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 first quarter of 2009, we felt the full impact of the global economic downturn. Our sales declined 37% in comparison to the first quarter of 2008, with bookings down across virtually all product lines and all regions. Although quotation levels were relatively strong during the quarter, many of our customers deferred purchase commitments in order to conserve cash.

In response to this slowdown in business activity, we initiated a 10% across the board pay reduction in February and began evaluating other cost saving measures. We subsequently reduced staffing by approximately 20% at our College Station facility in April, initiated a reduction in certain employee benefits, reduced Board-related expenses, and curtailed travel and entertainment expenses. Although our savings from these efforts will initially be offset by severance benefits of approximately $100,000, when they are fully in effect during the second quarter, we anticipate annualized savings of approximately $2,200,000. We believe these expense reductions will enable us to return to profitability during the second half of the year.

Our cash and investments position increased during the first quarter, despite the loss we incurred. The savings initiatives we have implemented should enable us to maintain an adequate level of liquidity to meet our operating needs during this economic slowdown.

During the first quarter, we renewed our value-added reseller agreement with Agilent, extending this contract through the end of 2009. We are pleased to continue our relationship with Agilent, the industry leader in gas chromatography ("GC") solutions, and believe our cooperative efforts will improve future sales opportunities. Last year, we announced a strategic alliance with Picarro, Inc., to develop a solution combining our total organic compound ("TOC") technology with Picarro's cavity ring-down spectroscopy technology. This novel technology won a prestigious new product innovation award in March and should enable us to pursue new market segments such as the analysis of food origin and adulteration, and ecosystem studies.

We began producing prototype, beta versions of our new process TOC and miniaturized mass spectrometer products during the first quarter and will conduct field tests of these new products during the second quarter. This represents the final stage in developing these products for market release.

While we do not know how long the global economic downturn will last, we believe that our financial strength and lower cost structure will enable us to weather this short term decline as we work to achieve longer term sales growth through our new products and strategic alliances.

Results of Operations

Revenues

                                         Three Months Ended
                                              March 31,                            Increase
(dollars in 000's)        2009        % of Rev.       2008        % of Rev.       (Decrease)
Sales by Segment:
Laboratory Products      $ 3,228            69.9 %   $ 5,549            75.7 %   $     (2,321 )
Air-Monitoring Systems     1,393            30.1 %     1,778            24.3 %           (385 )
Total                    $ 4,621           100.0 %   $ 7,327           100.0 %   $     (2,706 )

Our total revenue declined $2,706,000, or 36.9%, for the three months ended March 31, 2009 compared to the first quarter of 2008. Laboratory Products segment sales decreased 41.8% in the first quarter, while sales in the Air-Monitoring Systems segment declined 21.7%.

The slowdown in Laboratory Products sales was most pronounced in the domestic market where sales declined 48%, with sales of GC products experiencing the largest decline. Domestic sales of our TOC product line also declined substantially from last year, though we experienced some growth in sales of Automated Chemistry Analyzers ("ACA") in the first quarter and anticipate future opportunities due to the recent regulatory approval for a new cyanide-analysis method using our ACA products.

Internationally, the decline in Laboratory Product sales was less severe, with revenues down 38%, due largely to improved sales of GC products in Latin America. While we experienced small pockets of success in certain regions, in general sales of more expensive equipment such as configured systems, sample introduction products and TOC's declined as customers deferred purchase commitments due to the difficult economy. We are increasing our efforts to sell Laboratory Products into the governmental and educational markets where funds are more readily available. However, our backlog remains low and it is difficult to project the success of these efforts in the near term.

Sales in the Air-Monitoring Systems segment declined during the first quarter of 2009 compared to the same period in 2008 because of a diminished backlog at the end of 2008. Our sales in this segment generally involve products and services provided in connection with U.S. governmental projects. As a result, the sales process is longer in duration than the sales process in our Lab Products segment. The federal government did not complete its budget at the end of 2008 and governmental activity was slowed by uncertainty surrounding the transition in administration. We historically experience improved bookings in this segment during the second quarter and anticipate this trend to continue in the current year.

Gross Profit

                                 Three Months Ended March 31,
                                  2009                   2008
(dollars in 000's)            $          %           $          %

Gross Profit by Segment:
Laboratory Products        $ 1,425       44.1 %   $ 2,504       45.1 %
Air-Monitoring Systems         746       53.6 %       943       53.0 %
Total                      $ 2,171       47.0 %   $ 3,447       47.0 %

Our overall gross profit for the three months ended March 31, 2009 decreased $1,276,000, or 37.0%, compared to the first quarter of 2008 because of lower sales. On a percentage of sales basis, our overall margins were unchanged in first quarter 2009. Margins in our Laboratory Products segment were down 1.0% because of unfavorable manufacturing variances associated with our decreased production levels, while margins in our Air-Monitoring Systems segment increased slightly.

Operating Expenses

                                       Three Months Ended March 31,
                                     2009                        2008
(dollars in 000's)             $          % of Rev.        $          % of Rev.
SG&A Expenses by Segment:
Laboratory Products         $ 1,467            45.4 %   $ 1,689            30.4 %
Air-Monitoring Systems          510            36.6 %       610            34.3 %
Total                       $ 1,977            42.8 %   $ 2,299            31.4 %

R&D Expenses by Segment:
Laboratory Products         $   535            16.6 %   $   469             8.5 %
Air-Monitoring Systems          411            29.5 %       439            24.7 %
Total                       $   946            20.5 %   $   908            12.4 %

Total selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2009 decreased $322,000, or 14.0%, compared to the same period of the prior year. The decline in Laboratory Products SG&A expenses was attributable to decreased sales commissions, lower wage-related expenses and reduced Board-related expenses. SG&A expenses in the Air-Monitoring Systems segment were down because of lower wage related expenses and reduced legal fees. Our recent cost savings measures were minimally reflected in these first quarter results. We anticipate a further reduction in SG&A expenses during the second quarter, and significantly lower SG&A expenses in subsequent quarters when these cost savings measures are fully in effect.

Total research and development ("R&D") expenses for the three months ended March 31, 2009 increased by $38,000, or 4.2%, compared to the first quarter of 2008. This increase resulted from higher R&D expenses in our Laboratory Products segment, which was primarily attributable to decreased billings under our U.S. Army contract. Lower contract billings resulted in an increased allocation of R&D resources for product development activities. R&D expenses for the Air-Monitoring Systems segment declined because of lower wage related and consulting expenses. Our cost control measures in the Laboratory Products segment should result in lower R&D expenses in future quarters.

Operating Income (Loss)

                                                Three Months Ended March 31,
                                              2009                        2008
(dollars in 000's)                      $          % of Rev.       $          % of Rev.
Operating (Loss) Income by Segment
Laboratory Products                  $  (577 )         -17.9 %   $  346             6.2 %
Air-Monitoring Systems                  (175 )         -12.6 %     (106 )          -6.0 %
Total                                $  (752 )         -16.3 %   $  240             3.3 %

For the three months ended March 31, 2009, we generated a total operating loss of $752,000, or (16.3%) of revenues compared to operating income of $240,000 in the first quarter of 2008. The loss in the first quarter of 2009 resulted from lower sales activity in both segments.

Other Income, Net

Other income totaled $12,000 for the three months ended March 31, 2009, compared to $80,000 in 2008. Due to our return of value to shareholders through stock repurchases in 2008 and last year's loss on our investment holdings in preferred stock and corporate bonds, our cash available to invest in 2009 was down compared to 2008. Because of lower interest rates on investments and reduced cash to invest, our other income declined in 2009.

Provision (Benefit) for Income Taxes

Our benefit for income taxes totaled $244,000 during the first quarter of 2009, an effective rate of 33% based on our estimated tax rate after taking into consideration applicable tax credits such as the R&D tax credit and the Domestic Production Activity Deduction. In the first quarter of 2008, we recorded a tax provision of $80,000, which reflected a 25% estimated tax rate.

Liquidity and Capital Resources

Net cash flow provided by operating activities for the quarter ended March 31, 2009 totaled $476,000 compared to $148,000 during the comparable period of 2008. Despite our loss for the quarter, we generated positive cash flow from operations because of reduced working capital, which resulted primarily from collections on our accounts receivable. The combination of lower sales and positive collections caused our accounts receivable to decline by $1,823,000. This positive cash flow was partially offset by decreases in our current liabilities, the most significant of which occurred in our accrued liabilities and was largely attributable to reduced income taxes payable.

Net cash flow provided by investing activities totaled $36,000 for the three months ended March 31, 2009, compared to a $2,238,000 use of cash in the first quarter of 2008. Last year's use of cash resulted primarily from investment purchases such as commercial paper and bank certificates of deposit as we invested excess cash on hand. Our net investment activity was minimal during the first quarter of 2009. We kept purchases of property, plant and equipment to a minimum in both periods. As of March 31, 2009, we had no material commitments for the purchase of property, plant and equipment outstanding.

Net cash flow used in financing activities for the three months ended March 31, 2009 totaled $95,000, compared to $249,000 in 2008. During the first quarter of 2008, we purchased approximately 12,000 shares of our common stock on the open market, while in 2009 we had no stock purchases. Our cash dividends declined slightly in 2009 compared to 2008 because we had fewer shares of common stock outstanding. Over the course of the year, we repurchased 284,569 shares of our common stock in 2008 as part of our effort to return value to our shareholders.

Cash, cash equivalents and short-term investments totaled $3,751,000 as of March 31, 2009, compared to $3,434,000 as of December 31, 2008. We believe our liquidity and expected cash flows from operations should be sufficient to meet expected working capital, capital expenditure and R&D requirements for the short term. As the economy improves, we anticipate that cash flows from operations will generate sufficient cash flow to meet our long term liquidity needs. As of March 31, 2009, 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. With the significant decline we have experienced in our accounts receivable, we believe our availability under the revolving line of credit is substantially less than $6,000,000. We were not in compliance with our loan covenants as of March 31, 2009, but received a loan covenant waiver from the bank.

Because interest rates are historically low, we have established an investment committee consisting of two independent directors and our CEO/CFO to evaluate alternative investment options for excess funds to improve our returns. These investments may include less than investment grade bonds or other securities that the committee feels are likely to increase in value and/or provide a higher interest return. Though we have not currently invested in any such instruments, future investments made by the Investment Committee could subject us to a higher risk of loss than our current insured or government backed investments.

Our Board of Directors declared a cash dividend on February 2, 2009 of $0.05 per common share payable on February 27, 2009 to shareholders of record at the close of business on February 12, 2009. 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 II-Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2008.