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

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FORM 10-K

|(Mark one)                                  |                                                                                   
|------------------------------------------- | ----------------------------------------------------------------------------------
|ý                                           | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2007
|o                                           | 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

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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

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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, 2007 (the last business day of the registrant's second quarter) as reported by the Nasdaq Global Market System, was
$58,690,867.

As
of March 18, 2008, 5,541,195 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 2008 Annual Meeting of Shareholders to be held May 16, 2008.



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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. Although some of the markets for our products are maturing, 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 this year 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
revenues, 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%, 56% and 56% of our consolidated sales in 2007, 2006 and 2005, 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 hand-held, compact and are sold to original equipment manufacturers (OEMs) of mobile equipment. Our gas
analyzer products are for use in

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(1) industrial
hygiene (detection of hazardous gases in the workplace), (2) hydrocarbon gas analysis for oil and gas exploration, (3) contaminant detection in the manufacture of
specialty gases, and (4) environmental monitoring (tracking the release of, or the presence of, toxic substances), such as the intentional release of toxic gases by terrorists which would be a
homeland security application.

Our
gas analyzer products accounted for approximately 21%, 18% and 16% of our consolidated sales in 2007, 2006 and 2005, 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 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 of instrument 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 17%, 15% and 15% of our consolidated sales in 2007, 2006 and 2005, respectively. We market these products under the names
PAC GUARD®, SKYE® and PAC CHECK®.



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%, 38% and 36% of our consolidated sales for 2007, 2006 and 2005, 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 consists 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 GC components that we purchase from third
parties, with GCs purchased from third parties, to form multidimensional GC analyzer systems. The multidimensional GC analyzers that are formed through the integration of gas chromatography components
with GCs 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%, 6% and 8% of our consolidated sales in 2007, 2006 and 2005, 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

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could
result in delays in our production while we locate an alternative supplier, which in turn could result in a loss of sales and income. To date, we have experienced no significant production
delays because of a supplier's inability to ship an acceptable component.

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 43 U.S. patents and 28 international patents. These patents will
expire during the period from 2008 through 2026.

We
own or have applied for certain trademarks which protect and identify our products. Our trademarks and service marks include the following registered marks: AQUATRACE®,
AQUATRAN®, AROMATRAN®, AROMATRAX®, COULOX®, HERSCH®, OPTIPERM®, OX-TRAN®, PAC CHECK®, PAC
GUARD®, PERMATRAN-C®, PERMATRAN-W®, piD-TECH®, SKYE® and VERICAP®. Our trademarks and
service marks have a life, subject to periodic maintenance of 10 to 20 years, 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 15 employees and
approximately 10 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 our 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, 2007, 2006 and 2005, 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%, 6% and 8% of our consolidated sales in the years 2007, 2006 and
2005, respectively.

Backlog

As of December 31, 2007, our total backlog was $3,384,510 for all of our products as compared to $2,460,147 and $1,799,273 as of December 31, 2006
and 2005, respectively. We anticipate shipping the majority of the current backlog in 2008.

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.

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We incurred expenses of $2,030,157, $1,942,786 and $1,765,662 during the fiscal years ended December 31, 2007, 2006 and 2005, 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, 2007, we had 120 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 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

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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.

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, although the price of some of the components that we purchase has
increased in the past several years due in part to our purchasing fewer of such components. Certain other material and labor costs have increased, but we believe that such increases are approximately
consistent with overall inflation rates. 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.

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

The
analytical and measurement instrument markets in which we operate have not shown significant growth in recent years. Although we have identified a number of strategies that we
believe will allow us to grow our business and increase our sales, including developing new products and technologies, developing new applications for our technologies, acquiring complementary
businesses and product lines, and strengthening our sales force, we cannot assure you 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. For example, in July 2005, we sold our Vaculok® vacuum insulated panel product
line which had
experienced poor financial performance since we acquired it in November 2003. 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.

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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 products may become noncompetitive or obsolete and we may have to develop new products in order to maintain or increase our revenues. 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 revenues or profits for us for a number of
years, if at all.

Any reduction in the level of capital expenditures by our customers could negatively impact our sales.

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 revenues, business
and results of operations.

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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 52% of our sales in 2007 and approximately 55% and 50% of our sales in 2006 and 2005, 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.

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

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

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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 $14.10 and a low sales price of $10.00 during 2007, 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.

Recently enacted and future changes in securities laws and regulations will increase our costs.

Changing
laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Global Market
rules, are creating challenges for publicly-held companies, including 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 required the expenditure of financial and managerial resources in 2007. Because management was required to
complete an assessment of the effectiveness of our internal controls over financial reporting in 2007 and will continue to be required to do so in future years, we expect these expenditures to
continue.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.    PROPERTIES

We lease an aggregate of 57,325 square feet of office, engineering, laboratory and production space in Minnesota, Texas, Germany and China. We believe that all of
our facilities are generally 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 2008.

12

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Lippke's
operations are located in Neuwied, Germany, and occupy approximately 4,025 square feet. This space is leased until June 2008. We are currently negotiating a long term lease for
a new facility that we expect to occupy by September 2008.

The
MOCON (Shanghai) Trading Co., Ltd. operations are located in Shanghai, China, and occupy approximately 1,000 square feet. This space is leased until March 2010.

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 2007.

ITEM 4A.    EXECUTIVE OFFICERS OF REGISTRANT

Our executive officers, their ages and their offices held, as of March 18, 2008, are as follows:

|Name                 |  | Age |  | Title                                                           
|-------------------- |  | --- |  | ----------------------------------------------------------------
|Robert L. Demorest   |  | 62  |  | Chairman of the Board, President and Chief Executive Officer    
|Daniel W. Mayer      |  | 57  |  | Executive Vice President                                        
|Darrell B. Lee       |  | 59  |  | Vice President, Chief Financial Officer, Treasurer and Secretary
|Douglas J. Lindemann |  | 50  |  | Vice President and General Manager                              

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.

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:

2007

2006Fiscal PeriodHigh

Low

Dividend

High

Low

Dividend1st Quarter

$
13.98

$
11.00

$
0.075

$
9.75

$
8.25

$
0.0752nd Quarter


14.10


10.87


0.080


10.02


8.27


0.0753rd Quarter


11.83


10.01


0.080


10.05


8.57


0.0754th Quarter


12.26


10.00


0.080


12.75


9.00


0.075


We
have paid quarterly cash dividends without interruption or decline since 1988. Cash dividends paid in 2007, 2006 and 2005 totaled $1,703,965, $1,627,849 and $1,502,284, 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.

Record Holders

As of March 18, 2008, there were 298 record holders of our common stock.

Issuer Repurchases of Equity Securities

We did not repurchase any shares of our common stock or other equity securities of MOCON registered pursuant to Section 12 of the Securities Exchange Act
of 1934, as amended, during the fourth quarter ended December 31, 2007. On November 9, 2005, our Board of Directors authorized the repurchase of up to $2,000,000 in shares of our common
stock. This repurchase program superseded the Board's previous stock repurchase authorizations. Our current stock repurchase program may be suspended or discontinued at any time, and at
December 31, 2007, we had $1,636,875 available for stock repurchases.

Recent Sales of Unregistered Securities

During the fourth quarter and year ended December 31, 2007, 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.

14

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ITEM 6.    SELECTED FINANCIAL DATA

|                                       |         | Years Ended December 31,
|-------------------------------------- | ------- | ------------------------
|
|
|CONSOLIDATED STATEMENT OF INCOME DATA: |         |                         
|Sales                                  |         | $                       
|Net income                             |         |                         
|Net income per common share:           |         |                         
|                                       | Basic   |                         
|                                       | Diluted |                         
|Cash dividends declared per share      |         |                         

|
|

|                                 |  | As of December 31,
|-------------------------------- |  | ------------------
|
|
|CONSOLIDATED BALANCE SHEET DATA: |  |                   
|Total assets                     |  | $                 
|Noncurrent liabilities           |  |                   
|Stockholders' equity             |  |                   

Our
acquisition of Lippke in 2004 affects the comparability of the information in the table above. The results of this subsidiary have been included from the effective date of purchase,
which includes $3,880,238, $4,132,428, $3,631,918 and $3,824,782, respectively, in net incremental sales for 2007, 2006, 2005 and 2004.

Sales
for the years 2005, 2004 and 2003 do not include $22,397, $143,316 and $17,365, respectively, for sales from the Vaculok product line, which amounts have been included in the
"discontinued operations" section of our Consolidated Statements of Income.

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 "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. Although some of the markets for our products are maturing, 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 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 this year 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.

During
the last three years, we divested two product lines to allow us to better concentrate on our core product lines, particularly our gas detection, measurement and analysis products.
In March 2005, we committed to a plan to discontinue production of our Vaculok® vacuum insulated panels and exit this product line which had experienced poor financial performance since it
was acquired in November 2003. We recorded a pre-tax charge to earnings in our first quarter 2005, totaling approximately $207,000, to reflect the results of operations and asset
impairment write-down associated with the discontinuation of our Vaculok business. The $207,000 charge included a non-cash asset impairment charge of $162,000 relating to
equipment and inventory used in the Vaculok business. We sold the assets associated with the vacuum insulated panel product line in July 2005 in exchange for an up front payment of $125,000, along
with the right to receive additional amounts upon the occurrence of certain post-closing events. As a result of the sale, we recognized a pre-tax gain of approximately $69,000
in the third quarter 2005. In the first quarter 2006, we received an additional $35,000 related to the sale which resulted in an after-tax gain of $22,225. Sales associated with our vacuum
insulated panel product line were not significant. The results of this line of business are shown in the "discontinued operations" section of our Consolidated Statements of Income, and further
explained in Note 15 to our consolidated financial statements included herein.

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

16

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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.

Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised),Share-Based Payment(SFAS 123 (R)) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors. As a result, during 2007 and 2006, our
results of operations reflected compensation expense for new stock options granted to the extent they vested in those years, and the unvested portion of previous stock option grants which also vested
during those years. The total amount charged to operations in 2007 and 2006 was $339,610 and $174,038, respectively. Our consolidated financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R). Therefore, the results for 2007 and 2006 are not directly comparable to prior periods.

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 2007 financial results and position included the initial opening and ongoing expenses of our
new China sales and technical support office which opened in March 2007. In addition, we recognized an increase in SOX 404 compliance costs as this was the first year of required management assessment
of internal controls. 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 this trend to continue for the foreseeable future, especially as a result of
our acquisition of Lippke, which thus far has had, and is expected to continue to have, a positive impact on our sales and earnings, particularly on our foreign permeation products business.

Our
research and development costs were approximately 7% of our consolidated sales for the years 2007, 2006 and 2005. On an annual basis, we currently intend to spend approximately 6% to
8% of our sales on research and development in the future.

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.

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, 2007, 2006 and 2005. Our

17

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historical
financial data were derived from our consolidated financial statements and related notes included in Item 8 of this report.

Percent of Sales2007

2006

2005Sales

100.0

100.0

100.0Cost of sales

41.6

42.4

43.9Gross profit

58.4

57.6

56.1Selling, general and administrative expenses

31.5

29.4

32.4Research and development expenses

7.4

7.4

7.2Operating income

19.5

20.8

16.5Other income, net

2.1

1.5

1.2Income before income taxes

21.6

22.3

17.7Income taxes

7.7

7.5

5.4Income from continuing operations

13.9

14.8

12.3Gain (loss) from discontinued operations, net of tax



0.1

(0.4
)Net income

13.9

14.9

11.9


The
following table summarizes total sales by product line for 2007, 2006 and 2005:

Years Ended December 31,2007

2006

2005Permeation products and services

$
14,428,823

$
14,604,579

$
13,711,970Gas, headspace and other analyzer products and services


11,478,501


10,072,101


8,875,847Other instruments and services


1,489,258


1,613,295


1,993,783Total sales

$
27,396,582

$
26,289,975

$
24,581,600


The
following table sets forth the relationship between various components of domestic and foreign sales for 2007, 2006 and 2005:

Years Ended December 31,2007

2006

2005Domestic sales

$
13,160,268

$
11,924,805

$
12,294,985Foreign Sales:Europe


6,595,075


7,360,019


5,802,034Asia


5,309,901


4,842,523


5,093,417Other


2,331,338


2,162,628


1,391,164Total foreign sales


14,236,314


14,365,170


12,286,615Total sales

$
27,396,582

$
26,289,975

$
24,581,600


Sales



Sales for 2007 were $27,396,582, an increase of 4% compared to $26,289,975 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.

18

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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 $13,160,268, or 48% of total sales in 2007, an increase of 10% compared to $11,924,805, or 45% of sales in 2006. Our foreign sales were $14,236,314, or 52% of total sales in 2007, a
decrease of 1% compared to $14,365,170, 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 $14,428,823 and
$14,604,579 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-W (for increased
sensitivity in measuring water vapor) and the Ox-Tran 2/10 (lower price point product for less sensitivity in oxygen measurement) were factors in this growth. We believe that the overall
market for our permeation products is maturing. However, the market for our permeation products outside of the United States, where the demand for sophisticated packaging and other products is
continuing to develop, is likely to grow. No assurance can be provided, however, that the international market for our permeation products will grow.

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 our 2007 and 2006 consolidated sales, respectively, increased $925,000, or 20% in 2007 to
$5,662,923 compared to $4,738,220 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 $805,000, or
21% in 2007
to $4,685,403 compared to $3,880,877 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. Due to the significant competition in the market for weighing products, we do not expect the sales of our
weighing and pharmaceutical products to significantly increase.

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.



Sales for 2006 were $26,289,975, an increase of 7% compared to $24,581,600 for 2005. This increase in sales was primarily the result of the increased foreign
sales volume of our permeation

19

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products,
gas analyzer products and weighing and pharmaceutical products, together with increased domestic sales volume of our headspace analyzer products, partially offset by decreases in the
domestic sales volume of our permeation products and gas analyzer products. In addition, sales of our sample preparation products for 2006 were approximately $458,000 lower than 2005 due to the sale
of our Lab Connections subsidiary in the first quarter 2006. Our domestic sales were $11,924,805, or 45% of total sales in 2006, a decrease of 3% compared to $12,294,985, or 50% of sales in 2005. Our
foreign sales were $14,365,170, or 55% of total sales in 2006, an increase of 17% compared to $12,286,615, or 50% of sales in 2005. The overall sales volume increase in 2006 was generally the result
of increased demand primarily in our foreign markets. The impact of any price increases was not significant in 2006.

Permeation Products and ServicesSales of our permeation products and services were $14,604,579 and
$13,711,970 in 2006 and 2005, respectively, or approximately 56% of our consolidated sales in both years. The $892,609, or 7% increase in permeation sales in 2006 compared to 2005, was primarily due
to a 13% increase in foreign sales partially offset by a decrease in domestic sales. Foreign permeation product sales benefited from a large order received from China in the amount of $659,000 in our
third quarter 2006, where we recently named a new sales representative organization. Also, sales to our European markets increased significantly in 2006 after a soft 2005.

Gas, Headspace and Other Analyzer Products and ServicesSales of our gas, headspace, and other
analyzer products and services, which accounted for 38% and 36% of our consolidated sales in 2006 and 2005, respectively, increased 13% in 2006 compared to 2005. Within this group, sales of our gas
analyzers and sensors through our Baseline subsidiary, which accounted for 18% and 16% of our 2006 and 2005 consolidated sales, respectively, increased 20% in 2006 to $4,738,220 compared to $3,959,426
in 2005. This increase was due in part to shipments of our new Series 8900 analyzers which began shipping in the second half of 2006. Baseline's foreign sales increased 111% in 2006 compared to
2005, while domestic sales decreased slightly over the same periods. The increase in foreign sales was primarily due to sales of new products to the carbonated beverage and OEM portable sensor
industries, as well as ongoing sales of equipment to the oil and gas drilling and semiconductor markets.

Sales
of our packaging products (headspace analyzers and leak detection), which accounted for 15% of our consolidated sales in both 2006 and 2005, increased 4% in 2006 to $3,880,877
compared to $3,732,740 in 2005. The increase resulted primarily from increased domestic demand for headspace analyzer products and increased foreign sales of leak detection analyzers, offset somewhat
by a decrease in foreign shipments of headspace analyzers. The increase in domestic headspace analyzer sales was due primarily to new products, including the PAC CHECK® Model 333
hand-held tri-gas analyzer for the meat packing industry, as well as increased sales and marketing emphasis.

Sales
of our weighing and pharmaceutical products, which accounted for 5% of our consolidated sales in both 2006 and 2005, increased 23% in 2006 compared to 2005. The increase resulted
exclusively from increased demand in our foreign markets and represented a small volume increase. 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 6% and 8% of our
consolidated sales in 2006 and 2005, respectively, decreased 19% in 2006 compared to 2005. This decrease was primarily due to a decrease in sales of $458,086 in 2006 compared to 2005 as a result of
the sale of Lab Connections which occurred in the first quarter 2006. This decrease was partially offset by a 23% increase in contract analytical testing and equipment sales through our Microanalytics
subsidiary and a 5% increase in our consulting and testing laboratory services.

20

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Gross Profit



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 carry higher margins.



Our gross profit percentages were 57.6% and 56.1% during 2006 and 2005, respectively. The increase in gross profit percentage resulted primarily from the
following factors. A higher percentage of our sales were from permeation equipment, which typically carry a higher margin than most of our other products. We moved most of the remaining production of
certain equipment at our Baseline operation to Minnesota which allowed for increased operational efficiencies and plant utilization. In addition, the sale of our Lab Connections subsidiary in the
first quarter 2006 helped our gross profit percentage by eliminating inefficiencies due to the low and sporadic volume of sales at Lab Connections.

Selling, General and Administrative Expenses



Selling, general and administrative expenses were $8,643,735 and $7,735,524, or 31.5% and 29.4% of sales in 2007 and 2006, respectively. The increase of $908,211
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.



Selling, general and administrative expenses were $7,735,524 and $7,962,804, or 29.4% and 32.4% of sales in 2006 and 2005, respectively. The decrease of $227,280
was due primarily to a lower headcount in 2006 as well as reduced operating expenses in our Lab Connections subsidiary which was sold during the first quarter 2006. Also, we incurred reduced
consulting costs related to Sarbanes-Oxley Act of 2002 (SOX) compliance in 2006 as compared to 2005 due to a postponement of the effective date of Section 404 of SOX for
non-accelerated filers until 2007.

Research and Development Expenses



Research and development (R&D) expenses were $2,030,157 and $1,942,786 in 2007 and 2006, respectively, or 7.4% of sales in both periods. The increase of $87,371
in 2007 compared to 2006 was in line with our plan to continue to develop products that meet our customers' needs. For the foreseeable future, we currently 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 in our niche markets and remain competitive.



Research and development expenses were $1,942,786 and $1,765,662, or 7.4% and 7.2% of sales in 2006 and 2005, respectively. The increase of $177,124 in 2006
compared to 2005 was the result of our focus on business development opportunities in our core product areas.

21

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Other Income, Net

Other income, net for 2007, 2006 and 2005 is as follows:

Years Ended December 31,2007

2006

2005Interest income on short-term investments

$
565,441

$
412,882

$
209,217Foreign currency exchange gain (loss)


1,165


(19,152
)

80,691Other


13,668


2,485


2,717Total other income

$
580,274

$
396,215

$
292,625


Interest
income increased approximately $153,000 from 2006 to 2007 due primarily to higher invested balances of cash and marketable securities. Total cash and marketable securities
increased approximately $2,390,000 from December 31, 2006 to December 31, 2007. Interest income increased
approximately $204,000 from 2005 to 2006 due to higher interest rates (the prime rate increased four times in 2006) and increased average cash and marketable security balances.

Income Tax Expense

Our provision for income taxes from continuing operations for 2007 was $2,113,000, or 35.7% of income before income taxes, compared to $1,968,225, 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 $1,968,225, 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 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 carry-forward.

Our
provision for income taxes from continuing operations was 30.6% of income before income taxes in 2005. The provision for 2005 was favorably impacted as the result of a $156,000
reduction in accrued income taxes related to the completion of an Internal Revenue Service examination.

We
implemented the provisions of FASB Interpretation 48,Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
109(FIN 48), effective January 1, 2007. The impact on our consolidated financial statements of adopting FIN 48 was insignificant; as a result we did not
record a cumulative effect adjustment to the January 1, 2007 balance of retained earnings.

We
anticipate our effective tax rate for the full year 2008 will range between 35% and 37%.

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

22

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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.

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 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, 2007 and 2006, we
had $125,797 and $179,861, 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, 2007 and 2006, we had $548,043 and
$642,433, 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 2007, 2006 or 2005.

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

23

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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, 2007 and 2006, we had $201,373 and $246,737, 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.

We
have significant amounts of deferred tax assets. 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 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 its deferred tax assets. At December 31, 2007
and 2006, we provided a valuation allowance in the approximate amount of $324,000 against our net deferred tax assets.

On
January 1, 2007, we adopted FIN 48,Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
109.Prior to adoption, our policy was to establish an accrual that reflected the probable outcome of known tax contingencies. The effects of final resolution, if any, were
recognized as changes to the effective income tax rate in the period of resolution. 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 recognize a tax accrual for estimated exposures associated with uncertain tax positions and
adjust this accrual in light of changing facts and circumstances. 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.

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 $2,388,331 during 2007 to $15,024,881 as of December 31, 2007, compared to $12,636,550 at
December 31, 2006. We describe the reasons for this increase below under the caption "Cash Flows from Operating Activities." Our working capital as of December 31, 2007 increased
$1,151,760 to $17,357,064, compared to $16,205,304 at December 31, 2006.

24

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We
invest a large portion of our available cash in highly liquid certificates of deposit, municipal bonds, corporate 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 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, capital expenditures, dividend payments and
authorized stock repurchases. 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, 2007, we had no commitments for any material capital expenditures.

Cash Flow



Our primary source of funds is cash provided by operating activities. Cash flow from operating activities totaled $4,234,402, $4,956,818 and $3,216,745 in 2007,
2006 and 2005, respectively. 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 decreases in accounts payable and accrued income taxes offset by a
reduction in trade accounts receivable. In 2006, cash provided by operating activities increased by $1,740,073 compared to 2005. This increase was due primarily to the increased
year-over-year income from continuing operations, a decrease in inventories, and an increase in accounts payable and accrued compensation offset by a reduction in accrued
income taxes and an increase 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 $1,742,584 in 2007 as compared to $3,333,377 in 2006 and $1,865,771 in 2005. Cash used for investment purchases, net of
maturities, was $703,509, $2,949,807 and $1,096,578 in 2007, 2006 and 2005, respectively. Cash received from the sale of our Lab Connections subsidiary was $478,721 in 2006. Purchases of property,
plant and equipment totaled $436,527 in 2007, primarily for additions of office, manufacturing and laboratory equipment, as compared to $462,324 and $232,360 in 2006 and 2005, respectively. We do not
believe that any major property, plant and equipment expenditures are required to accommodate our current level of operations, and we expect purchases in 2008 to be similar to the levels in 2007.

Cash
paid in acquisitions in 2007, 2006 and 2005 of $574,568, $433,339 and $549,257, respectively, were related to our purchase of Lippke. These amounts resulted from an adjustment of
the required

25

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earnout
payments between the minimum amount originally recorded and the amount paid, based on actual earnings of Lippke.



Cash used in financing activities operations totaled $1,182,173 in 2007 as compared to $1,183,512 in 2006 and $1,102,685 in 2005. The primary use of cash for
financing activities in 2007, 2006 and 2005 was for the payment of dividends to our shareholders, in the amounts of $1,703,965, $1,627,849 and $1,502,284, 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 2006, we repurchased
a total of $363,125 of our common stock and have not made any further purchases pursuant to this authorization, leaving a remaining balance of $1,636,875 in this authorization.

Cash
flow from the exercise of stock options generated $461,374, $725,881 and $399,599, for the years 2007, 2006 and 2005, respectively.

Contractual Obligations

The following table summarizes our future contractual cash obligations as of December 31, 2007 (in thousands):

|                               |                                    | Payments Due By Period
|------------------------------ | ---------------------------------- | ----------------------
|
|Operating leases               |                                    | $                     
|Inventory purchase obligations |                                    |                       
|                               |                                    |                       
|                               | Total contractual cash obligations |                       
|                               |                                    |                       

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 $279,000 at December 31, 2007. 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 amount and 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 committed to the signing of a long term lease in 2008 for a new facility which is being constructed in Germany for our use. The lease signing is contingent upon the facility being
completed on a timely basis and meeting our specifications.

We
are parties to a severance agreement with four 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.

26

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Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS 157,Fair Value Measurement(SFAS 157). The standard
provides guidance for using fair value to measure assets and liabilities. SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately
disclosed by level within
the fair value hierarchy. The statement is effective for us beginning in 2008. We currently do not expect the adoption of SFAS 157 to have a material impact on our financial position, results
of operations or cash flows.

In
February 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB
Statement 115(SFAS 159). 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 is effective for us beginning in 2008. We currently do not expect the adoption of SFAS 159 to have a material impact on our financial
position, results of operations or cash flows.

In
December 2007, the FASB issued SFAS 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. SFAS 141(R) is effective for us beginning in 2009. We are currently assessing the impact of SFAS 141(R) on our consolidated financial statements.

In
December 2007, the FASB issued SFAS 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, believe
this pronouncement will have no impact on our consolidated financial statements.

In
December 2007, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 110 (SAB 110) to amend the SEC's views discussed in Staff Accounting Bulletin
107 (SAB 107) and extend the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS No. 123(R). SAB 110 is effective for
us beginning January 1, 2008. We currently do not expect the adoption of SAB 110 to have a material impact on our financial position, results of operations or cash flows.

In
February 2008, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 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.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Substantially all of our marketable securities are at fixed interest rates. However, virtually all of the marketable securities mature in two years or less;
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 2007, a 1% (100 basis points)
decrease in the interest rate on such balances would result in a reduction in interest income of approximately $138,000 on an annual basis.

Foreign Currency Exchange Risk

Historically, approximately 50% of our consolidated sales have been to international destinations. Since we invoice these customers in U.S. dollars, we are
not exposed to foreign currency transaction risk. However, our foreign operations expose us to foreign currency exchange risk when the euro 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.

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

|                             |         | Quarter
|---------------------------- | ------- | -------
|
|2007:                        |         |        
|Sales                        |         | $      
|Gross profit                 |         |        
|Net income                   |         |        
|Net income per common share: |         |        
|                             | Basic   |        
|                             | Diluted |        
|2006:                        |         |        
|Sales                        |         | $      
|Gross profit                 |         |        
|Net income                   |         |        
|Net income per common share: |         |        
|                             | Basic   |        
|                             | Diluted |        

|
|

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

Not applicable.

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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 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, 2007.

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, 2007 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

29

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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.

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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 2007, 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 will provide, free of charge, a copy of our Code of Ethics to any person who requests a copy. To request a copy of 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.

The
following table summarizes outstanding options under our equity compensation plans as of December 31, 2007. Our only equity compensation plans as of December 31, 2007
were the

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MOCON, Inc.
2006 Stock Incentive Plan, the MOCON, Inc. 1998 Stock Option Plan and the MOCON, Inc. 1992 Stock Option Plan. The MOCON, Inc. 1998 Stock Option Plan and the
MOCON, Inc. 1992 Stock Option Plan have 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             |       | 856,437                                                                                     |         | $                                                                           | 8.73 |                                                                                                                                              
|Equity compensation plans not approved by security holders holders |       |                                                                                            |         |                                                                             |     |                                                                                                                                              
|                                                                   |       |                                                                                             |         |                                                                             |      |                                                                                                                                              
|                                                                   | Total |                                                                                             | 856,437 |                                                                             | $    | 8.73                                                                                                                                         
|                                                                   |       |                                                                                             |         |                                                                             |      |                                                                                                                                              

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:

|                                                                                                                              |  | Page
|----------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm                                                                       |  | F-1 
|Consolidated Balance Sheets as of December 31, 2007 and 2006                                                                  |  | F-2 
|Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005                                        |  | F-3 
|Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2007, 2006 and 2005 |  | F-4 
|Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005                                    |  | F-5 
|Notes 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 18, 2008, 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

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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

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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders
MOCON, Inc.:

Under
date of March 31, 2008, we reported on the consolidated balance sheets of MOCON, Inc. and subsidiaries as of December 31, 2007 and 2006, 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, 2007, as contained
in this annual report on Form 10-K for the year 2007. 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.

As
discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment,"on January 1, 2006.

| |  | /s/ KPMG LLP
| |  | ------------

Minneapolis,
Minnesota
March 31, 2008

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, 2008 |  | MOCON, INC.
|-------------------- |  | -----------
|                     |  | By:        
|                     |  | By:        

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, 2008.

| |  | Signature and Title                                                                                  
| |  | -----------------------------------------------------------------------------------------------------
| |  | /s/ROBERT L. DEMORESTRobert L. Demorest, Chairman of the Board, President and Chief Executive Officer
| |  | /s/DEAN B. CHENOWETHDean B. Chenoweth, Director                                                      
| |  | /s/DONALD N. DEMORETTDonald N. DeMorett, Director                                                    
| |  | /s/J. LEONARD FRAMEJ. Leonard Frame, Director                                                        
| |  | /s/ROBERT F. GALLAGHERRobert F. Gallagher, Director                                                  
| |  | /s/DANIEL W. MAYERDaniel W. Mayer, Director                                                          
| |  | /s/RONALD A. MEYERRonald A. Meyer, Director                                                          
| |  | /s/RICHARD A. PROULXRichard A. Proulx, Director                                                      
| |  | /s/TOM C. THOMASTom C. Thomas, Director                                                              

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MOCON, INC. AND SUBSIDIARIES        Consolidated Financial Statements        December 31, 2007, 2006 and 2005

Table of Contents

|                                                                         |  | Page
|------------------------------------------------------------------------ |  | ----
|Report of Independent Registered Public Accounting Firm                  |  | F-1 
|Consolidated Balance Sheets                                              |  | F-2 
|Consolidated Statements of Income                                        |  | F-3 
|Consolidated Statements of Stockholders' Equity and Comprehensive Income |  | F-4 
|Consolidated Statements of Cash Flows                                    |  | F-5 
|Notes 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, 2007 and 2006, 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, 2007. 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, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles.

As
discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment,"on January 1, 2006.

|                                      |  | /s/ KPMG LLP
|------------------------------------- |  | ------------
|Minneapolis, Minnesota
March 31, 2008 |  |             

F-1

---





MOCON, INC. AND SUBSIDIARIES        Consolidated Balance Sheets        December 31, 2007 and 2006

|                                       |                                                                                                                                          | 2007                                       |           | 2006      
|-------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ----------
|Assets                                 |                                                                                                                                          |                                            |           |           
|Current assets:                        |                                                                                                                                          |                                            |           |           
|                                       | Cash and cash equivalents                                                                                                                |                                            | $         | 5,207,105 
|                                       | Marketable securities, current                                                                                                           |                                            |           | 7,028,812 
|                                       | Trade accounts receivable, less allowance for doubtful accounts of $125,797 in 2007 and $179,861 in 2006                                 |                                            |           | 4,291,224 
|                                       | Other receivables                                                                                                                        |                                            |           | 186,273   
|                                       | Inventories                                                                                                                              |                                            |           | 3,965,446 
|                                       | Prepaid expenses                                                                                                                         |                                            |           | 335,104   
|                                       | Deferred income taxes                                                                                                                    |                                            |           | 291,943   
|                                       |                                                                                                                                          |                                            |           |           
|                                       |                                                                                                                                          | Total current assets                       |           |           
|                                       |                                                                                                                                          |                                            |           |           
|Marketable securities, noncurrent      |                                                                                                                                          |                                            | 2,788,964 |           
|Property, plant, and equipment, net    |                                                                                                                                          |                                            | 1,583,387 |           
|Other assets:                          |                                                                                                                                          |                                            |           |           
|                                       | Goodwill                                                                                                                                 |                                            |           | 3,096,317 
|                                       | Technology rights and other intangibles, net                                                                                             |                                            |           | 572,675   
|                                       | Deferred income taxes                                                                                                                    |                                            |           | 252,729   
|                                       | Other                                                                                                                                    |                                            |           | 73,518    
|                                       |                                                                                                                                          |                                            |           |           
|                                       |                                                                                                                                          | Total other assets                         |           |           
|                                       |                                                                                                                                          |                                            |           |           
|                                       |                                                                                                                                          | Total assets                               |           | $         
|                                       |                                                                                                                                          |                                            |           |           
|Liabilities and Stockholders' Equity   |                                                                                                                                          |                                            |           |           
|Current liabilities:                   |                                                                                                                                          |                                            |           |           
|                                       | Accounts payable                                                                                                                         |                                            | $         | 1,591,306 
|                                       | Accrued compensation and vacation                                                                                                        |                                            |           | 1,340,500 
|                                       | Earnout payable                                                                                                                          |                                            |           |          
|                                       | Other accrued expenses                                                                                                                   |                                            |           | 304,750   
|                                       | Accrued product warranties                                                                                                               |                                            |           | 201,373   
|                                       | Accrued income taxes                                                                                                                     |                                            |           | 68,670    
|                                       | Dividends payable                                                                                                                        |                                            |           | 442,244   
|                                       |                                                                                                                                          |                                            |           |           
|                                       |                                                                                                                                          | Total current liabilities                  |           |           
|Obligations to former employees        |                                                                                                                                          |                                            | 60,387    |           
|Accrued income taxes                   |                                                                                                                                          |                                            | 279,000   |           
|                                       |                                                                                                                                          |                                            |           |           
|                                       |                                                                                                                                          | Total noncurrent liabilities               |           |           
|                                       |                                                                                                                                          |                                            |           |           
|                                       |                                                                                                                                          | Total liabilities                          |           |           
|                                       |                                                                                                                                          |                                            |           |           
|Commitments 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 5,528,051 shares in 2007 and 5,469,275 shares in 2006 |                                            |           | 552,805   
|                                       | Capital in excess of par value                                                                                                           |                                            |           | 2,127,183 
|                                       | Retained earnings                                                                                                                        |                                            |           | 22,106,178
|                                       | Accumulated other comprehensive income                                                                                                   |                                            |           | 599,101   
|                                       |                                                                                                                                          |                                            |           |           
|                                       |                                                                                                                                          | Total stockholders' equity                 |           |           
|                                       |                                                                                                                                          |                                            |           |           
|                                       |                                                                                                                                          | Total liabilities and stockholders' equity |           | $         
|                                       |                                                                                                                                          |                                            |           |           

See accompanying notes to consolidated financial statements.

F-2

---





MOCON, INC. AND SUBSIDIARIES        Consolidated Statements of Income        Years ended December 31, 2007, 2006 and 2005

|                                                     |                                                     | 2007                                |           | 2006       |            | 2005      |           
|---------------------------------------------------- | --------------------------------------------------- | ----------------------------------- | --------- | ---------- | ---------- | --------- | ----------
|Sales:                                               |                                                     |                                     |           |            |            |           |           
|                                                     | Products                                            |                                     | $         | 25,659,362 |            | $         | 24,464,091
|                                                     | Consulting services                                 |                                     |           | 1,737,220  |            |           | 1,825,884 
|                                                     |                                                     |                                     |           |            |            |           |           
|                                                     |                                                     | Total sales                         |           |            | 27,396,582 |           |           
|                                                     |                                                     |                                     |           |            |            |           |           
|Cost of sales:                                       |                                                     |                                     |           |            |            |           |           
|                                                     | Products                                            |                                     |           | 10,398,764 |            |           | 10,181,366
|                                                     | Consulting services                                 |                                     |           | 985,879    |            |           | 969,988   
|                                                     |                                                     |                                     |           |            |            |           |           
|                                                     |                                                     | Total cost of sales                 |           |            | 11,384,643 |           |           
|                                                     |                                                     |                                     |           |            |            |           |           
|                                                     |                                                     | Gross profit                        |           |            | 16,011,939 |           |           
|Selling, general and administrative expenses         |                                                     |                                     | 8,643,735 |            |            | 7,735,524 |           
|Research and development expenses                    |                                                     |                                     | 2,030,157 |            |            | 1,942,786 |           
|                                                     |                                                     |                                     |           |            |            |           |           
|                                                     |                                                     | Operating income                    |           |            | 5,338,047  |           |           
|Other income, net                                    |                                                     |                                     | 580,274   |            |            | 396,215   |           
|                                                     |                                                     |                                     |           |            |            |           |           
|                                                     |                                                     | Income before income taxes          |           |            | 5,918,321  |           |           
|Income taxes                                         |                                                     |                                     | 2,113,000 |            |            | 1,968,225 |           
|                                                     |                                                     |                                     |           |            |            |           |           
|                                                     |                                                     | Income from continuing operations   |           |            | 3,805,321  |           |           
|Gain (loss) from discontinued operations, net of tax |                                                     |                                     |          |            |            | 22,225    |           
|                                                     |                                                     |                                     |           |            |            |           |           
|                                                     |                                                     | Net income                          |           | $          | 3,805,321  |           | $         
|                                                     |                                                     |                                     |           |            |            |           |           
|Basic net income per common share:                   |                                                     |                                     |           |            |            |           |           
|                                                     | Income from continuing operations                   |                                     | $         | 0.69       |            | $         | 0.72      
|                                                     | Loss from discontinued operations                   |                                     |           |           |            |           |          
|                                                     |                                                     |                                     |           |            |            |           |           
|Basic net income per common share                    |                                                     | $                                   | 0.69      |            | $          | 0.72      |           
|                                                     |                                                     |                                     |           |            |            |           |           
|                                                     | Basic weighted average common shares outstanding:   |                                     |           | 5,500,767  |            |           | 5,429,511 
|                                                     |                                                     |                                     |           |            |            |           |           
|Diluted net income per common share:                 |                                                     |                                     |           |            |            |           |           
|                                                     | Income from continuing operations                   |                                     | $         | 0.67       |            | $         | 0.71      
|                                                     | Loss from discontinued operations                   |                                     |           |           |            |           |          
|                                                     |                                                     |                                     |           |            |            |           |           
|                                                     |                                                     | Diluted net income per common share |           | $          | 0.67       |           | $         
|                                                     |                                                     |                                     |           |            |            |           |           
|                                                     | Diluted weighted average common shares outstanding: |                                     |           | 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, 2007, 2006 and 2005

|                           |                                                                | Common stock |         | Capital in |         |        |   | Accumulated
other |          |   |           
|-------------------------- | -------------------------------------------------------------- | ------------ | ------- | ---------- | ------- | ------ | - | ----------------- | -------- | - | ----------
|
|Balance, December 31, 2004 |                                                                | 5,338,489    |         | $          | 533,849 |        | $ | 199,705           |          | $ | 16,377,709
|                           | Stock options exercised                                        |              | 70,404  |            |         | 7,040  |   |                   | 443,496  |   |           
|                           | Purchase and retirement of common stock                        |              | (5,320  | )          |         | (532   | ) |                   | (50,405  | ) |           
|                           | Dividends declared ($0.285 per share)                          |              |        |            |         |       |   |                   |         |   |           
|                           | Net income                                                     |              |        |            |         |       |   |                   |         |   |           
|                           | Cumulative translation adjustment                              |              |        |            |         |       |   |                   |         |   |           
|                           | Adjustment for unrealized loss on marketable equity securities |              |        |            |         |       |   |                   |         |   |           
|                           |                                                                |              |         |            |         |        |   |                   |          |   |           
|                           | Comprehensive income                                           |              |         |            |         |        |   |                   |          |   |           
|                           |                                                                |              |         |            |         |        |   |                   |          |   |           
|Balance, December 31, 2005 |                                                                | 5,403,573    |         |            | 540,357 |        |   | 592,796           |          |   | 17,759,120
|                           | Stock options exercised                                        |              | 118,775 |            |         | 11,878 |   |                   | 826,066  |   |           
|                           | Purchase and retirement of common stock                        |              | (53,073 | )          |         | (5,307 | ) |                   | (469,881 | ) |           
|                           | Dividends declared ($0.30 per share)                           |              |        |            |         |       |   |                   |         |   |           
|                           | Stock compensation expense                                     |              |        |            |         |       |   |                   | 187,553  |   |           
|                           | Tax benefit on stock plans                                     |              |        |            |         |       |   |                   | 81,581   |   |           
|                           | Net income                                                     |              |        |            |         |       |   |                   |          |   |           
|                           | Cumulative translation adjustment                              |              |        |            |         |       |   |                   |         |   |           
|                           | Adjustment for unrealized gain on marketable equity securities |              |        |            |         |       |   |                   |         |   |           
|                           |                                                                |              |         |            |         |        |   |                   |          |   |           
|                           | Comprehensive income                                           |              |         |            |         |        |   |                   |          |   |           
|                           |                                                                |              |         |            |         |        |   |                   |          |   |           
|Balance, December 31, 2006 |                                                                | 5,469,275    |         |            | 546,928 |        |   | 1,218,115         |          |   | 20,036,869
|                           | Stock options exercised                                        |              | 58,776  |            |         | 5,877  |   |                   | 455,497  |   |           
|                           | Dividends declared ($0.315 per share)                          |              |        |            |         |       |   |                   |         |   |           
|                           | Stock compensation expense                                     |              |        |            |         |       |   |                   | 393,153  |   |           
|                           | Tax benefit on stock plans                                     |              |        |            |         |       |   |                   | 60,418   |   |           
|                           | Net income                                                     |              |        |            |         |       |   |                   |         |   |           
|                           | Cumulative translation adjustment                              |              |        |            |         |       |   |                   |         |   |           
|                           | Adjustment for unrealized gain on marketable equity securities |              |        |            |         |       |   |                   |         |   |           
|                           |                                                                |              |         |            |         |        |   |                   |          |   |           
|                           | Comprehensive income                                           |              |         |            |         |        |   |                   |          |   |           
|                           |                                                                |              |         |            |         |        |   |                   |          |   |           
|Balance, December 31, 2007 |                                                                | 5,528,051    |         | $          | 552,805 |        | $ | 2,127,183         |          | $ | 22,106,178
|                           |                                                                |              |         |            |         |        |   |                   |          |   |           

See accompanying notes to consolidated financial statements.

F-4

---





MOCON, INC. AND SUBSIDIARIES        Consolidated Statements of Cash Flows        Years ended December 31, 2007, 2006 and 2005

|                                                                     |                                                                                   | 2007                                                                               |                                   | 2006                                         |         | 2005     |           
|-------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------- | -------------------------------------------- | ------- | -------- | ----------
|Cash flows from operating activities:                                |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|                                                                     | Net income                                                                        |                                                                                    | $                                 | 3,805,321                                    |         | $        | 3,910,526 
|                                                                     | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                                    |                                   |                                              |         |          |           
|                                                                     |                                                                                   | (Gain) loss from discontinued operations, net of tax                               |                                   |                                              |        |          |           
|                                                                     |                                                                                   | Share-based compensation expense                                                   |                                   |                                              | 393,153 |          |           
|                                                                     |                                                                                   | Loss (gain) on disposition of long-term assets                                     |                                   |                                              | 26,009  |          |           
|                                                                     |                                                                                   | Depreciation and amortization                                                      |                                   |                                              | 576,059 |          |           
|                                                                     |                                                                                   | Deferred income taxes                                                              |                                   |                                              | 116,696 |          |           
|                                                                     |                                                                                   | Excess tax benefit from employee stock plans                                       |                                   |                                              | (60,418 | )        |           
|                                                                     |                                                                                   | Changes in operating assets and liabilities, net of divestitures in 2006 and 2005: |                                   |                                              |         |          |           
|                                                                     |                                                                                   |                                                                                    | Trade accounts receivable         |                                              |         | 226,148  |           
|                                                                     |                                                                                   |                                                                                    | Other receivables                 |                                              |         | (18,182  | )         
|                                                                     |                                                                                   |                                                                                    | Inventories                       |                                              |         | (289,435 | )         
|                                                                     |                                                                                   |                                                                                    | Prepaid expenses                  |                                              |         | (82,246  | )         
|                                                                     |                                                                                   |                                                                                    | Accounts payable                  |                                              |         | (167,013 | )         
|                                                                     |                                                                                   |                                                                                    | Accrued compensation and vacation |                                              |         | (18,891  | )         
|                                                                     |                                                                                   |                                                                                    | Other accrued expenses            |                                              |         | (19,674  | )         
|                                                                     |                                                                                   |                                                                                    | Accrued product warranties        |                                              |         | (50,945  | )         
|                                                                     |                                                                                   |                                                                                    | Accrued income taxes              |                                              |         | (202,180 | )         
|                                                                     |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|                                                                     |                                                                                   |                                                                                    |                                   | Net cash provided by operating activities    |         |          | 4,234,402 
|                                                                     |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|Cash flows from investing activities:                                |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|                                                                     | Purchases of marketable securities                                                |                                                                                    |                                   | (9,822,218                                   | )       |          | (9,512,296
|                                                                     | Proceeds from sales or maturities of marketable securities                        |                                                                                    |                                   | 9,118,709                                    |         |          | 6,562,489 
|                                                                     | Cash paid for acquisitions                                                        |                                                                                    |                                   | (574,568                                     | )       |          | (433,339  
|                                                                     | Proceeds from sale of subsidiary                                                  |                                                                                    |                                   |                                             |         |          | 478,721   
|                                                                     | Purchases of property, plant and equipment                                        |                                                                                    |                                   | (436,527                                     | )       |          | (462,324  
|                                                                     | Proceeds from sale of fixed assets                                                |                                                                                    |                                   | 9,595                                        |         |          | 139,534   
|                                                                     | Purchases of patents and trademarks                                               |                                                                                    |                                   | (136,065                                     | )       |          | (99,291   
|                                                                     | Other                                                                             |                                                                                    |                                   | 98,490                                       |         |          | (6,871    
|                                                                     |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|                                                                     |                                                                                   |                                                                                    |                                   | Net cash used in investing activities        |         |          | (1,742,584
|                                                                     |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|Cash flows from financing activities:                                |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|                                                                     | Proceeds from the exercise of stock options                                       |                                                                                    |                                   | 461,374                                      |         |          | 725,881   
|                                                                     | Purchases and retirement of common stock                                          |                                                                                    |                                   |                                             |         |          | (363,125  
|                                                                     | Excess tax benefit from employee stock plans                                      |                                                                                    |                                   | 60,418                                       |         |          | 81,581    
|                                                                     | Dividends paid                                                                    |                                                                                    |                                   | (1,703,965                                   | )       |          | (1,627,849
|                                                                     |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|                                                                     |                                                                                   |                                                                                    |                                   | Net cash used in financing activities        |         |          | (1,182,173
|                                                                     |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|Discontinued operations:                                             |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|                                                                     | Net cash provided by operating activities                                         |                                                                                    |                                   |                                             |         |          |          
|                                                                     | Net cash provided by investing activities                                         |                                                                                    |                                   |                                             |         |          | 22,225    
|                                                                     |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|                                                                     |                                                                                   |                                                                                    |                                   | Net cash provided by discontinued operations |         |          |          
|                                                                     |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|Effect of exchange rate changes on cash and cash equivalents         |                                                                                   |                                                                                    | 348,418                           |                                              |         | 197,565  |           
|                                                                     |                                                                                   |                                                                                    |                                   | Net increase in cash and cash equivalents    |         |          | 1,658,063 
|Cash and cash equivalents:                                           |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|                                                                     | Beginning of year                                                                 |                                                                                    |                                   | 3,549,042                                    |         |          | 2,889,323 
|                                                                     |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|                                                                     | End of year                                                                       |                                                                                    | $                                 | 5,207,105                                    |         | $        | 3,549,042 
|                                                                     |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|Supplemental disclosures of cash flow information:                   |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|                                                                     | Cash paid during the year for income taxes                                        |                                                                                    | $                                 | 2,208,601                                    |         | $        | 2,038,775 
|Supplemental schedule of noncash investing and financing activities: |                                                                                   |                                                                                    |                                   |                                              |         |          |           
|                                                                     | Dividends accrued                                                                 |                                                                                    | $                                 | 442,244                                      |         | $        | 410,196   
|                                                                     | Unrealized holding gain (loss) on available-for-sale securities                   |                                                                                    |                                   | 26,759                                       |         |          | 5,655     
|                                                                     | Noncash purchase and retirement of common stock                                   |                                                                                    |                                   |                                             |         |          | 112,063   
|                                                                     | Noncash exercise of stock options                                                 |                                                                                    |                                   |                                             |         |          | 112,063   

See accompanying notes to consolidated financial statements.

F-5

---





MOCON, INC. AND SUBSIDIARIES        Notes to Consolidated Financial Statements        December 31, 2007, 2006 and 2005

(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, 2007, 2006 and 2005

(1) Summary of Significant Accounting Policies (Continued)









F-7

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(1) Summary of Significant Accounting Policies (Continued)











F-8

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(1) Summary of Significant Accounting Policies (Continued)







F-9

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(1) Summary of Significant Accounting Policies (Continued)



F-10

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(1) Summary of Significant Accounting Policies (Continued)





F-11

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(2) Marketable Securities

The 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 and 2006 were as follows:

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


|
|

2006Amortized
Cost

Gross
Unrealized
Holding
Gains

Gross
Unrealized
Holding
Losses

Fair
ValueAvailable for sale:Municipal bonds

$
4,115,512

$
437

$
(1,851
)
$
4,114,098Certificates of deposit


4,773,472


119


(81
)

4,773,510Government bonds


200,000





(100
)

199,900$
9,088,984

$
556

$
(2,032
)
$
9,087,508


There
were no gross realized gains or losses for the years ended December 31, 2007, 2006 and 2005.

Maturities
of investment securities classified as available-for-sale were as follows at December 31, 2007 and 2006:

2007

2006Amortized
Cost

Fair
Value

Amortized
Cost

Fair
ValueAvailable for sale:Due within one year

$
7,014,458

$
7,028,812

$
8,711,746

$
8,710,390Due after one year


2,778,035


2,788,964


377,238


377,118$
9,792,493

$
9,817,776

$
9,088,984

$
9,087,508


F-12

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(3) Inventories

The major components of inventories at December 31, 2007 and 2006 were as follows:

2007

2006Finished products

$
687,979

$
526,918Work-in-process


1,391,620


1,261,119Raw materials


1,885,847


1,831,607$
3,965,446

$
3,619,644


(4) Property, Plant and Equipment

Property, plant and equipment at December 31, 2007 and 2006 consisted of the following:

2007

2006

Estimated useful livesLand

$
200,000

$
200,000

Buildings


445,833


445,833

27 yearsMachinery and equipment


3,289,146


3,427,430

3 to 10 yearsOffice equipment


1,021,117


1,116,501

2 to 15 yearsLeasehold improvements


655,153


655,254

1 to 5 yearsVehicles


262,449


208,662

3 to 5 yearsTotal property, plant and equipment


5,873,698


6,053,680Less accumulated depreciation


(4,290,311
)

(4,496,696
)Net property, plant and equipment

$
1,583,387

$
1,556,984


Depreciation
and amortization of property, plant and equipment charged to income was $420,606, $397,017 and $486,495 for the years ended December 31, 2007, 2006 and 2005,
respectively.

(5) Goodwill and Other Intangible Assets



As of December 31, 2007 and 2006, goodwill amounted to $3,096,317, which includes the addition in 2006 of $454,718 for an earnout payment related to the
acquisition of Paul Lippke Handels-GmbH. The Company completed its annual impairment tests during the fourth quarters of 2007 and 2006 and determined there was no impairment.

F-13

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(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, 2007Carrying Amount

Accumulated Amortization

NetPatents

$
790,269

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


418,101


(306,812
)

111,289Technology rights


184,008


(184,008
)

Other intangibles


698,596


(698,596
)

$
2,090,974

$
(1,518,299
)
$
572,675


|
|

As of December 31, 2006Carrying
Amount

Accumulated
Amortization

NetPatents

$
710,549

$
(289,430
)
$
421,119Trademarks and trade names


397,338


(233,993
)

163,345Technology rights


184,008


(173,055
)

10,953Other intangibles


698,596


(669,096
)

29,500$
1,990,491

$
(1,365,574
)
$
624,917


Amortization
expense was $155,453, $276,717 and $292,486 in 2007, 2006 and 2005, respectively.

Estimated
amortization expense for the fiscal years 2008 to 2012 and thereafter is $110,319, $41,896, $34,368, $20,786, $15,886 and $83,772, 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, 2007, 2006 and 2005

(6) Warranty (Continued)

Warranty provisions and claims for the years ended December 31, 2007, 2006 and 2005 were as follows:

|Description                   |                                  | Balance at
Beginning of Year |   | Warranty
Provisions |  | Warranty
Claims |  | Balance at
End of Year
|----------------------------- | -------------------------------- | ---------------------------- | - | ------------------- |  | --------------- |  | ----------------------
|Year ended December 31, 2005: |                                  |                              |   |                     |  |                 |  |                       
|                              | Allowance for product warranties |                              | $ | 352,634             |  | 318,635         |  | 344,254               
|Year ended December 31, 2006: |                                  |                              |   |                     |  |                 |  |                       
|                              | Allowance for product warranties |                              | $ | 327,015             |  | 266,706         |  | 346,984               
|Year ended December 31, 2007: |                                  |                              |   |                     |  |                 |  |                       
|                              | Allowance for product warranties |                              | $ | 246,737             |  | 354,383         |  | 399,747               

|
|

(7) Commitments and Contingencies





Year Ending December 31:2008

$
371,7452009


309,3672010


145,2032011


2012 and thereafter


$
826,315






F-15

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(7) Commitments and Contingencies (Continued)





(8) Income Taxes

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, 2007

$
199,000Additions based on tax positions related to the current year


21,000Balance at December 31, 2007

$
220,000


Included
in the balance of total unrecognized tax benefits at December 31, 2007 are potential benefits of $157,000 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 $90,000
and
$55,000 on a gross basis, at January 1, 2007 and December 31, 2007, respectively, and are excluded from the reconciliation of unrecognized tax benefits presented above.

The
Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, several state jurisdictions, and Germany. With limited exceptions, the Company is no
longer subject to income tax examinations by taxing authorities for taxable years before 2004.

Income
from continuing operations before income taxes was as follows:

2007

2006

2005Income before income taxes:Domestic

$
4,580,000

$
4,288,000

$
3,283,000Foreign


1,338,000


1,569,000


1,074,000Total

$
5,918,000

$
5,857,000

$
4,357,000


F-16

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(8) Income Taxes (Continued)

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

2007

2006

2005Current tax expense:Federal

$
1,383,000

$
1,131,000

$
909,000State


178,000


137,000


147,000Foreign


570,000


677,000


466,000Total current expense


2,131,000


1,945,000


1,522,000Deferred tax expense:Federal


33,000


86,000


(124,000
)State


4,000


10,000


(10,000
)Foreign


(55,000
)

(73,000
)

(53,000
)Total deferred expense (benefit)


(18,000
)

23,000


(187,000
)Provision for income taxes

$
2,113,000

$
1,968,000

$
1,335,000


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

Percentage of pretax income
for years ended December 31,2007

2006

2005Tax 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

2.0

1.7

2.0Sale of stock of subsidiary



(4.3
)
Change in valuation allowance



4.1

Export incentives



(1.4
)
(2.1
)Domestic manufacturing deduction

(1.7
)
(0.6
)
(0.8
)Effect of foreign operations

1.0

1.2

1.1Tax-exempt interest

(0.9
)
(0.4
)
(0.4
)Reduction of tax contingency accrual



(0.9
)
(3.6
)Stock option compensation

1.4

0.9

Other

(0.1
)
(0.7
)
0.4Effective income tax rate

35.7
%
33.6
%
30.6
%


F-17

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(8) Income Taxes (Continued)

The tax effect of significant temporary differences representing deferred tax assets and liabilities at December 31, 2007 and 2006 were as follows:

2007

2006Deferred tax assets:Allowance for doubtful accounts

$
41,000

$
61,000Inventory items


219,000


240,000Reserves and accruals


246,000


205,000Capital loss carryforward


324,000


324,000Intangibles





63,000Other


85,000


Subtotal


915,000


893,000Less: Valuation allowance


(324,000
)

(324,000
)Total deferred tax assets


591,000


569,000Deferred tax liabilities:Fixed assets


(20,000
)

(140,000
)Other


(26,000
)

(61,000
)Total deferred tax liabilities


(46,000
)

(201,000
)Net deferred tax asset

$
545,000

$
368,000


As
of December 31, 2007, the Company has determined that establishing a valuation allowance for the deferred tax assets is required since it is more likely than not that the tax
benefit of $324,000 from the capital loss carryforward related to the sale of Lab Connections 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, 2007 will be realized either through future taxable income or net operating loss carry-backs.

As
of December 31, 2007, there were approximately $3,600,000 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.

(9) Stock-Based Compensation

As of December 31, 2007, the Company has reserved 313,300 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 856,437 shares for options that have been granted under either the Company's 2006 stock incentive plan, 1998 stock option plan or
1992 stock option plan but have not yet been exercised.

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 1992,

F-18

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(9) Stock-Based Compensation (Continued)

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, and nonqualified options granted under the 1992, 1998 and 2006
plans, which may be granted at option prices no less than 25% 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) supersedes the Company's previous accounting under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to
Employees(APB 25).

The
Company adopted the modified prospective transition method of applying SFAS 123(R) which required the application of the standard as of January 1, 2006. As a result, as
of December 31, 2006, the Company's results of operations reflected compensation expense for new stock options granted and vested during 2006 and the unvested portion of previous stock option
grants that became vested during the year ended 2006. The Company's consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of
SFAS 123(R). Therefore, the results for 2006 and 2007 are not directly comparable to the prior periods.

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. Share-based compensation expense recognized in the Company's Consolidated Statements of Income for 2006 and 2007
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). Share-based compensation expense recognized in the Consolidated Statements of Income for 2006 and 2007 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.

Prior
to January 1, 2006, the Company accounted for share-based employee compensation arrangements in accordance with the provisions and related interpretations of APB 25,
using the intrinsic-value method. Under the guidelines of APB 25, compensation cost for share-based employee compensation plans was recognized based on the difference, if any, between the
quoted market price of the stock on the date of grant and the amount an employee must pay to acquire the stock. The Company had adopted the disclosure-only provisions for employee
share-based compensation, and therefore, had not recorded compensation cost in its financial statements. Had compensation cost for

F-19

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(9) Stock-Based Compensation (Continued)

share-based
compensation been determined consistent with SFAS 123(R), net income and net income per share would have been adjusted to the following pro forma amounts:

Year Ended
December 31,
2005Net incomeas reported

$
2,915,269Deduct: Total share-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


(141,097
)Net incomepro forma

$
2,774,172Net income per common shareas reported:Basic

$
0.54Diluted

$
0.53Net income per common sharepro forma:Basic

$
0.52Diluted

$
0.50


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

Year Ended December 31,2007

2006Total cost of share-based compensation

$
393,153

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





Amounts charged against income, before income taxes


393,153


187,553Amount of income tax benefit recognized in earnings


(53,543
)

(13,515
)Amount charged against net income

$
339,610

$
174,038


Share-based
compensation expense was reflected in the statements of income for the years 2007 and 2006 as follows:

Year Ended December 31,2007

2006Cost of sales

$
59,087

$
56,297Selling, general and administrative expenses


276,161


107,150Research and development expenses


57,905


24,106Amounts charged against income, before income taxes


393,153


187,553Tax benefit recognized in earnings


(53,543
)

(13,515
)Amount charged against net income

$
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

F-20

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(9) Stock-Based Compensation (Continued)

volatility,
expected option life and expected forfeiture rate. The Company based its estimate of expected volatility for awards granted in 2006 and 2007 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 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 2007, 2006 and 2005 using the Black-Scholes model:

2007

2006

2005Dividend yield

2.6
%
3.1
%
3.0
%Expected volatility

34
%
37
%
31
%Risk-free interest rate

4.0
%
4.6
%
4.0
%Expected lives (in years)

5.4

5.2

7.9


Information
regarding the Company's stock option plans for 2007, 2006 and 2005 was as follows:

Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
ValueOptions outstanding, December 31, 2004

838,439

7.46Granted

106,200

8.91Exercised

(70,404
)
6.40Canceled or expired

(23,786
)
8.43Options outstanding, December 31, 2005

850,449

7.70

6.7Granted

154,200

12.00

10.0Exercised

(118,775
)
7.05Canceled 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
)
7.85Canceled or expired

(34,512
)
11.26Options outstanding, December 31, 2007

856,437

8.73

5.4

$
2,061,171Options exercisable, December 31, 2007

670,895

8.13

5.0

$
1,989,080


The
weighted average grant date fair value based on the Black-Scholes model for options granted in 2006 and 2007 was $3.34 and $3.02, respectively. The Company issues new shares of
common stock upon exercise of stock options. The total intrinsic value of options exercised was $216,882, $290,942 and $220,836 during the years ended December 31, 2007, 2006 and 2005,
respectively.

F-21

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(9) Stock-Based Compensation (Continued)

A
summary of the status of the Company's unvested option shares as of December 31, 2007 is as follows:

Number of
Shares

Weighted
Average
Grant Date
Fair ValueUnvested at December 31, 2006

235,209

$
2.95Options granted

95,850


3.02Options cancelled

(15,787
)

2.91Options vested

(129,730
)

3.04Unvested at December 31, 2007

185,542

$
2.93


As
of December 31, 2007, there was $542,868 of total unrecognized compensation cost related to unvested share-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 2007 and 2006 was $394,818 and $187,576, respectively.

(10) Other Income

Other income, net for 2007, 2006 and 2005 was as follows:

Years Ended December 31,2007

2006

2005Interest income on short-term investments

$
565,441

$
412,882

$
209,217Foreign currency exchange gain (loss)


1,165


(19,152
)

80,691Other


13,668


2,485


2,717Total other income

$
580,274

$
396,215

$
292,625


(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, 2007, there was $1,636,875 remaining in this authorization.

F-22

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(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, 2007, 2006 and 2005:

Years Ended December 31,2007

2006

2005Weighted shares of common stock outstandingbasic

5,500,767

5,429,511

5,370,335Weighted shares of common stock assumed upon exercise of stock options

181,795

95,972

163,945Weighted shares of common stock outstandingdiluted

5,682,562

5,525,483

5,534,280


Outstanding
stock options totaling 140,850, 179,200 and 150,020 at December 31, 2007, 2006 and 2005, 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: 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 2007, 2006 and 2005 respectively:

Years Ended December 31,2007

2006

2005Permeation products and services

$
14,428,823

$
14,604,579

$
13,711,970Gas, headspace and other analyzer products


11,478,501


10,072,101


8,875,847Other instruments and services


1,489,258


1,613,295


1,993,783Total sales

$
27,396,582

$
26,289,975

$
24,581,600


The
following table summarizes total sales, based upon the country to which sales to external customers were made for fiscal years 2007, 2006 and 2005. All of the Company's tangible
long-lived

F-23

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(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 31,2007

2006

2005Domestic sales

$
13,160,268

$
11,924,805

$
12,294,985Foreign sales:Europe


6,595,075


7,360,019


5,802,034Asia


5,309,901


4,842,523


5,093,417Other


2,331,338


2,162,628


1,391,164Total foreign sales


14,236,314


14,365,170


12,286,615Total sales

$
27,396,582

$
26,289,975

$
24,581,600


The
Company's products are marketed outside of North America through various independent representatives. One independent representative accounted for approximately 6%, 6% and 8% in
2007, 2006 and 2005, respectively.

No
single customer accounted for 10% or more of the Company's consolidated revenues in any of the fiscal years ended December 31, 2007, 2006 and 2005.

(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 2007, 2006 and 2005 were $85,145, $77,915 and $78,265, respectively.

(15) Discontinued Operations

In July 2005, the Company sold substantially all of the assets used in its discontinued Vaculok product line. As previously reported in the first quarter 2005,
the decision had been made to cease production of Vaculok vacuum insulated panels and exit the product line.

Pursuant
to the sale agreement, the Company received an up-front payment of $125,000, along with the right to receive additional amounts upon the occurrence of certain
post-closing events. As a result of the sale, the Company recognized a pre-tax gain on disposal of approximately $69,000. When combined with additional operating expenses, this
produced a pre-tax loss of approximately $169,000 for 2005 which is reported as discontinued operations in the Consolidated Statements of Income. After tax, the total loss recognized from
discontinued operations was approximately $107,000. The Company received an additional 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

F-24

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

December 31, 2007, 2006 and 2005

(16) Sale of Subsidiary (Continued)

$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 $156,000, $47,000 and $505,000 for 2007, 2006 and 2005, respectively.

F-25

---





MOCON, INC.        EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K  FOR THE YEAR ENDED DECEMBER 31, 2007

|Exhibit No. |  | Exhibit                                                                                                                                          |  | Method of Filing                                                                                                                            
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | 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. 1992 Stock Option Plan                                                                                                               |  | Incorporated by reference to Exhibit 10.5 to our Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (File No. 000-09273)
|10.5        |  | MOCON, Inc. 1998 Stock Option Plan, as amended                                                                                                   |  | Incorporated by reference to our Definitive Proxy Statement on Form DEF-14A filed on April 9, 2002 (File No. 000-09273)                     
|10.6        |  | 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)                 

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|10.7  |  | 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)                  
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|10.8  |  | 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)                       
|10.9  |  | 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)                       
|10.10 |  | 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)                       
|10.11 |  | Form of Executive Severance Agreement                                                                                                                                           |  | Filed herewith                                                                                                                               
|10.12 |  | 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)
|10.13 |  | Share Purchase Agreement, dated as of December 19, 2003 by and between Ahlström Capital Oy and MOCON, Inc.                                                                      |  | Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on January 29, 2004 (File No. 000-09273)                    
|10.14 |  | Transfer Deed dated as of January 29, 2004 by and between Ahlström Capital Oy and MOCON, Inc.                                                                                   |  | Incorporated by reference to Exhibit 2.2 to our Current Report on Form 8-K filed on January 29, 2004 (File No. 000-09273)                    
|10.15 |  | Stock Purchase Agreement, dated February 27, 2006, by and among Leap Technologies, Lab Connections, Inc. and MOCON, Inc.                                                        |  | Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March 2, 2006 (File No. 000-09273)                      
|10.16 |  | 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)

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|10.17 |  | Description of Non-Employee Director Compensation Arrangements                                      |  | Filed herewith    
|----- |  | --------------------------------------------------------------------------------------------------- |  | ------------------
|10.18 |  | Description of Executive Officer Compensation Arrangements                                          |  | Filed herewith    
|21.1  |  | Subsidiaries of MOCON, Inc.                                                                         |  | Filed herewith    
|23.1  |  | Consent of Independent Registered Public Accounting Firm                                            |  | Filed herewith    
|31.1  |  | Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  | Furnished herewith
|31.2  |  | Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  | Furnished herewith
|32.1  |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)   |  | Filed herewith    
|32.2  |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)   |  | Filed herewith    

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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 Year
|----------------------------- | ------------------------------------------------- | ---------------------------- | - | ----------------------------- |  | ---------- |  | ----------------------
|Year ended December 31, 2005: |                                                   |                              |   |                               |  |            |  |                       
|                              | Allowance for doubtful accounts and sales returns |                              | $ | 222,040                       |  | 30,668     |  | 60,262                
|Year ended December 31, 2006: |                                                   |                              |   |                               |  |            |  |                       
|                              | Allowance for doubtful accounts and sales returns |                              | $ | 192,446                       |  | 132,570    |  | 145,155               
|Year ended December 31, 2007: |                                                   |                              |   |                               |  |            |  |                       
|                              | Allowance for doubtful accounts and sales returns |                              | $ | 179,861                       |  | 23,209     |  | 77,273                

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