**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

**ý****Quarterly Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

**Forthe Quarter Ended September 30, 2007**

 

**or**

 

**o****Transition Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

**Forthe transition period from                 to**

 

CommissionFile Number **000-09273**

 

**MOCON, INC.**

(Exact nameof 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’stelephone number, including area code)

 

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

 

YES x NO o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, 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

 

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

 

YES o NO x

 

5,525,603Common Shares were outstanding as of October 31, 2007.

 

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MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter EndedSeptember 30, 2007

 
| ** **                    | ** ** | **Page  Number**                                                                                               |
|-------------------------------|------------|----------------------------------------------------------------------------------------------------------------|
| PART I. FINANCIAL INFORMATION |       |                                                                                                           |
|                          |       |                                                                                                           |
| Item 1.                       |       | Financial  Statements                                                                                          |   |   |
|                          |       | Consolidated  Balance Sheets  September 30, 2007 (Unaudited) and December 31, 2006                        |   | 1 |
|                          |       |                                                                                                           |   |   |
|                          |       | Consolidated  Statements of Income (Unaudited)  Three months and nine months ended September 30, 2007 and 2006 |   | 2 |
|                          |       |                                                                                                           |   |   |
|                          |       | Consolidated  Statements of Cash Flows (Unaudited)  Nine months ended September 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                                                    |   | 21-22 |
|                          |       |                                                                                                           |   |   |
| 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 6.                       |       | Exhibits                                                                                                       |   | 23 |
|                          |       |                                                                                                           |   |   |
| Signatures                    |       |                                                                                                           |   | 24 |
|                          |       |                                                                                                           |   |   |
| Exhibit  Index                |       | 25                                                                                                             |

 

*In thisreport, references to “MOCON,” “the Company,” “we,” “our,” or “us,” unless thecontext otherwise requires, refer to MOCON, Inc. and its subsidiaries.*

* *

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

 

----

 

PART I.FINANCIAL INFORMATION

 

Item 1. FinancialStatements

 

MOCON, INC.AND SUBSIDIARIES

 

CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                                        | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| ** **                                                                                                                                        | ** ** | **(Unaudited)**   | ** ** | **(Audited)**    | ** ** |
| ASSETS                                                                                                                                            |       |              |       |             |       |
| Current  assets:                                                                                                                                  |       |              |       |             |       |
| Cash  and cash equivalents                                                                                                                        |       | $                 | 4,948,051  |             | $          | 3,549,042 |   |
| Marketable  securities, current                                                                                                                   |       | 6,125,024         |       | 8,710,390        |       |
| Trade  accounts receivable, less allowance for doubtful accounts of $137,698 in 2007  and $179,861 in 2006                                        |       | 4,680,339         |       | 4,384,808        |       |
| Other  receivables                                                                                                                                |       | 170,674           |       | 166,697          |       |
| Inventories                                                                                                                                       |       | 3,601,421         |       | 3,619,644        |       |
| Prepaid  expenses                                                                                                                                 |       | 272,644           |       | 251,953          |       |
| Deferred  income taxes                                                                                                                            |       | 340,125           |       | 340,125          |       |
| Total  current assets                                                                                                                             |       | 20,138,278        |       | 21,022,659       |       |
|                                                                                                                                              |       |              |       |             |       |
| Marketable  securities, noncurrent                                                                                                                |       | 2,650,592         |       | 377,118          |       |
|                                                                                                                                              |       |              |       |             |       |
| Property,  plant and equipment, net of accumulated depreciation of $4,173,529 in 2007  and $4,496,696 in 2006                                     |       | 1,525,317         |       | 1,556,984        |       |
|                                                                                                                                              |       |              |       |             |       |
| Other  assets:                                                                                                                                    |       |              |       |             |       |
| Goodwill                                                                                                                                          |       | 3,096,317         |       | 3,096,317        |       |
| Technology  rights and other intangibles, net                                                                                                     |       | 578,890           |       | 624,917          |       |
| Other                                                                                                                                             |       | 203,432           |       | 199,251          |       |
| Total  other assets                                                                                                                               |       | 3,878,639         |       | 3,920,485        |       |
|                                                                                                                                              |       |              |       |             |       |
| TOTAL  ASSETS                                                                                                                                     |       | $                 | 28,192,826 |             | $          | 26,877,246 |   |
|                                                                                                                                              |       |              |       |             |       |
| LIABILITIES  AND STOCKHOLDERS' EQUITY                                                                                                             |       |              |       |             |       |
| Current  liabilities:                                                                                                                             |       |              |       |             |       |
| Accounts  payable                                                                                                                                 |       | $                 | 1,428,291  |             | $          | 1,688,846 |   |
| Accrued  compensation and vacation                                                                                                                |       | 1,133,099         |       | 1,286,316        |       |
| Earnout  payable                                                                                                                                  |       | —            |       | 574,568          |       |
| Other  accrued expenses                                                                                                                           |       | 243,957           |       | 320,797          |       |
| Accrued  product warranties                                                                                                                       |       | 269,930           |       | 246,737          |       |
| Accrued  income taxes                                                                                                                             |       | 128,167           |       | 289,895          |       |
| Dividends  payable                                                                                                                                |       | 441,890           |       | 410,196          |       |
| Total  current liabilities                                                                                                                        |       | 3,645,334         |       | 4,817,355        |       |
|                                                                                                                                              |       |              |       |             |       |
| Non-current  liabilities:                                                                                                                         |       |              |       |             |       |
| Obligations  to former employees                                                                                                                  |       | 108,006           |       | 99,918           |       |
|                                                                                                                                              |       |              |       |             |       |
| Total  liabilities                                                                                                                                |       | 3,753,340         |       | 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  5,523,628 shares in 2007 and 5,469,275 shares in 2006 |       | 552,363           |       | 546,928          |       |
| Capital  in excess of par value                                                                                                                   |       | 1,996,580         |       | 1,218,115        |       |
| Retained  earnings                                                                                                                                |       | 21,463,868        |       | 20,036,869       |       |
| Accumulated  other comprehensive gain                                                                                                             |       | 426,675           |       | 158,061          |       |
| Total  stockholders' equity                                                                                                                       |       | 24,439,486        |       | 21,959,973       |       |
|                                                                                                                                              |       |              |       |             |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                       |       | $                 | 28,192,826 |             | $          | 26,877,246 |   |

 

See accompanying notes to consolidated financialstatements.

 

1

----

 

MOCON, INC.AND SUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF INCOME

(Unaudited)

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                                             | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Sales:                                                 |       |                   |       |                  |       |   |   |   |   |
| Products                                               |       | $                      | 6,386,056  |                  | $          | 6,235,775 |   | $ | 19,010,517 |   | $ | 18,180,592 |   |
| Consulting  services                                   |       | 433,944                |       | 411,316               |       | 1,343,918 |   | 1,325,934 |   |
| Total  sales                                           |       | 6,820,000              |       | 6,647,091             |       | 20,354,435 |   | 19,506,526 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Cost  of sales:                                        |       |                   |       |                  |       |   |   |   |   |
| Products                                               |       | 2,658,791              |       | 2,603,556             |       | 7,922,843 |   | 7,500,754 |   |
| Consulting  services                                   |       | 238,439                |       | 237,044               |       | 741,481 |   | 706,057 |   |
| Total  cost of sales                                   |       | 2,897,230              |       | 2,840,600             |       | 8,664,324 |   | 8,206,811 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Gross  profit                                          |       | 3,922,770              |       | 3,806,491             |       | 11,690,111 |   | 11,299,715 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Selling,  general and administrative expenses          |       | 2,117,652              |       | 1,914,020             |       | 6,444,582 |   | 5,724,656 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Research  and development expenses                     |       | 469,132                |       | 507,933               |       | 1,439,232 |   | 1,417,639 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Operating  income                                      |       | 1,335,986              |       | 1,384,538             |       | 3,806,297 |   | 4,157,420 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Other  income                                          |       | 146,406                |       | 107,971               |       | 414,312 |   | 272,742 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Income  from continuing operations before income taxes |       | 1,482,392              |       | 1,492,509             |       | 4,220,609 |   | 4,430,162 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Income  taxes                                          |       | 527,000                |       | 524,000               |       | 1,500,000 |   | 1,486,225 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Income  from continuing operations                     |       | 955,392                |       | 968,509               |       | 2,720,609 |   | 2,943,937 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Gain  from discontinued operations, net of tax         |       | —                 |       | —                |       | — |   | 22,225 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Net  income                                            |       | $                      | 955,392    |                  | $          | 968,509 |   | $ | 2,720,609 |   | $ | 2,966,162 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Basic  net income per common share:                    |       |                   |       |                  |       |   |   |   |   |
| Income  from continuing operations                     |       | $                      | 0.17       |                  | $          | 0.18 |   | $ | 0.50 |   | $ | 0.54 |   |
| Gain  from discontinued operations                     |       | —                 |       | —                |       | — |   | 0.01 |   |
| Basic  net income per common share:                    |       | $                      | 0.17       |                  | $          | 0.18 |   | $ | 0.50 |   | $ | 0.55 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Basic  weighted average common shares outstanding      |       | 5,515,050              |       | 5,431,008             |       | 5,492,409 |   | 5,420,267 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Diluted  net income per common share:                  |       |                   |       |                  |       |   |   |   |   |
| Income  from continuing operations                     |       | $                      | 0.17       |                  | $          | 0.18 |   | $ | 0.48 |   | $ | 0.53 |   |
| Gain  from discontinued operations                     |       | —                 |       | —                |       | — |   | 0.01 |   |
| Diluted  net income per common share:                  |       | $                      | 0.17       |                  | $          | 0.18 |   | $ | 0.48 |   | $ | 0.54 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Diluted  weighted average common shares outstanding    |       | 5,672,172              |       | 5,527,663             |       | 5,681,236 |   | 5,512,318 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

2

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MOCON, INC.AND SUBSIDIARIES

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                          | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                          | ** ** | **September 30,**     | ** ** |
| ** **                                                                          | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Cash  flows from operating activities:                                              |       |                  |       |   |   |
| Net  income                                                                         |       | $                     | 2,720,609  |   | $ | 2,966,162 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:  |       |                  |       |   |   |
| Gain  from discontinued operations, net of tax                                      |       | —                |       | (22,225 | ) |
| Share-based  compensation expense                                                   |       | 298,810               |       | 143,349 |   |
| Loss  (gain) on disposition of long-term assets                                     |       | 22,364                |       | (150,651 | ) |
| Depreciation  and amortization                                                      |       | 431,394               |       | 561,842 |   |
| Deferred  income taxes                                                              |       | (37,464               | )          | (35,640 | ) |
| Changes  in operating assets and liabilities, net of effect of divestiture in 2006: |       |                  |       |   |   |
| Trade  accounts receivable                                                          |       | (196,949              | )          | 138,481 |   |
| Other  receivables                                                                  |       | (2,845                | )          | (50,222 | ) |
| Inventories                                                                         |       | 58,195                |       | 242,641 |   |
| Prepaid  expenses                                                                   |       | (20,114               | )          | 7,045 |   |
| Accounts  payable                                                                   |       | (312,631              | )          | 328,058 |   |
| Accrued  compensation and vacation                                                  |       | (169,619              | )          | 13,919 |   |
| Other  accrued expenses                                                             |       | (78,581               | )          | (106,349 | ) |
| Accrued  product warranties                                                         |       | 16,779                |       | (34,511 | ) |
| Accrued  income taxes                                                               |       | (177,421              | )          | (105,969 | ) |
| Net  cash provided by operating activities                                          |       | 2,552,527             |       | 3,895,930 |   |
|                                                                                |       |                  |       |   |   |
| Cash  flows from investing activities:                                              |       |                  |       |   |   |
| Proceeds  from sale of subsidiary                                                   |       | —                |       | 478,721 |   |
| Purchases  of marketable securities                                                 |       | (7,286,148            | )          | (6,535,213 | ) |
| Proceeds  from sales or maturities of marketable securities                         |       | 7,600,319             |       | 4,543,328 |   |
| Cash  paid for acquisitions                                                         |       | (574,568              | )          | (433,339 | ) |
| Purchases  of property and equipment                                                |       | (273,742              | )          | (334,670 | ) |
| Proceeds  from sale of property and equipment                                       |       | —                |       | 119,452 |   |
| Purchases  of patents and trademarks                                                |       | (94,890               | )          | (69,875 | ) |
| Other                                                                               |       | 99,395                |       | (5,153 | ) |
| Net  cash used in investing activities                                              |       | (529,634              | )          | (2,236,749 | ) |
|                                                                                |       |                  |       |   |   |
| Cash  flows from financing activities:                                              |       |                  |       |   |   |
| Proceeds  from the exercise of stock options                                        |       | 427,065               |       | 473,843 |   |
| Purchases  and retirement of common stock                                           |       | —                |       | (363,125 | ) |
| Dividends  paid                                                                     |       | (1,261,916            | )          | (1,219,214 | ) |
| Net  cash used in financing activities                                              |       | (834,851              | )          | (1,108,496 | ) |
|                                                                                |       |                  |       |   |   |
| Discontinued  operations:                                                           |       |                  |       |   |   |
| Net  cash provided by discontinued operations                                       |       | —                |       | 22,225 |   |
|                                                                                |       |                  |       |   |   |
| Effect  of exchange rate changes on cash                                            |       | 210,967               |       | 100,012 |   |
|                                                                                |       |                  |       |   |   |
| Net  increase in cash and cash equivalents                                          |       | 1,399,009             |       | 672,922 |   |
|                                                                                |       |                  |       |   |   |
| Cash  and cash equivalents:                                                         |       |                  |       |   |   |
| Beginning  of period                                                                |       | 3,549,042             |       | 2,889,323 |   |
| End  of period                                                                      |       | $                     | 4,948,051  |   | $ | 3,562,245 |   |
|                                                                                |       |                  |       |   |   |
| Supplemental  disclosures of cash flow information:                                 |       |                  |       |   |   |
| Cash  paid during the period for income taxes                                       |       | $                     | 1,724,841  |   | $ | 1,638,038 |   |
|                                                                                |       |                  |       |   |   |
| Supplemental  schedule of noncash investing and financing activities:               |       |                  |       |   |   |
| Unrealized  holding gain (loss) on available-for-sale securities                    |       | $                     | 2,279      |   | $ | (36 | ) |
| Dividends  accrued                                                                  |       | $                     | 441,890    |   | $ | 407,488 |   |
|                                                                                     |            |                       |            |  |  |  |  |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements.

 

3

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MOCON, INC. AND SUBSIDIARIES

 

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 — Consolidated Financial Statements

 

Theconsolidated balance sheet as of September 30, 2007, and the consolidatedstatements of income and cash flows for the three- and nine-month periods endedSeptember 30, 2007 and 2006 have been prepared by us, without audit. However,all adjustments (consisting solely of normal recurring adjustments) which are,in the opinion of management, necessary to present fairly the financialposition, results of operations and cash flows at September 30, 2007, and forall periods presented, have been made. The results of operations for the three-and nine-month periods ended September 30, 2007 are not necessarily indicativeof operating results for the full year.

 

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted. It is suggested that these consolidated financial statements be readin conjunction 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 single industry segment: the developing, manufacturing,and marketing of measurement, analytical and monitoring products used todetect, 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*

 

Thefinancial statements for operations outside the United States are maintained intheir local currency. All assets and liabilities of our foreign subsidiary aretranslated to U.S. dollars at period-end exchange rates, while revenue andexpense accounts are translated at the average exchange rates during the periodtransactions occurred. Translation adjustments arising from the use ofdiffering exchange rates are included in accumulated other comprehensive incomeor loss in stockholders’ equity. Gains and losses on foreign currencytransactions are included in other income or loss.

 

*Use of Estimates*

 

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

 

4

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*New Accounting Pronouncements*

 

In June 2006, the FASB ratified the Emerging IssuesTask Force (EITF) consensus on EITF Issue 06-3, *How TaxesCollected From Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement*(that is, gross versus netpresentation) (EITF 06-3). The scope of EITF 06-3 includes any tax assessed bya governmental authority that is directly imposed on a revenue-producingtransaction between a seller and a customer, and provides that a company mayadopt a policy of presenting taxes either gross within revenue or on a netbasis. For any such taxes that are reported on a gross basis, a company shoulddisclose the amounts of those taxes for each period for which an incomestatement is presented if those amounts are significant. This statement iseffective for financial reports for interim and annual reporting periodsbeginning after December 15, 2006. EITF 06-3 became effective for us as ofJanuary 1, 2007. We collect various sales and value-added taxes on certainproducts and service 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 on derecognition,measurement, classification, interest and penalties, accounting in interim periods,disclosure and transition.  Therequirements are effective for fiscal years beginning after December 15,2006.  Adoption of FIN48 did not have a material effect on our financial position, results ofoperations or cash flows.

 

In September 2006, the FASB issued SFAS 157, *Fair Value Measurement* (SFAS 157). The standard providesguidance for 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 the standard, fair value measurements would beseparately disclosed by level within the fair value hierarchy. The statement iseffective for us beginning in 2008; however, early adoption is permitted. Wehave not yet determined the impact, if any, that the implementation of SFAS 157will have on our financial position, results of operations or cash flows.

 

In February 2007, the FASB issued SFAS 159, *The Fair Value Option for Financial Assets and Financial Liabilities —Including an amendment of FASB Statement 115*(SFAS 159). Thisstatement permits entities to choose to measure many financial instruments andcertain other items at fair value. The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions. SFAS159 is effective for us beginning in 2008. We have not yet determined theimpact, if any, that the implementation of SFAS 159 will have on our financialposition, results of operations or cash flows.

 

In May 2007, the FASB issued FASB Staff Position(FSP) FIN 48-1, *Definition of Settlement in FASBInterpretation 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 the FSP, a tax position is considered to beeffectively settled if the taxing authority completed its examination, thecompany does not plan to appeal, and it is remote that the taxing authoritywould re-examine the tax position in the future. FSP FIN 48-1 is effective forus as of January 1, 2007, the date of adoption of FIN 48. The adoption of FSPFIN 48-1 did not have an impact on our financial position, results ofoperations or cash flows.

 

*Prior Period Revisions*

 

Certain prior period amounts in the ConsolidatedStatement of Cash Flows for the nine-months ended September 30, 2006 have beenrevised to conform to the current period presentation. These revisionsincreased cash flows from operating activities by $433,339 and decreased cashflows from investing activities by the same amount. In addition, we will revisethe 2005 and 2006 Consolidated Statements of Cash Flows in future SEC filings. Specifically,net cash provided by operating activities previously reported in theConsolidated Statement of Cash Flows for the year ended December 31, 2005, willincrease by $223,432 to $3,331,325, and net cash used in investing activitieswill increase by $223,432 to $1,865,771. Net cash provided by operatingactivities previously reported in the Consolidated Statement of Cash Flows forthe year ended December 31, 2006, will decrease by $21,379 to $4,956,818, andnet cash used in investing activities will decrease by $21,379 to $3,311,152. These

 

5

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revisions are being made to correct errors in theclassification of certain annual earnout payments made in 2005, 2006 and thefirst quarter of 2007 in connection with an acquisition completed in January2004. The amounts were previously reported as a component of cash flow fromoperations rather than cash flow from investing activities. These correctionshave no effect on the Consolidated Balance Sheets or Consolidated Statements ofIncome for any prior periods involved.

 

In addition, the following changes in theConsolidated Statement of Income for the nine-months ended September 30, 2006were made. Other income was reduced by $152,826 and reclassified as a reductionto selling, general and administrative expenses of $140,139 and a reduction incost of sales (products) of $12,687. This reclassification was due to theimproper recording of the gains realized from the sale of a subsidiary andcertain fixed assets and had no impact on net income.

 

Note 2 — Inventories

 

Inventories consist of the following:

 

| ** **         | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished  products |       | $                       | 636,988    |                        | $          | 526,918 |   |
| Work-in-process    |       | 1,185,510               |       | 1,261,119                   |       |
| Raw  materials     |       | 1,778,923               |       | 1,831,607                   |       |
|               |       | $                       | 3,601,421  |                        | $          | 3,619,644 |   |

 

Note 3 — Net Income Per Common Share

 

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

 

The following table presents a reconciliation of the denominators usedin the computation of net income per common share — basic, and net income percommon share — diluted, for the three- and nine-month periods ended September 30, 2007and 2006:

 

| ** **                                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                              | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted  shares of common stock outstanding — basic               |       | 5,515,050                             |       | 5,431,008                            |       | 5,492,409 |   | 5,420,267 |   |
| Weighted  shares of common stock assumed upon exercise of stock options |       | 157,122                               |       | 96,655                               |       | 188,827 |   | 92,051 |   |
| Weighted  shares of common stock outstanding — diluted             |       | 5,672,172                             |       | 5,527,663                            |       | 5,681,236 |   | 5,512,318 |   |

 

Note 4 — Goodwill and Intangible Assets

 

Asof both September 30, 2007 and December 31, 2006, unamortized goodwillamounted to $3,096,317. Other identifiable intangible assets (all of which arebeing amortized except projects in process) are as follows:

 

6

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| ** **                  | ** ** | **As of September 30, 2007** | ** ** |
|-----------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **Carrying  Amount**         | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                     |       | $                            | 774,526    |   | $ | (318,830 | ) | $ | 455,696 |   | 10 to 17  years |   |
| Trademarks  and trade names |       | 404,693                      |       | (288,874 | ) | 115,819 |   | 5 to 17  years |   |
| Technology  rights          |       | 184,008                      |       | (184,008 | ) | —- |   | 7 to 10  years |   |
| Other  intangibles          |       | 698,596                      |       | (691,221 | ) | 7,375 |   | Less than 1  year to 5 years |   |
|                        |       | $                            | 2,061,823  |   | $ | (1,482,933 | ) | $ | 578,890 |   |   |   |

 

 
| ** **                  | ** ** | **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 nine-month periods ended September 30,2007 and 2006 was $36,090 and $118,827, and $75,026 and $219,838, respectively.Estimated amortization expense for the remainder of 2007 and each of the foursucceeding fiscal years based on the intangible assets as of September 30, 2007is as follows:

 

| ** **           | ** ** | **Estimated  Expense** | ** ** |
|----------------------|------------|------------------------|------------|
| 2007                 |       | $                      | 35,089     |   |
| 2008                 |       | $                      | 110,319    |   |
| 2009                 |       | $                      | 41,896     |   |
| 2010                 |       | $                      | 34,368     |   |
| 2011                 |       | $                      | 20,786     |   |
| 2012  and thereafter |       | $                      | 89,711     |   |

###  

### Note 5 — Marketable Securities

###  

Available-for-sale securities are recorded at fairvalue. 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 September 30, 2007 and 2006, the net cumulativeunrealized gain (loss) was $802 and ($7,168), respectively. A decline in themarket value of any available-for-sale security below cost that is deemed otherthan temporary is charged to income resulting in the establishment of a new costbasis for the security.

 

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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net  income                                          |       | $                                     | 955,392    |                                 | $          | 968,509 |   | $ | 2,720,609 |   | $ | 2,966,162 |   |
| Foreign  currency translation adjustment             |       | 203,263                               |       | 23,868                               |       | 266,335 |   | 132,549 |   |
| Net  unrealized gain (loss) on marketable securities |       | 4,471                                 |       | 3,381                                |       | 2,279 |   | (36 | ) |
| Comprehensive  income                                |       | $                                     | 1,163,126  |                                 | $          | 995,758 |   | $ | 2,989,223 |   | $ | 3,098,675 |   |

 

Note 7 — Warranty

 

We provide a warranty for most 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 from accident, or failure to follow manufacturer’sdirections are excluded from warranty coverage.

 

Warranty expense is accrued at the time of sale based on historicalclaims experience. Special warranty reserves are also accrued for specialrework campaigns for known major product modifications. We also offer servicecontracts for select products when the factory warranty period expires.

 

Warranty provisions and claims for the nine-month periods endedSeptember 30, 2007 and 2006 were as follows:

 

| ** **                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| ** **                   | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| Beginning  balance           |       | $                                    | 246,737    |   | $ | 327,015 |   |
| Warranty  provisions         |       | 314,435                              |       | 242,686 |   |
| Warranty  claims             |       | (291,242                             | )          | (273,821 | ) |
| Decrease  due to sale of LCI |       | —                               |       | (33,248 | ) |
| Ending  balance              |       | $                                    | 269,930    |   | $ | 262,632 |   |

 

Note 8 — Income Taxes

 

In June 2006, the FASB issued Interpretation 48, *Accountingfor Uncertainty in Income Taxes* (FIN 48). This interpretation, asrequired to be adopted on January 1, 2007, clarifies the accounting foruncertainty in income taxes recognized in an entity’s financial statements inaccordance with SFAS 109, *Accounting for IncomeTaxes*. It prescribes a recognition threshold and measurementattribute for financial statement disclosure of tax positions taken or expectedto be taken on a tax return. Implementation of FIN 48 on January 1, 2007resulted in no adjustment to the liability for unrecognized tax benefits. As ofthe date of adoption, the total amount of unrecognized tax benefits was$289,000, of which $204,000 would favorably impact the effective income taxrate in future periods if recognized. Included in this liability forunrecognized tax benefits is an estimate for interest and penalties totaling$60,000, both of which we classify as a component of income tax expense. It isexpected that the amount of unrecognized tax benefits for positions which wehave identified will not change significantly in the next twelve months.

 

MOCON, Inc. or one of its subsidiaries files income tax returns in theU.S. Federal jurisdiction and various state and foreign jurisdictions. Withlimited exceptions, we are no longer subject to income tax examinations bytaxing authorities for taxable years before 2003 in the case of a U.S. Federalexamination or state examinations.

 

8

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Note 9 — Share-Based Compensation

* *

As of September 30, 2007, we have reserved398,800 shares of common stock for options and other share-based incentiveawards that are still available for grant under our 2006 stock incentive plan,and 785,635 shares for options that have been granted under either the 2006stock incentive plan, the 1998 stock option plan or the 1992 stock option planbut have not yet been exercised. We issue new shares of common stock uponexercise of stock options. There were no optionsgranted in the first three quarters of 2007.

 

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

 
| ** **                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Total  cost of share-based compensation                     |       | $                                     | 96,809     |                                 | $          | 45,683 |   | $ | 298,810 |   | $ | 143,349 |   |
| Amount  capitalized in inventory and property and equipment |       | —                                |       | —                               |       | — |   | — |   |
| Amounts  charged against income, before income taxes        |       | 96,809                                |       | 45,683                               |       | 298,810 |   | 143,349 |   |
| Amount  of income tax benefit recognized in earnings        |       | (13,700                               | )          | —                               |       | (42,344 | ) | — |   |
| Amount  charged against net income                          |       | $                                     | 83,109     |                                 | $          | 45,683 |   | $ | 256,466 |   | $ | 143,349 |   |

 

The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option-pricing model (Black-Scholes). We use historicaldata to estimate the expected price volatility, expected option life andexpected forfeiture rate. We base our estimate of expected volatility forawards granted on daily historical trading data of our common stock for aperiod equivalent to the expected term of 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. We estimate the expected term consistentwith historical exercise and cancellation activity of our previous share-basedgrants with a ten-year contractual term. Forfeitures are based on historicalexperience. The dividend yield is calculated based upon the dividend paymentsmade during the prior four quarters as a percent of the average stock price forthat period.

 

A summary of the option activity for the first nine months of 2007 isas 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                 |       | (13,887               | )          | $                                                  | 10.80      |                                                 | —     |                            |       |   |
| Options  expired                   |       | —                |       | —                                             |       | —                                               |       |                            |       |
| Options  exercised                 |       | (54,353               | )          | $                                                  | 7.86       |                                                 | —     |                            |       |   |
| Outstanding  at September 30, 2007 |       | 785,635               |       | $                                                  | 8.53       |                                                 | 5.9        |                            | $          | 2,562,040 |   |
|                               |       |                  |       |                                               |       |                                                 |       |                            |       |
| Exercisable  at September 30, 2007 |       | 600,463               |       | $                                                  | 7.86       |                                                 | 5.1        |                            | $          | 2,330,600 |   |

 

The total intrinsic value of options exercised was $63,085 and $8,075during the three-month periods ended September 30, 2007 and 2006, respectively,and $201,713 and $167,228 during the first nine months of 2007 and 2006,respectively.

 

9

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A summary of the status of our unvested option shares as of September30, 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              |       | (13,162               | )          | $                                              | 2.91       |   |
| Options  vested                 |       | (36,875               | )          | $                                              | 3.39       |   |
| Unvested  at September 30, 2007 |       | 185,172               |       | $                                              | 2.87       |   |

 

As of September 30, 2007, there was $531,420 of total unrecognizedcompensation cost related to unvested share-based compensation granted underour plans. That cost is expected to be recognized over a weighted-averageperiod of 1.1 years. The total fair value of option shares vested during thethree-month periods ended September 30, 2007 and 2006 was $41,527 and $0,respectively, and $124,866 and $6,584during the nine-month periods ended September 30, 2007 and 2006, respectively.

 

Note 10 — Sale of Subsidiary

 

In February 2006, we sold all the outstanding common stock of LabConnections, Inc. (LCI), a wholly-owned subsidiary. 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 recognizedan after-tax gain of approximately $92,000 in the first quarter 2006. This gainwas previously reflected in other income and reclassified as a reduction ofselling, general and administrative expenses during the current period (seeNote 1).

 

Note 11 — Discontinued Operations

 

In July 2005, we sold substantially all of theassets used in our discontinued Vaculok product line. Pursuant to the sale agreement,we received an up-front payment of $125,000, along with the right to receive anadditional amount upon the occurrence of certain post-closing events. In thefirst quarter 2006, we received an additional $35,000 related to this previoussale. The after-tax effect of this additional payment is a gain of $22,225which is reflected on the gain from discontinued operations line of theConsolidated Statements of Income.

 

10

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Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

ThisManagement’s Discussion and Analysis provides material historical andprospective disclosures intended to enable investors and other users to assessour financial condition and results of operations. Statements that are nothistorical are forward-looking and involve risks and uncertainties discussedbelow under the caption “Forward-Looking Statements.” The following discussionof the 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 includeinstruments that detect, measure and monitor gases and chemical compounds. Althoughsome of the 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 adirect sales force and independent sales representatives to market our productsand services in the United States, Canada and Germany and use a network ofindependent sales representatives to market and service our products andservices in other foreign countries.

 

Prior to 1998, we expanded our business primarilythrough internally developing new products and technologies and licensingproducts and technology. Since 1998, we have supplemented our internal growththrough acquisitions that have provided us with additional technologies,products and product development expertise. 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 theshares of Lippke for a base purchase price plus three earnout payments based onthe net profits of Lippke in each of the years 2004, 2005 and 2006, with aminimum payment amount of 100,000 euros per year. We made the final earnoutpayment 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, in 2006 and 2007 our results ofoperations reflected compensation expense for new stock options granted andvested during those years and the unvested portion of previous stock optiongrants which vested after January 1, 2006. The total amounts net of tax chargedto operations in the nine-month periods ended September 30, 2007 and 2006 were$256,466 and $143,349, respectively.

 

11

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### ***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 nine-month periods ended September 30, 2007, and2006:

 

| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Sales                                                  |       | 100.0                                 |       | 100.0                                |       | 100.0 |   | 100.0 |   |
| Cost  of sales                                         |       | 42.5                                  |       | 42.7                                 |       | 42.6 |   | 42.1 |   |
| Gross  profit                                          |       | 57.5                                  |       | 57.3                                 |       | 57.4 |   | 57.9 |   |
| Selling,  general and administrative expenses          |       | 31.0                                  |       | 28.8                                 |       | 31.6 |   | 29.3 |   |
| Research  and development expenses                     |       | 6.9                                   |       | 7.6                                  |       | 7.1 |   | 7.3 |   |
| Operating  income                                      |       | 19.6                                  |       | 20.9                                 |       | 18.7 |   | 21.3 |   |
| Other  income                                          |       | 2.1                                   |       | 1.6                                  |       | 2.0 |   | 1.4 |   |
| Income  from continuing operations before income taxes |       | 21.7                                  |       | 22.5                                 |       | 20.7 |   | 22.7 |   |
| Income  taxes                                          |       | 7.7                                   |       | 7.9                                  |       | 7.3 |   | 7.6 |   |
| Income  from continuing operations                     |       | 14.0                                  |       | 14.6                                 |       | 13.4 |   | 15.1 |   |
| Gain  from discontinued operations, net of tax         |       | —                                |       | —                               |       | — |   | 0.1 |   |
| Net  income                                            |       | 14.0                                  |       | 14.6                                 |       | 13.4 |   | 15.2 |   |

### * *

### *Comparison of Financial Resultsfor the Three- and Nine-Month Periods Ended September 30, 2007 and 2006*

### * *

### *Sales*

###  

Sales for the three-month period ended September 30,2007 were $6,820,000, up 3% compared to $6,647,091for the same period in 2006.   On aproduct line basis, this increase was primarily the result of increased salesof our packaging products and permeation products and services, partiallyoffset by a decrease in our weighing and pharmaceutical products. On ageographical basis, sales increased 7% in our domestic markets and decreased 1%in our foreign markets. Sales for the nine-month period ended September 30,2007 were $20,354,435, up 4% compared to $19,506,526for the same period in 2006. On a product line basis, the increase wasprimarily due to increased sales of our gas analyzer and packaging products,offset somewhat by a decrease in foreign sales of our permeation products and adecrease in sales of our weighing and pharmaceutical products. On ageographical basis, sales increased 17% in our domestic markets and decreased5% in our foreign markets.    There wereno significant price increases or decreases during either the third quarter orthe first nine months of 2007, compared to the same periods in 2006.

 

The following table summarizes total sales by product line for thethree- and nine-month periods ended September 30, 2007 and 2006:

 

12

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| ** **                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Permeation  Products and Services                         |       | $                                     | 3,946,713  |                                 | $          | 3,761,957 |   | $ | 10,793,545 |   | $ | 10,992,607 |   |
| Gas,  Headspace, and Other Analyzer Products and Services |       | 2,614,772                             |       | 2,540,640                            |       | 8,595,820 |   | 7,361,352 |   |
| Other  Instruments and Services                           |       | 258,515                               |       | 344,494                              |       | 965,070 |   | 1,152,567 |   |
| Total  sales                                              |       | $                                     | 6,820,000  |                                 | $          | 6,647,091 |   | $ | 20,354,435 |   | $ | 19,506,526 |   |

 

The following table sets forth the relationshipbetween various components of domestic and foreign sales for the three- andnine-month periods ended September 30, 2007 and 2006:

 

| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **           | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Domestic  sales      |       | $                                     | 3,081,370  |                                 | $          | 2,889,646 |   | $ | 9,911,946 |   | $ | 8,498,776 |   |
| Foreign  sales:      |       |                                  |       |                                 |       |   |   |   |   |
| Europe               |       | 1,921,438                             |       | 1,789,097                            |       | 4,364,121 |   | 5,339,239 |   |
| Asia                 |       | 1,350,393                             |       | 1,441,035                            |       | 4,308,634 |   | 4,173,539 |   |
| Other                |       | 466,799                               |       | 527,313                              |       | 1,769,734 |   | 1,494,972 |   |
| Total  foreign sales |       | 3,738,630                             |       | 3,757,445                            |       | 10,442,489 |   | 11,007,750 |   |
| Total  sales         |       | $                                     | 6,820,000  |                                 | $          | 6,647,091 |   | $ | 20,354,435 |   | $ | 19,506,526 |   |

*** ***

***Permeation Products and Services*** —Sales of our permeation products and services, which accounted forapproximately 58% and 57% of our consolidated third quarter sales in 2007 and 2006,respectively, increased 5% during the third quarter 2007 compared to the sameperiod in 2006. This increase, which was exclusively in our domestic markets,was due primarily to new product introductions and increased demand for testingservices.

 

Sales of our permeation products and services, whichaccounted for approximately 53% and 56% of our consolidated sales during thefirst nine months in 2007 and 2006, respectively, decreased 2% during the firstnine months of 2007 compared to the same period in 2006. This decrease in saleswas a result of a decline in orders from our international customers, primarilyin Europe, partially offset by an increase in domestic orders and increasedtesting services performed.

 

***Gas, Headspace, and Other Analyzer Products andServices*****— Sales of ourgas, headspace, and other analyzer products and services, which accounted for38% of our consolidated third quarter sales in both 2007 and 2006, increased 3%during the third quarter 2007 compared to the same period in 2006. Within thisgroup, sales of our gas analyzer products through our Baseline subsidiary wereconsistent between the two periods. However, due to certain warranty and reworkissues and a significant decrease in new orders, shipments were lower in thecurrent quarter than the prior two quarters.

 

Sales of our packaging products, which includeheadspace analyzers and leak detection equipment, increased 25% for the thirdquarter 2007 compared to the same quarter in 2006. The increase was primarilyin our foreign markets and was largely attributable to growing customeracceptance of new products introduced last year as well as increased marketingemphasis and product development in this area.

 

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Sales of our weighing and pharmaceutical productsdecreased 39% for the third quarter 2007 compared to the same quarter in 2006as a result of decreased demand in both domestic and foreign markets.  Our weighing and pharmaceutical productsgroup consists of a relatively fewer number of higher priced products comparedto our other product groups and will typically experience significantfluctuations in demand.

 

Sales of our gas, headspace, and other analyzerproducts and services, which accounted for 42% and 38% of our consolidatedsales during the first nine months in 2007 and 2006, respectively, increased17% during the first nine months of 2007 compared to the same period in2006.  Within this group, sales of our gasanalyzer products through our Baseline subsidiary increased 38% due in part toshipments of our total hydrocarbon analyzers and gas chromatographs as well assales of our new BevAlertTM product for the carbonated beverage industry.

 

Sales of our packaging products increased 18% duringthe first nine months of 2007 compared to the same period in 2006.  This increase, which was predominately in ourdomestic markets, was due primarily to continued market acceptance of our PACCHECK® series of analyzers, and increased marketing emphasis and newproduct development.

 

Sales of our weighing and pharmaceutical productsdecreased 41% during the first nine 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 our other instruments and servicescategory, which accounted for 4% and 5% of our consolidated sales in the thirdquarters 2007 and 2006, respectively, decreased 25% in the third quarter 2007,compared to the same period in 2006.  Thedecrease was partially due to lower sales of non-MOCON products by our Germansubsidiary.

 

For the nine months ended September 30, 2007 and2006, sales of other instruments and services accounted for 5% and 6% of ourconsolidated sales, respectively, decreasing 16% in the first nine months of2007 as compared to the same period in 2006.

 

On a geographical basis, domestic and foreign salesaccounted for 45% and 55%, respectively, of our consolidated third quartersales in 2007, and 43% and 57%, respectively, for the same period in 2006.  Domestic and foreign sales accounted for 49%and 51%, respectively, of our consolidated sales for the first nine months of2007, and 44% and 56%, respectively, of our consolidated sales for the sameperiod in 2006.

 

### *Gross Profit*

###  

The gross profit margins for our product sales were58.4% and 58.3% for the three-month periods ended September 30, 2007 and 2006,respectively.  The slightly higher marginfor the third quarter 2007 was due primarily to the higher percentage of ourpermeation products and services that were sold, which typically carry a higherprofit margin than our other products. As a partial offset, our warranty expense and scrap allowance increasedin the current quarter compared to last year.

 

The gross profit margins for our consulting serviceswere 45.1% and 42.4%, respectively, for the three-month periods ended September30, 2007 and 2006.  This increase wasprimarily due to higher sales of our consulting and analytical testing serviceswhich allowed for greater absorption of the related fixed overhead costs.

 

For the nine months ended September 30, 2007 and2006, the gross profit margins for our product sales were 58.3% and 58.7%,respectively.  The slightly lower marginfor the first nine months of 2007 was due primarily to the higher percentage ofour gas analyzer products that were sold which typically carry a lower profitmargin than our other products, and increased warranty expense and scrap

 

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allowance.

 

For the nine months ended September 30, 2007 and2006, the gross profit margins for our consulting services were 44.8% and46.8%, respectively.  This decrease isprimarily due to the mix of testing and consulting work where profit marginscan vary between projects.

 

*Selling, General andAdministrative Expenses*

 

Selling, general and administrative (SG&A)expenses in the three-month period ended September 30, 2007 were $2,117,652, or31.0% of sales, compared to $1,914,020, or 28.8% of sales in the third quarter2006.  The dollar increase in SG&Aexpenses was primarily due to increased costs in the third quarter 2007 forstock option expensing, ongoing expenses related to the new sales and technicalsupport office in China, increased headcount and related hiring costs andincreased SOX 404 compliance costs.

 

SG&A expenses were $6,444,582, or 31.6% ofsales, during the first nine months of 2007, compared to $5,724,656, or 29.3%of sales, for the same period in 2006. The increase in SG&A expenses was primarily due to increased costsin 2007 for stock option expensing, expenses related to opening and maintainingan office in China, increased headcount, increased SOX 404 compliance costs andincreased foreign sales and marketing expenses. In addition, the 2006 amount has been reduced by $140,139 due to areclassification from other income during the current period (see Note 1).

 

### *Research and Development Expenses*

###  

Research and development (R&D) expenses were$469,132, or 6.9% of sales in the third quarter 2007, compared to $507,933, or7.6% of sales, in the same period of 2006. This level of expense is within our planned range of R&Dexpenditures.

 

R&D expenses were $1,439,232 and $1,417,639, or7.1% and 7.3% of sales for the nine-month periods ended September 30, 2007 and2006, respectively.  For the foreseeablefuture, we expect to allocate on an annual basis approximately 6% to 8% ofsales to research and development.

 

### *Other Income*

###  

Other income for the third quarter ended September30, 2007 of $146,406 consisted of interest income of $144,437 and miscellaneousother income of $1,969. Other income for the third quarter ended September 30,2006 of $107,971 consisted of interest income of $108,160, offset by othersmall losses.

 

For the nine months ended September 30, 2007, otherincome of $414,312 consisted of interest income of $418,991 and miscellaneousother income of $1,630, partially offset by a loss of $6,309 on foreigncurrency exchange.  For the nine monthsended September 30, 2006, other income of $272,742 consisted of interest incomeof $282,751 and miscellaneous other income of $1,631, offset by a loss onforeign currency exchange of $11,640. Interest income increased for the third quarter and nine months endedSeptember 30, 2007, compared to the same periods in 2006, due to higher averageyields and higher average interest bearing investments.

 

### *Income Tax Expense*

 

Our provision for income taxes from continuingoperations was 35.6% of income before income taxes for the third quarter endedSeptember 30, 2007, compared to 35.1% of income before income taxes for thethird quarter ended September 30, 2006. The slightly higher effective tax rate in 2007 was due to a higherproportion of the consolidated pre-tax income being derived from our Germansubsidiary which is taxed at a higher statutory rate.

 

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For the nine months ended September 30, 2007, ourprovision for income taxes from continuing operations was 35.5% of incomebefore income taxes compared to 33.5% of income before income taxes for thenine months ended September 30, 2006.  Therate for the first nine months of 2006 was favorably impacted by the resolutionof a proposed income tax assessment in the state of New Jersey, which reducedincome tax expense by approximately $50,000. Also, because the sale of LCI 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 remainder of 2007 to be in therange 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.

### * *

### *Net Income*

###  

Net income was $955,392 in the third quarter 2007,compared to $968,509 in the third quarter 2006. Diluted net income was $0.17 and $0.18 per share in the third quartersof 2007 and 2006, respectively.  For thenine months ended September 30, 2007, net income was $2,720,609, or $0.48 perdiluted share, compared to net income of $2,966,162, or $0.54 per diluted sharein the prior year.

* *

*Liquidity and Capital Resources*

 

We have historically financed our operations,capital expenditures and other liquidity needs through our cash flows generatedfrom operations.  Total cash, cashequivalents and marketable securities increased $1,087,117 during the first ninemonths of 2007 to $13,723,667 as of September 30, 2007, compared to $12,636,550at December 31, 2006.  Our workingcapital as of September 30, 2007 increased $287,640 to $16,492,944, as comparedto $16,205,304 at December 31, 2006. We believe that a combination of our existing cash, cash equivalents andmarketable securities, plus an expected continuation of cash flow fromoperations, will continue to be adequate to fund our operations, capitalexpenditures, dividend payments and stock repurchases for at least the nexttwelve months.  Purchases of property andequipment were relatively constant between the two periods mentioned above, andwe had no material commitments for capital expenditures as of September 30, 2007.

 

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

 

As noted above, we adopted FIN 48, *Accounting for Uncertainty in Income Taxes,*as of January 1,2007.  At the date of adoption, we hadapproximately $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 Operating Activities

 

Our primary source of funds is cash provided byoperating activities which totaled $2,552,527 and $3,895,930 in the first ninemonths of 2007 and 2006, respectively. The decrease of $1,343,403 between the two periods was primarily due tolower net income, increase in accounts receivable, a smaller reduction ininventories and a reduction in accounts payable and accrued compensation.  Partially offsetting these decreases in cashprovided by operating activities was the increased addback for non-cashshare-based compensation expense.

 

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### Cash Flow from Investing Activities

###  

Cash used in investing activities totaled $529,634and $2,236,749 in the first nine months of 2007 and 2006, respectively.  The primary reason for the higher amount usedin 2006 was higher net purchases of marketable securities, partially offset bythe proceeds from the sale of LCI and other property and equipment.  We presently do not believe that anysignificant property, plant and equipment expenditures are required toaccommodate our current level of operations.

 

Cash Flow from Financing Activities

###  

Cash used in financing activities totaled $834,851and $1,108,496 in the first nine months of 2007 and 2006, respectively.  During the first nine months of 2007 and2006, we made dividend payments to our shareholders of $1,261,916 and$1,219,214, respectively.  During the first nine 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 $427,065 and$473,843 in the first nine 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 ofSeptember 30, 2007, we had repurchased an aggregate of 41,500 shares of MOCONcommon stock under the program at a total cumulative cost of $363,125.  There were no shares of common stockrepurchased in the quarter ended September 30, 2007 and there was $1,636,875remaining in this authorization at that date.

 

***ContractualObligations***

 

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 of $574,568, paid in the first quarter of 2007 in connection with theLippke acquisition, there has been no material change in this information.

 

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

###  

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

 

***New AccountingPronouncements***

 

In June 2006, the FASB ratified the Emerging IssuesTask Force (EITF) consensus on EITF Issue 06-3, *How TaxesCollected From Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement*(that is, gross versus netpresentation) (EITF 06-3).  The scope ofEITF 06-3 includes any tax assessed by a governmental authority that isdirectly imposed on a revenue-producing transaction between a seller and acustomer, and provides that a company may adopt a policy of presenting taxeseither gross within revenue or on a net basis. For any such taxes that are reported on a gross basis, a company shoulddisclose the amounts of those taxes for each period for which an incomestatement is presented if those amounts are significant.  This statement is effective for financialreports for interim and annual reporting periods beginning after December 15,2006.  EITF 06-3 became effective for usas of January 1, 2007.  We collectvarious sales and value-added taxes on certain products and service 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

 

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periods,disclosure and transition.  Therequirements are effective for fiscal years beginning after December 15,2006.  Adoption of FIN48 did not have a material effect on our financial position, results ofoperations or cash flows.

 

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

 

In February 2007, the FASB issued SFAS 159, *The Fair Value Option for Financial Assets and Financial Liabilities —Including an amendment of FASB Statement 115*(SFAS 159).  This statement permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The objective is to improve financial reportingby providing entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions.  SFAS 159 is effective for us beginning in2008.  We have not yet determined theimpact, if any, that the implementation of SFAS 159 will have on our financialposition, results of operations or cash flows.

 

In May 2007, the FASB issued FASB Staff Position(FSP) FIN 48-1, *Definition of Settlement in FASBInterpretation No. 48.* ThisFSP amends FIN 48,*Accounting for Uncertainty in Income Taxes*, to provide guidance about how an enterpriseshould determine whether a tax position is effectively settled for the purposeof recognizing previously unrecognized tax benefits.  Under the FSP, a tax position is consideredto be effectively settled if the taxing authority completed its examination,the company does not plan to appeal, and it is remote that the taxing authoritywould re-examine the tax position in the future.  FSP FIN 48-1 is effective for us as ofJanuary 1, 2007, the date of adoption of FIN 48.  The adoption of FSP FIN 48-1 did not have animpact on our financial position, results of operations or cash flows.

 

***CriticalAccounting Policies***

###  

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

 

*Revenue recognition* — We recognizerevenue when it is realized or realizable and earned.  In accordance with the Securities andExchange Commission Staff Accounting Bulletin 104 (SAB 104), *Revenue Recognition,*we consider revenuerealized or realizable when persuasive evidence of an arrangement exists, theproduct has been shipped or the services have been provided to the customer,title and risk of loss of products has passed to the customer, the sales priceis fixed or determinable, and collectibility is reasonably assured.  Our terms are F.O.B. shipping point with noright of return, and

 

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customer acceptance of our products is not required.  The revenue recognition policy does notdiffer among the various product lines, the marketing venues, or variousgeographic destinations.  We do not havedistributors who stock our equipment.  Wedo not offer rebates, price protection, or other similar incentives, anddiscounts when offered are recorded as a reduction in revenue.

Revenue for preventive maintenance agreements is recognized on a pervisit basis and extended warranties on a straight-line basis over the life ofthe contracts, in accordance with FASB Technical Bulletin 90-1, *Accounting for Separately Priced Extended Warranty and ProductMaintenance Contracts*.

Emerging Issues Task Force (EITF) Issue 00-21, *RevenueArrangements with Multiple Deliverables*, provides revenuerecognition guidance for arrangements with multiple deliverables, and thecriteria to determine if items in a multiple deliverable agreement should beaccounted for separately.  The elementsof our sales transactions are clearly and separately stated and sufficientevidence of their fair value exists to separately account for the elements.

*Allowance for doubtful accounts and sales returns* —Our allowance for doubtful accounts and sales returns is for accountsreceivable balances that are estimated to be uncollectible as well as projectedsales returns.  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 September 30, 2007,we had $137,698 reserved against our accounts receivable for doubtful accountsand sales returns.

 

*Allowance for excess and obsolete inventories*—**We perform an analysis to identify excessand obsolete inventory.  We record acharge to cost of sales for amounts identified. Our analysis includes inventory levels, the nature of the finishedproduct and its inherent risk of obsolescence and the on-hand quantitiesrelative to the sales history of that finished product.  We believe that our financial results couldbe materially different if historical trends do not reflect actual results orif demand for our products decreased because of economic or competitiveconditions or otherwise.  As of September30, 2007, we had $560,492 accrued for excess and obsolete inventories.

 

*Recoverability of long-lived assets*—**We assess the recoverability of goodwilland other long-lived assets annually or whenever events or changes incircumstances indicate that expected future undiscounted cash flows might notbe sufficient to support the carrying amount of an asset.  We deem an asset to be impaired if a forecastof undiscounted future operating cash flows is less than an asset’s carryingamount.  If an asset is determined to beimpaired, the loss is measured as the amount by which the carrying value of theasset exceeds its fair value.  Changes inour business strategies, changes in the economic environment in which weoperate, competitive conditions, and other factors could result in futureimpairment charges.

 

*Accrued product warranties*—**Our products are generally covered by awarranty, with warranty periods ranging from ninety days to one year from thedate of sale.  Estimated warranty costsare accrued in the same period in which the related revenue is recognized,based on anticipated parts and labor costs, utilizing historicalexperience.  Special warranty reservesare also accrued for major rework campaigns. We periodically assess the adequacy of our warranty reserves based onchanges in these factors and record any necessary adjustments if actual claim experienceindicates that adjustments are necessary. Although we believe the likelihood to be relatively low, warranty claimsexperience could be materially different from actual results due tomanufacturing changes that could impact product quality, a change in ourwarranty policy in response to industry trends, as yet unrecognized defects inproducts

 

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sold, or other factors.  As of September 30, 2007, we had $269,930accrued for future estimated warranty claims.

 

*Income taxes*—**In the preparation of our consolidatedfinancial statements, management is required to estimate income taxes in eachof the jurisdictions in which we operate. This process involves estimatingactual current tax exposures together with assessing temporary differences resultingfrom differing treatment of items for tax and accounting purposes. Thesedifferences result in deferred tax assets and liabilities, which are includedin our Consolidated Balance Sheets.

 

We have significant amounts of deferred taxassets.  Management reviews the deferredtax assets for recoverability on a quarterly basis and assesses the need forvaluation allowances.  These deferred taxassets are evaluated by considering historical levels of income, estimates offuture taxable income streams and the impact of tax planning strategies.  A valuation allowance is recorded to reducedeferred tax assets when it is determined that it is more likely than not thatwe would not be able to realize all or part of our deferred tax assets.  At September 30, 2007, we have a valuationallowance in the approximate amount of $238,000 against our deferred taxassets.

 

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

###  

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

 

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

 
| • |   | Increases in prices for raw materials;                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| • |   | Risks inherent in operating internationally and  selling and shipping our products and purchasing our products and components  internationally; |
| • |   | Fluctuations in foreign currency exchange rates  and interest rates;                                                                            |
| • |   | Failure to develop new products and technologies,  delays in new product introduction and lack of market acceptance of new  products;           |
| • |   | Failure to effect strategic acquisitions and  integrate effectively newly acquired operations;                                                  |
| • |   | Incurrence of additional debt, contingent  liabilities and expenses in connection with future acquisitions;                                     |
| • |   | Decreases in capital spending by our customers;                                                                                                 |
| • |   | Exposure to assertions of intellectual property  claims and failure to protect our                                                              |

 

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|   |   | intellectual  property;                                                                                                                                                                                                              |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • |   | Disruption in our ability to manufacture our  products or the ability of our key suppliers to provide us products or  components or raw materials for products resulting in our inability to supply  market demand for our products; |
| • |   | Reliance on independent sales distributors and  sales associates to market and sell our products;                                                                                                                                    |
| • |   | Highly competitive nature of the markets in which  we sell our products and the introduction of competing products;                                                                                                                  |
| • |   | Loss of customers;                                                                                                                                                                                                                   |
| • |   | Failure to retain senior management or replace  lost senior management;                                                                                                                                                              |
| • |   | Employee slowdowns, strikes or similar actions;                                                                                                                                                                                      |
| • |   | Reliance on our management information systems for  inventory management, distribution and other functions;                                                                                                                          |
| • |   | Effects of any pending or threatened litigation;                                                                                                                                                                                     |
| • |   | Failure to comply with applicable laws and  regulations and adverse changes in applicable laws or regulations;                                                                                                                       |
| • |   | Changes in generally accepted accounting  principles; or                                                                                                                                                                             |
| • |   | Conditions and changes in general economic and  business conditions.                                                                                                                                                                 |

 

Formore information regarding these and other uncertainties and factors that couldcause our actual results to differ materially from what we have anticipated inour forward-looking statements or 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.

 

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

 

 

Item 3.  Quantitativeand Qualitative Disclosures About Market Risk

 

*Equity Price and Interest RateRisk*

 

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 Currency Exchange Risk*

###  

Historically,approximately 50% of our consolidated sales are to internationaldestinations.  Since we

 

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invoicethese customers in U.S. dollars, we are not exposed to foreign currencytransaction risk.  However, our foreignoperations expose us to foreign currency exchange risk when the euro currencyresults of operations are translated to U.S. dollars.  While we historically have not experiencedany material foreign currency translation losses, we may engage in hedgingactivity in the future to minimize this risk. Our net investment in foreign subsidiary translated into U.S. dollars isnot hedged.

 

 

Item 4. Controls and Procedures

 

*Evaluation of Disclosure Controlsand Procedures*

 

Wemaintain disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) that are designed to ensure that information requiredto be disclosed by us in the reports we file or submit under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized, andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms and that such information is accumulated andcommunicated to our management, including our principal executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.  In designing and evaluating our disclosurecontrols and procedures, we recognize that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and we necessarily are required toapply our judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.  Our managementevaluated, with the participation of our Chief Executive Officer and ChiefFinancial Officer, the effectiveness of the design and operation of ourdisclosure controls and procedures as of the end of the period covered in thisQuarterly Report on Form 10-Q.  Based onthat evaluation, our Chief Executive Officer and Chief Financial 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*

 

Therewas no change in our internal control over financial reporting that occurredduring our quarter ended September 30, 2007 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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PART II. OTHER INFORMATION

 

Item 1A.  Risk Factors

 

We are affected by risksspecific to us as well as factors that affect all businesses operating in aglobal market.  The significant factorsknown to us that could materially adversely affect our business, financialcondition or operating results are described in our annual report on Form 10-Kfor the fiscal year ended December 31, 2006 under the heading “Part I — Item1A. Risk Factors.”  There has been nomaterial change in those risk factors.

 

 

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

 

*UnregisteredSales of Equity Securities*

 

We did not sell any equitysecurities of MOCON, Inc. during the third quarter ended September 30, 2007that were not registered under the Securities Act of 1933.

 

*IssuerRepurchases of Equity Securities*

 

We did not repurchase anyequity securities of MOCON, Inc. during the third quarter ended September 30,2007.

 

 

Item 6.  Exhibits

 

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

**No.** | ** ** | **Description**                                                                                     |
|----------------------|------------|-----------------------------------------------------------------------------------------------------|
| 31.1                 |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2                 |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1                 |       | Certification of Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-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 Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.

 

 
|                    | MOCON, INC.                                  |   |
|-------------------------|----------------------------------------------|--------|
|                    |                                         |   |
|                    |                                         |   |
| Date: November 14, 2007 | /s/ Robert L. Demorest                       |   |
|                    | Robert L. Demorest                           |   |
|                    | Chairman, President and Chief                |   |
|                    | Executive Officer                            |   |
|                    | (Principal Executive Officer)                |   |
|                    |                                         |   |
|                    |                                         |   |
| Date: November 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 FORM10-Q

QUARTER ENDED SEPTEMBER 30,2007

 

EXHIBIT INDEX

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

 

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