UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

(Mark one)ý

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008o

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from
 to
.

Commission File No.: 000-09273



MOCON, Inc.(Exact name of registrant as specified in its charter)

Minnesota(State or other jurisdiction of
incorporation or organization)

41-0903312(I.R.S. Employer
Identification No.)7500 Boone Avenue NorthMinneapolis, Minnesota(Address of principal executive offices)

55428(Zip Code)


Registrant's
telephone number, including area code:(763) 493-6370

Securities
registered under Section 12(b) of the Act:

Title of each class

Name of each exchange on which registeredCommon Stock, par value $.10 per share

The NASDAQ Stock Market LLC
(NASDAQ Global Market)


Securities
registered under Section 12(g) of the Act:None



Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES o    NO ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES o    NO ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. YES ý    NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ý

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company ý


Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES o    NO ý

The aggregate market value of the registrant's common stock, excluding outstanding shares beneficially owned by directors and executive officers, computed by reference to the
price at which the common stock was last sold as of June 30, 2008 (the last business day of the registrant's second quarter) as reported by the Nasdaq Global Market System, was $56,659,908.

As
of March 20, 2009, 5,589,694 shares of common stock of the registrant were deemed outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this annual report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the
registrant's Proxy Statement for its 2009 Annual Meeting of Shareholders to be held May 19, 2009.



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PART I

This annual report on Form 10-K contains or incorporates by reference not only historical
information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject to the safe harbor created by those sections. We refer you to the information under the heading "Part I. Item 1. BusinessForward-Looking
Statements."

As used in this annual report on Form 10-K, references to "MOCON," the "Company," "we," "our" or "us," unless the context otherwise requires,
refer to MOCON, Inc. and our subsidiaries.

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

ITEM 1.    BUSINESS

MOCON, Inc. designs, manufactures, markets and services products and provides consulting services primarily in the measurement
and analytical instrument and services markets. Our products include instruments that detect, measure and monitor gases and chemical compounds.

Our
gas and vapor permeation products were first used in the food packaging industry to measure small amounts of moisture which adversely affects dry cereal and other food packaging.
Today our core business, the detection, measurement and analysis of vapors and gases, serves industries far beyond food packaging. Our products serve niche markets from foods, beverages,
pharmaceuticals and consumer products, to oil and gas exploration, industrial safety and homeland security. For example, our gas analyzers detect hazardous gases in the workplace and detect the
release or presence of toxic substances in public places, which is part of the homeland security market.

Our
principal business strategy is to employ our product development and technological capabilities, manufacturing processes and marketing skills in market niches where we can
successfully penetrate the market and then strive to become a leader in the market segment. Our management team continually emphasizes product innovation, product performance, quality improvements,
cost reductions and other value-adding activities. We continually seek growth opportunities through technological and product improvement, by acquiring and developing new products, and by acquiring
new companies.

MOCON, Inc.
was incorporated as a Minnesota corporation in February 1966, and was initially involved in the commercialization of technology developed for the measurement of water
vapor permeating through various materials. Today, the key drivers in the industries we serve are food product safety and quality, improving workplace safety and supplying equipment for oil and gas
exploration.

Historically,
a significant portion of our revenues have come from international customers. In this regard, we acquired our subsidiary in Germany in 2004 to solidify our presence and
opportunities in Europe. Similarly, we opened our office in Shanghai, China in 2007 to better serve our Asian customers.

Our
current plans for growth include substantial funding for research and development to foster new product development together with strategic acquisitions where appropriate.

Our
principal executive offices and worldwide headquarters are located at 7500 Boone Avenue North, Minneapolis, Minnesota 55428, and our telephone number is
(763) 493-6370. Our website address iswww.mocon.com. The information contained on our website or connected to our website is not
incorporated by reference into this annual report on Form 10-K and should not be considered part of this report.

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We
make available, free of charge on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. We also make available, free of charge and through our website, to any
shareholder who requests, the charters of our board committees and our Code of Ethics. Requests for copies can be directed to our Chief Financial Officer at the address and phone number above.

Products and Services

We develop, manufacture, market and service measurement, analytical and monitoring products used to detect, measure and analyze gases
and chemical compounds, as well as provide related consulting services. Please see our consolidated financial statements beginning on page F-1 for financial information concerning
our business, including our sales, net income and net assets. Our sales are grouped into three major categories as discussed below.

Permeation Products and Services

Our permeation products consist of systems and services that measure the rate at which various gases and vapors transmit through
various materials. These products perform measurements under precise temperature and relative humidity conditions. The principal market for these products consists of manufacturers of packaging
materials (including manufacturers of papers, plastic films and container coatings) and the users of such packaging materials, such as companies in the food, beverage, pharmaceutical and consumer
product industries.

We
also provide certain laboratory testing services to companies that have a need for our permeation products. These services consist primarily of testing film and package permeation for
companies that:



Our
permeation products and services accounted for approximately 53%, 53% and 56% of our consolidated sales in 2008, 2007 and 2006, respectively. Permeation instruments that we currently
manufacture include OX-TRAN® systems for oxygen transmission rates, PERMATRAN-W® systems for water vapor transmission rates, and
PERMATRAN-C® systems for carbon dioxide transmission rates. Our systems are available in a wide range of options for our customers, including high or low throughput, price,
sensitivity and ease of use. They are primarily marketed to both research and development departments as well as production and quality assurance groups.

Gas, Headspace and Other Analyzer Products and Services



Our Baseline-MOCON, Inc. subsidiary located near Boulder, Colorado produces advanced gas analysis and monitoring instrumentation
used in applications such as oil and gas exploration, process gas analysis, industrial hygiene and safety, environmental air monitoring and homeland security.

We
sell two categories of gas analyzer products: 1) permanent gas analyzers and systems which are installed in fixed locations at the monitoring sites and generally perform their
functions continually or at regular intervals, and 2) gas sensors which are sold to original equipment manufacturers (OEMs) of mobile equipment. Our gas analyzer products are for use in
industrial hygiene (detection of hazardous

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gases
in the workplace), hydrocarbon gas analysis for oil and gas exploration, contaminant detection in the manufacture of specialty gases, and environmental monitoring (tracking the release, or the
presence, of toxic substances). These substances can include the intentional release of toxic gases by terrorists which would be a homeland security application.

Our
gas analyzer products accounted for approximately 22%, 21% and 18% of our consolidated sales in 2008, 2007 and 2006, respectively. We market some of these products under the names
BEVALERT®, PETROALERT®, and piD-TECH®.



Our headspace analyzer products are used to analyze the amount and type of gas present in the headspace of flexible and rigid packages,
as applied to gas flushing modified or controlled atmosphere packaging. The principal market for these products consists of packagers of foods, beverages and pharmaceuticals. Our headspace analyzer
products include the PAC CHECK® series of off-line headspace analyzers and the GSA series of on-line gas stream analyzers for continuous and
intermittent monitoring of modified atmosphere packaging (MAP) and other gas flushing operations.

Our
leak detection products detect leaks in sterile medical trays, food pouches, blister packs and a wide range of other packages. We currently manufacture three types of leak detection
instruments. The first type is a non-destructive leak detector that senses small amounts of carbon dioxide escaping from a package or tray. The second type of instrument detects leaks and
checks for seal integrity by applying and measuring pressure within a package. The third type pulls a vacuum on a package and looks for vacuum or gas flow changes. The principal markets for these
products are packagers of sterile medical items, pharmaceuticals and food products.

Our
headspace analyzer and leak detection products accounted for 16%, 17% and 15% of our consolidated sales in 2008, 2007 and 2006, respectively. We market these products under the names
PAC CHECK®, LIPPKE®, SKYE® and PAC GUARD®.



Our weighing products automatically determine the weight of pharmaceutical capsules and tablets and reject those that are out of
acceptable limits. Our VERICAP® high-speed capsule weighing system runs at rates up to 2,000 capsules per minute and can be integrated into a capsule production line in
pharmaceutical factories. Our AB automatic balance weighing systems are designed for off-line use for both tablets and capsules, and we market these products primarily to the
pharmaceutical industry. In addition, we sell tablet inspection systems and blister packaging-related equipment through our Lippke subsidiary, which is also an agent for other manufacturers.

Our
gas, headspace and other analyzer products and services accounted for an aggregate of approximately 42%, 42% and 38% of our consolidated sales for 2008, 2007 and 2006, respectively.

Other Instruments and Services



We provide consulting and analytical services, on a special project basis, for customers that require custom solutions to unique
problems. Services that we typically provide relate to:



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The
principal markets for our consulting and analytical services consist of manufacturers of foods, beverages, pharmaceuticals, plastics, chemicals, electronics and personal care
products.



We sell various gas chromatographic (GC) instruments and provide services with an emphasis on multidimensional gas chromatography
through our Microanalytics Instrumentation Corp. (Microanalytics) subsidiary, which is located near Austin, Texas. A variety of GC specific applications have been developed by our Microanalytics
personnel, ranging from petroleum and petrochemical purity assay to aroma and off-odor analysis for the food, beverage, packaging and other industries. We integrate GCs and components that
we purchase from third parties to form multidimensional GC analyzer systems. These GC analyzers represent state-of-the-art technology in gas chromatographic
separations and are used in identifying compounds causing off-odors in various products, in identifying critical aroma compounds, and in high purity analysis of single component matrixes.
Our GC analyzer products include the AROMATRAX® systems for odor and aroma analysis and profiling, the PURI-TRAX systems consisting of a vinyl chloride monomer
purity analysis system and a system for measuring trace levels of oxygenated hydrocarbons in a variety of hydrocarbon products and process streams such as liquefied petroleum gases, and the
VAPO-JECT automated vaporizing injector system for permanent and liquefied petroleum gases. The principal markets for our GC analyzer products consist of food, beverage,
petroleum, chemical and petrochemical manufacturers.

Our
other instruments and services groups accounted for an aggregate of approximately 5%, 5% and 6% of our consolidated sales in 2008, 2007 and 2006, respectively.

Competition

We have several competitors for all of our products and services in both foreign and domestic markets. The principal competitive
factors for our products and services are:



We
compete with a variety of companies in each market in which we sell our products. Some of our competitors have greater assets and resources than we do, and some are smaller than we
are. To remain competitive, we must continue to invest in research and development, marketing, customer service and support, and manage our operating expenses. We believe that we have strategies in
place to develop technological and other advantages that will give us a competitive advantage over our competitors. However, there can be no assurance that we will have sufficient resources to execute
these strategies, or that our competitors will not develop new technologies or other advantages which would require us to reduce our prices, result in lost orders or otherwise adversely affect our
financial results.

Manufacturing and Supplies

We manufacture products at our locations in Minnesota, Texas, Colorado and Germany. Our manufacturing capabilities include
electro-mechanical assembly, testing, integration of components and systems, calibration and validation of systems. Certain components that we use in our products are currently purchased from single
source suppliers. Although we purchase additional quantities of these components in the case of an interruption or delay in supply, an interruption of one of these sources could result in delays in
our production while we locate an alternative supplier, which in turn could

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result
in a loss of sales and income. We did experience a temporary shortage of a critical component for our sensor product line during the second half of 2008, however, the issue has since been
resolved.

Patents, Trademarks and Other Intellectual Property Rights

We believe that the protection afforded us by our patent rights is important to our business, and we will continue to seek patent
protection for our technology and products. We require all of our employees and consultants to assign to us all inventions that are conceived and developed during their employment, except to the
extent prohibited by applicable law. To protect our proprietary information, we have entered into confidentiality and non-compete agreements with those of our employees and consultants who
have access to sensitive information. We hold both United States and international patents and have U.S. and international patents pending. We currently hold 39 U.S. patents and 32 foreign patents
which will expire during the period from 2009 through 2026, and have another 57 patents pending.

We
own or have applied for certain trademarks which protect and identify our products. Our trademarks and service marks include the following registered marks: MOCON®,
AQUATRACE®, AQUATRAN®, AROMATRAN®, AROMATRAX®, BASELINE®, BEVALERT®, COULOX®, HERSCH®,
LIPPKE®, OPTIPERM®, OX-TRAN®, PAC CHECK®, PAC GUARD®, PERMATRAN-C®,
PERMATRAN-W®, PETROALERT®, piD-TECH®, QUICK START®, SKYE® and VERICAP®. Our trademarks and service marks
have a life of 10 to 20 years, and are subject to periodic maintenance which may be extended in accordance with applicable law.

Marketing and Customers; Distribution Methods

We market our products and services throughout the United States and in over 60 foreign markets. We use a direct sales force of
approximately 20 employees and approximately 15 independent sales representatives to market and sell our products and services to end users in the United States, Canada, Germany and China, and use a
network of approximately 55 independent sales representatives to market, service and sell our products and services in other foreign countries. To our knowledge, none of our independent sales
representatives sell a material amount of product manufactured by any of our competitors.

For
information concerning our export sales by geographic area, see Note 13 of the notes to consolidated financial statements. We market products and services to research
laboratories, production environments and quality control applications in the life science, medical, food, pharmaceutical, plastics, paper, electronics, oil and gas and other industries. No single
customer accounted for 10% or more of our consolidated sales in any of the fiscal years ended December 31, 2008, 2007 and 2006, and we do not believe that the loss of any single customer would
have a material adverse effect on our business or financial performance. One independent representative accounted for approximately 6% of our consolidated sales in each of the years 2008, 2007 and
2006.

Backlog

As of December 31, 2008, our total backlog was $2,157,132 for all of our products as compared to $3,384,510 and $2,460,147 as of
December 31, 2007 and 2006, respectively. We anticipate shipping the majority of the current backlog in 2009.

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Research and Development

We are committed to an ongoing engineering program dedicated to innovating new products and improving the quality and performance of
our existing products. Our engineering expenses are primarily incurred in connection with the improvement of existing products, cost reduction efforts, and the development of new products that may
have additional applications or represent extensions of existing product lines. None of these costs are borne directly by our customers.

We
incurred expenses of $1,950,754, $2,030,157 and $1,942,786 during the fiscal years ended December 31, 2008, 2007 and 2006, respectively, for research and development (R&D) of
our products. These amounts were approximately 7% of our consolidated sales for each of those three fiscal years. On an annual basis, we currently intend to spend approximately 6% to 8% of our
consolidated sales on R&D in the future.

Working Capital Practices

We strive to maintain a level of inventory that is appropriate given our projected sales. Our standard domestic payment terms are net
30 days and our international payment terms vary but generally range between 30 and 90 days. International sales are, in some cases, transacted pursuant to letters of credit.

Seasonality

Our business is not seasonal in nature.

Employees

As of December 31, 2008, we had approximately 130 full-time employees. Included in this total are approximately 15
scientists and engineers who research and develop potential new products. None of our employees are represented by a labor union, and we consider our employee relations to be satisfactory.

Forward-Looking Statements

This annual report on Form 10-K contains or incorporates by reference not only historical information, but also
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are
subject to the safe harbor created by those sections. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone
conferences and/or web casts open to the public, in press releases or reports, on our website or otherwise. All statements other than statements of historical facts included in this report that
address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our
plans, objectives, strategies and prospects regarding, among other things, our financial condition, results of operations and business. We have identified some of these 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" and other words and terms of similar meaning. These forward-looking statements may be contained in the notes to our consolidated financial statements and elsewhere in this report, including
under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Forward-looking
statements involve risks and uncertainties. These uncertainties include factors that affect all businesses as well as matters specific to us. Some of the factors known to
us that could cause

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our
actual results to differ materially from what we have anticipated in our forward-looking statements are described under the heading "Item 1A. Risk Factors" below.

We
wish to caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are
predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to
the risks and uncertainties described under the heading "Item 1A. Risk Factors" below, as well as others that we may consider immaterial or do not anticipate at this time. Although we believe
that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. The expectations reflected in our forward-looking
statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including those described below under the heading "Item 1A. Risk Factors." The
risks and uncertainties described under the heading "Item 1A. Risk Factors" below are not exclusive and further information concerning us and our business, including factors that potentially
could materially affect our financial results or condition, may emerge from time to time. We assume no obligation to update forward-looking statements to reflect actual results or changes in factors
or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our quarterly reports on
Form 10-Q and current reports on Form 8-K we file with or furnish to the Securities and Exchange Commission.

ITEM 1A.    RISK FACTORS

The following are significant factors known to us that could have material adverse effects on our business, financial condition or
operating results.

Current worldwide economic conditions may adversely affect our business, operating results and financial condition, as well as decrease our stock price.

We believe that the deterioration in general worldwide economic conditions may result in our customers decreasing their capital
expenditures. Our customers include pharmaceutical, food, medical and chemical companies, laboratories, government agencies and public
and private research institutions. The capital spending of these entities can have a significant effect on the demand for our products. Any decrease in capital spending by any of these customer groups
could have a material adverse effect on our sales, business and results of operations.

Consistent
with the above, our customers' and independent representatives' ability to borrow money from their existing lenders or to obtain credit from other sources to purchase our
products may be impaired. Although we maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments and such losses have
historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same loss rates that we have in the past, especially given the
current turmoil in the worldwide economy. A significant change in the liquidity or financial condition of our customers could cause unfavorable trends in our receivable collections and additional
allowances may be required, which could adversely affect our operating results. In addition, the worldwide economic crisis may adversely impact our suppliers' ability to provide us with materials and
components, which could adversely affect our business and operating results. Like many other stocks, our stock price has decreased recently and if investors have concerns that our business, operating
results and financial condition will be negatively impacted by a worldwide economic downturn, our stock price could further decrease.

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Some of the markets in which we operate have experienced minimal growth in recent years, and our ability to increase our sales will depend in part on our ability to develop
new products, develop new applications for our existing products or acquire complementary businesses and product lines.

We have identified a number of strategies that we believe will allow us to grow our business and increase our sales in markets
experiencing minimal growth, including developing new products and technologies, developing new applications for our technologies, acquiring complementary businesses and product lines, and
strengthening our sales force. However, we can make no assurance that we will be able to successfully implement these strategies, or that these strategies will result in the growth of our business or
an increase in our sales.

If we acquire businesses in the future, we could experience a decrease in our profit margins, a decrease in our net income, and other adverse consequences.

One of our growth strategies is to supplement our internal growth with the acquisition of businesses and technologies that complement
or augment our existing products. Some of the businesses that we previously acquired have produced net operating losses or low levels of profitability. Other businesses that we may acquire in the
future may be marginally profitable or
unprofitable, and may require us to improve the operations and market penetration of such companies in order to achieve the level of profitability that we desire.

Further,
acquisitions and the integration of those acquisitions involve a number of risks, which could be heightened if we complete several acquisitions within a relatively short period
of time, including:



In
addition, acquisitions that we believe will be beneficial to our business and financial results are difficult to identify and complete for a number of reasons, including the
competition among prospective
buyers. We may not be able to complete acquisitions in the future, and have not completed an acquisition since January 2004. Any acquisitions that we do complete in the future may have an adverse
effect on our financial performance and liquidity. It may be necessary for us to raise additional funds either through public or private debt or equity financing in order to finance any future
acquisitions. Any equity or debt financing, if available at all, may be on terms that are not favorable to us and may dilute the percentage ownership of our existing shareholders.

We face risks of technological changes that may render our products obsolete.

The markets for our products and services are characterized by rapid and significant technological change and evolving industry
standards. As a result of such changes and evolving standards, our

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products
may become noncompetitive or obsolete and we may have to develop new products in order to maintain or increase our sales. New product introductions that are responsive to these factors
require significant planning, design, development and testing at the technological, product and manufacturing process levels, and we may not be able to timely develop new products. In addition,
industry acceptance of new technologies that we may develop may be slow due to, among other things, existing regulations or standards written specifically for older technologies and general
unfamiliarity of users with new technologies. As a result, any new products that we may develop may not generate any meaningful sales or profits for us for a number of years, if at all.

A significant portion of our sales are generated from foreign countries and selling in foreign countries entails a number of risks which could result in a decrease in our
sales or an increase in our operating expenses.

Sales outside the United States accounted for approximately 56% of our sales in 2008 and approximately 52% and 55% of our sales in 2007
and 2006, respectively. We expect that foreign sales will continue to account for a significant portion of our revenues in the future. Sales to customers in foreign countries are subject to a number
of risks, including the following:



If
any of these risks were to materialize, our sales into foreign countries could decline, or our operating costs could increase, which would adversely affect our financial results.

Fluctuations in foreign currency exchange rates could result in declines in our reported net sales and net earnings.

Because the functional currency of our foreign operations is the applicable local currency, we are exposed to foreign currency exchange
rate risk arising from transactions in the normal course of business, such as sales to third party customers and purchases from suppliers denominated in foreign currencies. Our reported net sales and
net earnings are subject to fluctuations in foreign exchange rates. Because our products are manufactured or sourced primarily from the United States, a stronger U.S. dollar generally has a negative
impact on results from operations outside the United States while a weaker dollar generally has a positive effect. Our primary exchange rate exposure is with the euro. We currently do not use hedging
activities to minimize the volatility associated with foreign currency exchange rate changes. If we do use such activities in the future, they also involve some risk.

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Some of our competitors have greater resources than we do, which may provide our competitors with an advantage in the development and marketing of new products.

We currently encounter, and expect to continue to encounter, competition in the sale of our products. We believe that the principal
competitive factors affecting the market for our products include product quality and performance, price, reliability and customer service. Our competitors include large multinational corporations.
Some of our competitors have substantially greater financial, marketing and other resources than we do. As a result, they may be able to adapt more quickly to new or emerging technologies and changes
in customer requirements, or to devote greater resources to the promotion and sale of their products than we can. In addition, competition could increase if new companies enter the market or if
existing competitors expand their product lines or intensify efforts within existing product lines. Our current products, products under development and our ability to discover new technologies may be
insufficient to enable us to compete effectively with our competitors.

Our reliance upon patents, domestic trademark laws, trade secrets and contractual provisions to protect our proprietary rights may not be sufficient to protect our
intellectual property from others who may sell similar products.

We hold patents relating to various aspects of our products and believe that proprietary technical know-how is critical to
many of our products. Proprietary rights relating to our products are protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are
maintained in confidence as trade secrets. We cannot be certain that we will be issued any patents from any pending or future patent applications owned by or licensed to us or that the claims allowed
under any issued patents will be sufficiently broad to protect our technology. In the absence of patent protection, we may be vulnerable to competitors who attempt to copy our products or gain access
to our trade secrets and know-how. Our competitors may initiate litigation to challenge the validity of our
patents, or they may use their resources to design comparable products that do not infringe our patents. We may incur substantial costs if our competitors initiate litigation to challenge the validity
of our patents or if we initiate any proceedings to protect our proprietary rights. If the outcome of any such litigation is unfavorable to us, it could have a material adverse effect on our business
and results of operations. There may also be pending or issued patents held by parties not affiliated with us that relate to our products or technologies and we may need to acquire licenses to any
such patents to continue selling some or all of our products. If we had to obtain any such license in order to be able to continue to sell some or all of our products, we may not be able to do so on
terms that were favorable to us, if at all.

In
addition, we rely on trade secrets and proprietary know-how that we seek to protect, in part, by confidentiality agreements with our collaborators, employees and
consultants. These agreements may be breached and we may not have adequate remedies for any such breach. Even if these confidentiality agreements are not breached, our trade secrets may otherwise
become known or be independently developed by competitors.

We rely on our management information systems for inventory management, distribution and other functions. If our information systems fail to adequately perform these
functions or if we experience an interruption in their operation, our business and results of operations could be adversely affected.

The efficient operation of our business depends on our management information systems. We rely on our management information systems to
effectively manage accounting and financial functions, order entry, order fulfillment and inventory replenishment. The failure of our management information systems to perform could disrupt our
business and could result in decreased sales, increased overhead costs, excess inventory and product shortages, causing our business and results of operations to suffer. In addition, our management
information systems are vulnerable to damage or interruption from natural or man-made disasters, terrorist attacks, computer viruses or hackers, power loss, or other

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computer
systems, internet, telecommunications or data network failures. Any such interruption could adversely affect our business and results of operations.

The market price of our common stock has fluctuated significantly in the past and will likely continue to do so in the future and any broad market fluctuations may
materially adversely affect the market price of our common stock.

The market price of our common stock has been volatile in the past, ranging from a high sales price of $11.83 and a low sales price of
$6.70 during 2008, and several factors could cause the price to fluctuate substantially in the future. These factors include:



In
addition, the stock prices of instrumentation companies have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of such
companies. This market volatility may adversely affect the market price of our common stock.

Complying with securities laws and regulations is costly for us.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations promulgated by
the SEC and Nasdaq, are creating particular challenges for smaller publicly-held companies like us. We are committed to maintaining high standards of corporate governance and public
disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses
and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of
2002 and the related regulations regarding our assessment of our internal control over financial reporting have required, and will continue to require, the expenditure of significant financial and
managerial resources.

If we experience any increase in the cost of raw materials or supplies, we may experience a decrease in profit margins.

In the past, the overall cost of the materials that we purchase has not risen much more than the rate of inflation. We believe that the
price of our products and the prices of our competitors' products is a significant factor affecting our customers' buying decisions and consequently, we may not be able to pass along any cost
increases in raw materials and supplies in the form of price increases or sustain profit margins that we have achieved in prior years.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.    PROPERTIES

We lease an aggregate of 61,375 square feet of office, engineering, laboratory and production space in Minnesota, Texas, Germany and
China. We believe that all of our facilities are generally

12

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adequate
for their present operations and that suitable space is readily available if any of our leases are not extended.

Our
headquarters and operations occupy approximately 47,200 square feet of space in Minneapolis, Minnesota. This space is leased until June 2010.

Microanalytics'
operations occupy approximately 5,100 square feet of space in the metropolitan area of Austin, Texas. This space is leased until August 2009.

Lippke's
operations are located in Neuwied, Germany, and occupy approximately 8,075 square feet. This space is leased until July 2018.

The
MOCON (Shanghai) Trading Co., Ltd. operations are located in Shanghai, China, and occupy approximately 1,000 square feet. This space is leased until December 2009.

In
addition to our leased facilities described above, we own a building located near Boulder, Colorado that consists of approximately 9,300 square feet of office and production space in
which our Baseline-MOCON, Inc. subsidiary conducts its operations. We also own the land, consisting of approximately two acres, on which this building is located.

ITEM 3.    LEGAL PROCEEDINGS

There are no material pending legal, governmental, administrative or other proceedings to which we are a party or of which any of our
property is the subject.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of our security holders during the fourth quarter of 2008.

ITEM 4A.    EXECUTIVE OFFICERS OF REGISTRANT

Our executive officers, their ages and their offices held, as of March 20, 2009, are as follows:

Name

Age

TitleRobert L. Demorest


63

Chairman of the Board, President and Chief Executive Officer, MOCON, Inc.Daniel W. Mayer


58

Executive Vice President, MOCON, Inc.Darrell B. Lee


60

Vice President, Chief Financial Officer, Treasurer and Secretary, MOCON, Inc.Douglas J. Lindemann


51

Vice President and General Manager, MOCON, Inc.Robert E. Forsberg


53

President, Baseline-MOCON, Inc.


There
are no family relationships among any of our directors and executive officers. Information regarding the business experience of our executive officers is set forth below.

Mr. Robert
L. Demorest has been our President, Chief Executive Officer, and Chairman of the Board since April 2000. Prior to that time, Mr. Demorest had been our President
for more than five years. Mr. Demorest is also a director of Marten Transport, Ltd., a publicly traded company.

Mr. Daniel
W. Mayer has been an Executive Vice President for us since January 1995. Prior to that time, Mr. Mayer had been our Vice President, Product Development for more
than five years.

Mr. Darrell
B. Lee has been our Chief Financial Officer, Vice President, Treasurer and Secretary since January 2006. Mr. Lee served as our Director of External Reporting
from April 2005 to January 2006. Prior to that time, Mr. Lee had served as Vice President and Chief Financial Officer of Spinal Designs International, Inc., a health-care
company based in Minneapolis, Minnesota, since 1993.

Mr. Douglas
J. Lindemann has been a Vice President and General Manager for us since January 2001. From July 2000 to December 2000, Mr. Lindemann served as a General Manager
for us. Prior to that time, Mr. Lindemann had been one of our Business Managers since 1995.

Mr. Robert
E. Forsberg has been the President of Baseline-MOCON, Inc. for more than five years.

13

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Dividends

Our common stock is quoted on the Nasdaq Global Market System under the symbol MOCO. The following table sets forth, for the fiscal
periods indicated, the high and low sales prices for our common stock as reported by the Nasdaq Global Market System. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions. The following table also sets forth, for the fiscal periods indicated, the amount of cash dividends declared
on our common stock:

2008

2007Fiscal Period

High

Low

Dividend

High

Low

Dividend1st Quarter

$
11.83

$
9.64

$
0.080

$
13.98

$
11.00

$
0.0752nd Quarter


11.30


10.23


0.085


14.10


10.87


0.0803rd Quarter


11.44


9.63


0.085


11.83


10.01


0.0804th Quarter


11.24


6.70


0.090


12.26


10.00


0.080


We
have paid quarterly cash dividends without interruption or decline since 1988. Cash dividends paid in 2008, 2007 and 2006 totaled $1,835,707, $1,703,965 and $1,627,849, respectively.
Our Board of Directors monitors and evaluates our dividend practice quarterly, and the Board may elect at any time to increase, decrease or not pay a dividend on our common stock based upon our
financial condition, results of operations, cash requirements and future prospects and other factors deemed relevant by the Board.

For
information concerning securities authorized for issuance under equity compensation plans, please see Part IIIItem 12.

Record Holders

As of March 20, 2009, there were 279 record holders of our common stock.

Issuer Repurchases of Equity Securities

The following table shows our stock repurchase activity during the fourth quarter ended December 31, 2008:

Period

Total Number
of Shares
Purchased(1)

Average Price
Per Share

Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs

Maximum
Amount of
Authorization
Remaining
Under the PlanOctober 1, 2008 through October 31, 2008











November 1, 2008 through November 30, 2008


2,044

$
7.80


2,044

$
1,618,954December 1, 2008 through December 31, 2008


5,143

$
7.95


5,143

$
1,578,047


---

14

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Except
as set forth in the table above, we did not purchase any shares of our common stock or other equity securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934, as amended, during the fourth quarter ended December 31, 2008.

Recent Sales of Unregistered Securities

During the fourth quarter and year ended December 31, 2008, we did not issue or sell any shares of our common stock or other
equity securities of MOCON without registration under the Securities Act of 1933, as amended.

ITEM 6.    SELECTED FINANCIAL DATA

Years Ended December 31,2008

2007

2006

2005

2004(in thousands, except per share data)CONSOLIDATED STATEMENT OF INCOME DATA:Sales

$
29,696

$
27,397

$
26,290

$
24,582

$
24,965Net income


4,059


3,805


3,911


2,915


2,429Net income per common share:Basic


0.73


0.69


0.72


0.54


0.45Diluted


0.72


0.67


0.71


0.53


0.44Cash dividends declared per share


0.34


0.315


0.30


0.285


0.265




As of December 31,2008

2007

2006

2005

2004(in thousands)CONSOLIDATED BALANCE SHEET DATA:Current assets

$
22,357

$
21,306

$
21,023

$
18,257

$
16,724Total assets


32,953


29,673


26,877


23,657


22,516Current liabilities


4,464


3,949


4,817


4,418


4,772Noncurrent liabilities


271


339


100


440


543Stockholders' equity


28,218


25,385


21,960


18,799


17,201


Sales
for the years 2005 and 2004 do not include $22,397 and $143,316, respectively, for sales from the Vaculok product line, which was sold in 2005.

15

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and
other users to assess our financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties including those discussed under the
heading "Item 1A. Risk Factors" and elsewhere in this report. For more information, see "Part I Item 1 BusinessForward-Looking Statements" of this report. The
following discussion of the results of the operations and financial condition of MOCON should be read in conjunction with our consolidated financial statements and the related notes thereto included
elsewhere in this report.

Overview

MOCON, Inc. designs, manufactures, markets and services products and provides consulting services primarily in the measurement
and analytical instrument and services markets. Our products include instruments that detect, measure and monitor gases and chemical compounds. We continually seek growth opportunities through
technological and product improvement, by acquiring and developing new products, and by acquiring new companies.

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

Historically,
a significant portion of our sales have come from international customers. In this regard, we acquired our subsidiary in Germany in 2004 to solidify our presence and
opportunities in Europe. Similarly, we opened our office in Shanghai, China in 2007 to better serve our Asian customers.

Our
current plans for growth include substantial funding for research and development to foster new product development together with strategic acquisitions where appropriate. In
February 2006, we sold the capital stock of our Lab Connections, Inc. subsidiary in exchange for $517,296 in cash, subject to a purchase price adjustment based on the amount of Lab Connections'
net tangible assets as of the closing date. As a result of the sale, we recognized an after-tax gain of $92,345 in the first quarter 2006. See Note 16 to our consolidated financial
statements.

Significant Transactions and Financial Trends

Throughout these financial sections, you will read about significant transactions or events that materially contribute to, or reduce
our earnings, and materially affect our financial results and financial position. Significant transactions and events that affected our 2008 financial results and position included the moving of our
German office to a new facility. Significant transactions, such as the sale of our Lab Connections subsidiary in 2006, result from unique facts and circumstances and, given their nature, some of these
items will likely not recur with similar materiality or impact on our continuing operations.

Our
international sales have historically accounted for a significant portion of our revenues, and we expect our international sales, as a percentage of total sales, to continue to
increase for the foreseeable future.

Our
research and development costs were approximately 7% of our consolidated sales for the years 2008, 2007 and 2006. On an annual basis, we intend to spend approximately 6% to 8% of our
sales on research and development in the future.

16

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While
these items are important in understanding and evaluating our financial results, certain trends, such as our international sales accounting for a significant portion of our
revenues, and other transactions or events such as those discussed later in this Management's Discussion and Analysis may also have a material impact on our financial results.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to our consolidated financial statements included in Item 8
of this report. This Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that
affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Securities and Exchange Commission has defined a company's
most critical accounting policies as those that are most important to the portrayal of its financial condition and results of operations, and which require the company to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the following critical accounting policies.
Although we believe that our estimates and assumptions are reasonable, they are based upon information available when they are made. Actual results may differ significantly from these estimates under
different assumptions or conditions.

Revenue Recognition

We recognize revenue when it is realized or realizable and earned. In accordance with the Securities and Exchange Commission Staff
Accounting Bulletin No. 104 (SAB 104),Revenue Recognition, we consider revenue realized or realizable when persuasive evidence of an
arrangement exists, the product 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 price is fixed or
determinable, and collectability is reasonably assured. Our terms are F.O.B. shipping point with no right of return, and customer acceptance of its products is not required. The revenue recognition
policy does not differ among the various product lines, the marketing venues, or various geographic destinations. We do not have distributors who stock our equipment. We do not offer rebates, price
protection, or other similar incentives, and discounts when offered are recorded as a reduction in revenue.

Revenue
for preventive maintenance agreements is recognized on a per visit basis and extended warranties on a straight-line basis over the life of the contracts, in
accordance with FASB Technical Bulletin No. 90-1,Accounting for Separately Priced Extended Warranty and Product Maintenance
Contracts.

Emerging
Issues Task Force (EITF) Issue No. 00-21,Revenue Arrangements with Multiple Deliverables, provides revenue
recognition guidance for arrangements with multiple deliverables, and the criteria to determine if items in a multiple deliverable agreement should be accounted for separately. If products or services
are sold on a standalone basis, revenue is recognized as the products or services are delivered. When products or services are sold as part of a multiple element arrangement, the Company allocates
revenue on a relative fair value basis.

Allowance for Doubtful Accounts and Sales Returns

Our allowance for doubtful accounts and sales returns is for accounts receivable balances that are estimated to be uncollectible as
well as anticipated sales returns. The reserve is based on a number of factors, including: (1) an analysis of customer accounts and (2) our historical experience with accounts receivable
write-offs and sales returns. The analysis includes the age of the receivable, the financial

17

---



condition
of a customer or industry and general economic conditions. We believe our financial results could be materially different if historical trends do not reflect actual results or if economic
conditions worsened for our customers. In the event we determined that a smaller or larger allowance for doubtful accounts is appropriate, we would record a credit or charge to selling, general and
administrative expense in the period that we made such a determination. As of December 31, 2008 and 2007, we had $137,182 and $125,797, respectively, reserved against our accounts receivable
for doubtful accounts and sales returns.

Accrual for Excess and Obsolete Inventories

We perform an analysis to identify excess and obsolete inventory. We record a charge to cost of sales for amounts identified. Our
analysis includes inventory levels, the nature of the finished product and its inherent risk of obsolescence and the on-hand quantities relative to the sales history of that finished
product. We believe that our financial results
could be materially different if historical trends do not reflect actual results or if demand for our products decreased because of economic or competitive conditions or otherwise. As of
December 31, 2008 and 2007, we had $303,823 and $335,344, respectively, accrued for excess and obsolete inventories.

Recoverability of Long-Lived Assets

We assess the recoverability of goodwill and other long-lived assets annually or whenever events or changes in
circumstances indicate that expected future undiscounted cash flows might not be sufficient to support the carrying amount of an asset. We deem an asset to be impaired if a forecast of undiscounted
future operating cash flows is less than an asset's carrying amount. If an asset is determined to be impaired, the loss is measured as the amount by which the carrying value of the asset exceeds its
fair value. Changes in our business strategies, changes in the economic environment in which we operate, competitive conditions, and other factors could result in future impairment charges. We did not
record any long-lived asset impairment charges in 2008, 2007 or 2006.

Accrued Product Warranties

Our products are generally covered by a warranty, with warranty periods ranging from ninety days to one year from the date of sale.
Estimated warranty costs are accrued in the same period in which the related revenue is recognized, based on anticipated parts and labor costs, utilizing historical experience. Additional warranty
reserves are also accrued for major rework campaigns. We periodically assess the adequacy of our warranty reserves based on changes in these factors and record any necessary adjustments if actual
claim experience indicates that adjustments are necessary. Although we believe the likelihood to be relatively low, warranty claims experience could be materially different from actual results due to
manufacturing changes that could impact product quality, a change in our warranty policy in response to industry trends, as yet unrecognized defects in products sold, or other factors. As of
December 31, 2008 and 2007, we had $229,087 and $201,373, respectively, accrued for future estimated warranty claims.

Income Taxes

In the preparation of our consolidated financial statements, management is required to estimate income taxes in each of the
jurisdictions in which we operate. This process involves estimating actual current tax exposures together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets.

Management
reviews the deferred tax assets for recoverability on a quarterly basis and assesses the need for valuation allowances. These deferred tax assets are evaluated by considering
historical levels of

18

---



income,
estimates of future taxable income streams and the impact of tax planning strategies. A valuation allowance is recorded to reduce deferred tax assets when it is determined that it is more
likely than not that we would not be able to realize all or part of our deferred tax assets. At December 31, 2008 and 2007, we provided a valuation allowance in the amounts of $364,000 and
$324,000, respectively, against our net deferred tax assets, related primarily to the long-term capital loss carryforward.

On
January 1, 2007, we adopted FIN 48,Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
109.FIN 48 requires application of a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions.
Under FIN 48, once the more-likely-than-not threshold is met, the amount of benefit to be recognized is the largest amount of tax benefit that is greater
than 50% likely of being ultimately realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in
earnings in the period of such a change. We have recognized a tax accrual in the amount of $216,000 for estimated exposures associated with uncertain tax positions and periodically adjust this accrual
when facts and circumstances change. However, due to the complexity of some of these uncertainties, the ultimate settlement may result in payments that are significantly different from our current
estimate of tax liabilities, resulting in the recognition of additional charges or benefits to income tax expense.

Results of Operations

The following table sets forth the relationship between various components of our results of operations, stated as a percent of sales,
for fiscal years ended December 31, 2008, 2007 and 2006. Our historical financial data were derived from our consolidated financial statements and related notes included in Item 8 of
this report.

Percent of Sales2008

2007

2006Sales


100.0


100.0


100.0Cost of sales


40.8


41.6


42.4Gross profit


59.2


58.4


57.6Selling, general and administrative expenses


34.2


31.5


29.4Research and development expenses


6.6


7.4


7.4Operating income


18.4


19.5


20.8Other income, net


2.0


2.1


1.5Income before income taxes


20.4


21.6


22.3Income taxes


6.7


7.7


7.5Income from continuing operations


13.7


13.9


14.8Gain from discontinued operations,net of tax








0.1Net income


13.7


13.9


14.9


19

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The following table summarizes total sales by product line for 2008, 2007 and 2006:

Years Ended December 31,2008

2007

2006Permeation products and services

$
15,850,027

$
14,428,823

$
14,604,579Gas, headspace and other analyzer productsand services


12,490,244


11,478,501


10,072,101Other instruments and services


1,355,435


1,489,258


1,613,295Total sales

$
29,695,706

$
27,396,582

$
26,289,975


The
following table sets forth the relationship between various components of domestic and foreign sales for 2008, 2007 and 2006:

Years Ended December 31,2008

2007

2006Domestic sales

$
12,960,723

$
13,160,268

$
11,924,805Foreign Sales:Europe


7,836,335


6,595,075


7,360,019Asia


6,144,822


5,309,901


4,842,523Other


2,753,826


2,331,338


2,162,628Total foreign sales


16,734,983


14,236,314


14,365,170Total sales

$
29,695,706

$
27,396,582

$
26,289,975


Sales



Sales for 2008 were $29,696,000, an increase of 8% compared to $27,397,000 for 2007. This increase in sales was primarily the result of
the increased volume of our permeation products and services, gas analyzer instruments and sensors, and packaging products. These increases were partially offset by decreases in the sale of weighing
and pharmaceutical products and gas chromatography instruments and services. Our domestic sales were $12,961,000, or 44% of total sales in 2008, a 2% decrease compared to $13,160,000, or 48% of sales
in 2007. Our foreign sales were
$16,735,000, or 56% of total sales in 2008, an increase of 18% compared to $14,236,000, or 52% of sales in 2007. The overall sales volume increase in 2008 was driven by an increased demand as a result
of enhanced marketing efforts in our foreign markets, which offset a slight decline in sales in our domestic markets. The impact of any price increases was not significant in 2008.

Permeation Products and ServicesSales of our permeation products and services, which accounted for
53% of our consolidated sales in both 2008 and 2007, increased $1,421,000, or 10% in 2008 compared to 2007. This increase in permeation sales was primarily due to a 21% increase in foreign sales. We
believe that product introductions in recent years, specifically the PERMATRAN-W Model 1/50 (lower price point product for less sensitivity in water vapor measurement), and growing
acceptance of the AQUATRAN (for increased sensitivity in measuring water vapor) were factors in this growth. Domestic sales declined 11% from 2007 to 2008, which we believe is attributable to the
slowdown in the U.S. economy in the second half of the year.

Gas, Headspace and Other Analyzer Products and ServicesSales of our gas, headspace, and other
analyzer products and services, which accounted for 42% our consolidated sales in both 2008 and 2007, increased $1,012,000, or 9% in 2008 compared to 2007. Within this group, sales of our gas
analyzers and sensors through our Baseline subsidiary, which accounted for 23% and 21% of our 2008 and 2007

20

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consolidated
sales, respectively, increased $1,016,000, or 18% in 2008 to $6,679,000 compared to $5,663,000 in 2007. This was due primarily to increased shipments of the piD-TECH Plus to
the OEM portable sensor market, which increase was offset somewhat by a decrease in the sales of gas chromatographs. Sales of total hydrocarbon analyzer instruments were essentially the same in both
years. Baseline's domestic sales increased $820,000, or 24% in 2008 compared to 2007, and foreign sales increased $196,000, or 9% over the same period.

Sales
of our packaging products (headspace analyzers and leak detection), which accounted for 16% and 17% of our consolidated sales in 2008 and 2007, respectively, increased $137,000, or
3% in 2008 to $4,822,000 compared to $4,685,000 in 2007. The increase resulted from sales of our Lippke 4000 leak detection instrument primarily in the European markets as well as continued market
acceptance of our PAC CHECK series of analyzers generally used for headspace analysis. Our emphasis on the international markets resulted in a 19% increase in sales outside the U.S. of packaging
products in 2008 over 2007, and our entry into the medical device market in 2008 contributed to the overall sales increase.

Sales
of our weighing and pharmaceutical products, which accounted for 3% and 4% of our consolidated sales in 2008 and 2007, respectively, decreased $141,000, or 12% in 2008 compared to
2007. The decrease resulted from decreased demand in both our domestic and foreign markets. Our weighing and pharmaceutical products group consists of a relatively fewer number of products compared to
our other product groups and will typically experience significant fluctuations in demand.

Other Instruments and ServicesSales of our other instruments and services group, which accounted for 5% of our consolidated
sales in both 2008 and 2007, decreased $134,000, or 9% in 2008 compared to 2007. This decrease was due primarily to lower sales of our consulting and testing laboratory services.



Sales for 2007 were $27,397,000, an increase of 4% compared to $26,290,000 for 2006. This increase in sales was primarily the result of
the increased volume of our gas analyzer and packaging products, together with increased domestic sales volume of our permeation products and services. These increases were partially offset by
decreases in the foreign sales volume of our permeation products and services and a decline in the sale of weighing and pharmaceutical products. Our domestic sales were $13,160,000, or 48% of total
sales in 2007, an increase of 10% compared to $11,925,000, or 45% of sales in 2006. Our foreign sales were $14,236,000, or 52% of total sales in 2007, a decrease of 1% compared to $14,365,000, or 55%
of sales in 2006. The overall sales volume increase in 2007 was generally the result of increased demand primarily in our domestic markets. The impact of any price increases was not significant in
2007.

Permeation Products and ServicesSales of our permeation products and services were $14,429,000 and
$14,605,000 in 2007 and 2006, respectively, or approximately 53% and 56%, respectively, of our consolidated sales. The 1% decrease in permeation sales in 2007 compared to 2006 was primarily due to an
$814,000, or 8% drop in foreign sales. Foreign sales had been favorably impacted in 2006 as a result of a large order from China in the amount of $659,000. By comparison, our domestic sales of
permeation equipment and services increased by $638,000, or 14% in 2007 as compared to 2006. We believe that new product introductions, specifically the AQUATRAN (for increased sensitivity in
measuring water vapor) and the OX-TRAN Model 2/10 (lower price point product for less sensitivity in oxygen measurement) were factors in this growth.

Gas, Headspace and Other Analyzer Products and ServicesSales of our gas, headspace, and other
analyzer products and services, which accounted for 42% and 38% of our consolidated sales in 2007 and 2006, respectively, increased $1,406,000, or 14% in 2007 compared to 2006. Within this group,
sales of our gas analyzers and sensors through our Baseline subsidiary, which accounted for 21% and 18% of

21

---



our
2007 and 2006 consolidated sales, respectively, increased $925,000, or 20% in 2007 to $5,663,000 compared to $4,738,000 in 2006. This increase was due primarily to shipments of the
piD-TECH Plus to the OEM portable sensor market as well as ongoing shipments of our total hydrocarbon analyzers and gas chromatographs. Baseline's domestic sales increased $486,000, or 17%
in 2007 compared to 2006, and foreign sales increased $439,000, or 24% over the same period.

Sales
of our packaging products (headspace analyzers and leak detection), which accounted for 17% and 15% of our consolidated sales in 2007 and 2006, respectively, increased $804,000, or
21% in 2007 to $4,685,000 compared to $3,881,000 in 2006. The increase resulted primarily from sales of our PAC CHECK series of analyzers and was evident in both our domestic and foreign markets.

Sales
of our weighing and pharmaceutical products, which accounted for 4% and 6% of our consolidated sales in 2007 and 2006, respectively, decreased $323,000, or 22% in 2007 compared to
2006. The decrease resulted from decreased demand in both our domestic and foreign markets. Our weighing and pharmaceutical products group consists of a relatively fewer number of products compared to
our other product groups and will typically experience significant fluctuations in demand.

Other Instruments and ServicesSales of our other instruments and services group, which accounted for 5% and 6% of our
consolidated sales in 2007 and 2006, respectively, decreased $124,000, or 8% in 2007 compared to 2006. This decrease was due both to lower sales of non-MOCON products by our German
subsidiary and also a decrease in sales of our consulting and testing laboratory services.

Gross Profit



Our gross profit percentages were 59.2% and 58.4% during 2008 and 2007, respectively. The increase in gross profit percentage resulted
primarily from a higher concentration of permeation equipment sales, sales of new products which replaced older, less profitable items, and higher volume in our detector and sensor area which resulted
in increased manufacturing efficiencies.



Our gross profit percentages were 58.4% and 57.6% during 2007 and 2006, respectively. One strategic initiative for us in 2007 was to
improve our product margins. The increase in gross profit percentage resulted primarily from sales of some of our new products that carried higher margins.

Selling, General and Administrative Expenses



Selling, general and administrative expenses were $10,170,000 and $8,644,000, or 34.2% and 31.5% of sales in 2008 and 2007,
respectively. The increase of $1,526,000 was due primarily to the following: higher salaries and benefits relating to annual wage increases and a 5% increase in average headcount; increased travel,
marketing and promotion expenses related to our increased emphasis in foreign markets; and increased professional fees.



Selling, general and administrative expenses were $8,644,000 and $7,736,000, or 31.5% and 29.4% of sales in 2007 and 2006,
respectively. The increase of $908,000 was due primarily to a higher headcount and related hiring expenses, increased stock option expense, increased SOX 404 compliance costs and the expenses related
to the opening and ongoing costs associated with the sales and technical support office in China.

22

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Research and Development Expenses



Research and development (R&D) expenses were $1,951,000 and $2,030,000 in 2008 and 2007, respectively, or 6.6% and 7.4% of sales,
respectively. The relatively consistent spending between years was in line with our 2008 R&D plan. For the foreseeable future, we intend to allocate on an annual basis approximately 6% to 8% of sales
to research and development. We believe continued R&D expenditures are necessary as we develop new products to expand revenue opportunities in our niche markets and remain competitive.



Research and development (R&D) expenses were $2,030,000 and $1,943,000 in 2007 and 2006, respectively, or 7.4% of sales in both
periods. The increase of $87,000 in 2007 compared to 2006 was in line with our plan to continue to develop products that meet our customers' needs.

Other Income, Net

Other income, net for 2008, 2007 and 2006 was as follows:

Years Ended December 31,2008

2007

2006Interest income on investments

$
575,094

$
565,441

$
412,882Foreign currency exchange gain (loss)


12,500


1,165


(19,152
)Other


1,317


13,668


2,485Total other income

$
588,911

$
580,274

$
396,215


Interest
income increased slightly in 2008, as compared to 2007, primarily due to higher average invested balances of cash and marketable securities, partially offset by lower average
yields. Total cash and marketable securities increased approximately $1,084,000 from December 31, 2007 to December 31, 2008. Interest income increased approximately $153,000 in 2007, as
compared to 2006, due primarily to higher invested balances of cash and marketable securities.

Income Tax Expense

Our provision for income taxes from continuing operations for 2008 was $1,990,000, or 32.9% of income before income taxes, compared to
$2,113,000, or 35.7% of income before income taxes for 2007. This year over year decrease in the effective tax rate was due primarily to the increased amount of tax-exempt interest earned,
lower statutory tax rates in Germany in 2008, and a reduction in the tax contingency accrual.

Our
provision for income taxes from continuing operations for 2007 was $2,113,000, or 35.7% of income before income taxes, compared to $1,968,000, or 33.6% of income before income taxes
for 2006. This year over year increase in the effective tax rate was due to higher state income taxes, the expiration of certain export incentives in 2007 and increased non-deductible
stock option compensation expense in 2007.

Our
provision for income taxes from continuing operations for 2006 was $1,968,000, or 33.6% of income before income taxes, a three percentage point increase over 2005. The increase in
the effective tax rate was due primarily to stock option compensation recognized in 2006 for the first time, which was not tax deductible, and a reduction in the tax contingency accrual in 2005
resulting from an Internal Revenue Service examination. The provision for 2006 was favorably impacted by the resolution of a proposed income tax assessment in the state of New Jersey, which reduced
income tax expense by

23

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approximately
$50,000. Also, because the sale of Lab Connections generated a taxable loss, there was no provision applicable to the $92,345 gain that was realized in the first quarter 2006. The
taxable loss of approximately $650,000 results in a long-term capital loss carryforward which produces a deferred tax asset. Because it is currently unlikely that we will incur a
long-term capital gain in the foreseeable future to offset against this loss, we have established a valuation allowance against the entire deferred tax asset relating to the capital loss
carryforward.

We
anticipate our effective tax rate for the full year 2009 will range between 31% and 36%.

Inflation

We do not believe that inflation has had a material effect on our results of operations in recent years; however, there can be no
assurance that our business will not be adversely affected by inflation in the future.

Liquidity and Capital Resources

Total cash, cash equivalents and marketable securities increased $1,084,035 during 2008 to $16,108,916 as of December 31, 2008,
compared to $15,024,881 at December 31, 2007. We describe the reasons for this increase below under the caption "Cash Flows from Operating Activities." Our working capital as of
December 31, 2008 increased $535,715 to $17,892,779, compared to $17,357,064 at December 31, 2007.

We
invest a large portion of our available cash in highly liquid certificates of deposit, municipal bonds, United States treasury obligations and money market funds. Our investment
policy is to manage these
assets to preserve principal, maintain adequate liquidity at all times, and maximize returns subject to investment guidelines we maintain. We do not have any investments in auction rate or
hard-to-value securities.

We
have historically financed our operations and capital equipment requirements through cash flows generated from operations. We believe that a combination of our existing cash, cash
equivalents and marketable securities, plus an expected continuation of cash flow from operations, will continue to be adequate to fund operations and working capital, capital expenditures, dividend
payments and authorized stock repurchases. While we strive to maintain appropriate inventory levels, we recently have increased certain quantities primarily related to new product offerings. Our
belief is based on current business operations and economic conditions and assumes that we continue to operate our business in the ordinary course. However, one of our strategic objectives is, as
market and business conditions warrant, to consider acquisitions of businesses, products or technologies. If the cost of one or more acquisition opportunities exceeds our existing cash resources, we
may need to fund such activities, should they arise, with a portion of our cash balances and debt and/or equity financing. We currently do not have any committed lines of credit or other credit
facilities, and it is uncertain whether such facilities could be obtained in sufficient amounts or on acceptable terms. Any plan to raise additional capital may involve an equity-based or
equity-linked financing, which may be dilutive to existing shareholders. If we raise additional funds by issuing debt, we may be subject to restrictive covenants that could limit our operational
flexibility and higher interest expense could dilute earnings per share. As of December 31, 2008, we had no commitments for any material capital expenditures.

24

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Cash Flow



Our primary source of funds is cash provided by operating activities. Cash flow from operating activities totaled $3,602,330,
$4,234,402 and $4,956,818 in 2008, 2007 and 2006, respectively. In 2008, cash provided by operating activities decreased by $632,072 compared to 2007. This decrease was due primarily to the
year-over-year increases in inventories and prepaid income taxes. In 2007, cash provided by operating activities decreased by $722,416 compared to 2006. This decrease was due
primarily to the year-over-year increase in inventories due to stronger fourth quarter order volume, and a decrease in accrued income taxes offset by a reduction in trade
accounts receivable. Working capital requirements typically will increase or decrease with changes in the level of sales. In addition, the timing of certain accrued payments will affect the annual
cash flow. Income tax payments and any employee incentive payments affect the timing of our operating cash flow as they are accrued throughout the year but paid on a quarterly, semi-annual
or annual basis.



Cash used in investing activities totaled $2,694,376 in 2008 as compared to $1,742,584 in 2007 and $3,333,377 in 2006. Cash used for
investment purchases, net of maturities, was $1,760,416, $703,509 and $2,949,807 in 2008, 2007 and 2006, respectively. Purchases of property, plant and equipment totaled $719,641 in 2008, primarily
for renovation of our Colorado offices and additions of office, manufacturing and laboratory equipment, as compared to $436,527 and $462,324 in 2007 and 2006, respectively. Cash received from the sale
of our Lab Connections subsidiary was $478,721 in 2006. We do not believe that any major property, plant and equipment expenditures are required to accommodate our current level of operations.

Cash
paid for acquisitions in 2007 and 2006 of $574,568 and $433,339, respectively, were related to our purchase of Lippke. These amounts resulted from an adjustment of the required
earnout payments between the minimum amount originally recorded and the amount paid, based on actual earnings of Lippke.



Cash used in financing activities totaled $1,391,087 in 2008 as compared to $1,182,173 in 2007 and $1,183,512 in 2006. The primary use
of cash for financing activities in 2008, 2007 and 2006 was for the payment of dividends to our shareholders, in the amounts of $1,835,707, $1,703,965 and $1,627,849, respectively.

Our
Board of Directors has authorized, depending upon market conditions and other factors, the repurchase of up to a total of $2,000,000 of our common stock. During 2008, we repurchased
a total of $58,828 of our common stock, leaving a remaining balance of $1,578,047 in this authorization.

Cash
flow from the exercise of stock options generated $478,878, $461,374 and $725,881, for the years 2008, 2007 and 2006, respectively.

25

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Contractual Obligations

The following table summarizes our future contractual cash obligations as of December 31, 2008 (in thousands):

Payments Due By PeriodTotal

Less than
1 year

1-3 years

4-5 years

After 5 yearsOperating leases

$
1,319


460


504


238


117Inventory purchase obligations


1,545


1,513


32





Total contractual cash obligations

$
2,864


1,973


536


238


117


We
adopted FIN 48,Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement 109on
January 1, 2007. We had $289,000 of gross unrecognized tax benefits as of the date of adoption and $216,000 and $279,000 at December 31, 2008 and 2007, respectively. The timing of any
payments which could result from these unrecognized tax benefits will depend on a number of factors. Accordingly, we cannot make reasonably reliable estimates of the period of potential cash
settlement, if any, with taxing authorities. Due to the uncertainty regarding the timing of these liabilities, we have excluded these amounts from the contractual obligations table.

We
are parties to a severance agreement with five of our executive officers which provides for the payment to the executive of a lump sum amount upon the occurrence of certain
termination events. The payment could amount to one or two times the executive's current annual salary depending on the reason for termination.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the SEC, that have or are
reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources. As a result, we are not materially
exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements.

Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued the Statement of Financial Accounting Standard (SFAS)
No. 157,Fair Value Measurement(SFAS 157). This statement did not require any new fair value measurements, but rather, it provided
enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. The changes to current practice resulting from the application of this statement
related to the definition of fair value, the methods used to estimate fair value, and the requirement for expanded disclosures about estimates of fair value. This statement became effective for us
beginning in 2008. The effective date for this statement for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis, has been delayed by one year. We adopted the provisions of SFAS 157 related to financial assets and financial liabilities on
January 1, 2008. This statement applies only to fair value measurements that are already required or permitted by other accounting standards, except for measurements of share-based payments and
measurements that are similar to, but not intended to be, fair value. Although the adoption of SFAS 157 for financial assets and liabilities did not impact our consolidated financial
statements, additional disclosures about fair value measurements may be required.

26

---



SFAS 157
establishes a framework for measuring fair value by creating a hierarchy of fair value measurements that distinguishes market data between observable independent market
inputs and unobservable market assumptions by the reporting entity.

In
February 2008, the FASB issued FASB Staff Position (FSP) No. 157-1,Application of FASB Statement No. 157 to FASB Statement
No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions, and FSP FAS 157-2,Effective
Date of FASB Statement No. 157. FSP FAS 157-1 removes leasing from the scope of SFAS 157,Fair Value
Measurements. FSP FAS 157-2 delays the effective date of SFAS 157 from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). See SFAS 157 discussion above. Adoption of FSP
FAS 157-1 did not have an effect on our consolidated financial statements.

In
October 2008, the FASB issued FSP No. FAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active, which clarifies the application of SFAS 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset
is not active. The Staff Position is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before
September 28, 2008. The implementation of FAS 157-3 did not have an effect on our consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 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 to measure many financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. SFAS 159 was effective for us beginning in 2008 and was to be applied prospectively. As we did not elect to measure existing assets and liabilities at
fair value, the adoption of this statement did not have an effect on our consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations(SFAS 141(R)). SFAS 141(R)
retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS 141(R) defines the acquirer as the entity that
obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets
acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. SFAS 141(R) also requires that acquisition-related costs be recognized separately
from the acquisition. We will be required to apply the guidance of SFAS 141(R) to any business combinations completed on or after January 1, 2009.

In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements(SFAS 160).
SFAS 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. Consolidated net income should include the net income
for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement of income. The calculation of earnings per share will continue to be based on income
amounts attributable to the parent. SFAS 160 is effective for us beginning in 2009. We currently do not have any subsidiaries in which we hold a noncontrolling interest and, therefore, we
believe this pronouncement will have no impact on our consolidated financial statements.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities(SFAS 161), an
amendment of SFAS No. 133. SFAS 161 establishes, among other things, the disclosure requirements for derivative instruments and for hedging activities. The intent is to provide users of
financial statements with an enhanced understanding of a) how and why an entity uses derivative instruments, b) how derivative instruments and related hedged items are accounted for
under

27

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SFAS 133
and its related interpretations, and c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. To meet
those objectives, the Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for us beginning in 2009. We
currently have no derivative instruments or hedging activities but will assess the impact of SFAS 161 if and when we engage in these types of transactions.

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

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Substantially all of our marketable securities, the majority of which are insured by the FDIC, are at fixed interest rates and mature
within two years; therefore, we believe that the market risk arising from the holding of these financial instruments is minimal. Based on our average invested cash balances during 2008, a 1% (100
basis points) decrease in the interest rate on such balances would result in a reduction in interest income of approximately $156,000 on an annual basis.

Foreign Currency Exchange Risk

Historically, in excess of 50% of our consolidated sales have been to international destinations. Since we invoice most of these
customers in U.S. dollars, we do not have significant exposure to foreign currency transaction risk. We invoice a small amount to our international customers in their local currency which exposes us
to some transaction gain or loss when converting their payments into U.S. dollars. We also pay a small number of our international suppliers in their local currency which exposes us to transaction
gain or loss. However, these have not resulted in material amounts in the past. Our foreign operations expose us to foreign currency exchange risk when the euro and yuan currency results of operations
are translated to U.S. dollars. While we historically have not experienced any material foreign currency translation losses, we may engage in hedging activity in the future to minimize this risk. Our
net investment in foreign subsidiary translated into U.S. dollars is not hedged. Any changes in foreign currency exchange rates would be reflected as a foreign currency translation adjustment, a
component of accumulated other comprehensive income in stockholders' equity, and would not impact our net income.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and Report of Independent Registered Public Accounting Firm are included beginning on
page F-1 of this annual report on Form 10-K and are incorporated herein by reference.

28

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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)  (in thousands, except per share data)

Quarter1st

2nd

3rd

4th2008:Sales

$
7,462

$
7,379

$
7,429

$
7,426Gross profit


4,308


4,400


4,563


4,310Net income


886


1,051


1,082


1,040Net income per common share:Basic

$
0.16

$
0.19

$
0.19

$
0.19Diluted


0.16


0.18


0.19


0.192007:Sales

$
6,876

$
6,658

$
6,820

$
7,043Gross profit


3,940


3,827


3,923


4,322Net income


833


932


955


1,085Net income per common share:Basic

$
0.15

$
0.17

$
0.17

$
0.20Diluted


0.15


0.16


0.17


0.19


ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A(T).    CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) that are designed to reasonably ensure that information required to be disclosed by us in
the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our
management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered in this annual report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that material information relating to our company is made known to management, including our
Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.

Management's Report on Internal Control over Financial Reporting

MOCON's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under

29

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the
supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

This
annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was
not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's
report in this annual report.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our fourth quarter of the year ended
December 31, 2008 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute,
assurance that the objectives of the system will be met. In designing and operating a control system, one must consider the potential benefits of controls relative to their costs and the reality of
limited resources available to allocate to control activities, particularly in smaller companies. In addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events and there can be no assurance that any control will meet its objectives under all potential future conditions. Because of such inherent limitations in any control system,
there can be no absolute assurance that control issues, misstatements, and/or fraud will be prevented or detected.

ITEM 9B.OTHER INFORMATION

None.

30

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required under Item 10 of this report is to be contained under the headings "Proposal OneElection
of DirectorsInformation About Board Nominees," "Proposal OneElection of DirectorsAdditional Information About Board Nominees," "Corporate
GovernanceInformation About our Board and its Committees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive proxy statement to be filed with the SEC
with respect to our next annual meeting of shareholders, which involves the election of directors and is incorporated herein by reference, or, if such proxy statement is not filed with the SEC within
120 days after the end of the fiscal year covered by this report, such information will be filed as part of an amendment to this report not later than the end of the 120-day period.

The
information concerning our executive officers is included in this report under Item 4A, "Executive Officers of Registrant" and is incorporated herein by reference.

During
the fourth quarter 2008, we made no material changes to the procedures by which shareholders may recommend nominees to the board of directors, as described in our most recent
proxy statement.

Our
Code of Ethics applies to all of our officers, directors and employees, including our principal executive officer and principal financial officer, and meets the requirements of the
rules and regulations of the Securities and Exchange Commission. We will disclose any amendments to, and any waivers from a provision of, our Code of Ethics on a Form 8-K filed with
the Securities and Exchange Commission. We make available, free of charge and through our website, to any shareholder who requests, the charters of our board committees and our Code of Ethics. Our
website iswww.mocon.com.

To
request a copy of the charters of our board committees or our Code of Ethics, write to us at:



ITEM 11.    EXECUTIVE COMPENSATION

The information required under Item 11 of this report is to be contained under the headings "Director Compensation," "Executive
Compensation," "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report" in our definitive proxy statement to be filed with the SEC with respect to our next
annual meeting of shareholders, which involves the election of directors and is incorporated herein by reference, or, if such proxy statement is not filed with the SEC within 120 days after the
end of the fiscal year covered by this report, such information will be filed as part of an amendment to this report not later than the end of the 120-day period.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required under Item 12 of this report is to be contained under the headings "Principal Shareholders and
Beneficial Ownership of Management" in our definitive proxy statement to be filed with the SEC with respect to our next annual meeting of shareholders, which involves the election of directors and is
incorporated herein by reference, or, if such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by this report, such information will be filed
as part of an amendment to this report not later than the end of the 120-day period.

31

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The
following table summarizes outstanding options under our equity compensation plans as of December 31, 2008. Our only equity compensation plans as of December 31, 2008
were the MOCON, Inc. 2006 Stock Incentive Plan and the MOCON, Inc. 1998 Stock Option Plan. The MOCON, Inc. 1998 Stock Option Plan has terminated with respect to future grants.
Options and other stock incentive awards to be granted in the future under the MOCON, Inc. 2006 Stock Incentive Plan are within the discretion of our Board of Directors and the Compensation
Committee of our Board of Directors and therefore cannot be ascertained at this time.

Plan Category

Number of Securities to
be Issued upon Exercise
of Outstanding Options,
Warrants and Rights

Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights

Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in First Column)Equity compensation plans approved by security holders


848,562

$
8.81


232,000Equity compensation plans not approved by security holders








Total


848,562





232,000


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required under Item 13 of this report is to be contained under the heading "Related Party Relationships and
Transactions" and "Corporate GovernanceDirector Independence" in our definitive proxy statement to be filed with the SEC with respect to our next annual meeting of shareholders, which
involves the election of directors and is incorporated herein by reference, or, if such proxy statement is not filed with the SEC within 120 days after the end of the fiscal year covered by
this report, such information will be filed as part of an amendment to this report not later than the end of the 120-day period.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required under Item 14 of this report is to be contained under the headings "Proposal
TwoRatification of Selection of Independent Registered Public Accounting FirmAudit, Audit-Related, Tax and Other Fees" and "Proposal TwoRatification of Selection
of Independent Registered Public Accounting FirmPre-Approval Policies and Procedures" in our definitive proxy statement to be filed with the SEC with respect to our next
annual meeting of shareholders, which involves the election of directors and is incorporated herein by reference, or, if such proxy statement is not filed with the SEC within 120 days after the
end of the fiscal year covered by this report, such information will be filed as part of an amendment to this report not later than the end of the 120-day period.

32

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



The
following consolidated financial statements of MOCON, Inc. and its subsidiaries are included herein:

PageReport of Independent Registered Public Accounting Firm


F-1Consolidated Balance Sheets as of December 31, 2008 and 2007


F-2Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006


F-3Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2008, 2007 and
2006


F-4Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006


F-5Notes to Consolidated Financial Statements


F-6




The
following financial statement schedule is included herein and should be read in conjunction with the consolidated financial statements referred to above:

Schedule II: Valuation and Qualifying Accounts


S-1




The
exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index.

A
copy of any of the exhibits listed or referred to above will be furnished at a reasonable cost to any person who was a shareholder of MOCON as of March 20, 2009, upon receipt
from any such person of a written request for any such exhibit. Such request should be sent to MOCON, Inc., 7500 Boone Avenue North, Minneapolis, Minnesota 55428; Attn: Shareholder Information.

The
following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant
to Item 15(a):



33

---





The
exhibits to this annual report on Form 10-K are listed in the Exhibit Index.



See Item 15(a)(2) above for the financial statement schedule filed herewith.

34

---





Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders
MOCON, Inc.:

Under
date of March 31, 2009, we reported on the consolidated balance sheets of MOCON, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008, as contained
in this annual report on Form 10-K for the year 2008. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated
financial statement schedule. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule
based on our audits.

In
our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects,
the information set forth therein.



Minneapolis,
Minnesota
March 31, 2009

35

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 31, 2009

MOCON, INC.By:

/s/ ROBERT L. DEMOREST Robert L. Demorest,Chairman of the Board, President and Chief Executive Officer
(principal executive officer)By:

/s/ DARRELL B. LEE Darrell B. Lee,Vice President, Chief Financial Officer, Treasurer and Secretary
(principal financial and accounting officer)


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities
indicated and on March 31, 2009.

Signature and Title/s/ ROBERT L. DEMOREST Robert L. Demorest, Chairman of the Board, President and Chief Executive Officer/s/ DEAN B. CHENOWETH Dean B. Chenoweth, Director/s/ DONALD N. DEMORETT Donald N. DeMorett, Director/s/ J. LEONARD FRAME J. Leonard Frame, Director/s/ ROBERT F. GALLAGHER Robert F. Gallagher, Director/s/ DANIEL W. MAYER Daniel W. Mayer, Director/s/ RONALD A. MEYER Ronald A. Meyer, Director/s/ RICHARD A. PROULX Richard A. Proulx, Director/s/ TOM C. THOMAS Tom C. Thomas, Director


36

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MOCON, INC. AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2008, 2007 and 2006

Table of Contents

PageReport of Independent Registered Public Accounting Firm


F-1Consolidated Balance Sheets


F-2Consolidated Statements of Income


F-3Consolidated Statements of Stockholders' Equity and Comprehensive Income


F-4Consolidated Statements of Cash Flows


F-5Notes to Consolidated Financial Statements


F-6


37

---





Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders
MOCON, Inc.:

We
have audited the accompanying consolidated balance sheets of MOCON, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of
income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MOCON, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.

/s/ KPMG LLPMinneapolis, Minnesota
March 31, 2009


F-1

---



MOCON, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2008 and 2007

2008

2007AssetsCurrent assets:Cash and cash equivalents

$
4,553,479

$
5,207,105Marketable securities, current


7,087,373


7,028,812Trade accounts receivable, less allowance for doubtful accounts of $137,182 in 2008 and $125,797 in 2007


4,514,359


4,291,224Other receivables


255,923


186,273Inventories


4,731,859


3,965,446Prepaid income taxes


465,641


Prepaid expensesother


385,264


335,104Deferred income taxes


362,773


291,943Total current assets


22,356,671


21,305,907Marketable securities, noncurrent


4,468,064


2,788,964Property, plant, and equipment, net


1,826,269


1,583,387Other assets:Goodwill


3,267,926


3,096,317Technology rights and other intangibles, net


659,298


572,675Deferred income taxes


298,094


252,729Other


76,905


73,518Total other assets


4,302,223


3,995,239Total assets

$
32,953,227

$
29,673,497Liabilities and Stockholders' EquityCurrent liabilities:Accounts payable

$
1,676,448

$
1,357,971Accrued compensation and vacation


1,498,428


1,340,500Other accrued expenses


310,828


304,750Accrued product warranties


229,087


201,373Accrued income taxes





68,670Dividends payable


503,308


442,244Deferred revenue


245,793


233,335Total current liabilities


4,463,892


3,948,843Obligations to former employees


55,522


60,387Accrued income taxes


215,820


279,000Total noncurrent liabilities


271,342


339,387Total liabilities


4,735,234


4,288,230Commitments and contingencies (Note 7)Stockholders' equity:Capital stockundesignated. Authorized 3,000,000 shares





Common stock$0.10 par value. Authorized 22,000,000 shares; issued and outstanding 5,592,314 shares in 2008 and 5,528,051 shares in 2007


559,231


552,805Capital in excess of par value


2,868,669


2,127,183Retained earnings


24,268,266


22,106,178Accumulated other comprehensive income


521,827


599,101Total stockholders' equity


28,217,993


25,385,267Total liabilities and stockholders' equity

$
32,953,227

$
29,673,497


See accompanying notes to consolidated financial statements.

F-2

---



MOCON, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 2008, 2007 and 2006

2008

2007

2006Sales:Products

$
28,016,390

$
25,659,362

$
24,464,091Consulting services


1,679,316


1,737,220


1,825,884Total sales


29,695,706


27,396,582


26,289,975Cost of sales:Products


11,136,392


10,398,764


10,181,366Consulting services


978,529


985,879


969,988Total cost of sales


12,114,921


11,384,643


11,151,354Gross profit


17,580,785


16,011,939


15,138,621Selling, general and administrative expenses


10,170,083


8,643,735


7,735,524Research and development expenses


1,950,754


2,030,157


1,942,786Operating income


5,459,948


5,338,047


5,460,311Other income, net


588,911


580,274


396,215Income before income taxes


6,048,859


5,918,321


5,856,526Income taxes


1,990,000


2,113,000


1,968,225Income from continuing operations


4,058,859


3,805,321


3,888,301Gain from discontinued operations, net of tax








22,225Net income

$
4,058,859

$
3,805,321

$
3,910,526Basic net income per common share:Income from continuing operations

$
0.73

$
0.69

$
0.72Gain from discontinued operations








Basic net income per common share

$
0.73

$
0.69

$
0.72Basic weighted average common shares outstanding:


5,565,801


5,500,767


5,429,511Diluted net income per common share:Income from continuing operations

$
0.72

$
0.67

$
0.71Gain from discontinued operations








Diluted net income per common share

$
0.72

$
0.67

$
0.71Diluted weighted average common shares outstanding:


5,649,208


5,682,562


5,525,483


See
accompanying notes to consolidated financial statements.

F-3

---



MOCON, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity and Comprehensive Income

Years ended December 31, 2008, 2007 and 2006

Common stockAccumulated
other
comprehensive
(loss) incomeNumber
of shares

Amount

Capital in
excess of
par value

Retained
earnings

TotalBalance, December 31, 2005


5,403,573

$
540,357

$
592,796

$
17,759,120

$
(93,655
)
$
18,798,618Stock options exercised


118,775


11,878


826,066








837,944Purchase and retirement of common stock


(53,073
)

(5,307
)

(469,881
)







(475,188
)Dividends declared ($0.30 per share)











(1,632,777
)




(1,632,777
)Stock-based compensation expense








187,553








187,553Tax benefit on stock plans








81,581








81,581Net income











3,910,526





3,910,526Cumulative translation adjustment














246,061


246,061Adjustment for unrealized gain on marketable equity securities














5,655


5,655Comprehensive income

















4,162,242Balance, December 31, 2006


5,469,275


546,928


1,218,115


20,036,869


158,061


21,959,973Stock options exercised


58,776


5,877


455,497








461,374Dividends declared ($0.315 per share)











(1,736,012
)




(1,736,012
)Stock-based compensation expense








393,153








393,153Tax benefit on stock plans








60,418








60,418Net income











3,805,321





3,805,321Cumulative translation adjustment














414,281


414,281Adjustment for unrealized gain on marketable equity securities














26,759


26,759Comprehensive income

















4,246,361Balance, December 31, 2007


5,528,051


552,805


2,127,183


22,106,178


599,101


25,385,267Stock options exercised


79,183


7,918


553,460








561,378Purchase and retirement of common stock


(14,920
)

(1,492
)

(139,836
)







(141,328
)Dividends declared ($0.34 per share)











(1,896,771
)




(1,896,771
)Stock-based compensation expense








303,292








303,292Tax benefit on stock plans








24,570








24,570Net income











4,058,859





4,058,859Cumulative translation adjustment














(54,518
)

(54,518
)Amortization of cumulative unrealized gain on marketable securities














(22,756
)

(22,756
)Comprehensive income

















3,981,585Balance, December 31, 2008


5,592,314

$
559,231

$
2,868,669

$
24,268,266

$
521,827

$
28,217,993


See accompanying notes to consolidated financial statements.

F-4

---



MOCON, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2008, 2007 and 2006

2008

2007

2006Cash flows from operating activities:Net income

$
4,058,859

$
3,805,321

$
3,910,526Adjustments to reconcile net income to net cash provided by operating activities:Gain from discontinued operations, net of tax








(22,225
)Stock-based compensation expense


303,292


393,153


187,553Loss (gain) on disposition of long-term assets


33,967


26,009


(147,457
)Depreciation and amortization


582,767


576,059


733,183Deferred income taxes


(118,456
)

116,696


23,228Excess tax benefit from employee stock plans


(24,570
)

(60,418
)

(81,581
)Changes in operating assets and liabilities, net of divestiture in 2006:Trade accounts receivable


(12,146
)

226,148


(149,279
)Other receivables


(70,230
)

(18,182
)

(41,033
)Inventories


(796,400
)

(289,435
)

331,593Prepaid income taxes


(476,565
)




Prepaid expensesother


(52,948
)

(82,246
)

61,798Accounts payable


61,065


50,617


142,671Accrued compensation and vacation


167,393


(18,891
)

276,279Other accrued expenses


8,962


(19,674
)

(126,826
)Accrued product warranties


30,280


(50,945
)

(53,748
)Accrued income taxes


(105,441
)

(202,180
)

(87,864
)Deferred revenue


12,501


(217,630
)

Net cash provided by operating activities


3,602,330


4,234,402


4,956,818Cash flows from investing activities:Purchases of marketable securities


(8,916,510
)

(9,822,218
)

(9,512,296
)Proceeds from sales or maturities of marketable securities


7,156,094


9,118,709


6,562,489Cash paid for acquisitions





(574,568
)

(433,339
)Proceeds from sale of subsidiary








478,721Purchases of property, plant and equipment


(719,641
)

(436,527
)

(462,324
)Proceeds from sale of fixed assets


7,554


9,595


139,534Purchases of patents and trademarks


(218,486
)

(136,065
)

(99,291
)Other


(3,387
)

98,490


(6,871
)Net cash used in investing activities


(2,694,376
)

(1,742,584
)

(3,333,377
)Cash flows from financing activities:Proceeds from the exercise of stock options


478,878


461,374


725,881Purchases and retirement of common stock


(58,828
)




(363,125
)Excess tax benefit from employee stock plans


24,570


60,418


81,581Dividends paid


(1,835,707
)

(1,703,965
)

(1,627,849
)Net cash used in financing activities


(1,391,087
)

(1,182,173
)

(1,183,512
)Discontinued operations:Net cash provided by investing activities








22,225Net cash provided by discontinued operations








22,225Effect of exchange rate changes on cash and cash equivalents


(170,493
)

348,418


197,565Net (decrease) increase in cash and cash equivalents


(653,626
)

1,658,063


659,719Cash and cash equivalents:Beginning of year


5,207,105


3,549,042


2,889,323End of year

$
4,553,479

$
5,207,105

$
3,549,042Supplemental disclosures of cash flow information:Cash paid during the year for income taxes

$
2,457,312

$
2,208,601

$
2,038,775Supplemental schedule of noncash investing and financing activities:Dividends accrued

$
503,308

$
442,244

$
410,196Unrealized holding gain on available-for-sale securities





26,759


5,655Amortization of cumulative unrealized gain on marketable securities


(22,756
)




Noncash purchase and retirement of common stock


(82,500
)




(112,063
)Noncash exercise of stock options


82,500





112,063


See accompanying notes to consolidated financial statements.

F-5

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008, 2007 and 2006

(1) Summary of Significant Accounting Policies

MOCON, Inc. (the Company) operates in a single industry segment: the developing, manufacturing and marketing of measurement, analytical, monitoring and consulting products for
customers in the barrier packaging, food, pharmaceutical, consumer products, industrial hygiene, air quality monitoring, oil and gas exploration and other industries throughout the world. The
following is a summary of the
significant accounting policies used in the preparation of the Company's consolidated financial statements.











F-6

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(1) Summary of Significant Accounting Policies (Continued)











F-7

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(1) Summary of Significant Accounting Policies (Continued)











F-8

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(1) Summary of Significant Accounting Policies (Continued)











F-9

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(1) Summary of Significant Accounting Policies (Continued)



F-10

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(1) Summary of Significant Accounting Policies (Continued)



F-11

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(2) Marketable Securities

The classification of our marketable securities was changed as of January 1, 2008 from available-for-sale to held-to-maturity. The
amortized cost and fair value for held-to-maturity securities by major security type at December 31, 2008, and amortized cost, gross unrealized holding gains, gross
unrealized
holding losses, and fair value for available-for-sale securities by major security type at December 31, 2007 were as follows:

2008Amortized
Cost

Fair
ValueHeld-to-maturity:Municipal bonds

$
4,603,040

$
4,614,136Certificates of deposit


6,949,870


6,949,972Unamortized holding gain on marketable securities


2,527


$
11,555,437

$
11,564,108




2007Amortized
Cost

Gross
Unrealized
Holding
Gains

Gross
Unrealized
Holding
Losses

Fair
ValueAvailable for sale:Municipal bonds

$
9,177,519

$
26,248

$
(991
)
$
9,202,776Certificates of deposit


614,974


26





615,000$
9,792,493

$
26,274

$
(991
)
$
9,817,776


There
were no gross realized gains or losses for the years ended December 31, 2008, 2007 and 2006.

Maturities
of investment securities classified as held-to-maturity at December 31, 2008 and available-for-sale at
December 31, 2007 were as follows:

2008

2007Amortized
Cost

Fair
Value

Amortized
Cost

Fair
ValueDue within one year

$
7,087,373

$
7,105,317

$
7,014,458

$
7,028,812Due after one year


4,465,537


4,458,791


2,778,035


2,788,964$
11,552,910

$
11,564,108

$
9,792,493

$
9,817,776


F-12

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(3) Inventories

The major components of inventories at December 31, 2008 and 2007 were as follows:

2008

2007Finished products

$
829,861

$
687,979Work-in-process


1,633,577


1,391,620Raw materials


2,268,421


1,885,847$
4,731,859

$
3,965,446


(4) Property, Plant and Equipment

Property, plant and equipment at December 31, 2008 and 2007 consisted of the following:

2008

2007

Estimated
useful livesLand

$
200,000

$
200,000

Buildings


742,755


445,833

27 yearsMachinery and equipment


3,127,428


3,289,146

3 to 10 yearsOffice equipment


1,111,484


1,021,117

2 to 15 yearsLeasehold improvements


658,864


655,153

1 to 5 yearsVehicles


260,192


262,449

3 to 5 yearsTotal property, plant and equipment


6,100,723


5,873,698Less accumulated depreciation


(4,274,454
)

(4,290,311
)Net property, plant and equipment

$
1,826,269

$
1,583,387


Depreciation
and amortization of property, plant and equipment charged to income was $464,015, $420,606 and $397,017 for the years ended December 31, 2008, 2007 and 2006,
respectively.

(5) Goodwill and Other Intangible Assets



As of December 31, 2008 and 2007, goodwill amounted to $3,267,926 and $3,096,317, respectively. The increase was due to foreign
currency translation relating to the acquisition of Paul Lippke Handels-GmbH. The Company completed its annual impairment tests during the fourth quarters of 2008 and 2007 and determined
there was no impairment.

F-13

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(5) Goodwill and Other Intangible Assets (Continued)



Other intangible assets (all of which are being amortized except projects in process) are as follows:

As of December 31, 2008Carrying
Amount

Accumulated
Amortization

NetPatents

$
860,422

$
(365,329
)
$
495,093Trademarks and trade names


465,756


(381,551
)

84,205Other intangibles


778,596


(698,596
)

80,000$
2,104,774

$
(1,445,476
)
$
659,298




As of December 31, 2007Carrying
Amount

Accumulated
Amortization

NetPatents

$
790,269

$
(328,883
)
$
461,386Trademarks and trade names


418,101


(306,812
)

111,289Other intangibles


698,596


(698,596
)

$
1,906,966

$
(1,334,291
)
$
572,675


Amortization
expense was $118,752, $155,453 and $276,717 in 2008, 2007 and 2006, respectively.

Estimated
amortization expense for the fiscal years 2009 to 2013 and thereafter is $82,403, $74,876, $61,103, $28,493, $23,730 and $102,071, respectively.

(6) Warranty

The Company provides a warranty for most of its products. Warranties are for periods ranging from ninety days to one year, and cover parts and labor for non-maintenance
repairs, at the Company location. Operator abuse, improper use, alteration, damage resulting from accident, or failure to follow manufacturer's directions are excluded from warranty coverage.

Warranty
expense is accrued at the time of sale based on historical claims experience. Warranty reserves are also accrued for special rework campaigns for known major product
modifications. The Company also offers extended warranty service contracts for select products when the factory warranty period expires.

F-14

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(6) Warranty (Continued)

Warranty
provisions and claims for the years ended December 31, 2008, 2007 and 2006 were as follows:

Description

Balance at
Beginning
of Year

Warranty
Provisions

Warranty
Claims

Balance at
End of YearYear ended December 31, 2006:Allowance for product warranties

$
327,015


266,706


346,984


246,737Year ended December 31, 2007:Allowance for product warranties

$
246,737


354,383


399,747


201,373Year ended December 31, 2008:Allowance for product warranties

$
201,373


416,043


388,329


229,087


(7) Commitments and Contingencies





Year Ending December 312009

$
459,6072010


258,4992011


122,7762012


122,7762013 and thereafter


355,814$
1,319,472








F-15

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(8) Income Taxes

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, several state jurisdictions, China and Germany. With limited exceptions, the Company is
no longer subject to income tax examinations by taxing authorities for taxable years before 2005.

Income
from continuing operations before income taxes was as follows:

2008

2007

2006Income before income taxes:Domestic

$
4,901,000

$
4,580,000

$
4,288,000Foreign


1,148,000


1,338,000


1,569,000Total

$
6,049,000

$
5,918,000

$
5,857,000


The
provision (benefit) for income taxes consists of the following:

2008

2007

2006Current tax expense:Federal

$
1,502,000

$
1,383,000

$
1,131,000State


170,000


178,000


137,000Foreign


414,000


570,000


677,000Total current expense


2,086,000


2,131,000


1,945,000Deferred tax expense:Federal


(66,000
)

33,000


86,000State


(7,000
)

4,000


10,000Foreign


(23,000
)

(55,000
)

(73,000
)Total deferred expense (benefit)


(96,000
)

(18,000
)

23,000Provision for income taxes

$
1,990,000

$
2,113,000

$
1,968,000


F-16

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(8) Income Taxes (Continued)

The
effective income tax rate varies from the federal statutory tax rate for the following reasons:

Percentage of pretax income
for years ended December 31,2008

2007

2006Tax at statutory federal income tax rate


34.0
%

34.0
%

34.0
%Increases (reductions) in taxes resulting from:State income taxes, net of federal benefit


2.1


2.0


1.7Sale of stock of subsidiary








(4.3
)Change in valuation allowance


0.7





4.1Export incentives








(1.4
)Domestic manufacturing deduction


(1.6
)

(1.7
)

(0.6
)Effect of foreign operations


(0.7
)

1.0


1.2Tax-exempt interest


(1.3
)

(0.9
)

(0.4
)Reduction of tax contingency accrual


(0.7
)




(0.9
)Stock option compensation


1.0


1.4


0.9Research credit


(0.8
)

(0.5
)

(0.4
)Other, net


0.2


0.4


(0.3
)Effective income tax rate


32.9
%

35.7
%

33.6
%


The
tax effect of significant temporary differences representing deferred tax assets and liabilities at December 31, 2008 and 2007 were as follows:

2008

2007Deferred tax assets:Allowance for doubtful accounts

$
34,000

$
41,000Inventory items


104,000


219,000Reserves and accruals


342,000


246,000Capital loss carryforward


321,000


324,000Compensation expensestock options


80,000


55,000NOL carryforward


43,000


Intangibles


55,000


Other


72,000


30,000Subtotal


1,051,000


915,000Less: Valuation allowance


(364,000
)

(324,000
)Total deferred tax assets


687,000


591,000Deferred tax liabilities:Fixed assets


(26,000
)

(20,000
)Other





(26,000
)Total deferred tax liabilities


(26,000
)

(46,000
)Net deferred tax asset

$
661,000

$
545,000


F-17

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MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(8) Income Taxes (Continued)

As
of December 31, 2008, the Company has determined that establishing a valuation allowance against the deferred tax assets is required since it is more likely than not that the
tax benefits of the $321,000 from the capital loss carryforward related to the sale of Lab Connections and the $43,000 from the operating losses in China, will not be realized through future taxable
income. However, the Company believes it is more likely than not that the remainder of its deferred tax assets at December 31, 2008 will be realized either through future taxable income or net
operating loss carrybacks.

As
of December 31, 2008, there were approximately $4,500,000 of accumulated undistributed earnings of subsidiaries outside the United States that are considered to be reinvested
indefinitely. No deferred tax liability has been provided on such earnings. If they were remitted to the Company, applicable U.S. federal and foreign withholding taxes would be partially offset by
available foreign tax credits.

The
Company adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109(FIN 48) on January 1, 2007, and upon adoption did not need to recognize an adjustment in the previously recorded liability for unrecognized income
tax benefits. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:

Balance at January 1, 2008

$
220,000Additions based on tax positions related to the current year


40,000Reductions based on tax positions related to the prior year


(92,000
)Balance at December 31, 2008

$
168,000


Included
in the balance of total unrecognized tax benefits at December 31, 2008 are potential benefits of $121,000 that if recognized would affect the effective tax rate on income
from continuing operations. The difference between this amount and the corresponding amount of gross unrecognized tax benefits related primarily to the deferred federal benefit for state income tax
related amounts.

The
Company does not anticipate that the total amount of unrecognized tax benefits will change significantly in the next twelve months.

The
Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Total accrued interest and penalties amounted to $48,000
and $55,000 on a gross basis at December 31, 2008 and 2007, respectively, and are excluded from the reconciliation of unrecognized tax benefits presented above.

(9) Stock-Based Compensation

As of December 31, 2008, the Company has reserved 232,000 shares of common stock for options and other stock-based incentive awards that are still available for grant under the
Company's 2006 stock incentive plan, and 848,562 shares for options that have been granted under either the Company's 2006 stock incentive plan or 1998 stock option plan but have not yet been
exercised.

F-18

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(9) Stock-Based Compensation (Continued)

Under
the Company's stock-based incentive plans, option exercise prices are 100% of the market value of the common stock at the date of grant, except for incentive options granted under
the 1998 and 2006 plans to persons owning more than 10% of the Company's stock, in which case the option price is 110% of the market value. Exercise periods are generally for seven to ten years.
Certain of the plans allow for the granting of nonqualified stock options. Upon the exercise of these nonqualified options, the Company may realize a compensation deduction allowable for income tax
purposes. The after-tax effect of these tax deductions is included in the accompanying consolidated financial statements as an addition to capital in excess of par value.

Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based
Payment(SFAS 123(R)) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors.
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award ultimately
expected to vest is recognized as expense over the requisite service period. Stock-based compensation expense recognized in the Company's Consolidated Statements of Income for 2008, 2007 and 2006
included compensation expense for share-based payment awards granted prior to, but not yet vested as of January 1, 2006. This compensation expense is based on the grant date fair value
estimated in accordance with the pro forma provisions of Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based
Compensation(SFAS 123). Compensation expense for the share-based payment awards granted subsequent to January 1, 2006 is based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). Stock-based compensation expense recognized in the Consolidated Statements of Income for 2008, 2007 and 2006 is based on awards
ultimately expected to vest, and therefore it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ materially from those estimates.

Stock-based
compensation expense recognized in the consolidated financial statements under SFAS 123(R) for 2008, 2007 and 2006 was as shown below:

Years Ended December 31,2008

2007

2006Total cost of stock-based compensation

$
303,292

$
393,153

$
187,553Amount capitalized in inventory and property and equipment








Amounts charged against income, before income taxes


303,292


393,153


187,553Amount of income tax benefit recognized in earnings


(44,896
)

(53,543
)

(13,515
)Amount charged against net income

$
258,396

$
339,610

$
174,038


The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model (Black-Scholes). The Company uses historical data to estimate the
expected price volatility, expected option life and expected forfeiture rate. The Company based its estimate of expected volatility for awards granted in 2008, 2007 and 2006 on daily historical
trading data of its common stock for a period equivalent to the expected term of the award. The risk-free interest rate is

F-19

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(9) Stock-Based Compensation (Continued)

based
on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The Company estimated the expected term consistent with historical exercise and cancellation
activity of its previous share-based grants with a ten-year contractual term. Forfeitures were based on historical experience. The dividend yield is calculated based upon the dividend
payments made during the prior four quarters as a percent of the average stock price for that period. The following assumptions were used to estimate the fair value of options granted during 2008,
2007 and 2006 using the Black-Scholes model:

2008

2007

2006Dividend yield


3.1
%

2.6
%

3.1
%Expected volatility


37
%

34
%

37
%Risk-free interest rate


2.1
%

4.0
%

4.6
%Expected lives (in years)


5.4


5.4


5.2


Information
regarding the Company's stock option plans for 2006, 2007 and 2008 was as follows:

Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
ValueOptions outstanding, December 31, 2005


850,449

$
7.70


6.7Granted


154,200


12.00


10.0Exercised


(118,775
)

7.05Cancelled or expired


(31,999
)

9.09Options outstanding, December 31, 2006


853,875


8.52


6.6

$
3,359,907Granted


95,850


10.95


7.0Exercised


(58,776
)

7.85Cancelled or expired


(34,512
)

11.26Options outstanding, December 31, 2007


856,437


8.73


5.4

$
2,061,171Granted


91,500


8.58


7.0Exercised


(79,183
)

7.09Cancelled or expired


(20,192
)

10.96Options outstanding, December 31, 2008


848,562

$
8.81


4.9

$
567,879Options exercisable, December 31, 2008


685,093

$
8.60


4.5

$
567,879


The
weighted average grant date fair value based on the Black-Scholes model for options granted in 2008, 2007 and 2006 was $2.16, $3.02 and $3.34, respectively. The Company issues new
shares of common stock upon exercise of stock options. The total intrinsic value of options exercised was $296,904, $216,882 and $290,942 during the years ended December 31, 2008, 2007 and
2006, respectively.

F-20

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(9) Stock-Based Compensation (Continued)

A
summary of the status of the Company's unvested option shares as of December 31, 2008 is as follows:

Number of
Shares

Weighted
Average
Grant Date
Fair ValueUnvested at December 31, 2007


185,542

$
2.93Options granted


91,500


2.16Options cancelled


(11,337
)

2.83Options vested


(102,236
)

2.98Unvested at December 31, 2008


163,469

$
2.47


As
of December 31, 2008, there was $403,772 of total unrecognized compensation cost related to unvested stock-based compensation granted under the Company's plans. That cost is
expected to be recognized over a weighted-average period of 1.7 years. The total fair value of option shares vested during the years 2008, 2007 and 2006 was $304,302, $394,818 and $187,576,
respectively.

(10) Other Income

Other income, net for 2008, 2007 and 2006 was as follows:

Years Ended December 31,2008

2007

2006Interest income on investments

$
575,094

$
565,441

$
412,882Foreign currency exchange gain (loss)


12,500


1,165


(19,152
)Other


1,317


13,668


2,485Total other income

$
588,911

$
580,274

$
396,215


(11) Stockholders' Equity

On November 5, 2005 the Company's board of directors authorized the repurchase of up to $2,000,000 in shares of the Company's common stock. As of December 31, 2008, there
was $1,578,047 remaining in this authorization.

F-21

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(12) Net Income per Common Share

The following table presents a reconciliation of the denominators used in the computation of net income per common sharebasic and net income per common
sharediluted for the years ended December 31, 2008, 2007 and 2006:

Years Ended December 31,2008

2007

2006Weighted shares of common stockoutstandingbasic


5,565,801


5,500,767


5,429,511Weighted shares of common stockassumed upon exercise of stock options


83,407


181,795


95,972Weighted shares of common stockoutstandingdiluted


5,649,208


5,682,562


5,525,483


Outstanding
stock options totaling 484,574, 140,850 and 179,200 at December 31, 2008, 2007 and 2006, have been excluded from the net income per common share calculations because
the effect on net income per common share would not have been dilutive.

(13) Product Line, Geographical and Significant Customer Information

The Company operates in a single industry segment which consists of the development, manufacturing and marketing of measurement, analytical, monitoring, and consulting products used to
detect, measure and analyze gases and chemical compounds for customers in the barrier packaging, food, pharmaceutical and other industries throughout the world.

The
following table summarizes total sales by product line for 2008, 2007 and 2006 respectively:

Years Ended December 31,2008

2007

2006Permeation products and services

$
15,850,027

$
14,428,823

$
14,604,579Gas, headspace and other analyzerproducts and services


12,490,244


11,478,501


10,072,101Other instruments and services


1,355,435


1,489,258


1,613,295Total sales

$
29,695,706

$
27,396,582

$
26,289,975


The
following table summarizes total sales, based upon the country to which sales to external customers were made for fiscal years 2008, 2007 and 2006. All of the Company's tangible
long-lived

F-22

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2008, 2007 and 2006

(13) Product Line, Geographical and Significant Customer Information (Continued)

assets
are located in the United States, except for an insignificant amount of property and equipment in Germany and China.

Years Ended December 31,2008

2007

2006Domestic sales

$
12,960,723

$
13,160,268

$
11,924,805Foreign sales:Europe


7,836,335


6,595,075


7,360,019Asia


6,144,822


5,309,901


4,842,523Other


2,753,826


2,331,338


2,162,628Total foreign sales


16,734,983


14,236,314


14,365,170Total sales

$
29,695,706

$
27,396,582

$
26,289,975


The
Company's products are marketed outside of North America through various independent representatives. One independent representative accounted for approximately 6% of our
consolidated sales in each of the years 2008, 2007 and 2006

No
single customer accounted for 10% or more of the Company's consolidated revenues in any of the fiscal years ended December 31, 2008, 2007 and 2006.

(14) Savings and Retirement Plan

The Company has a 401(k) Savings and Retirement Plan covering substantially all of its employees. The Company provides matching contributions in accordance with the plan. The Company's
contributions to this plan in 2008, 2007 and 2006 were $169,465, $85,145 and $77,915, respectively.

(15) Discontinued Operations

In July 2005, the Company sold substantially all of the assets used in its discontinued Vaculok product line. The Company received the final payment of $35,000 (approximately $22,000
after-tax) in 2006 related to the sale which is shown as a gain from discontinued operations on the Consolidated Statements of Income.

(16) Sale of Subsidiary

In February 2006, the Company sold all of the outstanding capital stock of Lab Connections, Inc. (LCI). Pursuant to the sale agreement, the Company received a cash payment of
approximately $517,000 in exchange for all the outstanding shares of LCI. As a result of the sale, the Company recognized an after-tax gain of approximately $92,000 in the first quarter
ended March 31, 2006. As a result of the sale, the Company entered into a manufacturing agreement with the purchaser to be the exclusive supplier of sample preparation products previously made
and sold by LCI.

Sales
of sample preparation products were approximately $133,000, $156,000 and $47,000 for 2008, 2007 and 2006, respectively.

F-23

---





MOCON, INC.  EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K  FOR THE YEAR ENDED DECEMBER 31, 2008

Exhibit No.

Exhibit

Method of Filing3.1

Restated Articles of Incorporation of MOCON, Inc.

Incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (File No. 000-09273)3.2

Third Restated Bylaws of MOCON, Inc.

Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on December 20, 2007 (File No. 000-09273)10.1

Office/Warehouse Lease, dated July 29, 1994, by and between MOCON, Inc. and DRESCO III, Inc.

Incorporated by reference to Exhibit 10.1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 000-09273)10.2

Lease Notification and Extension Agreement, dated June 6, 1997, by and between MOCON, Inc. and DRESCO III, Inc.

Incorporated by reference to Exhibit 10.2 to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 000-09273)10.3

Second Lease Notification and Extension Agreement, dated November 17, 1999, by and between MOCON, Inc. and Boone Associates LLC

Incorporated by reference to Exhibit 10.3 to our Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-09273)10.4

MOCON, Inc. 1998 Stock Option Plan, as amended

Incorporated by reference to Appendix A to our Definitive Proxy Statement on Form DEF-14A filed on April 9, 2002 (File No. 000-09273)10.5

Form of Incentive Stock Option Agreement between MOCON, Inc. and its Executive Officers under the MOCON, Inc. 1998 Stock Option Plan, as amended

Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K filed on December 29, 2004 (File No. 000-09273)10.6

Form of Non-Statutory Stock Option Agreement between MOCON, Inc. and its Non-Employee Directors and Executive Officers under the MOCON, Inc. 1998 Stock Option Plan, as amended

Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K filed on December 29, 2004 (File No. 000-09273)


---



Exhibit No.

Exhibit

Method of Filing10.7

MOCON, Inc. 2006 Stock Incentive Plan

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 23, 2006 (File No. 000-09273)10.8

Form of Incentive Stock Option Agreement between MOCON, Inc. and its Executive Officers under the MOCON, Inc. 2006 Stock Incentive Plan

Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on May 23, 2006 (File No. 000-09273)10.9

Form of Non-Statutory Stock Option Agreement between MOCON, Inc. and its Non-Employee Directors and Executive Officers under the MOCON, Inc. 2006 Stock Incentive Plan

Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on May 23, 2006 (File No. 000-09273)10.10

Form of Executive Severance Agreement

Incorporated by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (File No. 000-09273)10.11

2003 Compensation Committee resolution setting forth the MOCON Incentive Pay Plan

Incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 000-09273)10.12

Description of Non-Employee Director Retirement Plan

Incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (File No. 000-09273)10.13

Description of Non-Employee Director Compensation Arrangements

Filed herewith10.14

Description of Executive Officer Compensation Arrangements

Filed herewith21.1

Subsidiaries of MOCON, Inc.

Filed herewith23.1

Consent of Independent Registered Public Accounting Firm

Filed herewith31.1

Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith31.2

Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)

Furnished herewith


---



Exhibit No.

Exhibit

Method of Filing32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

Furnished herewith


---



Financial Statement Schedule:

IIValuation and Qualifying Accounts

All other schedules are omitted as the required information is inapplicable or the information is presented in our consolidated
financial statements or related notes.

Description

Balance at Beginning of Year

Charged to Costs and Expenses

Deductions

Balance at End of YearYear ended December 31, 2006:Allowance for doubtful accounts and sales returns

$
192,446


132,570


145,155


179,861Year ended December 31, 2007:Allowance for doubtful accounts and sales returns

$
179,861


23,209


77,273


125,797Year ended December 31, 2008:Allowance for doubtful accounts and sales returns

$
125,797


158,133


146,748


137,182


S-1

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