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. We continually seek growth opportunities through technological and product improvement, by acquiring and developing new products, and by acquiring new companies.

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

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

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

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-month
periods ended March 31, 2009 and 2008:



                                                 Three Months Ended
                                                     March 31,
                                                 2009         2008
Sales                                              100.0        100.0
Cost of sales                                       41.8         42.3
Gross profit                                        58.2         57.7
Selling, general and administrative expenses        41.8         34.6
Research and development expenses                    8.3          7.3
Operating income                                     8.1         15.8
Other income                                         1.8          1.8
Income before income taxes                           9.9         17.6
Income taxes                                         3.4          5.7
Net income                                           6.5         11.9

Comparison of Financial Results for the Three-Month Periods Ended March 31, 2009 and 2008

Sales

Sales for the three-month period ended March 31, 2009 were $6,172,000, down 17% compared to $7,462,000for the same period in 2008. The effects of the global economic recession contributed to a decrease in sales across all major product lines and market regions. On a geographical basis, sales decreased 17% in both our domestic and foreign markets. Domestic and foreign sales accounted for 47% and 53%, respectively, of our consolidated first quarter sales in both 2009 and 2008.

The following table summarizes total sales by product line for the three-month periods ended March 31, 2009 and 2008:

                                                              Three Months Ended
                                                                   March 31,
                                                              2009          2008
Permeation products and services                           $ 3,592,625   $ 3,934,053
Gas, headspace, and other analyzer products and services     2,365,996     3,029,078
Other instruments and services                                 213,138       499,303
Total sales                                                $ 6,171,759   $ 7,462,434

The following table sets forth the relationship between various components of domestic and foreign sales for the three-month periods ended March 31, 2009 and 2008:

                         Three Months Ended
                              March 31,
                         2009          2008
Domestic sales        $ 2,889,432   $ 3,492,931
Foreign sales:
Europe                  1,593,759     1,982,901
Asia                    1,171,583     1,433,195
Other                     516,985       553,407
Total foreign sales     3,282,327     3,969,503
Total sales           $ 6,171,759   $ 7,462,434

Permeation Products and Services - Sales of our permeation products and services, which accounted for approximately 58% and 53% of our consolidated first quarter sales in 2009 and 2008, respectively, decreased 9% during the first quarter 2009 compared to the same period in 2008. This decrease, which was primarily in our foreign markets, was due primarily to decreased demand for our core permeation instruments, as orders for capital equipment have weakened.

Gas, Headspace, and Other Analyzer Products and Services - Sales of our gas, headspace, and other analyzer products and services, which accounted for 38% and 40% of our consolidated first quarter sales in 2009 and 2008, respectively, decreased 22% during the first quarter 2009 compared to the same period in 2008. Within this group, sales of our gas analyzer products through our Baseline subsidiary decreased 17% due primarily to reduced demand for the gas chromatograph and total hydrocarbon analyzer instruments, partially offset by an increase in sales of sensors, detectors and spares.

Sales of our packaging products, which includes headspace analyzers and leak detection equipment, were consistent as a percentage of consolidated first quarter sales in 2009 and 2008.

Other Instruments and Services - Sales in our other instruments and services category, which accounted for 4% and 7% of our consolidated first quarter sales in 2009 and 2008, respectively, decreased 57% in the first quarter 2009, compared to the same period in 2008. This decrease was due primarily to a reduction in contract manufacturing of sample preparation products, reduced sales of non-MOCON products by our German subsidiary and decreased demand for our gas chromatography analyzer products and consulting services.

Gross Profit

The gross profit margins for our product sales were 59.7% and 58.9% for the three-month periods ended March 31, 2009 and 2008, respectively. This increase was primarily due to the mix of products shipped and cost reductions associated with our OEM sensor product line.

The gross profit margins for our consulting services were 31.6% and 34.9%, respectively, for the three-month periods ended March 31, 2009 and 2008. This decrease was primarily due to slightly decreased sales over which the fixed costs were applied.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses were $2,581,000 in the three-month period ended March 31, 2009, consistent with $2,583,000 in the same period of 2008. As a percentage, SG&A expenses were 41.8% and 34.6% of consolidated sales in the first quarters of 2009 and 2008, respectively, due to the lower sales level in 2009. Decreases in incentive compensation and stock option expense were offset by increased professional fees and trade show expense in the first quarter 2009 compared to the same period in the prior year.

Research and Development Expenses

Research and development (R&D) expenses were $508,000, or 8.3% of sales in the first quarter 2009, compared to $544,000, or 7.3% of sales, in the same period of 2008. Although this current level of expense was higher than our historical range of 6% to 8% of sales, and it may continue to be in subsequent quarters, it is lower in terms of absolute dollars spent on R&D than what we had projected to spend.

Other Income

Other income for the first quarter ended March 31, 2009 of $109,000 consisted of interest income of $118,000, partially offset by a loss of $9,000 on foreign currency exchange and other insignificant expenses. Other income for the first quarter ended March 31, 2008 of $132,000 consisted of interest income of $139,000, partially offset by a loss of $7,000 on foreign currency exchange and other insignificant expenses. Interest income decreased for the first quarter ended March 31, 2009, compared to the same period in 2008, due to lower average yields on slightly higher average interest bearing investments.

Income Tax Expense

Our provision for income taxes was 34.8% of income before income taxes for the first quarter ended March 31, 2009, compared to 32.6% of income before income taxes for the first quarter ended March 31, 2008. This increase in the effective tax rate in the first quarter 2009 was primarily due to the impact of stock compensation expense, the mix of foreign earnings, and the lower income base. Based on current projected annual operating results and current income tax rates, we expect the effective tax rate for the

remainder of 2009 to be in the range of 31% to 36%. 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.

Net Income

Net income was $399,000 in the first quarter 2009, compared to $886,000 in the first quarter 2008. Diluted net income per share was $0.07 and $0.16 in the first quarters of 2009 and 2008, respectively.

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 $914,000 during the first three months of 2009 to $15,195,000 as of March 31, 2009, compared to $16,109,000 at December 31, 2008. Our working capital as of March 31, 2009 increased $994,000 to $18,887,000, as compared to $17,893,000 at December 31, 2008. This increase was primarily due to lower accrued compensation and accounts payable balances and marketable security maturities, offset somewhat by a decrease in accounts receivable. Our investment in marketable securities consists primarily of municipal bonds, certificates of deposits and U.S. treasury obligations. We do not currently have any funds invested in auction rate certificates. 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 authorized 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 March 31, 2009.

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. We currently do not have any committed lines of credit or other credit facilities available for use. If we raise additional funds by issuing debt, we may be subject to restrictive covenants that could limit our operational flexibility and higher interest expense could dilute earnings per share. Any plan to raise additional capital may involve an equity-based or equity-linked financing, which may be dilutive to existing shareholders.

Cash Flow

Cash Flow from Operating Activities

Our primary source of funds is cash provided by operating activities which totaled $32,000 and $851,000 in the first three months of 2009 and 2008, respectively. The key components of the cash provided by operating activities in 2009 were the net income and decreased accounts receivable, primarily offset by decreases in accounts payable and accrued compensation and vacation. The decrease in accounts receivable is primarily due to the decrease in sales; the decrease in accrued compensation and vacation is primarily due to the March 2009 payment of incentive bonuses related to 2008.

Cash Flow from Investing Activities

Cash provided by (used in) investing activities totaled $1,070,000 and ($558,000) in the first three months of 2009 and 2008, respectively. The primary reasons for cash provided by investing activities in 2009 were net proceeds from maturities of marketable securities of $1,242,000, offset somewhat by purchases of 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.

Cash Flow from Financing Activities

Cash used in financing activities totaled $522,000 and $330,000 in the first three months of 2009 and 2008, respectively. During the first three months of 2009 and 2008, we made dividend payments to our shareholders of $503,000 and $442,000, respectively. Partially offsetting the impact of the dividend payment in 2008 were the proceeds from the exercise of stock options in the amount of $106,000.

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 March 31, 2009, we had repurchased an aggregate of 51,532 shares of MOCON common stock under the program at a total cumulative cost of $441,000, leaving $1,559,000 remaining in this authorization at that date. During the first three months of 2009 we repurchased 2,620 shares at a total cost of $19,000.

Contractual Obligations

We refer you to our Annual Report on Form 10-K for the year ended December 31, 2008 for a summary of our contractual obligations. 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.

Recently Issued Accounting Pronouncements

In February 2008, the FASB amended SFAS 157 by FSP Financial Accounting Standard (FAS) 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2). FSP FAS 157-2 deferred the effective date of SFAS 157 for all nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis to fiscal years beginning after February 15, 2008. We adopted the required provisions of SFAS 157 effective in the first quarter of fiscal 2008. In the first quarter 2009, we adopted the remaining provisions of SFAS 157. Although we believe the adoption of FSP FAS 157-2 may impact the way that we determine the fair value of goodwill, indefinite-lived intangible assets, and other long-lived assets, we do not expect it to have a material impact on our results of operations or financial condition.

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

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

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161), an amendment of SFAS No. 133. SFAS 161 establishes, among other things, the

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

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 was effective for us beginning January 1, 2009. The implementation of FSP FAS 142-3 did not have an effect on our consolidated financial statements.

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.

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. If products or services are sold on a standalone basis, revenue is recognized as the products or services are delivered.

When products or services are sold as part of a multiple element arrangement, we allocate revenue on a relative fair value basis.

Allowance for doubtful accounts and sales returns - Our allowance for doubtful accounts and sales returns is for accounts receivable balances that are estimated to be uncollectible as well as anticipated sales returns. The reserve is based on a number of factors, including: (1) an analysis of customer accounts and (2) our historical experience with accounts receivable write-offs and sales returns. The analysis includes the age of the receivable, the financial 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 March 31, 2009, we had $141,686 reserved against our accounts receivable for doubtful accounts and sales returns.

Accrual for excess and obsolete inventories - We perform an analysis to identify excess and obsolete inventory. We record a charge to cost of sales for amounts identified. Our analysis includes inventory levels, the nature of the finished product and its inherent risk of obsolescence and the on-hand quantities relative to the sales history of that finished product. We believe that our financial results could be materially different if historical trends do not reflect actual results or if demand for our products decreased because of economic or competitive conditions or otherwise. As of March 31, 2009, we had $303,976 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. Additional warranty reserves are also accrued for major rework campaigns. We periodically assess the adequacy of our warranty reserves based on changes in these factors and record any necessary adjustments if actual claim experience indicates that adjustments are necessary. Although we believe the likelihood to be relatively low, warranty claims experience could be materially different from actual results due to manufacturing changes that could impact product quality, a change in our warranty policy in response to industry trends, as yet unrecognized defects in products sold, or other factors. As of March 31, 2009, we had $220,203 accrued for future estimated warranty claims.

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

Management reviews the deferred tax assets for recoverability on a quarterly basis and assesses the need for valuation allowances. These deferred tax assets are evaluated by considering historical levels of 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 March 31, 2009 and December 31, 2008, we provided a valuation allowance in the approximate amount of $370,000 and $364,000, respectively, against our net deferred tax assets, related primarily to the long-term capital loss carryforward.

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 . . .