UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

[   ]

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

For the transition period from __________________ to _____________________.

Commission File No.:  0-9273

____________________

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 NORTH
MINNEAPOLIS, MINNESOTA
(Address of principal executive offices) | 55428
(Zip Code)                               

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

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $0.10 PAR VALUE

____________________

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  [X]      NO   [_]



Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K 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.    [X]



Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   YES  [_]      NO   [X]



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, 2003 (the last business day of the Registrants second quarter) as reported by the Nasdaq Stock Market, was $36,215,041.

As of March 25, 2004, 5,410,764 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 2004 Annual Meeting of Shareholders to be held May 18,
2004.

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PART I

This Annual Report on Form 10-K includes certain statements that are deemed to be 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. All statements contained in this Annual Report, other than statements of historical facts, are forward-looking statements. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments, and other factors we believe are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks, and uncertainties, many of which are beyond our control. You can identify forward-looking statements by those that are not
historical in nature, particularly those that use terminology such as may, will, should, expects, believes, anticipates,
estimates, continues, projects, potential, or plan or the negative of these or other similar terms. We caution you that any such
statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.

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 as well as products that prepare samples of various substances for laboratory analysis. We also recently began to manufacture and sell vacuum insulated
panels.

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 in February
1966 and was initially involved in the commercialization of technology developed for the measurement of water vapor permeating through various materials. Prior to 1998, we expanded our business
primarily through internally developing new products and technologies, acquiring product lines and technology, and licensing our products and technology. In the last six years, we supplemented
our internal growth through a total of five separate acquisitions (including our latest acquisition which closed in January 2004) that have provided us with additional technologies, products and
product development expertise.

In January 1998, we acquired Microanalytics
Instrumentation Corp., which is located near Austin, Texas. Microanalytics produces various gas chromatographic (GC) instruments and provides services with an emphasis on multidimensional gas
chromatography. A variety of GC specific applications have been developed by Microanalytics personnel, ranging from petroleum and petrochemical purity assay to aroma and off-odor analysis for
the food and packaging fields.

In December 1998, we acquired Lab
Connections, Inc., located near Boston, Massachusetts. Lab Connections manufactures hardware and software interfaces that allow the components of a

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particular substance to be identified by
spectrometry and spectroscopy after they have been separated through chromatography. Lab Connections products extend and enhance customers productivity by allowing for the rapid
preparation of samples for laboratory analysis furnishing information regarding the identity, composition and configuration of complex mixtures. Lab Connections products are used by a
variety of customers, including bio-pharmaceutical, polymer and consumer products companies as well as companies that analyze proteins, pharmaceutical compounds, polymers, adhesives and other
materials. In order to reduce costs and increase operating efficiencies, Lab Connections operations are being consolidated with our operations in Texas and Minneapolis, and the Boston
location will be closed in the first quarter of 2004.

In October 2001, we acquired Questar
Baseline Industries, Inc. from Questar InfoComm, Inc., a subsidiary of Questar Corporation. We have subsequently renamed this company Baseline-MOCON, Inc. (Baseline). Baseline
is located near Denver, Colorado. Baseline produces advanced gas analysis and monitoring instrumentation used in applications such as oil and gas exploration, process gas analysis, and
industrial hygiene and safety applications.

In November 2003, we acquired the
Vaculok® vacuum insulated panel product line from Advantek, Inc., a Minnesota-based provider of packaging products. Vacuum insulated panels (VIPs) are devices which utilize unique technologies to
excel in packaging applications requiring lengthy temperature protection. With this acquisition, we can now help our existing food, pharmaceutical, medical, and many other new customers in
specialized packaging markets improve their handling of temperature-sensitive products from the point of manufacture to their destinations. The acquired Vaculok product line was not material to
the companys operations during the fiscal year ended December 31, 2003.

Effective January 1, 2004, we acquired Paul
Lippke Handels-GmbH Prozess- und Laborsysteme (Lippke) which is located in Germany. Lippke has been the primary distributor of our products in Europe for approximately thirty years, and also
serves in the capacity of distributor or agent for several companies in addition to MOCON. This acquisition now provides us with a direct presence in Europe.

Our principal executive offices are located
at 7500 Boone Avenue North, Minneapolis, Minnesota 55428 and our telephone number is (763) 493-6370. Our website address is www.mocon.com.

Products and Services

We develop, manufacture, market, and
service measurement, analytical, monitoring, sample preparation and consulting products used to detect, measure, and analyze gases and chemical compounds. 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.

Permeation Products

Permeation products consist of systems and
services that measure the rate at which various gases and vapors are transmitted 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, plastics and

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coatings) and the users of such packaging
materials, such as companies in the food, beverage, pharmaceutical and chemical industries.

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



have insufficient business to justify the purchase of our products;



are not familiar with such equipment; or



have purchased our products but have a need for additional capacity.

Permeation products accounted for
approximately 60%, 53%, and 62% of our consolidated sales in 2003, 2002, and 2001, 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.

Weighing Products

We manufacture weighing products that 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. Other weighing systems that we sell are designed for off-line use, and we market these products primarily to the pharmaceutical industry. In addition to the VERICAP® high-speed capsule weighing systems, we also manufacture the
AB automatic balance weighing systems for both tablets and capsules.

Consulting and Analytical 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:



absorption or diffusion of various compounds;



harsh environment applications;



shelf-life concerns;



flavor or odor detection; or



other special permeation applications.

In providing consulting and analytical
services, we use our most advanced measurement technologies, including proprietary TRANSORPTION® technology. The principal market for the consulting and analytical services consists of
manufacturers of foods, beverages, pharmaceuticals, plastics, chemicals, electronics, and personal care products.

Headspace Analyzer Products

Our headspace analyzers are used to analyze
the amount of oxygen and carbon dioxide present in the headspace of flexible and rigid packages. Some analyzers measure the oxygen and carbon

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dioxide content in flushing gases used in
modified or controlled atmosphere packaging. The principal market for these products consists of packagers of foods, beverages and pharmaceuticals. The headspace analyzer products that we
currently manufacture 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.

Sample Preparation Products

We design, manufacture, market, and service
products used in sample preparation. These products consist of hardware and software interfaces that allow the components of a particular substance to be identified by spectroscopy after they
have been separated through chromatography. The most time-consuming part of chemical analysis is sample preparation and any product that reduces total sample preparation time is of benefit to
companies who analyze chemical compounds. Our products provide fully automatic sample collection from various Liquid Chromatographs and Gel Permeation Chromatographs in a form suitable for
immediate examination by Fourier transform infra-red spectroscopy (FTIR) and/or matrix-assisted laser desorption ionization mass spectrometry (MALDI-MS). The principal market for these products
is laboratories that analyze proteins, polymeric compounds and adhesives. The sample preparation products that we currently manufacture are the LC-Transform® for interfacing to FTIR and the
LC-Transform for interfacing to MALDI-MS.

Gas Chromatography Analyzer Products

We integrate gas chromatography (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. The GC analyzer products that we currently manufacture are 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.

Leak Detection Products

The leak detection products that we
manufacture detect leaks in sterile medical trays, pouches, blister packs and a wide range of other packages. We currently manufacture two 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 principal market for these products are packagers of sterile medical items, pharmaceuticals, and food products.

Gas Analyzer Products

We sell two categories of gas analyzer
products. Our permanent gas analyzers and systems are installed in fixed locations at the monitoring sites and generally perform their functions continually or

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at regular intervals. Our portable gas
analyzers are hand-held, compact and are used on occasions requiring mobile equipment. The gas analyzer products are for use in (1) industrial hygiene (detection of hazardous gases in the
workplace), (2) hydrocarbon gas analysis for oil and gas exploration, and gas pipeline monitoring, (3) contaminant detection in the manufacture of specialty gases, and (4) environmental monitoring
(tracking the release of, or the presence of, toxic substances).

We acquired the gas analyzer product line
effective October 1, 2001. Gas analyzer products accounted for approximately 15%, 19%, and 7% of our consolidated sales in 2003, 2002, and 2001, respectively.

On November 24, 2003 we acquired the
Vaculok® vacuum insulated panel product line from Advantek, Inc. This product line had no material impact on our 2003 operating results.

Competition

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



product performance;



product reliability;



product support; and



price.

We compete with a variety of competitors 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.

Manufacturing and Supplies

During 2003, we manufactured products at
four locations in the United States. 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. An interruption of one of these sources 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. There are other single source components for which we have determined that other sources are readily
available. To date, we have experienced no significant production delays because of a suppliers inability to ship an acceptable component.

Market Risk Management

Substantially all of our marketable
securities are at fixed interest rates and therefore the fair value of these instruments is affected by changes in market interest rates. However, virtually all of the marketable securities that
we purchase mature within two years. Accordingly, we believe that the market risk associated with the holding of these financial instruments is minimal.

During 2003, we sold our products and
services in United States dollars and therefore had no foreign currency exchange risk.

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Backlog

As of December 31, 2003, our total backlog
was $1,048,465 for all of our products as compared to $1,722,421 and $1,146,245 as of December 31, 2002 and 2001, respectively. We anticipate shipping the entire current backlog in
2004.

Patents and Licenses

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 certain 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. We hold both United States and international patents and have U.S. and
international patents pending. We currently hold 45 U.S. patents and 25 international patents. In addition, we hold license rights under four U.S. patents subject to royalty payments. These
patents and licenses will expire during the period from 2005 through 2022.

We own or have applied for certain
trademarks which protect and identify our products. Among the trademarks we own is MOCON®, which we have designated as a house trademark under which all our products manufactured at our
headquarters are sold. In addition, we hold the following trademarks and servicemarks:  VERICAP®, OX-TRAN®, PERMATRAN-W®, PROFILER®, COULOX®, HERSCH®,
VERITAB®, AROMATRAN®, SKYE®, PAC CHECK 200®, LC-Transform®, TRANSORPTION®, 1-TIME®, AROMATRAX®, PAC GUARD®, INNOVATIVE TECHNOLOGY CONFERENCES®,
VACULOK®, and OPTIPERM®. Our trademarks and servicemarks have a life, subject to periodic maintenance, of 10 to 20 years, which may be extended in accordance with applicable law.

Research and Development

We incurred expenses of $1,313,379,
$1,286,220 and $1,042,961 during the fiscal years ended December 31, 2003, 2002 and 2001, respectively, for research and development of our products. Research and development (R&D) costs
were approximately 7% of sales for the fiscal year ended December 31, 2003 and approximately 6% and 5% of sales for the fiscal years ended December 31, 2002 and 2001, respectively. For the
foreseeable future, we expect to spend, on an annual basis, approximately 6% to 8% of our sales on research and development.

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. International sales are, in some cases,
transacted pursuant to letters of credit.

Foreign and Domestic Marketing

We market our products and services
throughout the United States and foreign markets. We sell the majority of our products in the United States and Canada through our sales force directly to end-users. As previously mentioned, effective
January 1, 2004, we acquired our European representative, Lippke, which provides us with a direct sales force in Europe. Most of our sales in other foreign markets are conducted through a network of
independent representatives. To our knowledge, none of

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our independent sales representatives sells a material amount of product manufactured by any of our competitors.

We conduct all of our foreign sales in U.S.
dollars and consequently do not hedge against exchange rate fluctuations. Nonetheless, should the value of the dollar rise relative to other currencies, our sales abroad could be negatively
impacted. Additionally, it is possible that changes to foreign tariff, trade or tax policies or foreign economic conditions could negatively affect our sales and earnings in the future.

For information concerning our export sales
by geographic area, see Note 11 of the Notes to Consolidated Financial Statements contained on page F-17. No single customer accounted for 10% or more of our consolidated revenues in any of the
fiscal years ended December 31, 2003, 2002 and 2001, and we do not believe that the loss of any single customer would have a material adverse effect on our business or financial performance.
 Lippke accounted for approximately 10%, 8%, and 10% of sales in 2003, 2002, and 2001, respectively. As previously explained, we acquired Lippke effective January 1, 2004. Another
independent representative accounted for approximately 8%, 7%, and 14% of sales in 2003, 2002, and 2001, respectively. Our business is not seasonal in nature.

Employees

As of December 31, 2003, we had 99
full-time employees. The number of full-time employees as of January 31, 2004 is 115, which includes the 14 employees in Germany that were added as part of our acquisition of Lippke. Included in this
total are approximately 18 scientists and engineers who research and develop potential new products. To protect our proprietary information, we have confidentiality and non-compete agreements with
those of our employees who have access to sensitive information. None of our employees are represented by a labor union, and we consider our employee relations to be satisfactory.

ITEM 2.

PROPERTIES

We lease an aggregate of 61,100 square feet
of office, engineering, laboratory, and production space in Minnesota, Massachusetts, and Texas. 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 8,600 square feet of space in the metropolitan area of Austin, Texas. This space is leased until June 2007.

Lab Connections leases approximately
5,300 square feet of space near Boston, Massachusetts. This space is leased through July 2004.

In addition to our leased facilities
described above, we own a building located within forty miles of Denver, Colorado that consists of approximately 9,300 square feet of office and production space in which Baseline conducts its
operations. We also own the land, consisting of approximately two acres, on which this building sits.

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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 2003.

ITEM 4A.

EXECUTIVE OFFICERS OF MOCON

Our executive officers, their ages, the
year first elected or appointed as an executive officer and the offices held, as of March 25, 2004, are as follows:

|Name                     | Age | Title (1)                                                           | Executive
Officer Since
|------------------------ | --- | ------------------------------------------------------------------- | -----------------------
|Robert L. Demorest (2)   | 58  | President and Chief Executive Officer,
Chairman of the Board        | 1985                   
|Daniel W. Mayer          | 53  | Executive Vice President                                            | 1988                   
|Dane D. Anderson (3)     | 42  | Vice President and Chief Financial Officer,
Treasurer and Secretary | 2000                   
|Douglas J. Lindemann (4) | 46  | Vice President and General Manager                                  | 2001                   
|Ronald A. Meyer (5)      | 53  | Vice President                                                      | 1985                   

_________________

(1)

All
executive officers have been employed in the capacity set forth for at least five years unless otherwise indicated.

(2)

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.



(3)

Mr.
Dane D. Anderson has been our Chief Financial Officer, Vice President, Treasurer and Secretary since January 2001. Mr. Anderson had been our Chief Financial Officer, Treasurer and Secretary since
August 2000, and was our acting Vice President  Finance and Administration, Treasurer and Secretary from May 2000 to August 2000. From July 1996 to May 2000, Mr. Anderson had been one of our Business
Managers.



(4)

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.



(5)

Mr.
Ronald A. Meyer has been a Vice President for us for more than five years. From 1995 to April 2000, Mr. Meyer also served as our Chief Financial Officer, Treasurer and Secretary.

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PART II

ITEM 5.

MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of March 19, 2004, there were 401 record
holders of our common stock. Our common stock trades on the Nasdaq Stock Marketsm under the symbol MOCO. The following table sets forth, for the fiscal periods indicated, the high and low
quotations for our common stock as reported by the Nasdaq National Market System.

|            | 2003 |  | 2002
|----------- | ---- |  | ----
|Quarter     | Low  |  | High
|1st Quarter |      |  | $   
|2nd Quarter |      |  | $   
|3rd Quarter |      |  | $   
|4th Quarter |      |  | $   



ITEM 6.

SELECTED FINANCIAL DATA

|                             | Years Ended December 31,             
|---------------------------- | -------------------------------------
|                             | 2003                                 
|                             | (in thousands, except per share data)
|OPERATIONS DATA:             |                                      
|Sales                        |                                      
|Net income                   |                                      
|Net income per common share: |                                      
|Basic                        |                                      
|Diluted                      |                                      
|Dividends declared per share |                                      
|                            
|                             | As of December 31,                   
|                             | 2003                                 
|                             | (in thousands)                       
|BALANCE SHEET DATA:          |                                      
|Total assets                 |                                      
|Long-term liabilities        |                                      



Our acquisition of Baseline-MOCON, Inc. in
2001 affects the comparability of the information in the table above. The results of this subsidiary have been included from the effective date of

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purchase, which includes sales of
$2,980,271, $3,881,781 and $1,348,101 for 2003, 2002 and 2001, respectively.

ITEM 7.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 as well as products that prepare samples of various substances for laboratory analysis. 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.

Prior to 1998, we expanded our business
primarily through internally developing new products and technologies, acquiring product lines and technology, and licensing our products and technology. In 1998, 2001, and 2003, we supplemented our
internal growth through a total of four acquisitions that have provided us with additional technologies, products and product development expertise. During 2003 we had four primary operating
locations, all located in the United States.

Sales decreased approximately 2% in 2003
compared to 2002, while net income decreased approximately 4% for the same period. Our financial position as of December 31, 2003 reflects an increase in working capital of $372,235 to $10,902,126,
compared to $10,529,891 at December 31, 2002. Diluted earnings per share were $0.40 in 2003, $0.41 in 2002 and $0.61 in 2001.

Forward-looking Statements

The information in this Managements
Discussion and Analysis of Financial Condition and Results of Operations, except for the historical information, contains forward-looking statements. These statements are subject to risks and
uncertainties. These forward-looking statements could differ materially from actual results. The company assumes no obligation to publicly release the results of any revision or updates to these
forward-looking statements to reflect future events or unanticipated occurrences. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the related
Notes, which are included elsewhere in this report.

Critical Accounting Policies

Our estimates related to certain assets and
liabilities are an integral part of the consolidated financial statements. These estimates are considered critical to the consolidated financial statements because they require subjective and complex
judgments.

Allowance for doubtful accounts  This
reserve is for accounts receivable balances that are potentially uncollectible. The reserve is based on (1) an analysis of customer accounts and (2) our historical experience with accounts receivable
write-offs. The analysis includes the age of the receivable, the financial condition of a customer or industry, and general economic conditions. We

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believe the results could be materially different if
historical trends do not reflect actual results or if economic conditions worsened for our customers.

Inventory
obsolescence analysis  We perform an analysis to identify inventory shrinkage, slow moving, and obsolete inventory. We record a charge to cost of sales for amounts
identified. Our analysis includes inventory levels, physical inventory counts, cycle count adjustments, the nature of the finished product and its inherent risk of
obsolescence, the gross margin of the product, and the on-hand quantities relative to the sales history of that finished product. We believe that the 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.

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 and/or changes in the
economic environment in which we operate may result in future impairment charges.

Results of Operations

The following table sets forth the
relationship between various components of operations, stated as a percent of sales, for fiscal years 2003, 2002 and 2001. The Companys historical financial data were derived from its audited
consolidated financial statements and related notes included elsewhere in this annual report.

|                                              | Percent of Sales
|--------------------------------------------- | ----------------
|                                              | 2003            
|Sales                                         |                 
|Cost of sales                                 |                 
|                                              |                 
|Gross profit                                  |                 
|Selling, general, and administrative expenses |                 
|Research and development expenses             |                 
|                                              |                 
|Operating income                              |                 
|Investment income                             |                 
|                                              |                 
|Income before income taxes                    |                 
|Income taxes                                  |                 
|                                              |                 
|Net income                                    |                 
|                                              |                 



The following table sets forth the
relationship between various components of domestic and foreign sales, stated as a percent of total sales, for fiscal years 2003, 2002 and 2001.

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|                    | Percent of Sales
|------------------- | ----------------
|                    | 2003            
|Domestic Sales      |                 
|Foreign Sales:      |                 
|Japan               |                 
|Western Europe      |                 
|Canada              |                 
|Other               |                 
|                    |                 
|Total foreign sales |                 
|                    |                 
|Total Sales         |                 
|                    |                 



Net Sales

Sales were $19,632,366 in 2003, compared to
$19,931,065 in 2002 and $19,261,334 in 2001. The decrease in sales from 2002 to 2003 was primarily the result of decreases in the domestic sales volume of our sample preparation products, domestic and
foreign sales volume of our gas analyzer products, domestic sales volume of our gas chromatography analyzer products and foreign sales volume of our leak detection products, offset by increases in the
foreign sales volume of our permeation products and domestic and foreign sales volume of our weighing products. The impact of price increases was not significant. The increase in sales from 2001 to
2002 was primarily the result of Baseline sales in 2002 totaling $3,881,781 (Baseline was acquired in October, 2001, and therefore our 2001 results included sales of Baseline from the effective date
of acquisition, or $1,348,101), increases in the domestic sales volume of our sample preparation products, domestic sales volume of our permeation products, and the foreign sales volume of our leak
detection products, offset by decreases in the foreign sales volume of our permeation products, domestic and foreign sales volume of our weighing products, and the foreign sales volume of our sample
preparation products. The impact of price increases was not significant.

We use a network of independent
representatives to market and service our products in foreign countries, and expect that international sales will continue to account for a significant portion of our revenues for the foreseeable
future. Effective January 1, 2004, we acquired Paul Lippke Handels-GmbH Prozess- und Laborsysteme (Lippke) which is located in Germany. Lippke has been the primary distributor of our products in
Europe for approximately thirty years, and also serves in the capacity of distributor or agent for several companies in addition to MOCON. This acquisition gives us a direct presence in Europe. The acquisition of
Lippke is expected to have a positive impact on sales in 2004, particularly for revenues associated with our permeation products.

In 2003, domestic sales decreased 11% to
$11,847,295 and foreign sales increased 18% to $7,785,071. Foreign sales were 40% of total sales in 2003, compared to $6,576,975, or 33% of sales in 2002, and $8,303,688, or 43% of total sales
in 2001. Domestic sales were 60% of total sales in 2003, compared to $13,354,090 or 67% in 2002, and $10,957,646 or 57% in 2001.

13

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Permeation Products

Permeation products accounted for
approximately 60%, 53%, and 62% of our consolidated sales in 2003, 2002, and 2001, respectively. Total sales of our permeation products increased in 2003 versus 2002 due primarily to increases in
foreign sales, particularly in Western Europe, Japan, and Canada. Permeation sales decreased in 2002 compared to 2001, primarily due to decreases in sales to Japan and, to a lesser extent, Western
Europe and Canada, which we believe was primarily the result of slow economies in these major foreign markets.

Weighing Products

Weighing products accounted for
approximately 6%, 3% and 9% of our consolidated sales in 2003, 2002, and 2001, respectively. Weighing product sales increased in 2003 over 2002 due to an increase in the sales of our AB weighing
systems, and to a lesser extent increases in the sales of our VERICAP systems. The increase in sales of the AB systems was due in part to AB systems being sold in markets outside of the traditional
pharmaceutical market. Weighing product sales decreased in 2002 versus 2001 due to declining sales of both our VERICAP and AB weighing systems. We believe that the decline in 2002 sales of our VERICAP
systems was due both to increased competition in high speed capsule weighing systems, and the slowness in the economy. We believe that decreased sales of our AB weighing systems was due primarily to
the slow economy.

Sample Preparation Products

Sample preparation products accounted for
approximately 2%, 7% and 3% of our consolidated sales in 2003, 2002, and 2001, respectively. Sales of the sample preparation products sold by our Lab Connections, Inc.
subsidiary decreased significantly in 2003, primarily due to decreased sales in the life sciences and drug discovery markets. Sales increased in 2002 versus 2001 primarily due to sales of a new unit
to one particular customer for use in the drug discovery and life sciences markets. These sales were not repeated in 2003. As a result of the revenue shortfall in our sample preparation products, we
have taken steps to consolidate the Lab Connections operations into our Minneapolis, Minnesota, and metro Austin, Texas, locations, and have closed the Boston location effective February 1, 2004. This is
expected to result in reduced operating costs in 2004.

Gas Analyzer Products

Sales of gas analysis and monitoring
instrumentation products at our Baseline-MOCON, Inc. subsidiary decreased in 2003. We believe that the decrease was primarily due to the slowness in the economy. Baseline sales for 2003 totaled
$2,980,271, compared with $3,881,781 for 2002, and $1,348,101 for the period from October 1, 2001 (effective date of acquisition) through December 31, 2001. In order to reduce operating costs and
increase operating efficiencies, we are in the process of moving the majority of Baselines production to our Minneapolis facility. This transfer is expected to be completed by the end of the
first quarter of 2004.

Gas Chromatography Analyzer Products

Sales of gas chromatography components at our
Microanalytics Instrumentation Corp. subsidiary accounted for approximately 3%, 4% and 4% of our consolidated sales in 2003, 2002, and 2001, respectively.

14

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Leak Detection Products

Sales of our leak detection products
accounted for approximately 2%, 3% and 2% of our consolidated sales in 2003, 2002, and 2001, respectively. The decrease in 2003 versus 2002 was primarily due to foreign sales of our non-destructive
leak detector unit in 2002 not being repeated in 2003. Sales of leak detection products increased in 2002 over 2001 due to an increase in sales of our non-destructive leak detector in foreign
markets.

Headspace Analyzer Products

Headspace analyzer products accounted for
approximately 8%, 7% and 8% of our consolidated sales in 2003, 2002, and 2001, respectively. We believe sales of these products were up slightly in 2003 as compared to 2002 primarily due to the
addition of new hand-held headspace analyzer products.

Consulting and Analytical Services

Consulting and analytical services (CAS)
sales accounted for approximately 4%, 4% and 5% of our consolidated sales in 2003, 2002, and 2001, respectively. Because the majority of CAS sales are to domestic customers, we believe that the
primary cause for the decreases in these sales in 2002 and 2003 from 2001 was the slowdown in the domestic economy, which resulted in a reduced demand for our advanced testing services.

Gross Profit

Our gross profit margin was 55%, 53% and
60% in each of the fiscal years ended December 31, 2003, 2002 and 2001. The 2003 gross profit margin is slightly higher than the prior year due to the product mix in 2003 including more permeation and
weighing product sales, which on average carry a higher gross margin. The 2002 gross profit margin percentage was slightly lower than 2001 due to the product mix in 2002 including Baseline sales,
which on average carry a lower gross margin percentage than our historical averages.

Selling, General and Administrative Expenses

Selling, general and administrative
(SG&A) expenses in 2003 were $6,268,837, or 32% of sales, compared to $6,107,066, or 31% of sales in 2002, and $5,814,588, or 30% of sales in 2001. The increase in SG&A expenses from 2002 to
2003 is primarily due to an increase in tradeshow expense in an effort to increase future sales, offset somewhat by a decrease in commission expense associated with domestic sales. The increase in
SG&A expenses from 2001 to 2002 is primarily due to a slight increase in commission and other selling expenses associated with the increase in sales, including Baseline sales, partially offset by
a decrease in goodwill amortization expense of $77,000 in 2002 versus 2001 as goodwill was no longer being amortized.

Research and Development Expenses

Research and development (R&D) expenses were
$1,313,379, or approximately 7% of sales in 2003, compared to $1,286,220, or approximately 6% of sales in 2002, and $1,042,961, or approximately 5% of sales in 2001. Continued R&D expenditures are necessary as we develop new products to
expand in our niche markets. For the

15

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foreseeable future, we expect to allocate on
an annual basis approximately 6% to 8% of sales to research and development.

Investment Income

Investment income decreased to $126,711 in
2003 from $195,468 in 2002 and $435,928 in 2001. The decrease in 2003 is primarily due to lower average investment yields, offset by higher average investment balances, during 2003. The decrease in
2002 is due both to lower average investment balances and lower average investment yields during 2002 versus 2001.

Income Tax Expense

The Companys provision for income
taxes was 33.0% of income before income taxes in 2003 and 33.1% and 32.5% in 2002 and 2001, respectively. Based on current operating conditions and income tax laws, we expect the tax
rate for 2004 to be in the range of 33% to 36%.

Net Income

Net income was $2,211,305 in 2003 compared
to $2,297,214 in 2002, and $3,420,668 in 2001. Diluted net income per share was $.40 per share in 2003 compared to $.41 per share in 2002, and $.61 per share in 2001.

Liquidity and Capital Resources

We continue to maintain a strong financial
position. Total cash, temporary cash investments and marketable securities increased $631,752 during 2003 to $6,791,650, primarily due to net income for the period of $2,211,305 and a decrease in
accounts receivable, offset somewhat by an increase in capital assets, dividend payments totaling $1,377,725 and repurchases of the Companys common stock during 2003 totaling $627,606. Our Board
of Directors has authorized, depending upon market conditions and other factors, the repurchase of up to a total of $3,200,000 of our common stock at prices not exceeding the market price at the time
of the purchase. As of December 31, 2003, $2,572,394 was remaining in this authorization. The $422,517 decrease in accounts receivable in 2003 versus 2002 is primarily due to improved accounts
receivable collection efforts, and a decrease in sales in the fourth quarter of 2003 versus the fourth quarter of 2002. Inventory remained generally consistent in 2003 compared to 2002. In 2003, we
purchased $335,794 of property, plant and equipment, and $378,392 and $515,549 in 2002 and 2001, respectively.

Cash flow from operations has historically
been sufficient to meet our liquidity requirements, capital expenditures and research and development costs. Cash flow from operations totaled $3,398,377, $3,424,407 and $3,603,690 in 2003, 2002 and
2001, respectively.

We have no long-term debt or material
commitments for capital expenditures as of December 31, 2003. We do not believe that any major property, plant and equipment expenditures are required to accommodate the current level of operations.
We anticipate that a combination of our existing cash, temporary cash investments and marketable securities, plus an expected continuation of cash flow from operations, will continue to be adequate to
fund operations, capital expenditures and dividend payments in the foreseeable future.

16

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Contractual Obligations

The following table summarizes our future
contractual cash obligations as of December 31, 2003 (in thousands):

|Contractual Obligations            |  |  | Total |       | Less than 1 year |   | 1-3 years |  | 4-5 years |     | After 5 years |  
|---------------------------------- |  |  | ----- | ----- | ---------------- | - | --------- |  | --------- | --- | ------------- | -
|Operating leases                   |  |  | $     | 1,884 |                  | $ | 321       |  | $         | 890 |               | $
|                                   |  |  |       |       |                  |   |           |  |           |    
|Total contractual cash obligations |  |  | $     | 1,884 |                  | $ | 321       |  | $         | 890 |               | $



During the first quarter of 2004, the
Company completed the acquisition of Lippke and paid $802,688 excluding the future minimum earn-out payments to be made in 2005, 2006, and 2007.

Foreign Currency Exchange Risk

All of our 2003 sales are denominated in
United States dollars, and as a result we have no exposure to foreign currency exchange risk with respect to sales made.

New Accounting Pronouncements

In December 2002, the Emerging Issues Task
Force issued EITF 00-21, Revenue Arrangements with Multiple Deliverables.  This issue addresses certain aspects of the accounting for arrangements under which a company will perform
multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable, and there exists sufficient evidence of their fair
values to separately account for some or all of the deliverables (that is, there are separate units of accounting). In other arrangements, some or all of the deliverables are not independently
functional, or there is not sufficient evidence of their fair values to account for them separately. This issue addresses when and, if so, how an arrangement involving multiple deliverables should be
divided into separate units of accounting. This issue does not change otherwise applicable revenue recognition criteria. This issue was applicable for us for revenue arrangements entered into
beginning in third quarter 2003. The adoption of EITF 00-21 did not have an impact on revenue recognition.

In December 2003, the FASB issued FASB
Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, which was issued in January 2003. We will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the
assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any
previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies
may be used to measure the assets, liabilities and noncontrolling interest of the VIE. FIN 46R did not have an impact on our consolidated financial statements.

17

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FASB Statement No. 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003. This Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For us, the Statement
was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain
mandatorily redeemable financial instruments, the Statement will be effective for us on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily
redeemable financial instruments. We currently do not have any financial instruments that are within the scope of this Statement.

Certain Important Factors

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 less 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 the form of price increases or sustain profit margins that we have achieved in prior years.

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
can not 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 sales.

If we acquire businesses in the
future, we may experience a decrease in our profit margins and our net income.

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. Businesses that we may acquire in the future may be marginally profitable or unprofitable. We will likely have to successfully change the
operations of any companies that we acquire in the future and improve the market penetration of such companies in order to achieve the level of profitability that we desire. In addition, acquisitions
that we believe will be beneficial to our business and financial results

18

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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 any acquisitions that we do complete 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 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 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 to develop 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 business and results of operations.

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 to our sales or an increase in our operating expenses.

Sales outside the United States accounted
for approximately 40% of our revenues in 2003 and for approximately 33% and 43% of our revenues in 2002 and 2001. 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:



agreements may be difficult to enforce;



receivables may difficult to collect;



certain regions are experiencing political unrest and conflict;



foreign customers may have longer payment cycles;



the countries into which we sell may impose tariffs or adopt other restrictions on foreign trade;



fluctuations in exchange rates may affect product demand; and



export licenses,
if required, may be difficult to obtain and the protection of intellectual property in foreign countries may be more difficult to enforce.

19

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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.



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

We currently encounter, and expect to
continue to encounter, competition in the sale of our products. We believe that the principal competitive factors affecting the market for our products include product quality and performance, price,
reliability and customer service.

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

Our reliance upon patents, domestic
trademark laws 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 can not 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, our business and results of operations could be materially
adversely affected. 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.

20

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If we are required to account for
stock options as a compensation expense, our net income and net income per common share will be reduced.

Some companies have begun to account for
stock options as compensation expense thus resulting in a reduction of their net income and net income per common share. We currently grant all options at fair market value and do not record
compensation expense in connection with the grants. It is possible that future laws, regulations or changes in accounting standards will require us to record the fair market value of all stock options
as a compensation expense in our consolidated financial statements. If such a change occurs, our net income and net income per common share will be reduced.

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, and several factors could cause the price to fluctuate substantially in the future. These factors include:



announcements of new products by us or our competitors;



quarterly fluctuations in our financial results;



customer contract awards;



developments in regulation; and



general economic and political conditions in the various markets where our products are sold.

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.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Substantially all of our marketable
securities are at fixed interest rates and therefore the fair value of these instruments is affected by changes in market interest rates. However, virtually all of our marketable securities mature
within two years. Accordingly, we believe that the market risk arising from our holding of these financial instruments is minimal.

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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Companys Consolidated Financial
Statements and Independent Auditors Report are included on pages F-1 to F-18 of this Form 10-K and are incorporated herein by reference.

SELECTED QUARTERLY FINANCIAL DATA  (UNAUDITED)

(in thousands, except per share data)



|                
|----------------
|                
|                
|                
|2003            
|Sales           
|Gross Profit    
|Net Income      
|Net Income      
|Per Common Share
|Basic           
|Diluted         
|2002            
|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.

ITEM 9A.

CONTROLS AND PROCEDURES



Our disclosure controls and procedures are
designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC. We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, that
the disclosure controls and procedures are effective to timely alert them to any material information relating to MOCON (including its consolidated subsidiaries) that must be included in our periodic
SEC filings.

22

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PART III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF MOCON

A.

Directors of the Registrant.

The information under the captions
Election of Directors  Information About Nominees and Election of Directors  Other Information About Nominees in MOCONs 2004 Proxy Statement is incorporated
herein by reference.

B.

Executive Officers of the Registrant.

Information about our executive officers is
included in this Report under Item 4A, Executive Officers of MOCON.

C.

Compliance with Section 16(a) of the Exchange Act.

The information under the caption
Section 16(a) Beneficial Ownership Reporting Compliance in MOCONs 2004 Proxy Statement is incorporated herein by reference.

D.

Audit Committee Financial Expert.

The information under the caption
Election of Directors  Information about the Board and its Committees in MOCONs 2004 Proxy Statement is incorporated herein by reference.

E.

Identification of the Audit Committee.

The information in the Election of
Directors  Information about the Board and its Committees section of our 2004 Proxy Statement is incorporated in this Report by reference.

F.

Code of Ethics.

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 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:

MOCON, Inc.

7500 Boone Avenue North

Minneapolis, Minnesota 55428

Attention:  Chief Financial Officer



ITEM 11.

EXECUTIVE COMPENSATION

The information under the captions
Election of Directors  Director Compensation and Executive Compensation and Other Benefits in MOCONs 2004 Proxy Statement is incorporated herein by reference.

23

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ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information under the caption
Principal Shareholders and Beneficial Ownership of Management and Executive Compensation and Other Benefits  Equity Compensation Plan Information in MOCONs 2004
Proxy Statement is incorporated herein by reference.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the caption
Election of Directors  Other Information About Nominees in MOCONs 2004 Proxy Statement is incorporated herein by reference.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information under the caption
Independent Auditors in MOCONs 2004 Proxy Statement is incorporated herein by reference.

24

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PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)

1.

Financial Statements:

The
following Consolidated Financial Statements of MOCON and its subsidiaries are included herein:

Page

|Independent Auditors Report                                                                         | F-1
|---------------------------------------------------------------------------------------------------- | ---
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                         | F-2
|Consolidated Statements of Income for the years ended
December 31, 2003, 2002 and 2001               | F-3
|Consolidated Statements of Stockholders Equity for the years ended
December 31, 2003, 2002 and 2001 | F-4
|Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001           | F-5
|Notes to Consolidated Financial Statements                                                           | F-6

25

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2.

Financial Statement Schedules:

The following financial statement schedules
are included herein and should be read in conjunction with the financial statements referred to above:

Independent Auditors Report on Financial Statement Schedule

The Board of Directors and StockholdersMOCON, Inc.:

Under
date of February 20, 2004, we reported on the consolidated balance sheets of MOCON, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income,
stockholders equity and cash flows for each of the years in the three-year period ended December 31, 2003, as contained in this annual report on Form 10-K for the year 2003. In connection
with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as included in the accompanying index. 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.

/s/   KPMG LLP

Minneapolis, Minnesota

February 20, 2004

26

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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 the financial statements or related notes.

SCHEDULE II

MOCON, INC. AND SUBSIDIARIES

Valuation and Qualifying Accounts

|Description                     |  | Balance atbeginning ofyear |   | Charged to costsand expenses |  | Deductions(1) |        | Balance atend of year |    
|------------------------------- |  | -------------------------- | - | ---------------------------- |  | ------------- | ------ | --------------------- | ---
|                               
|Year ended December 31, 2003    |  |                            |   |                              |  |               |        |                       |    
|allowance for doubtful accounts |  |                            | $ | 202,000                      |  |               | 44,000 |                       |    
|                               
|Year ended December 31, 2002    |  |                           
|allowance for doubtful accounts |  |                            | $ | 200,000                      |  |               | 20,000 |                       |    
|                               
|Year ended December 31, 2001    |  |                           
|allowance for doubtful accounts |  |                            | $ | 159,000                      |  |               | 49,000 |                       | (2)
|                               

(1)   Bad debts written off.

(2)   Includes adjustment for acquisition.

27

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3.

Exhibits

The exhibits to this Report 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 22, 2004, 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 14(c):

A.

1990
Non-Employee Director Stock Option Plan (incorporated by reference to the Companys Registration Statement on Form S-8 (File No. 33-42255)).

B.

1992
Stock Option Plan (incorporated by reference to the Companys Registration Statement on Form S-8 (File No. 33-49752)).

C.

1998 Stock Option Plan (incorporated by reference to the Companys Registration Statement on Form S-8 (File No. 33-58789)).

D.

1999 Compensation Committee resolutions setting forth the Incentive Compensation Plan (incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 0-9273)).

E.

Paired Profit Sharing Plan effective July 1, 1996 (incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-9273)).

F.

Form of Executive Severance Agreement (incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 0-9273)).

G.

2003 Compensation Committee resolution setting forth the Incentive Compensation Plan for 2003 and subsequent years (incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 0-9273)).

H.

MOCON, Inc. Savings and Retirement Plan (incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 0-9273)).

I.

1998 Stock Option Plan, as amended on May 21, 2002 (incorporated by reference to the Companys Registration Statement on Form S-8 (File No. 33-58789)).

(b)

Reports on Form 8-K

On October 21, 2003, we furnished a report
on Form 8-K under Item 12, Results of Operations and Financial Condition, to announce that we issued a press release on October 21, 2003, announcing preliminary results for the third
quarter ended September 30, 2003, which such press release was attached as an exhibit to the report.

28

---

We furnished a report dated December 19, 2003,
on Form 8-K under Item 5, Other Events, to announce that we issued a press release on December 22, 2003, announcing that we had signed a definitive agreement with Ahlström Capital Oy
to acquire Paul Lippke Handels-GmbH Prozess- und Laborsysteme, a German company, which such press release was attached as an exhibit to the report.

(c)

Exhibits

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

(d)

Financial Statement Schedules

See Item 14, section (a) 2 above for the
financial statement schedules filed herewith.

29

---

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 30, 2004 | MOCON, INC.                                                                                                                                               
|--------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|                      |                                                                                                                                                           
|                      | By: /s/  Robert L. Demorest

Robert L. Demorest, President, Chief
Executive Officer and Chairman of the Board
(principal executive officer)               
|                      |                                                                                                                                                           
|                      | By: /s/  Dane D. Anderson

Dane D. Anderson, Vice President, Chief
Financial Officer, Treasurer and Secretary
(principal financial and accounting officer)
|                      |                                                                                                                                                           



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on March 30, 2004.

|Signature and Title                                                
|-------------------------------------------------------------------
|                                                                   
|/s/  Robert L. Demorest                                            
|Robert L. Demorest, President, Chief Executive Officer and Director
|                                                                   
|/s/  Dean B. Chenoweth                                             
|Dean B. Chenoweth, Director                                        
|                                                                   
|/s/  J. Leonard Frame                                              
|J. Leonard Frame, Director                                         
|                                                                   
|/s/  Daniel W. Mayer                                               
|Daniel W. Mayer, Executive Vice President and Director             
|                                                                   
|/s/  Ronald A. Meyer                                               
|Ronald A. Meyer, Vice President and Director                       
|                                                                   
|/s/  Richard A. Proulx                                             
|Richard A. Proulx, Director                                        
|                                                                   
|/s/  Paul L. Sjoquist                                              
|Paul L. Sjoquist, Director                                         
|                                                                   
|/s/  Tom C. Thomas                                                 
|Tom C. Thomas, Director                                            

30

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MOCON, INC. AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2003, 2002, and 2001



Table of Contents



Page

|Independent Auditors Report                    | F-1
|----------------------------------------------- | ---
|Consolidated Balance Sheets                     | F-2
|Consolidated Statements of Income               | F-3
|Consolidated Statements of Stockholders Equity | F-4
|Consolidated Statements of Cash Flows           | F-5
|Notes to Consolidated Financial Statements      | F-6



---

Independent Auditors Report

The Board of Directors and StockholdersMOCON, Inc.:

We
have audited the accompanying consolidated balance sheets of MOCON, Inc. and subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of income,
stockholders equity and cash flows for each of the years in the three-year period ended December 31, 2003. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
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, 2003 and 2002,
and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the
United States of America.





/s/   KPMG LLP



Minneapolis, MinnesotaFebruary 20, 2004

F-1

---

MOCON, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2002

|                                                                         | 2003 |  | 2002
|------------------------------------------------------------------------ | ---- |  | ----
|Assets                                                                   |      |  |     
|Current assets:                                                          |      | 
|Cash and temporary cash investments                                      |      |  | $   
|Marketable securities, current                                           |      |  |     
|Trade accounts receivable, less allowance for doubtful accounts of      
|$244,000 in 2003 and $202,000 in 2002                                    |      |  |     
|Other receivables                                                        |      |  |     
|Inventories                                                              |      |  |     
|Prepaid expenses                                                         |      |  |     
|Deferred income taxes                                                    |      |  |     
|                                                                         |      |  |     
|Total current assets                                                     |      |  |     
|                                                                         |      |  |     
|Marketable securities, noncurrent                                        |      |  |     
|Property, plant, and equipment, net                                      |      |  |     
|Other assets:                                                            |      | 
|Software development costs, net of accumulated amortization of $435,430 
|in 2003 and $162,634 in 2002                                             |      |  |     
|Goodwill                                                                 |      |  |     
|Technology rights and other intangibles, net of accumulated             
|amortization of $729,894 in 2003 and $600,059 in 2002                    |      |  |     
|Other                                                                    |      |  |     
|                                                                         |      |  |     
|Total other assets                                                       |      |  |     
|                                                                         |      |  |     
|                                                                         |      |  | $   
|                                                                         |      |  |     
|Liabilities and Stockholders Equity                                     |      | 
|Current liabilities:                                                     |      | 
|Accounts payable                                                         |      |  | $   
|Accrued compensation and vacation                                        |      |  |     
|Other accrued expenses                                                   |      |  |     
|Accrued product warranties                                               |      |  |     
|Accrued income taxes                                                     |      |  |     
|Dividends payable                                                        |      |  |     
|                                                                         |      |  |     
|Total current liabilities                                                |      |  |     
|Deferred income taxes                                                    |      |  |     
|                                                                         |      |  |     
|Total liabilities                                                        |      |  |     
|                                                                         |      |  |     
|Stockholders equity:                                                    |      | 
|Capital stock  undesignated  authorized 3,000,000 shares               |      |  |     
|Common stock  $0.10 par value. Authorized 22,000,000 shares; issued and
|outstanding 5,406,189 shares in 2003 and 5,470,189 shares in 2002        |      |  |     
|Capital in excess of par value                                           |      |  |     
|Retained earnings                                                        |      |  |     
|Accumulated other comprehensive income                                   |      |  |     
|                                                                         |      |  |     
|Total stockholders equity                                               |      |  |     
|Commitments and contingencies (note 7)                                   |      | 
|                                                                         |      |  |     
|                                                                         |      |  | $   
|                                                                         |      |  |     

See accompanying notes to
consolidated financial statements.

F-2

---

MOCON, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2003, 2002, and 2001

|                                              | 2003 |  | 2002 |            | 2001
|--------------------------------------------- | ---- |  | ---- | ---------- | ----
|Sales:                                        |      |  |      |            |     
|Products                                      |      |  | $    | 17,751,263 |     
|Consulting services                           |      |  |      | 1,881,103  |     
|                                              |      |  |      |            |     
|Total sales                                   |      |  |      | 19,632,366 |     
|                                              |      |  |      |            |     
|Cost of sales:                                |      | 
|Products                                      |      |  |      | 7,959,228  |     
|Consulting services                           |      |  |      | 917,328    |     
|                                              |      |  |      |            |     
|Total cost of sales                           |      |  |      | 8,876,556  |     
|                                              |      |  |      |            |     
|Gross profit                                  |      |  |      | 10,755,810 |     
|Selling, general, and administrative expenses |      |  |      | 6,268,837  |     
|Research and development expenses             |      |  |      | 1,313,379  |     
|                                              |      |  |      |            |     
|Operating income                              |      |  |      | 3,173,594  |     
|Investment income                             |      |  |      | 126,711    |     
|                                              |      |  |      |            |     
|Income before income taxes                    |      |  |      | 3,300,305  |     
|Income taxes                                  |      |  |      | 1,089,000  |     
|                                              |      |  |      |            |     
|Net income                                    |      |  | $    | 2,211,305  |     
|                                              |      |  |      |            |     
|Net income per common share:                  |      | 
|Basic                                         |      |  | $    | 0.41       |     
|Diluted                                       |      |  |      | 0.40       |     
|Weighted average shares outstanding:          |      | 
|Basic                                         |      |  |      | 5,410,010  |     
|Diluted                                       |      |  |      | 5,503,911  |     

See accompanying notes to consolidated financial statements.

F-3

---

MOCON, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
Years ended December 31, 2003, 2002, and 2001

|                                    | Common stock |  | Capital inexcess ofpar value |           | Retainedearnings |   | Accumulatedothercomprehensiveincome |   | Total
|----------------------------------- | ------------ |  | ---------------------------- | --------- | ---------------- | - | ----------------------------------- | - | -----
|
|                                    |              |  |                              |           |                  |   |                                     |   |      
|Balance, December 31, 2000          |              |  |                              | 5,809,431 |                  | $ | 580,943                             |   |      
|Stock options exercised             |              |  |                              | 29,425    |                  |   | 2,942                               |   |      
|Purchase and retirement            
|of common stock                     |              |  |                              | (362,403  | )                |   | (36,240                             | ) |      
|Dividends declared                  |              | 
|($.24 per share)                    |              |  |                              |          |                  |   |                                    |   |      
|Net income                          |              |  |                              |          |                  |   |                                    |   |      
|Adjustment for unrealized gain on   |              | 
|marketable equity securities        |              |  |                              |          |                  |   |                                    |   |      
|                                    |              |  |                              |           |                  |   |                                    
|Comprehensive income                |              |  |                              |           |                  |   |                                     |   |      
|                                    |              |  |                              |           |                  |   |                                     |   |      
|Balance, December 31, 2001          |              |  |                              | 5,476,453 |                  |   | 547,645                             |   |      
|Stock options exercised             |              |  |                              | 21,736    |                  |   | 2,174                               |   |      
|Purchase and retirement             |              | 
|of common stock                     |              |  |                              | (28,000   | )                |   | (2,800                              | ) |      
|Dividends declared                 
|($.24 per share)                    |              |  |                              |          |                  |   |                                    |   |      
|Net income                          |              |  |                              |          |                  |   |                                    |   |      
|Adjustment for unrealized (loss) on
|marketable equity securities        |              |  |                              |          |                  |   |                                    |   |      
|                                    |              |  |                              |           |                  |   |                                    
|Comprehensive income                |              |  |                              |           |                  |   |                                     |   |      
|                                    |              |  |                              |           |                  |   |                                     |   |      
|Balance, December 31, 2002          |              |  |                              | 5,470,189 |                  |   | 547,019                             |   |      
|Stock options exercised             |              |  |                              | 28,501    |                  |   | 2,850                               |   |      
|Purchase and retirement            
|of common stock                     |              |  |                              | (92,501   | )                |   | (9,250                              | ) |      
|Dividends declared                  |              | 
|($.26 per share)                    |              |  |                              |          |                  |   |                                    |   |      
|Net income                          |              |  |                              |          |                  |   |                                    |   |      
|Adjustment for unrealized gain on   |              | 
|marketable equity securities        |              |  |                              |          |                  |   |                                    |   |      
|                                    |              |  |                              |           |                  |   |                                    
|Comprehensive income                |              |  |                              |           |                  |   |                                     |   |      
|                                    |              |  |                              |           |                  |   |                                     |   |      
|Balance, December 31, 2003          |              |  |                              | 5,406,189 |                  | $ | 540,619                             |   |      
|                                    |              |  |                              |           |                  |   |                                     |   |      

See accompanying notes to
consolidated financial statements.

F-4

---

MOCON, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002, and 2001

|                                                           | 2003 |  | 2002 |            | 2001
|---------------------------------------------------------- | ---- |  | ---- | ---------- | ----
|Cash flows from operating activities:                      |      |  |      |            |     
|Net income                                                 |      |  | $    | 2,211,305  |     
|Adjustments to reconcile net income to net cash provided   |      | 
|by operating activities:                                   |      | 
|Loss on disposition of long-term assets                    |      |  |      | 35,494     |     
|Depreciation and amortization                              |      |  |      | 987,712    |     
|Deferred income taxes                                      |      |  |      | (183,998   | )   
|Changes in operating assets and liabilities,               |      | 
|net of effect of acquisitions:                             |      | 
|Trade accounts receivable                                  |      |  |      | 422,517    |     
|Other receivables                                          |      |  |      | (12,826    | )   
|Inventories                                                |      |  |      | 35,311     |     
|Prepaid expenses                                           |      |  |      | (24,195    | )   
|Accounts payable                                           |      |  |      | (157,960   | )   
|Accrued compensation and vacation                          |      |  |      | 145,348    |     
|Other accrued expenses                                     |      |  |      | (4,871     | )   
|Accrued product warranties                                 |      |  |      | 12,706     |     
|Accrued income taxes                                       |      |  |      | (68,166    | )   
|                                                           |      |  |      |            |     
|Net cash provided by operating activities                  |      |  |      | 3,398,377  |     
|                                                           |      |  |      |            |     
|Cash flows from investing activities:                      |      | 
|Purchases of marketable securities                         |      |  |      | (5,303,838 | )   
|Proceeds from sales or maturities of marketable securities |      |  |      | 2,990,896  |     
|Cash paid in acquisitions, net of cash acquired            |      |  |      | (253,514   | )   
|Purchases of property and equipment                        |      |  |      | (335,794   | )   
|Proceeds from sale of property and equipment               |      |  |      |           |     
|Purchases and development of software                      |      |  |      | (205,127   | )   
|Purchases of patents and trademarks                        |      |  |      | (111,950   | )   
|Other                                                      |      |  |      | (6,491     | )   
|                                                           |      |  |      |            |     
|Net cash (used in) provided by                            
|investing activities                                       |      |  |      | (3,225,818 | )   
|                                                           |      |  |      |            |     
|Cash flows from financing activities:                      |      | 
|Proceeds from the exercise of stock options                |      |  |      | 149,999    |     
|Purchase and retirement of common stock                    |      |  |      | (627,606   | )   
|Dividends paid                                             |      |  |      | (1,377,725 | )   
|                                                           |      |  |      |            |     
|Net cash used in financing activities                      |      |  |      | (1,855,332 | )   
|                                                           |      |  |      |            |     
|Net (decrease) increase in cash and temporary              |      | 
|cash investments                                           |      |  |      | (1,682,773 | )   
|Cash and temporary cash investments:                       |      | 
|Beginning of year                                          |      |  |      | 3,082,610  |     
|                                                           |      |  |      |            |     
|End of year                                                |      |  | $    | 1,399,837  |     
|                                                           |      |  |      |            |     
|Supplemental disclosures of cash flow information:         |      | 
|Cash paid during the year for income taxes                 |      |  | $    | 1,341,163  |     
|Supplemental schedule of noncash investing and             |      | 
|financing activities:                                      |      | 
|Noncash purchase and retirement of common stock            |      |  | $    | 16,595     |     
|Noncash exercise of stock options                          |      |  |      | 20,226     |     
|Dividends accrued                                          |      |  |      | 350,891    |     

See accompanying notes to
consolidated financial statements.

F-5

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



(1)      Summary of Significant Accounting Policies

MOCON,
Inc. (the Company) operated in a single industry segment: the development, manufacturing, and marketing of measurement, analytical, monitoring, sample preparation, 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 is a summary of the
significant accounting policies used in the preparation of the Companys consolidated financial statements.

(a)

Principles of Consolidation

The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

(b)

Statements of Cash Flows

The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Temporary
cash investments consist of short-term investments which are readily convertible to cash.

(c)

Marketable Securities

Marketable
securities at December 31, 2003 consist of United States government obligations, municipal bonds, and certificates of deposit. The Company classifies its debt and marketable equity securities as
available-for-sale.

Available-for-sale
securities are recorded at fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from income and are reported as a separate component of stockholders
equity until realized.

A
decline in the market value of any available-for-sale security below cost that is deemed other than temporary is charged to income resulting in the establishment of a new cost basis for the
security.

Premiums
and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield. Dividend and interest income are recognized when earned. Realized gains and
losses for securities classified as available-for-sale are included in income and are derived using the specific identification method for determining the cost of securities sold.

(d)

Inventories

Inventories
are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, and market represents the lower of replacement cost or estimated net realizable value.

(e)

Property, Plant, and Equipment

Property,
plant, and equipment are carried at cost. Depreciation and amortization are computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is recognized

F-6

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



in
income for the period. The cost of maintenance and repairs is charged to income as incurred and significant renewals and betterments are capitalized.

(f)

Goodwill, Other Intangible Assets, and Software Development Costs

Goodwill represents the excess
of the purchase price over the fair value of assets acquired. The Company adopted the provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Pursuant to Statement 142, goodwill and intangible assets
acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that
intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets.

Intangible assets consist of
technology rights, patents, and trademarks. Technology rights, patents, and trademarks are carried at cost less accumulated amortization. Costs incurred in connection with applications for new patents are deferred until a
final determination, with respect to the application, is made by appropriate regulatory agencies. Costs of patents abandoned are charged to income in the period of abandonment. Technology rights costs are amortized on a straight-line basis over 7 to
10 years. Patent costs are amortized over the lesser of 17 years or their estimated useful lives using the straight-line method. Trademarks are amortized over five years.

Software development costs are
carried at cost less accumulated amortization. Software development costs are amortized on a straight-line basis over 3 years.

(g)

Income Taxes

The Company uses the
asset-and-liability method for computing its deferred taxes. Under the asset-and-liability method, deferred taxes are based on the difference between the financial statement and tax basis of assets and liabilities and the enacted tax rates that will
be in effect when these differences reverse. Deferred tax expense represents the change in deferred tax assets and liabilities during the year.

(h)

Use of Estimates

The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of
property, plant and equipment, intangibles and goodwill; and valuation of allowances for receivables, inventory, warranty and deferred income taxes. Actual results could differ from those estimates.

(i)

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of

The Company reviews its
long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such

F-7

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to
sell.

(j)

Fair Value of Financial Instruments

The Companys financial
instruments are recorded in its consolidated balance sheet. The carrying amount for cash and temporary cash investments, accounts receivable, accounts payable, and accrued liabilities approximates fair value due to the immediate or short-term
maturity of these financial instruments. The fair values of investments in marketable securities are based on quoted market prices and are summarized in note 2.

(k)

Revenue Recognition

Revenue is recognized when
title passes, which is generally upon shipment of product or upon completion of services. The Company provides for estimated warranty costs in the period revenue is recognized. The Company generally does not allow a right of return. Shipping and handling costs
are classified as part of cost of sales.

(l)

Advertising Costs

The Company incurs advertising
costs associated with trade shows, print advertising, and brochures. Such costs are charged to expense as incurred. Advertising expense was $420,000, $325,000, and $302,000 in 2003, 2002, and 2001, respectively.

(m)

Net Income Per Common Share

Basic net income per common
share is computed by dividing net income by the weighted average of common shares outstanding during the year. Diluted net income per share is computed by dividing net income by the weighted average of common and dilutive potential common shares
outstanding during the year.

(n)

Stock-Based Employee Compensation

The Company uses the
intrinsic-value method for employee stock-based compensation pursuant to Accounting Principles Board Opinion No. 25 (Opinion 25), Accounting for Stock Issued to Employees. Under the guidelines of Opinion 25, compensation
cost for stock-based employee compensation plans is 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 adopted the
disclosure provisions for employee stock-based compensation and the fair-value method for nonemployee stock-based compensation of Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-based Compensation.

The Company has adopted the
disclosure-only provisions of SFAS 123. Accordingly, no compensation cost has been recognized with respect to the Companys stock option plans. Had compensation cost for these plans been determined based on the fair value methodology
prescribed by SFAS 123, the Companys net income and income per common share would have been reduced to the pro forma amounts indicated below:

F-8

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|                                           | 2003 |  | 2002 |           | 2001
|------------------------------------------ | ---- |  | ---- | --------- | ----
|Net income  as reported                   |      |  | $    | 2,211,305 |     
|Deduct: Total stock-based employee         |      | 
|compensation expense determined under      |      | 
|fair value based method for all awards,    |      | 
|net of related tax effects                 |      |  |      | (253,317  | )   
|                                           |      |  |      |           |     
|Net income  pro forma                     |      |  | $    | 1,957,988 |     
|                                           |      |  |      |           |     
|Net income per common share  as reported: |      | 
|Basic                                      |      |  | $    | 0.41      |     
|Diluted                                    |      |  |      | 0.40      |     
|Net income per common share  pro forma:   |      | 
|Basic                                      |      |  |      | 0.36      |     
|Diluted                                    |      |  |      | 0.36      |     

The pro forma amounts may not
be representative of the effects on reported net income for future years. The fair value of each option grant is estimated on the date of grant using the binomial option-pricing model with the following weighted average assumptions used for grants in
2003, 2002, and 2001:

|                          | 2003 |  | 2002 |      | 2001
|------------------------- | ---- |  | ---- | ---- | ----
|Dividend yield            |      |  |      | 3.3% |     
|Expected volatility       |      |  |      | 37%  |     
|Risk-free interest rate   |      |  |      | 3.0% |     
|Expected lives (in years) |      |  |      | 7.9  |     



(o)

Reclassifications

Certain 2002 and 2001 amounts
have been reclassified to conform to the 2003 presentation.

(p)

New Accounting Pronouncements

In June 2002, the FASB issued
Statement of Financial Accounting Standards No. 146 (SFAS 146), Accounting for Costs
Associated with Exit or Disposal Activities, which supersedes Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. SFAS 146 requires that a liability for
a cost associated with an exit activity or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. EITF Issue No. 94-3 requires
recognition of a liability at the date an entity commits to an exit plan. All provisions
of SFAS 146 were effective for exit or disposal activities that were initiated after
December 31, 2002. We adopted SFAS 146 during the first quarter of fiscal 2003 with no
material impact on our consolidated financial statements.

In December 2002, the Emerging
Issues Task Force issued EITF 00-21, Revenue Arrangements with Multiple Deliverables.  This issue addresses certain aspects of the accounting for arrangements under which a company will perform multiple revenue-generating activities.
In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable, and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables (that is,

F-9

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



there are separate units of
accounting). In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. This issue addresses when and, if so, how an arrangement
involving multiple deliverables should be divided into separate units of accounting. This issue does not change otherwise applicable revenue recognition criteria. This issue was applicable for us for revenue arrangements entered into beginning in
third quarter 2003. The adoption of EITF 00-21 did not have an impact on revenue recognition.

In
December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an entity
through means other than voting rights and accordingly should consolidate the entity. FIN
46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, which was issued in January 2003. We will be required to apply FIN 46R to
variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on
January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest
being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies
may be used to measure the assets, liabilities and noncontrolling interest of the VIE. FIN 46R did not have an impact on the Companys consolidated financial statements.

In April 2003, the FASB issued
Statement of Financial Accounting Standards No. 149 (SFAS 149), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. This
statement amends SFAS 133 to provide clarification on the financial accounting
and reporting of derivative instruments and hedging activities and requires
contracts with similar characteristics to be accounted for on a comparable
basis. We adopted SFAS 149 during the second quarter of fiscal 2003 with no
material impact on our consolidated financial statements.

FASB
Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003. This Statement
establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also
includes required disclosures for financial instruments within its scope. For us, the Statement was effective for instruments entered into or modified after May 31, 2003
and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments,
the Statement will be effective for us on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial
instruments. We currently do not have any financial instruments that are within the scope of this Statement.

(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, 2003 and 2002 were as follows:

|                        | 2003         
|----------------------- | -------------
|                        | Amortizedcost
|Available for sale:     |              
|Municipal bonds         |              
|Certificates of deposit |              
|Federal bonds           |              
|                        |              
|                        |              
|                        |              

F-10

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|                        | 2002         
|----------------------- | -------------
|                        | Amortizedcost
|Available for sale:     |              
|Municipal bonds         |              
|Certificates of deposit |              
|                        |              
|                        |              
|                        |              

For the years ended
December 31, 2003, 2002, and 2001, gross realized gains were $0, $0, and $18,753, respectively. For the years ended December 31, 2003, 2002, and 2001, gross realized losses were $0, $0, and $1,253, respectively.

Maturities of investment
securities classified as available-for-sale were as follows at December 31, 2003 and 2002:

|                    | 2003          |  | 2002     
|------------------- | ------------- |  | ---------
|                    | Amortizedcost |  | Fairvalue
|Available for sale: |               |  |          
|Due within one year |               |  | $        
|Due after one       |               | 
|through five years  |               |  |          
|                    |               |  |          
|                    |               |  | $        
|                    |               |  |          

(3)      Inventories

The major components of
inventories at December 31, 2003 and 2002 were as follows:

|                  | 2003 |  | 2002
|----------------- | ---- |  | ----
|Finished products |      |  | $   
|Work-in-process   |      |  |     
|Raw materials     |      |  |     
|                  |      |  |     
|                  |      |  | $   
|                  |      |  |     

F-11

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



(4)      Property, Plant, and Equipment

Property, plant, and equipment at December 31, 2003 and 2002 consisted of the following:

|                              | 2003 |  | 2002 |            | Estimateduseful lives
|----------------------------- | ---- |  | ---- | ---------- | ---------------------
|Land                          |      |  | $    | 200,000    |                      
|Buildings                     |      |  |      | 445,833    |                      
|Machinery and equipment       |      |  |      | 3,654,627  |                      
|Office equipment              |      |  |      | 675,075    |                      
|Leasehold improvements        |      |  |      | 676,826    |                      
|Vehicles                      |      |  |      | 147,153    |                      
|                              |      |  |      |           
|Total property, plant, and    |      |  |      | 5,799,514  |                      
|equipment                     |      | 
|Less accumulated depreciation |      |  |      | (3,700,052 | )                    
|                              |      |  |      |           
|Net property, plant, and      |      | 
|equipment                     |      |  | $    | 2,099,462  |                      
|                              |      |  |      |           

Depreciation and amortization
of property, plant, and equipment charged to income was $534,512, $539,387, and $525,254 for the years ended December 31, 2003, 2002, and 2001, respectively.

(5)      Goodwill and Other Intangible Assets

We
adopted SFAS 142 effective January 1, 2002. As required by SFAS 142, we performed a transitional goodwill impairment assessment to determine whether there was an
indication that goodwill was impaired at the date of adoption. In connection therewith, the Company determined that it consisted of a single reporting unit and determined
the Companys fair value and compared it to the Companys carrying amount. As of January 1, 2002, the Companys fair value exceeded its carrying amount.
Therefore, there was no indication that goodwill was impaired and the Company did not record any transitional impairment loss. In addition to its transitional goodwill
impairment assessment, the Company also completed its annual impairment tests during the fourth quarters of 2003 and 2002 and determined there was no impairment.

Goodwill

There was no change in the
carrying amount of goodwill for the years ended December 31, 2003 and December 31, 2002. As of December 31, 2003, we have unamortized goodwill in the amount of $1,346,795.

The
following table presents a reconciliation of net income and income per share adjusted for the exclusion of goodwill, net of tax:

|                                        | Twelve Months EndedDecember 31,
|--------------------------------------- | -------------------------------
|
|Reported net income                     |                                
|Add:  Goodwill amortization, net of tax |                                
|                                        |                                
|Adjusted net income                     |                                
|                                        |                                
|                                        |                                
|Reported basic income per share         |                                
|Add:  Goodwill amortization, net of tax |                                
|                                        |                                
|Adjusted basic income per share         |                                
|                                        |                                
|                                        |                                
|Reported diluted income per share       |                                
|Add:  Goodwill amortization, net of tax |                                
|                                        |                                
|Adjusted diluted income per share       |                                
|                                        |                                



Other Intangible Assets

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



|                          | As of December 31, 2003
|------------------------- | -----------------------
|                          | Carrying Amount        
|Patents                   |                        
|Trademarks and tradenames |                        
|Technology rights         |                        
|Other intangibles         |                        
|Projects in process       |                        
|                          |                        
|                          |                        
|                          |                        



F-12

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|                          | As of December 31, 2002
|------------------------- | -----------------------
|                          | Carrying Amount        
|Patents                   |                        
|Trademarks and tradenames |                        
|Technology rights         |                        
|Other intangibles         |                        
|Projects in process       |                        
|                          |                        
|                          |                        
|                          |                        



Amortization expense was
$180,403, $178,597 and $236,557 in 2003, 2002 and 2001, respectively.



Estimated amortization expense
for the fiscal years 2004 to 2008 and thereafter is $179,517, $179,423, $166,064, $119,779, $98,014 and $153,207, respectively.



(6)       Warranty Guarantees

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 our 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 sales based on historical claims experience. Special warranty reserves are also accrued for special rework campaigns for known major product modifications. The Company also offers service contracts for select products when the factory
warranty period expires.

Warranty provisions and claims
for the years ended December 31, 2003, 2002, and 2001 were as follows:

|Years:                           | Balance atbeginningof year |  | WarrantyProvisions |         | WarrantyClaims |  | Balanceat endof year
|-------------------------------- | -------------------------- |  | ------------------ | ------- | -------------- |  | --------------------
|Year ended December 31, 2003     |                            |  |                    |         |                |  |                     
|Allowance for product warranties |                            |  | $                  | 267,000 |                |  | 336,000             
|                                
|Year ended December 31, 2002     |                            | 
|Allowance for product warranties |                            |  | $                  | 251,000 |                |  | 401,000             
|                                
|Year ended December 31, 2001     |                            | 
|Allowance for product warranties |                            |  | $                  | 272,000 |                |  | 336,000             
|                                

(1)   Includes adjustment for acquisition.

F-13

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



(7)      Commitments and Contingencies

(a)

Leases

The Company leases its
facilities and certain equipment pursuant to operating leases. The facility leases expire at various times through June 2010 and require the Company to pay operating costs, including real estate taxes.

Rental expense, including
charges for operating costs, was as follows:

| | 2003 |         | 2002 |  | 2001   
| | ---- | ------- | ---- |  | -------
| | $    | 443,929 |      |  | 440,580



The following is a schedule of
future minimum lease payments, excluding charges for operating costs, for operating leases as of December 31, 2003:

|Year ending December 31: |  |  |   |           | 
|------------------------ |  |  | - | --------- | 
|2004                     |  |  | $ | 321,000   | 
|2005                     |  |  |   | 301,000   | 
|2006                     |  |  |   | 306,000   | 
|2007                     |  |  |   | 283,000   | 
|2008                     |  |  |   | 266,000   | 
|Later years              |  |  |   | 407,000   | 
|                         |  | 
|                         |  |  | $ | 1,884,000 | 
|                         |  | 



(b)

Executive Severance Agreements

The Company has entered into
severance agreements with four executives that require payment of two times their annual salary if they are terminated within 24 months after a change of control occurs or upon the occurrence of other events as described in the agreements.

(8)      Income Taxes

The provision for income taxes
consists of the following:

|                           | 2003 |  | 2002 |           | 2001 | 
|-------------------------- | ---- |  | ---- | --------- | ---- | 
|Current tax expense:       |      |  |      |           |      | 
|Federal                    |      |  | $    | 1,140,000 |      | 
|State                      |      |  |      | 133,000   |      | 
|                           |      |  |      |           |      | 
|Total current expense      |      |  |      | 1,273,000 |      | 
|Deferred                   |      |  |      | (184,000  | )    | 
|                           |      |  |      |           |      | 
|Provision for income taxes |      |  | $    | 1,089,000 |      | 
|                           |      |  |      |           |      | 

F-14

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MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



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

|                                         | Percentage of pretax incomefor years ended December 31,
|---------------------------------------- | -------------------------------------------------------
|
|                                         |                                                        
|Tax at statutory federal income tax rate |                                                        
|Increases (reductions) in taxes          |                                                        
|resulting from:                          |                                                        
|State income taxes, net of federal       |                                                        
|benefit                                  |                                                        
|Export incentives                        |                                                        
|Tax-exempt investment earnings           |                                                        
|Other                                    |                                                        
|                                         |                                                        
|Effective income tax rate                |                                                        
|                                         |                                                        

The tax effect of significant
temporary differences representing deferred tax assets and liabilities at December 31, 2003 and 2002 were as follows:

|                                   | 2003 |  | 2002
|---------------------------------- | ---- |  | ----
|Deferred tax assets:               |      |  |     
|Allowance for doubtful accounts    |      |  | $   
|Inventory costs                    |      |  |     
|Inventory reserves                 |      |  |     
|Warranty reserves                  |      |  |     
|Other accruals                     |      |  |     
|                                   |      |  |     
|Total deferred tax assets          |      |  |     
|                                   |      |  |     
|Deferred tax liabilities:          |      | 
|Technology rights                  |      |  |     
|Fixed assets and intangibles       |      |  |     
|                                   |      |  |     
|Total deferred tax liabilities     |      |  |     
|                                   |      |  |     
|Net deferred tax (liability) asset |      |  | $   
|                                   |      |  |     

The Company has determined
that establishing a valuation allowance for the deferred tax assets is not required since it is more likely than not that the deferred tax assets will be realized through future taxable income.

(9)      Stockholders Equity

From time to time, the
Companys board of directors authorizes the repurchase of common stock. In May 2003, the Companys board of directors authorized a $1.2 million increase in its stock repurchase program. Under the terms of the increased program, up to a
cumulative total of $3.2 million of the Companys common stock may be purchased. During 2003, $627,606 in common stock has been acquired by the Company pursuant to this authorization.

F-15

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



As of December 31, 2003,
the Company has reserved 231,934 shares of common stock for options that are still available for grant under the Companys stock option plans, and 810,412 shares for options that have been granted but have not yet been exercised.

Under the stock option 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 and 1998 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 and 1998 plans, which may be granted at option prices no less than 25% of the market value. Exercise periods are generally for five 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.

Information regarding the
Companys stock option plans for 2003, 2002, and 2001 was as follows:

|                                       | Shares |  | Weightedaverageexerciseprice
|-------------------------------------- | ------ |  | ----------------------------
|Options outstanding, December 31, 2000 |        |  |                             
|Granted                                |        |  |                             
|Exercised                              |        |  |                             
|Canceled or expired                    |        |  |                             
|                                       |        |  |                             
|Options outstanding, December 31, 2001 |        |  |                             
|Granted                                |        |  |                             
|Exercised                              |        |  |                             
|Canceled or expired                    |        |  |                             
|                                       |        |  |                             
|Options outstanding, December 31, 2002 |        |  |                             
|Granted                                |        |  |                             
|Exercised                              |        |  |                             
|Canceled or expired                    |        |  |                             
|                                       |        |  |                             
|Options outstanding, December 31, 2003 |        |  |                             
|                                       |        |  |                             

|                                        | 2003 |  | 2002 |         | 2001 | 
|--------------------------------------- | ---- |  | ---- | ------- | ---- | 
|Weighted average fair value of options, |      |  |      |         |      | 
|granted during the year                 |      |  | $    | 2.46    |      | 
|Weighted average exercise price of      |      | 
|options, exercisable at end of year     |      |  |      | 7.06    |      | 
|Options exercisable, at end of year     |      |  |      | 563,921 |      | 

At December 31, 2003, the weighted average
remaining contractual life of outstanding options was 7.7 years.

F-16

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



(10)    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, 2003, 2002, and 2001:

|                                       | 2003 |  | 2002 |           | 2001 | 
|-------------------------------------- | ---- |  | ---- | --------- | ---- | 
|Weighted shares of common stock        |      |  |      |           |      | 
|outstanding  basic                    |      |  |      | 5,410,010 |      | 
|Weighted shares of common stock        |      | 
|assumed upon exercise of stock options |      |  |      | 93,901    |      | 
|                                       |      |  |      |           |      | 
|Weighted shares of common stock        |      | 
|outstanding  diluted                  |      |  |      | 5,503,911 |      | 
|                                       |      |  |      |           |      | 

The following represents
securities outstanding at December 31, 2003, 2002, and 2001, which 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:

|        | 2003 |  | 2002 |        | 2001
|------- | ---- |  | ---- | ------ | ----
|Options |      |  |      | 64,695 |     

(11)    Sales

Foreign sales were $7,785,071,
$6,576,975, and $8,303,688 in 2003, 2002, and 2001, respectively. Of the foreign sales, $2,457,411, $1,716,372, and $1,855,840 in 2003, 2002, and 2001, respectively, were to customers in Western Europe. Sales to customers in Japan were $2,057,904,
$1,752,285, and $3,282,264 for 2003, 2002, and 2001, respectively. The Companys products are marketed outside of North America through various independent representatives. Paul Lippke Handels-GmbH Prozess- und Laborsysteme (Lippke) accounted
for approximately 10%, 8%, and 10% of sales in 2003, 2002, and 2001, respectively. Lippke was acquired effective January 1, 2004. See footnote 14. Another independent representative accounted for approximately 8%, 7%, and 14% of sales in 2003, 2002,
and 2001, respectively.

(12)    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 2003, 2002, and 2001 were $75,862, $74,085, and
$53,412, respectively.

(13)    Acquisitions

Effective November 24, 2003,
the Company acquired the Vaculok® vacuum insulated panel product line from Advantek, Inc. of Minnetonka, Minnesota (Vaculok). Vacuum insulated panels (VIPs) are devices which utilize unique technologies to excel in packaging applications
requiring lengthy temperature protection. The acquisition, valued at $253,514 including associated fees and expenses, was recorded using the purchase method of accounting and, accordingly, the acquired operations of Vaculok have been included in the
results of operations since the date of acquisition. The purchase price has been allocated to the net

F-17

---



MOCON, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



assets acquired based on
estimated fair market values at the date of acquisition. The estimated fair values of the assets acquired in the acquisition included inventory and equipment valued at $43,003 and $210,511, respectively.

The following unaudited pro
forma consolidated results of operations have been prepared as if the acquisition of Vaculok had occurred as of the beginning of fiscal 2002:

|                             | 2003 |  | 2002
|---------------------------- | ---- |  | ----
|Net sales                    |      |  | $   
|Net income                   |      |  |     
|Net income per common share: |      | 
|Basic                        |      |  |     
|Diluted                      |      |  |     

Effective October 1,
2001, the Company acquired Baseline-MOCON, Inc. (Baseline) of Lyons, Colorado, a manufacturer of gas analysis and monitoring instrumentation used in applications such as oil and gas exploration, process gas analysis, and industrial hygiene and safety
applications. The acquisition, valued at approximately $3.6 million, was recorded using the
purchase method of accounting and, accordingly, the acquired operations of Baseline have been included in the results of operations since the date of acquisition.

The following unaudited pro
forma consolidated results of operations have been prepared as if the acquisition of Baseline had occurred as of the beginning of fiscal 2001. Pro forma adjustments consist primarily of amortization of other intangibles:

|                             | 2001
|---------------------------- | ----
|Net sales                    |     
|Net income                   |     
|Net income per common share: |     
|Basic                        |     
|Diluted                      |     

(14)    Subsequent Event

Effective
January 1, 2004, the Company acquired Paul Lippke Handels-GmbH Prozess- und
Laborsysteme (Lippke) which is located in Germany. Lippke has been the primary
distributor of our products in Europe for approximately thirty years, and also
serves in the capacity of distributor or agent for several companies in addition
to MOCON. The acquisition of Lippke provides the Company with a direct presence
in Europe, which we plan to leverage to benefit all of our product and service
offerings. The Company acquired all of the shares of Lippke for a base purchase
price of $802,688. In addition, the Company is obligated to make three future
earnout payments to Lippkes former parent company based on the
net profits of Lippke in each of the years 2004, 2005, and 2006, with a minimum
payment amount of 100,000 euros per year. The Company is in the process of
reviewing and finalizing the valuation of the tangible and intangible assets
acquired in the acquisition.

F-18

---

MOCON, INC.

EXHIBIT INDEX TO ANNUAL REPORT ON

FORM 10-K

FOR FISCAL YEAR ENDED DECEMBER 31, 2003



|Item
No. |  | Item                                                                                         |  | Method of Filing
|-------- |  | -------------------------------------------------------------------------------------------- |  | ----------------
|         |  |                                                                                              |  |                 
|3.1      |  | Restated Articles of Incorporation of the Company                                            |  | (1)             
|         |  |                                                                                              |  |                 
|3.2      |  | Amendment to Restated Articles of Incorporation of the Company, effective May 27, 1987       |  | (2)             
|         |  |                                                                                              |  |                 
|3.3      |  | Amendment to Restated Articles of Incorporation of the Company, effective June 28, 1991      |  | (3)             
|         |  |                                                                                              |  |                 
|3.4      |  | Amendment to Restated Articles of Incorporation of the Company, effective May 21, 1998       |  | (11)            
|         |  |                                                                                              |  |                 
|3.5      |  | Amendment to Restated Articles of Incorporation of the Company, effective May 26, 1999       |  | (13)            
|         |  |                                                                                              |  |                 
|3.6      |  | Third Restated Bylaws of the Company                                                         |  | (4)             
|         |  |                                                                                              |  |                 
|10.1     |  | Office/Warehouse Lease, dated July 29, 1994                                                  |  | (5)             
|         |  |                                                                                              |  |                 
|10.2     |  | Office/Warehouse Lease Extension, dated June 6, 1997                                         |  | (8)             
|         |  |                                                                                              |  |                 
|10.3     |  | Office/Warehouse Lease, dated November 17, 1999                                              |  | (13)            
|         |  |                                                                                              |  |                 
|10.4     |  | 1990 Non-Employee Director Stock Option Plan                                                 |  | (3)             
|         |  |                                                                                              |  |                 
|10.5     |  | 1992 Stock Option Plan                                                                       |  | (6)             
|         |  |                                                                                              |  |                 
|10.6     |  | 1998 Stock Option Plan, as amended                                                           |  | (9)             
|         |  |                                                                                              |  |                 
|10.7     |  | 1999 Compensation Committee resolutions setting forth the Incentive Compensation Plan        |  | (12)            
|         |  |                                                                                              |  |                 
|10.8     |  | Paired Profit Sharing Plan effective July 1, 1996                                            |  | (7)             
|         |  |                                                                                              |  |                 
|10.9     |  | Agency and Service Agreement, dated January 1, 1987, between the Company and MoCon FSC, Inc. |  | (4)             



---

|Item
No. |  | Item                                                                                                                                               |  | Method of Filing
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------
|         |  |                                                                                                                                                    |  |                 
|10.10    |  | Foreign Sales Corporation Suppliers Agreement, dated March 28, 1985, between the Company and MoCon FSC, Inc.                                       |  | (4)             
|         |  |                                                                                                                                                    |  |                 
|10.11    |  | Agreement and Plan of Merger, dated November 20, 1998, by and among Modern Controls, Inc., MOCON Acquisition Corporation and Lab Connections, Inc. |  | (10)            
|         |  |                                                                                                                                                    |  |                 
|10.12    |  | Form of Executive Severance Agreement                                                                                                              |  | (14)            
|         |  |                                                                                                                                                    |  |                 
|10.13    |  | Stock Purchase Agreement dated October 24, 2001 by and among MOCON, Inc., Questar InfoComm, Inc. and Questar Corporation                           |  | (15)            
|         |  |                                                                                                                                                    |  |                 
|10.14    |  | 2003 Compensation Committee resolution setting forth the Incentive Compensation Plan                                                               |  | (15)            
|         |  |                                                                                                                                                    |  |                 
|10.15    |  | MOCON, Inc. Savings and Retirement Plan                                                                                                            |  | (16)            
|         |  |                                                                                                                                                    |  |                 
|10.16    |  | Share Purchase Agreement, dated as of December 19, 2003 by and between Ahlström Capital Oy and MOCON, Inc.                                         |  | (17)            
|         |  |                                                                                                                                                    |  |                 
|10.17    |  | Transfer Deed dated as of January 29, 2004 by and between Ahlström Capital Oy and MOCON, Inc.                                                      |  | (17)            
|         |  |                                                                                                                                                    |  |                 
|21.1     |  | Subsidiaries of the Company                                                                                                                        |  | (18)            
|         |  |                                                                                                                                                    |  |                 
|23.1     |  | Independent Auditors Consent                                                                                                                      |  | (18)            
|         |  |                                                                                                                                                    |  |                 
|31.1     |  | Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                |  | (18)            
|         |  |                                                                                                                                                    |  |                 
|31.2     |  | Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                |  | (18)            
|         |  |                                                                                                                                                    |  |                 
|32.1     |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)                                                  |  | (18)            
|         |  |                                                                                                                                                    |  |                 
|32.2     |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)                                                  |  | (18)            
|         |  |                                                                                                                                                    |  |                 

____________________

(1)

Incorporated by reference to our
Annual Report on Form 10-K for the fiscal year ended January 31, 1984 (File No. 0-9273).



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(2)

Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1987 (File No. 0-9273).

(3)

Incorporated by reference to our Registration Statement on Form S-8 (File No. 33-42255).

(4)

Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (File No. 0-9273).

(5)

Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-9273).

(6)

Incorporated by reference to our Registration Statement on Form S-8 (File No. 33-49752).

(7)

Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-9273).

(8)

Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-9273).

(9)

Incorporated by reference to our Registration Statement on Form S-8 (File No. 33-58789).

(10)

Incorporated by reference to our Report on Form 8-K filed on December 21, 1998 (File No. 0-9273)

(11)

Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 0-9273).

(12)

Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 0-9273).

(13)

Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-9273).

(14)

Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 0-9273).

(15)

Incorporated by reference to our Report on Form 8-K filed on November 6, 2001 (File No. 0-9273).

(16)

Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 0-9273).

(17)

Incorporated by reference to our Current Report on Form 8-K filed on January 29, 2004 (File No. 0-9273).

(18)

Filed herewith.



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