Mocon (MOCO) 10-Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarter Ended June 30, 2007

or

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

For the transition period from                   to

Commission File Number 000-09273

MOCON, INC.

(Exact name of registrant as specified in its charter)

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

(763) 493-6370

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) 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 o

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

Large accelerated filer:  o                                         Accelerated filer:  o                                     Non-accelerated filer:  x

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

YES o  NO x

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

MOCON, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

For the Quarter Ended June 30, 2007

		Page Number
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets June 30, 2007 (Unaudited) and December 31, 2006	1
	Consolidated Statements of Income (Unaudited) Three months and six months ended June 30, 2007 and 2006	2
	Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 2007 and 2006	3
	Notes to Consolidated Financial Statements (Unaudited)	4-10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	22
PART II.  OTHER INFORMATION
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	23
Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 6.	Exhibits	24
Signatures		25
Exhibit Index		26

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

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

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

MOCON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

See accompanying notes to consolidated financial statements.

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MOCON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

See accompanying notes to consolidated financial statements.

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MOCON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

See accompanying notes to consolidated financial statements.

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MOCON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Consolidated Financial Statements

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

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

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

Principles of Consolidation

The consolidated financial statements include the accounts of MOCON, Inc. and its subsidiaries after elimination of inter-company transactions and accounts.

Foreign Currency Translation

The financial statements for operations outside the United States are maintained in their local currency.  All assets and liabilities of our foreign subsidiary are translated to United States dollars at period-end exchange rates, while revenue and expense accounts are translated at the average exchange rates during the period transactions occurred.  Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive income or loss in stockholders’ equity.  Gains and losses on foreign currency transactions are included in other income or loss.

Use of Estimates

The preparation of consolidated 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.  Actual results could differ from those estimates.

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New Accounting Pronouncements

In June 2006, the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue 06-3, How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, gross versus net presentation) (EITF 06-3).  The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer, and provides that a company may adopt a policy of presenting taxes either gross within revenue or on a net basis.  For any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes for each period for which an income statement is presented if those amounts are significant.  This statement is effective for financial reports for interim and annual reporting periods beginning after December 15, 2006.  EITF 06-3 became effective for us as of January 1, 2007.  We collect various sales and value-added taxes on certain products and service sales, which are accounted for on a net basis.

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

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement 115 (SFAS 159).  This statement permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  SFAS 159 is effective as of the beginning of fiscal years that begin after November 15, 2007.  We have not yet determined the impact, if any, that the implementation of SFAS 159 will have on our financial position, results of operations or cash flows.

In May 2007, the FASB issued FASB Staff Position (FSP) FIN 48-1, Definition of Settlement in FASB Interpretation No. 48.  This FSP amends FIN 48, Accounting for Uncertainty in Income Taxes, to provide guidance about how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.  Under the FSP, a tax position is considered to be effectively settled if the taxing authority completed its examination, the company does not plan to appeal, and it is remote that the taxing authority would reexamine the tax position in the future.  FSP FIN 48-1 is effective for us as of January 1, 2007, the date of adoption of FIN 48.  The adoption of FSP FIN 48-1 did not have a significant impact on our financial position, results of operations or cash flows.

Prior Period Revisions

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

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revisions are being made to correct errors in the classification of certain annual earnout payments made in 2005, 2006 and the first quarter of 2007 in connection with an acquisition completed in January 2004.  The amounts were previously reported as a component of cash flow from operations rather than cash flow from investing activities.  These corrections have no effect on the Consolidated Balance Sheets or Consolidated Statements of Income for any prior periods involved.

Note 2 – Inventories

Inventories consist of the following:

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

Note 3 – Net Income Per Common Share

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

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 three- and six-month periods ended June 30, 2007 and 2006:

	Three Months Ended June 30,		Six Months Ended June 30,
	2007	2006	2007	2006
Weighted shares of common stock outstanding – basic	5,489,160	5,424,877	5,481,089	5,414,897
Weighted shares of common stock assumed upon exercise of stock options	207,296	89,663	207,577	85,991
Weighted shares of common stock outstanding – diluted	5,696,456	5,514,540	5,688,666	5,500,888

Note 4 – Goodwill and Intangible Assets

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

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

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

Total amortization expense for the three- and six-month periods ended June 30, 2007 and 2006 was $40,375 and $82,737, and $73,098 and $144,812, respectively.  Estimated amortization expense for the remainder of 2007 and each of the four succeeding fiscal years based on the intangible assets as of June 30, 2007 is as follows:

	Estimated Expense
2007	$	153,916
2008	$	110,319
2009	$	41,896
2010	$	34,368
2011	$	20,786
2012 and thereafter	$	89,711

Note 5 – Marketable Securities

Available-for-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.  At June 30, 2007 and 2006, this resulted in a net cumulative unrealized loss of $3,669 and $10,549, respectively, within stockholders’ equity.  A decline in the market value of 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.

Note 6 – Comprehensive Income

Other comprehensive income pertains to net unrealized gains and losses on marketable securities and foreign currency translation adjustments that are not included in net income but rather are recorded directly in stockholders’ equity.

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

Note 7 – Warranty

We provide a warranty for most of our 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 sale based on historical claims experience.  Special warranty reserves are also accrued for special rework campaigns for known major product modifications.  We also offer service contracts for select products when the factory warranty period expires.

Warranty provisions and claims for the six-month periods ended June 30, 2007 and 2006 were as follows:

	Six Months Ended June 30,
	2007			2006
Beginning balance	$	246,737		$	327,015
Warranty provisions	133,335			167,302
Warranty claims	(142,049		)	(195,474		)
Decrease due to sale of LCI	—			(33,248		)
Ending balance	$	238,023		$	265,595

Note 8 – Income Taxes

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

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

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Note 9 – Share-Based Compensation

As of June 30, 2007, we have reserved 398,800 shares of common stock for options and other share-based incentive awards that are still available for grant under our 2006 stock incentive plan, and 811,291 shares for options that have been granted under either the 2006 stock incentive plan, the 1998 stock option plan or the 1992 stock option plan but have not yet been exercised.  We issue new shares of common stock upon exercise of stock options.  There were no options granted in the first two quarters of 2007.

Amounts recognized in the consolidated financial statements related to share-based compensation are as follows:

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

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model (Black-Scholes).  We use historical data to estimate the expected price volatility, expected option life and expected forfeiture rate.  We base our estimate of expected volatility for awards granted on daily historical trading data of our common stock for a period equivalent to the expected term of the award.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.  We estimate the expected term consistent with historical exercise and cancellation activity of our previous share-based grants with a ten-year contractual term.  Forfeitures are based on historical experience.  The dividend yield is calculated based upon the dividend payments made during the prior four quarters as a percent of the average stock price for that period.

A summary of the option activity for the first six months of 2007 is as follows:

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

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

A summary of the status of our unvested option shares as of June 30, 2007 is as follows:

	Number of  Shares		Weighted- average  Grant-Date  Fair Value
Unvested at December 31, 2006	235,209		$	2.95
Options granted	—		—
Options cancelled	(4,987	)	2.76
Options vested	(24,625	)	3.38
Unvested at June 30, 2007	205,597		$	2.91

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

Note 10 – Sale of Subsidiary

In February 2006, we sold all the outstanding common stock of Lab Connections, Inc. (LCI), a wholly-owned subsidiary.  Pursuant to the sale agreement, we received a net cash payment of approximately $479,000 in exchange for all the outstanding shares of LCI.  As a result of the sale, we recognized an after-tax gain of approximately $92,000 in the first quarter 2006.  This gain was reflected in the other income line on the Consolidated Statements of Income.

Note 11 – Discontinued Operations

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

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

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations.  Statements that are not historical are forward-looking and involve risks and uncertainties discussed below under the caption “Forward-Looking Statements.”  The following discussion of the results of operations and financial condition of MOCON should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this report.

Overview

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

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

Prior to 1998, we expanded our business primarily through internally developing new products and technologies and licensing products and technology.  Since 1998, we have supplemented our internal growth through acquisitions that have provided us with additional technologies, products and product development expertise.  During the last two years, we divested two product lines to allow us to better concentrate on our core product lines, particularly our gas detection and measurement products.

We completed our most recent acquisition effective January 1, 2004, by acquiring Paul Lippke Handels-GmbH Prozess- und Laborsysteme (Lippke), which is located in Germany.  We acquired all of the shares of Lippke for a base purchase price plus three earnout payments 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.  We made the final earnout payment in the first quarter 2007 in the amount of $574,568.

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

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

Results of Operations

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

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

Comparison of Financial Results for the Three- and Six-Month Periods Ended June 30, 2007 and 2006

Sales

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

The following table summarizes total sales by product line for the three- and six-month periods ended June 30, 2007 and 2006:

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Permeation Products and Services	$	3,387,667	$	3,734,412	$	6,846,832	$	7,230,650
Gas, Headspace, and Other Analyzer Products and Services	2,909,034		2,188,947		5,981,048		4,820,712
Other Instruments and Services	361,185		417,164		706,555		808,073
Total sales	$	6,657,886	$	6,340,523	$	13,534,435	$	12,859,435

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The following table sets forth the relationship between various components of domestic and foreign sales for the three- and six-month periods ended June 30, 2007 and 2006:

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Domestic sales	$	3,634,643	$	2,508,746	$	6,830,576	$	5,609,130
Foreign sales:
Europe	1,147,856		2,025,742		2,442,683		3,550,142
Asia	1,252,241		1,339,152		2,958,241		2,732,504
Other	623,146		466,883		1,302,935		967,659
Total foreign sales	3,023,243		3,831,777		6,703,859		7,250,305
Total sales	$	6,657,886	$	6,340,523	$	13,534,435	$	12,859,435

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

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

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

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

Sales of our weighing and pharmaceutical products decreased 25% for the second quarter ended June 30, 2007 compared to the same quarter in 2006 as a result of decreased demand in both domestic and foreign markets.  Our weighing and pharmaceutical products group consists of a relatively fewer number of higher priced products compared to our other product groups and will typically experience significant fluctuations in demand.

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

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

Sales of our weighing and pharmaceutical products decreased 42% during the first six months of 2007 compared to the same period in 2006 as a result of decreased demand in both our domestic and foreign markets.

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

On a geographical basis, domestic and foreign sales accounted for 55% and 45%, respectively, of our consolidated second quarter sales in 2007, and 40% and 60%, respectively, for the same period in 2006.  Domestic and foreign sales each accounted for 50% of our consolidated sales for the first six months of 2007, and 44% and 56%, respectively, of our consolidated sales for the same period in 2006.

Gross Profit

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

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

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

For the six months ended June 30, 2007, the gross profit margins for our consulting services were 44.7% and 48.7%, respectively.  This decrease was primarily due to decreased demand for our consulting and analytical testing services which reduced the ability to fully absorb the related fixed overhead costs.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses in the three-month period ended June 30, 2007 were $2,098,043, or 31.5% of sales, compared to $2,031,958, or 32.1% of sales in the second quarter 2006.  The dollar increase in SG&A expenses was primarily due to increased costs in the second quarter 2007 for stock option expensing, ongoing expenses related to the new technical support office in China, and increased headcount.  As a partial offset, our allowance for doubtful accounts was reduced in the second quarter due to an improved experience rate of sales returns and the collection of some accounts which previously had been determined as questionable.

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

Research and Development Expenses

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

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

Other Income

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

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

Income Tax Expense

Our provision for income taxes from continuing operations was 35.1% of income before income taxes for the second quarter ended June 30, 2007, compared to 35.5% of income before income taxes for the second quarter ended June 30, 2006.  The slightly lower effective tax rate in 2007 was due to a smaller proportion of the consolidated pre-tax income being derived from our German subsidiary which is taxed at a higher statutory rate.

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

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Net Income

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

Liquidity and Capital Resources

We have historically financed our operations, capital expenditures and other liquidity needs through our cash flows generated from operations.  Total cash, cash equivalents and marketable securities decreased $262,817 during the first six months of 2007 to $12,373,733 as of June 30, 2007, compared to $12,636,550 at December 31, 2006.  This decrease was due in part to the final earnout payment of $574,568 made in connection with the Lippke acquisition and dividend payments in the first six months of 2007 of $821,357.  Our working capital as of June 30, 2007 increased $1,246,399 to $17,451,703, as compared to $16,205,304 at December 31, 2006.  We believe that a combination of our existing cash, cash equivalents and marketable securities, plus an expected continuation of cash flow from operations, will continue to be adequate to fund our operations, capital expenditures, dividend payments and stock repurchases for at least the next twelve months.  Purchases of property and equipment were relatively constant between the two periods mentioned above, and we had no material commitments for capital expenditures as of June 30, 2007.

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

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

Cash Flow

Cash Flow from Operating Activities

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

Cash Flow from Investing Activities

Cash used in investing activities of continuing operations totaled $432,790 and $921,644 in the first six months of 2007 and 2006, respectively.  The primary reason for the higher amount used in 2006 was higher net purchases of marketable securities, partially offset by the proceeds from the sale of Lab Connections and other property and equipment.  We presently do not believe that any significant property, plant and equipment expenditures are required to accommodate our current level of operations.

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Cash Flow from Financing Activities

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

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

Contractual Obligations

We refer you to our Annual Report on Form 10-K for the year ended December 31, 2006 for a summary of our contractual obligations.  Except for the earnout payment paid in connection with the Lippke acquisition, there has been no material change in this information.

Off-Balance Sheet Arrangements

Except for operating leases entered into in the ordinary course of business and customary indemnification obligations under certain of our agreements entered into in the ordinary course of business, we do not have any material off-balance sheet arrangements.

New Accounting Pronouncements

In June 2006, the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue 06-3, How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, gross versus net presentation) (EITF 06-3).  The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer, and provides that a company may adopt a policy of presenting taxes either gross within revenue or on a net basis.  For any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes for each period for which an income statement is presented if those amounts are significant.  This statement is effective for financial reports for interim and annual reporting periods beginning after December 15, 2006.  EITF 06-3 became effective for us as of January 1, 2007.  We collect various sales and value-added taxes on certain products and service sales, which are accounted for on a net basis.

In June 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN 48).  FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The requirements are effective for fiscal years beginning after December 15, 2006.  Adoption of FIN 48 did not have a material effect on our financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS 157, Fair Value Measurement (SFAS 157).  The standard provides guidance for using fair value to measure assets and liabilities.  SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  Under the standard, fair value measurements would be separately disclosed by

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level within the fair value hierarchy.  The statement is effective for us beginning in 2008; however, early adoption is permitted.  We have not yet determined the impact, if any, that the implementation of SFAS 157 will have on our financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement 115 (SFAS 159).  This statement permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  SFAS 159 is effective as of the beginning of fiscal years that begin after November 15, 2007.  We have not yet determined the impact, if any, that the implementation of SFAS 159 will have on our financial position, results of operations or cash flows.

In May 2007, the FASB issued FASB Staff Position (FSP) FIN 48-1, Definition of Settlement in FASB Interpretation No. 48.  This FSP amends FIN 48, Accounting for Uncertainty in Income Taxes, to provide guidance about how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.  Under the FSP, a tax position is considered to be effectively settled if the taxing authority completed its examination, the company does not plan to appeal, and it is remote that the taxing authority would reexamine the tax position in the future.  FSP FIN 48-1 is effective for us as of January 1, 2007, the date of adoption of FIN 48.  The adoption of FSP FIN 48-1 did not have a significant impact on our financial position, results of operations or cash flows.

Critical Accounting Policies

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

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

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

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Emerging Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with Multiple Deliverables, provides revenue recognition guidance for arrangements with multiple deliverables, and the criteria to determine if items in a multiple deliverable agreement should be accounted for separately.  The elements of our sales transactions are clearly and separately stated and sufficient evidence of their fair value exists to separately account for the elements.

Allowance for doubtful accounts and sales returns – Our allowance for doubtful accounts and sales returns is for accounts receivable balances that are estimated to be uncollectible as well as projected sales returns.  The reserve is based on a number of factors, including:  (1) an analysis of customer accounts and (2) our historical experience with accounts receivable write-offs and sales returns.  The analysis includes the age of the receivable, the financial condition of a customer or industry, and general economic conditions.  We believe our financial results could be materially different if historical trends do not reflect actual results or if economic conditions worsened for our customers.  In the event we determined that a smaller or larger allowance for doubtful accounts is appropriate, we would record a credit or charge to selling, general and administrative expense in the period that we made such a determination.  As of June 30, 2007, we had $128,012 reserved against our accounts receivable for doubtful accounts and sales returns.

Allowance for excess and obsolete inventories – We perform an analysis to identify excess and obsolete inventory.  We record a charge to cost of sales for amounts identified.  Our analysis includes inventory levels, the nature of the finished product and its inherent risk of obsolescence and the on-hand quantities relative to the sales history of that finished product.  We believe that our financial results could be materially different if historical trends do not reflect actual results or if demand for our products decreased because of economic or competitive conditions or otherwise.  As of June 30, 2007, we had $541,629 accrued for excess and obsolete inventories.

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

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

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

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

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

Forward-Looking Statements

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

Forward-looking statements involve risks and uncertainties.  These uncertainties include factors that affect all businesses as well as matters specific to us.  Some of the factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements are described below.

·Increases in prices for raw materials;

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

·Fluctuations in foreign currency exchange rates and interest rates;

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

·Failure to effect strategic acquisitions and integrate effectively newly acquired operations;

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

·Decreases in capital spending by our customers;

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

·Disruption in our ability to manufacture our products or the ability of our key suppliers to provide us products or components or raw materials for products resulting in our inability to supply market demand for our products;

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

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

·Loss of customers;

·Failure to retain senior management or replace lost senior management;

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·Employee slowdowns, strikes or similar actions;

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

·Effects of any pending or threatened litigation;

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

·Changes in generally accepted accounting principles; or

·Conditions and changes in general economic and business conditions.

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

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Equity Price and Interest Rate Risk

Substantially all of our marketable securities are at fixed interest rates and all of our marketable securities mature within two years or less; therefore, we believe that the market risk arising from the holding of these financial instruments is minimal.

Foreign Currency Exchange Risk

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

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Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered in this Quarterly Report on Form 10-Q.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of such period, to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that material information relating to our Company and our consolidated subsidiaries is made known to management, including our Chief Executive Officer, and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1A.  Risk Factors

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

Item 2.Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Unregistered Sales of Equity Securities

We did not sell any equity securities of MOCON, Inc. during the second quarter ended June 30, 2007 that were not registered under the Securities Act of 1933.

Issuer Repurchases of Equity Securities

We did not repurchase any equity securities of MOCON, Inc. during the second quarter ended June 30, 2007.

Item 4.Submission of Matters to a Vote of Security Holders

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

(b)  The results of the shareholder votes were as follows:

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

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Item 6.  Exhibits

The following exhibits are being filed or furnished with this quarterly report on Form 10-Q:

Exhibit No.	Description
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

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

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MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED JUNE 30, 2007

EXHIBIT INDEX

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

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