MOD-PAC CORP. (MPAC)

RECENT/NEW ACCOUNTING PRONOUNCEMENTS

During the first quarter of 2006, we adopted SFAS 123 ( R ),  “Shared-Based Payment,” applying the modified prospective method.  This Statement requires all equity-based payments to employees, including grants of employee stock options, to be recognized in the statement of earnings based on the grant date fair value of the award.  Under the modified prospective method, we are required to record equity-based compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards outstanding as of the date of adoption.  We use a straight-line method of attributing the value of stock-based compensation expense, subject to minimum levels of expense based on vesting.  Stock compensation expense was $138,000 in the second quarter and $284,000 in first half of 2006.  No stock compensation expense was recognized prior to 2006.

In June 2006, the FASB issued interpretation (“FIN”) No.48, ”Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS No. 109.”  FIN No.48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.”  The pronouncement prescribes a recognition threshold and measurement attributable to financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN No. 48 is effective for fiscal years beginning after December 15, 2006.  We are currently evaluating the effect the adoption of FIN No. 48 will have on its financial position or results of operators.  

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