessand obsolete inventories was reduced in the second quarter 2007 due to the saleof slower moving items, resulting in a favorable margin impact.

The gross profit margins for our consulting serviceswere 53.0% and 48.9%, respectively, for the second quarters ended June 30, 2007and 2006.  This increase was primarilydue to higher sales of our consulting and analytical testing services whichallowed for greater absorption of the related fixed overhead costs.

For the six months ended June 30, 2007, the grossprofit margins for our products were 58.3% and 58.9%, respectively.  The slightly lower margin for the first sixmonths of 2007 was due primarily to the higher percentage of our gas analyzerproducts that were sold in the first six months of 2007 which typically carry alower profit margin than our other products.

For the six months ended June 30, 2007, the grossprofit margins for our consulting services were 44.7% and 48.7%,respectively.  This decrease wasprimarily due to decreased demand for our consulting and analytical testingservices which reduced the ability to fully absorb the related fixed overheadcosts.

*Selling,General and Administrative Expenses*

Selling, general and administrative (SG&A) expensesin the three-month period ended June 30, 2007 were $2,098,043, or 31.5% ofsales, compared to $2,031,958, or 32.1% of sales in the second quarter2006.  The dollar increase in SG&Aexpenses was primarily due to increased costs in the second quarter 2007 forstock option expensing, ongoing expenses related to the new technical supportoffice in China, and increased headcount. As a partial offset, our allowance for doubtful accounts was reduced inthe second quarter due to an improved experience rate of sales returns and thecollection of some accounts which previously had been determined asquestionable.

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SG&A expenses were $4,326,930, or 32.0% ofsales, during the first six months of 2007, compared to $3,951,098, or 30.7% ofsales, for the same period in 2006.  Theincrease in SG&A expenses was primarily due to increased costs in 2007 forstock option expensing, expenses related to opening and maintaining an officein China, increased headcount and increased foreign sales and marketingexpenses.

### *Researchand Development Expenses*

Research and development (R&D) expenses were$434,580, or approximately 6.6% of sales, in the second quarter 2007, comparedto $456,187, or approximately 7.2% of sales, in the same period of 2006.  This level of expense is within our plannedrange of R&D expenditures.

R&D expenses were 7.2% and 7.1% of sales for thesix-month periods ended June 30, 2007 and 2006, respectively.  For the foreseeable future, we expect toallocate on an annual basis approximately 6% to 8% of sales to research anddevelopment.

### *OtherIncome*

Other income for the second quarter ended June 30,2007 of $140,523 consisted of interest income of $139,949 and miscellaneousother income of $1,261, offset by a loss of $687 on foreign currencyexchange.  Other income for the threemonths ended June 30, 2006 of $162,623 consisted of interest income of $93,614,gain on the sale of fixed assets of $60,804, gain on foreign currency exchangeon $7,882 and miscellaneous other income of $323.

For the six months ended June 30, 2007, other incomeof $267,906 consisted of interest income of $274,554 and miscellaneous otherincome of $1,261, partially offset by a loss of $7,909 on foreign currencyexchange.  For the six months ended June30, 2006, other income of $317,920 consisted of interest income of $174,591, a$92,345 gain on the sale of Lab Connections, gain on the sale of fixed assetsof $60,804 and other income of $1,610, offset by a loss on foreign currencyexchange of $11,430.  Interest incomeincreased for the second quarter and six months ended June 30, 2007, comparedto the same periods in 2006, due to higher average yields and higher averageinterest bearing investments.

### *Income TaxExpense*

Our provision for income taxes from continuingoperations was 35.1% of income before income taxes for the second quarter endedJune 30, 2007, compared to 35.5% of income before income taxes for the secondquarter ended June 30, 2006.  Theslightly lower effective tax rate in 2007 was due to a smaller proportion ofthe consolidated pre-tax income being derived from our German subsidiary whichis taxed at a higher statutory rate.

For the six months ended June 30, 2007, ourprovision for income taxes from continuing operations was 35.5% of incomebefore income taxes compared to 32.8% of income before income taxes for the sixmonths ended June 30, 2006.  The rate forthe first half of 2006 was favorably impacted by the resolution of a proposedincome tax assessment in the state of New Jersey, which reduced income taxexpense by approximately $50,000.  Also,because the sale of Lab Connections generated a taxable loss, there was no taxprovision applicable to the $92,345 gain that was realized in the first quarter2006.  During the first quarter 2007, weimplemented FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (FIN 48). This implementation did not have an impact on earnings.  Based on current operating conditions andincome tax laws, we expect the tax rate for the remaining quarters of 2007 tobe in the range of 33% to 37%.  This ratefluctuates over time based on the income tax rates in the various jurisdictionsin which we operate, and also the level of profits in those jurisdictions.

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### *Net Income*

Net income was $931,866 in the second quarter 2007,compared to $862,894 in the second quarter 2006.  Diluted net income was $0.16 per share inboth the second quarters of 2007 and 2006. For the six months ended June 30, 2007, net income was $1,765,217, or$0.31 per diluted share, compared to net income of $1,997,653, or $0.36 perdiluted share in the prior year.

*Liquidityand Capital Resources*

We have historicallyfinanced our operations, capital expenditures and other liquidity needs throughour cash flows generated from operations. Total cash, cash equivalents and marketable securities decreased$262,817 during the first six months of 2007 to $12,373,733 as of June 30, 2007,compared to $12,636,550 at December 31, 2006.  This decrease was due in part to the finalearnout payment of $574,568 made in connection with the Lippke acquisition anddividend payments in the first six months of 2007 of $821,357.  Our working capital as of June 30, 2007increased $1,246,399 to $17,451,703, as compared to $16,205,304 atDecember 31, 2006.  We believe thata combination of our existing cash, cash equivalents and marketable securities,plus an expected continuation of cash flow from operations, will continue to beadequate to fund our operations, capital expenditures, dividend payments andstock repurchases for at least the next twelve months.  Purchases of property and equipment wererelatively constant between the two periods mentioned above, and we had nomaterial commitments for capital expenditures as of June 30, 2007.

One of our strategic objectives is, as market andbusiness conditions warrant, to consider acquisitions of businesses, productsor technologies.  We may need to fund suchactivities, should they arise, with a combination of cash on hand and debtand/or equity financing, although no assurance can be given that such debtand/or equity financing will be available at reasonable terms or at all.

As noted above, we adopted FIN 48, *Accounting for Uncertainty in Income Taxes,*as of January 1,2007.  At the date of adoption, we hadapproximately $289,000 of total gross unrecognized tax benefits.  The timing of any payments which could resultfrom these unrecognized tax benefits will depend on a number of factors.  Accordingly, we cannot make reasonablyreliable estimates of the amount and period of potential cash settlements, ifany, with taxing authorities.

*Cash Flow*

Cash Flow from OperatingActivities

Our primary source of funds is cash provided byoperating activities which totaled $996,804 and $2,364,947 in the first sixmonths of 2007 and 2006, respectively. In the first six months of 2007, the cash provided by operatingactivities decreased by $1,368,143 compared to the first six months of2006.  The key components of the decreasein 2007 were lower net income, the increase in accounts receivable, and thereduction of accounts payable and accrued compensation.  Partially offsetting these decreases in cashprovided by operating activities were the lower amounts paid for other accruedexpenses and accrued income taxes.

### Cash Flow from Investing Activities

Cash used in investing activities of continuingoperations totaled $432,790 and $921,644 in the first six months of 2007 and 2006,respectively.  The primary reason for thehigher amount used in 2006 was higher net purchases of marketable securities,partially offset by the proceeds from the sale of Lab Connections and otherproperty and equipment.  We presently donot believe that any significant property, plant and equipment expenditures arerequired to accommodate our current level of operations.

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Cash Flow from Financing Activities

Cash used in financing activities of continuingoperations totaled $521,877 and $723,262 in the first six months of 2007 and2006, respectively.  During the first sixmonths of 2007 and 2006, we made dividend payments to our shareholders of$821,357 and $811,970, respectively.  During the first six months of 2006 werepurchased outstanding common stock in the amount of $363,125.  Partially offsetting these payments were theproceeds from the exercise of stock options in the amounts of $299,480 and$451,833 in the first six months of 2007 and 2006, respectively.

Our Board of Directors has authorized, dependingupon market conditions and other factors, the repurchase of up to a total of$2,000,000 of our common stock.  As ofJune 30, 2007, we had repurchased an aggregate of 41,500 shares of MOCON commonstock under the program at a total cumulative cost of $363,125.  There were no shares of common stockrepurchased in the quarter ended June 30, 2007 and there was $1,636,875remaining in this authorization at that date.

***Contractual Obligations***

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

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

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

***New Accounting Pronouncements***

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

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

InSeptember 2006, the FASB issued SFAS 157, *FairValue Measurement* (SFAS 157).  The standard provides guidancefor using fair value to measure assets and liabilities.  SFAS 157clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing an asset or liability andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions.  Under thestandard, fair value measurements would be separately disclosed by 

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levelwithin the fair value hierarchy.  Thestatement is effective for us beginning in 2008; however, early adoption ispermitted.  We have not yet determined the impact, if any, that theimplementation of SFAS 157 will have on our financial position, results ofoperations or cash flows.

In February 2007, the FASBissued SFAS 159, *The Fair Value Option for Financial Assetsand Financial Liabilities – Including an amendment of FASB Statement 115*(SFAS159).  This statement permits entities tochoose to measure many financial instruments and certain other items at fairvalue.  The objective is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  SFAS 159 is effective as ofthe beginning of fiscal years that begin after November 15, 2007.  We have not yet determined the impact, ifany, that the implementation of SFAS 159 will have on our financial position,results of operations or cash flows.

In May 2007, the FASB issuedFASB Staff Position (FSP) FIN 48-1, *Definition of Settlementin FASB Interpretation No. 48.* This FSP amends FIN 48,*Accounting for Uncertaintyin Income Taxes*, to provide guidance about how an enterprise should determine whethera tax position is effectively settled for the purpose of recognizing previouslyunrecognized tax benefits.  Under theFSP, a tax position is considered to be effectively settled if the taxingauthority completed its examination, the company does not plan to appeal, andit is remote that the taxing authority would reexamine the tax position in thefuture.  FSP FIN 48-1 is effective for usas of January 1, 2007, the date of adoption of FIN 48.  The adoption of FSP FIN 48-1 did not have asignificant impact on our financial position, results of operations orcash flows.

***Critical Accounting Policies***

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

*Revenue recognition* – We recognize revenue whenit is realized or realizable and earned. In accordance with the Securities and Exchange Commission StaffAccounting Bulletin 104 (SAB 104), *RevenueRecognition,*we consider revenue realized or realizable whenpersuasive evidence of an arrangement exists, the product has been shipped orthe services have been provided to the customer, title and risk of loss ofproducts has passed to the customer, the sales price is fixed or determinable,and collectibility is reasonably assured. Our terms are F.O.B. shipping point with no right of return, andcustomer acceptance of our products is not required.  The revenue recognition policy does notdiffer among the various product lines, the marketing venues, or variousgeographic destinations.  We do not havedistributors who stock our equipment.  Wedo not offer rebates, price protection, or other similar incentives, anddiscounts when offered are recorded as a reduction in revenue.

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

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

*Allowance for doubtful accounts and sales returns* – Ourallowance for doubtful accounts and sales returns is for accounts receivablebalances that are estimated to be uncollectible as well as projected salesreturns.  The reserve is based on anumber of factors, including:  (1) ananalysis of customer accounts and (2) our historical experience with accountsreceivable write-offs and sales returns. The analysis includes the age of the receivable, the financial conditionof a customer or industry, and general economic conditions.  We believe our financial results could bematerially different if historical trends do not reflect actual results or ifeconomic conditions worsened for our customers. In the event we determined that a smaller or larger allowance fordoubtful accounts is appropriate, we would record a credit or charge toselling, general and administrative expense in the period that we made such adetermination.  As of June 30, 2007, wehad $128,012 reserved against our accounts receivable for doubtful accounts andsales returns.

*Allowance for excess and obsolete inventories –*We perform ananalysis to identify excess and obsolete inventory.  We record a charge to cost of sales foramounts identified.  Our analysisincludes inventory levels, the nature of the finished product and its inherentrisk of obsolescence and the on-hand quantities relative to the sales historyof that finished product.  We believethat our financial results could be materially different if historical trendsdo not reflect actual results or if demand for our products decreased becauseof economic or competitive conditions or otherwise.  As of June 30, 2007, we had $541,629 accruedfor excess and obsolete inventories.

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

*Accrued product warranties –*Our productsare generally covered by a warranty, with warranty periods ranging from ninetydays to one year from the date of sale. Estimated warranty costs are accrued in the same period in which therelated revenue is recognized, based on anticipated parts and labor costs,utilizing historical experience.  Specialwarranty reserves are also accrued for major rework campaigns.  We periodically assess the adequacy of ourwarranty reserves based on changes in these factors and record any necessaryadjustments if actual claim experience indicates that adjustments arenecessary.  Although we believe thelikelihood to be relatively low, warranty claims experience could be materiallydifferent from actual results due to manufacturing changes that could impactproduct quality, a change in our warranty policy in response to industrytrends, as yet unrecognized defects in products sold, or other factors.  As of June 30, 2007, we had $238,023 accruedfor future estimated warranty claims.

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

We have significant amounts of deferred taxassets.  Management reviews the deferredtax assets for 

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recoverability on a quarterly basis and assesses theneed for valuation allowances.  Thesedeferred tax assets are evaluated by considering historical levels of income,estimates of future taxable income streams and the impact of tax planningstrategies.  A valuation allowance isrecorded to reduce deferred tax assets when it is determined that it is morelikely than not that we would not be able to realize all or part of ourdeferred tax assets.  At June 30, 2007,we have a valuation allowance in the approximate amount of $238,000 against ourdeferred tax assets.

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

This quarterlyreport on Form 10-Q contains or incorporates by reference not only historicalinformation, but also forward-looking statements within the meaning of Section27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, and are subject to the safe harborcreated by those sections.  In addition,we or others on our behalf may make forward-looking statements from time totime in oral presentations, including telephone conferences and/or web castsopen to the public, in press releases or reports, on our website or otherwise.  All statements other than statements ofhistorical facts included in this report that address activities, events ordevelopments that we expect, believe or anticipate will or may occur in thefuture are forward-looking statements including, in particular, the statementsabout our plans, objectives, strategies and prospects regarding, among otherthings, our financial condition, results of operations and business.  We have identified some of theseforward-looking statements with words like “believe,” “may,” “could,” “might,” “forecast,”“possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,”“predict,” “anticipate,” “estimate,” “approximate” or “continue” and otherwords and terms of similar meaning. These forward-looking statements may be contained in the notes to ourconsolidated financial statements and elsewhere in this report, including underthe heading “Management’s Discussion and Analysis of Financial Condition andResults of Operations.”

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

·                  Increases in prices for raw materials;

·                  Risks inherent in operating internationallyand selling and shipping our products and purchasing our products andcomponents internationally;

·                  Fluctuations in foreign currency exchangerates and interest rates;

·                  Failure to develop new products andtechnologies, delays in new product introduction and lack of market acceptanceof new products;

·                  Failure to effect strategic acquisitions andintegrate effectively newly acquired operations;

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

·                  Decreases in capital spending by ourcustomers;

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

·                  Disruption in our ability to manufacture ourproducts or the ability of our key suppliers to provide us products orcomponents or raw materials for products resulting in our inability to supplymarket demand for our products;

·                  Reliance on independent sales distributorsand sales associates to market and sell our products;

·                  Highly competitive nature of the markets inwhich we sell our products and the introduction of competing products;

·                  Loss of customers;

·                  Failure to retain senior management orreplace lost senior management;

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·                  Employee slowdowns, strikes or similaractions;

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

·                  Effects of any pending or threatenedlitigation;

·                  Failure to comply with applicable laws andregulations and adverse changes in applicable laws or regulations;

·                  Changes in generally accepted accountingprinciples; or

·                  Conditions and changes in general economicand business conditions.

For moreinformation regarding these and other uncertainties and factors that couldcause our actual results to differ materially from what we have anticipated inour forward-looking statements or otherwise could materially adversely affectour business, financial condition or operating results, see our annual reporton Form 10-K for the fiscal year ended December 31, 2006 under the heading “PartI – Item 1A.  Risk Factors” on pages 8through 13 of such report.

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

Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk

*Equity Price and Interest RateRisk*

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

### *Foreign CurrencyExchange Risk*

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

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Item 4.  Controls and Procedures

*Evaluation of Disclosure Controlsand Procedures*

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

*Changes in Internal Control OverFinancial Reporting*

There was nochange in our internal control over financial reporting that occurred duringour quarter ended June 30, 2007 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item1A.  Risk Factors

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

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

*UnregisteredSales of Equity Securities*

Wedid not sell any equity securities of MOCON, Inc. during the second quarterended June 30, 2007 that were not registered under the Securities Act of 1933.

*IssuerRepurchases of Equity Securities*

Wedid not repurchase any equity securities of MOCON, Inc. during the secondquarter ended June 30, 2007.

Item4.                         Submission of Matters to a Vote of SecurityHolders

(a)  Our Annual Meeting of Shareholders was held on May 17,2007.

(b)  The results of the shareholder votes were as follows:
| ** **                                                                    | ** ** | **For**   | ** ** | **Against/Withhold** | ** ** | **Abstain** | ** ** | **Broker   Non-Votes** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------|------------|----------------------|------------|-------------|------------|-----------------------------|------------|
| 1.    Election of Directors                                         |       |      |       |                 |       |        |       |                        |       |
| Robert L. Demorest                                                            |       | 5,131,190 |       | 29,715               |       | —      |       | —                      |       |
| Dean B. Chenoweth                                                             |       | 5,124,854 |       | 36,051               |       | —      |       | —                      |       |
| Donald N. DeMorett                                                            |       | 5,128,835 |       | 32,070               |       | —      |       | —                      |       |
| J. Leonard Frame                                                              |       | 5,126,197 |       | 34,708               |       | —      |       | —                      |       |
| Robert F. Gallagher                                                           |       | 5,135,179 |       | 25,726               |       | —      |       | —                      |       |
| Daniel W. Mayer                                                               |       | 5,134,103 |       | 26,802               |       | —      |       | —                      |       |
| Ronald A. Meyer                                                               |       | 5,132,253 |       | 28,652               |       | —      |       | —                      |       |
| Richard A. Proulx                                                             |       | 5,129,438 |       | 31,467               |       | —      |       | —                      |       |
| Tom C. Thomas                                                                 |       | 5,108,175 |       | 52,730               |       | —      |       | —                      |       |
|                                                                          |       |      |       |                 |       |        |       |                        |       |
| 2.   Ratification of Independent  Registered Public Accounting Firm |       | 5,129,469 |       | 16,147               |       | 15,289      |       | —                      |       |

 

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Item 6.  Exhibits

Thefollowing exhibits are being filed or furnished with this quarterly report onForm 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-OxleyAct of 2002  |
|          |       |                                                                                                |
| 32.2          |       | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-OxleyAct of 2002  |

 

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SIGNATURES

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned hereunto duly authorized.

 
|                        |   | MOCON, INC.                                  |   |   |
|------------------------|--------|----------------------------------------------|--------|--------|
|                   |   |                                         |   |   |
|                   |   |                                         |   |   |
| Date: August 14,  2007 |   | /s/ Robert L. Demorest                       |   |   |
|                   |   | Robert L. Demorest                           |   |   |
|                   |   | Chairman, President and Chief                |   |   |
|                   |   | Executive Officer                            |   |   |
|                   |   | (Principal Executive Officer)                |   |   |
|                   |   |                                         |   |   |
|                   |   |                                         |   |   |
| Date: August 14,  2007 |   | /s/ Darrell B. Lee                           |   |   |
|                   |   | Darrell B. Lee                               |
|                   |   | Vice President, Treasurer and Chief          |
|                   |   | Financial Officer                            |
|                   |   | (Principal Financial and Accounting Officer) |

 

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MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED JUNE 30, 2007

EXHIBITINDEX
| 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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