The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto. This discussion also contains forward-looking statements. Please see the "Caution Regarding Forward-Looking Information; Risk Factors" above.

Company Overview

O. I. Corporation, referred to as "the Company," "OI," "we," "our" or "us", was organized in 1963 in accordance with the Business Corporation Act of the State of Oklahoma as Clinical Development Corporation, a builder of medical and research laboratories. In 1969, we moved from Oklahoma City, Oklahoma to College Station, Texas and changed our name to Oceanography International Corporation. To better reflect current business operations, we again changed our name to O.I. Corporation in July 1980, and in January 1989 we began doing business as OI Analytical.

At OI, we provide innovative products for chemical monitoring and analysis. Our products perform chemical detection, analysis, measurement and monitoring applications in a wide variety of industries including food, beverage, pharmaceutical, semiconductor, power generation, chemical, petrochemical and security. Headquartered in College Station, Texas, we sell our products throughout the world utilizing a direct sales force as well as a network of independent sales representatives and distributors.

Recent Developments

During the third quarter of 2008, we continued to experience over 20% growth in sales of our laboratory product lines, though our overall sales growth was tempered by significantly lower MINICAMS® sales, resulting in overall sales growth of 2.4%. We continue to strive for sales growth through new product development, strategic alliances to broaden our laboratory product lines, and by strengthening our distribution network to better capitalize on international opportunities. In addition, we are considering certain licensing and OEM opportunities to capitalize on our new technologies. We expect to have market-ready products based on our innovative ion-CCD based miniature mass spectrometer and unique Total Organic Carbon analyzer during the first half of 2009.

Because of recent volatility in the financial markets, we liquidated our investment holdings of preferred stock and corporate bonds in July. In connection with this liquidation, we recorded a loss of approximately $409,000 during the third quarter; this follows mark to market losses of $329,000 recorded during the second quarter. At this time, our investments are in highly liquid, government-backed or government insured instruments.

Based on anticipated future growth opportunities, we believe that our stock is undervalued. During the third quarter, we repurchased approximately 55,000 shares of stock from one shareholder at the reported NASDAQ closing price on the date of the sale. Our year-do-date repurchases of stock totaled 93,000 shares through September 30, 2008. Early in the fourth quarter, we repurchased an additional 176,000 shares in private transactions and may continue to buy shares in the open market or through private transactions.

Results of Operations (dollars in 000's)

Revenues



                      Three Months
                          Ended                            Nine Months Ended
                      September 30,       Increase           September 30,         Increase
                     2008      2007      (Decrease)         2008        2007      (Decrease)
     Net revenue:
     Products       $ 5,755   $ 5,564   $        191     $   19,348   $ 17,681   $      1,667
     Services       $   866   $   900            (34 )   $    2,644   $  2,656            (12 )

                    $ 6,621   $ 6,464   $        157     $   21,992   $ 20,337   $      1,655

Consolidated net revenues for the three months ended September 30, 2008 increased $157,000, or 2.4%, in comparison to the third quarter of 2007 because of strong sales growth in our laboratory product lines. However, reduced sales of our MINICAMS ® product line largely offset the growth in laboratory product sales.

Our Gas Chromatography (or "GC") laboratory product revenues increased 21.4% during the third quarter of 2008 with Total Organic Carbon (or "TOC") product sales also up by over 20%. Sales of our Purge and Trap Sample Concentrators and related auto sampling equipment continued to lead our GC sales growth. International demand was significantly higher than last year for these products, particularly in Europe. In addition, domestic demand increased well over 10% compared to 2007, with demand up in all our major market areas.

Third quarter TOC sales growth was driven by increased international demand with sales to the Asia Pacific Rim region providing the largest sales growth. In addition, domestic TOC sales increased over 17% on higher demand. We believe recent improvements in our TOC product line have increased our competitive advantage and should enable us to continue to grow our market share for this product line.

The increase in GC and TOC product line sales was largely offset by a 34.6% decline in third quarter sales of our MINICAMS® product line. Although 2008 sales for this product line have been well below last year's record setting level, several major government projects expected to utilize MINICAMS® are scheduled for future years, which we believe will lead to strong future sales in this product line.

Sales in our other product lines were little changed from 2007. Because sales of our Beverage Analyzer product line did not meet our expectations, we terminated production of this product line at the end of the third quarter. By focusing our efforts on product lines with greater sales and profit potential, we are confident we can continue to grow overall sales going forward. We expect no material sales or profit impact from this change.

Third quarter service revenues decreased $34,000, or 3.8%, compared to the same period in 2007 due to lower billings under our U.S. Army contract. This decrease in billings was partially offset by increased service revenues for product installations.

For the nine months ended September 30, 2008, net revenues increased $1,655,000, or 8.1%, compared to the same period in 2007 because of growth in product revenues. Product revenues increased $1,667,000, or 9.4%, due primarily to higher laboratory product sales, with lower sales of our MINICAMS® product line partially offsetting the growth in other product lines.

We enter the fourth quarter with an improved backlog and anticipate continued sales growth in comparison to 2007 for the balance of the year. We believe the longer term outlook for sales growth remains positive based on new technologies under development; the broadening of our laboratory product offerings through strategic alliances; the return to a VAR relationship with Agilent, the industry leader in gas chromatography products; and international sales opportunities which we expect to better capitalize upon through recent changes in our distribution network. Although we are confident in the future outlook, the current economic downturn could negatively impact future sales if our customers cut back on capital expenditures.

Gross Profit



                                         Three Months Ended September 30,              Nine Months Ended September 30,
                                             2008                    2007                  2008                  2007
                                         $           %             $       %            $           %          $        %
($ in 000's)
Cost of revenues:
Products                                  2,936      51.0 %       2,862   51.4 %        10,029     51.8 %      9,017   51.0 %
Services                                    385      44.5 %         205   22.8 %         1,327     50.2 %        995   37.5 %

                                     $    3,321      50.2 %     $ 3,067   47.4 %   $    11,356     51.6 %   $ 10,012   49.2 %

Gross profit                         $    3,300      49.8 %     $ 3,397   52.6 %   $    10,636     48.4 %   $ 10,325   50.8 %

On a percentage of sales basis, gross profit for the three months ended September 30, 2008, totaled 49.8% compared to 52.6% for the same period of the prior year. Profit margins on product sales declined slightly due to lower sales of MINICAMS ®. In addition, service margins declined due to below normal service cost of goods sold during the third quarter of 2007. We anticipate service margins over the balance of the year to remain at 2008 levels. Because of the reduction in service margins, our overall gross profit declined despite higher sales during the third quarter of 2008.

Through the first nine months of 2008, our gross profit increased $311,000 compared to last year because of higher sales. However, our gross profit margin decreased to 48.4% of revenues, down 2.4% from 2007. This decrease in margin was primarily attributable to below normal service cost of goods sold in the third quarter of 2007. As indicated above, we anticipate service margins over the balance of the year to remain at 2008 levels, on a year-to-date basis, from the U.S. Army contract. In addition, the profit margins on product sales declined slightly due to lower sales of MINICAMS ®.

Operating Expenses



                                            Three Months Ended September 30,             Nine Months Ended September 30,
                                               2008                   2007                  2008                   2007
($ in 000's)                               $          %             $        %          $          %             $        %
Selling, general and administrative
expenses                                   2,068      31.2 %        2,343   36.2 %      6,828      31.0 %        8,097   39.8 %
Research and development expenses            980      14.8 %          722   11.2 %      2,845      12.9 %        2,525   12.4 %

Selling, general and administrative (or "SG&A") expenses for the three months ended September 30, 2008 decreased $275,000, or 11.7%, compared to the same period in 2007. This decrease in SG&A expenses resulted in large part from reduced stock compensation expense, lower legal and consulting fees, and lower Board of Directors related costs. In addition, due to the reversal of our uncertain tax position as more fully described below, we recognized a benefit of $48,000 from the reversal of accrued interest and penalties related to the uncertain tax position. As a percentage of sales, SG&A expenses decreased 5.0% during the third quarter due to higher sales and reduced SG&A expenses compared to the same period of 2007.

Our SG&A expenses for the nine months ended September 30, 2008, decreased $1,269,000, or 15.7%, compared to 2007. The bulk of this reduction was attributable to elevated legal and consulting costs during 2007 incurred in connection with the stock option investigation concluded during the first quarter of last year. Our stock compensation and Board of Directors expenses also declined compared to 2007. SG&A expenses decreased 8.8% as a percentage of sales during the first nine months of 2008 compared to 2007 due to lower SG&A expenses and higher sales in 2008.

R&D expenses for the three months ended September 30, 2008, increased $258,000, or 35.7%, compared to the third quarter of 2007 and represented 14.8% of revenues in 2008 compared to 11.2% of revenues in the same period last year. Our higher R&D expense in the third quarter was attributable to purchases and staffing expenses in connection with new product development and decreased billings under our U.S. Army contract, which resulted in an increased allocation of R&D resources for product development activities.

For the nine months ended September 30, 2008, R&D expenses increased $320,000, or 12.7%, in comparison to the same period last year. R&D expense represented 12.9% of revenues, up 0.5% from 2007. The increase in R&D expense resulted primarily from the third quarter increase in this area as discussed above.

Operating Income (Loss)



                                                    Three Months Ended                     Nine Months Ended
                                                       September 30,                         September 30,
                                                   2008              2007              2008                2007
                                                $         %         $      %        $         %         $         %
($ in 000's)
Operating income (loss)                       $  252      3.8 %   $ 332   5.1 %   $  963      4.4 %   $ (297 )   -1.5 %
Other income, net                               (346 )   -5.2 %     183   2.8 %     (482 )   -2.2 %      733      3.6 %

Income (loss) before income taxes                (94 )   -1.4 %     515   8.0 %      481      2.2 %      436      2.1 %
Provision (benefit) for income taxes            (236 )   -3.6 %     114   1.8 %      (92 )   -0.4 %       94      0.5 %

Net income                                       142      2.1 %     401   6.2 %      573      2.6 %      342      1.7 %

Operating income totaled $252,000 for the three months ended September 30, 2008, down $80,000 from the same period in 2007, due to lower gross profit and increased R&D expenses. On a year-to-date basis, we generated operating income of $963,000 through the first nine months of 2008 compared to a loss of $297,000 in 2007. This increase in earnings was primarily attributable to higher sales and decreased SG&A expenses partially offset by higher R&D expenses.

Other Income, Net

Because of continued financial market volatility, we sold all our remaining preferred stock and corporate bond holdings in July. As a result of this liquidation of our investment holdings, we recognized a loss of $409,000 during the three months ended September 30, 2008. Our recorded loss on investment holdings was partially offset by interest and dividend income.

Due to losses in connection with the liquidation of our investment portfolio previously noted, which were partially offset by interest and dividend income during the year, we incurred a net loss in other income of $482,000 for the nine months ended September 30, 2008. Other income for the nine months ended September 30, 2007 totaled $733,000 due largely to interest and dividend income on our investment portfolio as well as a gain on the sale of .40 acres of our College Station, Texas property during the first quarter of 2007. Because of our reduced cash and investment holdings, we anticipate lower interest income in the months ahead.

Provision for Income Taxes

Effective January 1, 2007, we adopted the provisions of FIN 48 and established certain unrecognized tax benefits related to uncertain tax positions. As of September 30, 2008, we are no longer subject to U.S. Federal income tax examination on a portion of these uncertain tax positions and accordingly recorded a tax benefit of $285,000 during the third quarter of 2008. Because of the impact of this tax benefit, our effective tax rate for the quarter and year-to-date totaled (251)% and (19)%, respectively during 2008. Our effective tax rate in 2007 was approximately 22%. Permanent differences between book and tax records, such as credits for R&D and Domestic Production, generally cause our effective tax rate to be lower than statutory rates.

For the nine months ended September 30, 2008, cash flow provided by operating activities totaled $951,000, compared to a $1,566,000 use of cash by operating activities during the same period in 2007. Our increase in operating cash flow during 2008 resulted from significantly higher operating income and reduced working capital requirements in comparison to the previous year. This decline in working capital requirements during 2008 compared to 2007 resulted from reduced accounts receivable and inventories as well as reduced payments to fund current liabilities. Our accounts receivable declined because of improved collection efforts after the reorganization of our collection department while inventories declined due in part to better information availability from our new ERP system. Payments on accrued liabilities declined compared to last year largely because of lower tax payments.

Cash flow provided by investing activities totaled $2,024,000 through the first nine months of 2008, compared to $4,892,000 in 2007. This reduction in cash flow during 2008 was primarily attributable to last year's liquidation of investments to fund the Modified Dutch Auction Self-Tender that was completed in August of 2007. Purchases of property, plant and equipment decreased to $279,000 in 2008, down $394,000 from last year which consisted primarily of expenditures related to the implementation of the ERP computer system on July 1, 2007. Our 2008 capital expenditures primarily include the purchase of equipment used in our laboratory products and MINICAMS® manufacturing areas. We have no material commitments for capital expenditures as of September 30, 2008.

Net cash flow used in financing activities for the nine months ended September 30, 2008 totaled $1,388,000, and consisted primarily of funding to repurchase outstanding common stock. In addition, we disbursed $388,000 to pay dividends to shareholders of our common stock.

Cash, cash equivalents and short-term investments totaled $5,243,000 as of September 30, 2008, compared to $6,476,000 as of December 31, 2007. Although we generated positive cash flow from operations, our cash position declined due largely to repurchases of our common stock during the year. While cash holdings have declined from last year, we believe our liquidity and expected cash flows from operations are more than sufficient to meet expected working capital, capital expenditure, stock repurchase and R&D requirements for both the short and long-term. As of September 30, 2008 we had no borrowings under our $6,000,000 revolving line of credit. Availability under this agreement may be limited by our eligible collateral value, which we have not calculated because we have no borrowings.

We invest a portion of our excess funds generated from operations in short-term securities, including money market funds invested in government backed securities, and FDIC insured certificates of deposit. Our primary goal is preservation of capital with a secondary goal of return on invested cash.

Our Board of Directors declared a cash dividend on January 19, 2008, of $0.05 per common share that was payable on August 29, 2008, to shareholders of record at the close of business on August 14, 2008. The quarterly dividend was declared in connection with the Board's decision in 2006 to establish an annual cash dividend of $0.20 per share, payable at $0.05 per quarter. The payment of future cash dividends under the policy is subject to the approval of our Board of Directors.

Critical Accounting Policies

Please reference Part I-Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007.