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

We continued to feel the effects of the global economic downturn during the second quarter of 2009 as our sales declined 39% in comparison to the second quarter of 2008. Despite continued slow sales, we generated a small profit in the second quarter of 2009, primarily due to cost savings measures implemented during the first and second quarters.

The staff reduction and other cost cutting initiatives we instituted this year significantly lowered our cost structure. In comparison to the first quarter of 2009, our SG&A expenses declined 18% and R&D expenses declined 21% during the second quarter. A number of these reductions occurred during the quarter, and their impact is not fully reflected in our second quarter results. In addition, we incurred severance costs of approximately $100,000 during the second quarter.

Although our sales continued to be weak during the second quarter, sales in the Laboratory Products segment increased by 14% in comparison to the first quarter of 2009. We believe economic conditions have stabilized in this segment and anticipate slight growth over the balance of the year. In our Air Monitoring segment, we believe sales will increase as we approach the end of the U.S. Government's fiscal year, which historically results in higher bookings. In addition, we expect to receive significant orders for MINICAMS® systems during the second half of 2009 in connection with projects that are currently underway.

In the second quarter we completed a number of prototype, beta versions of our innovative new process Total Organic Carbon analyzer and ion-CCD based miniaturized mass spectrometer. During the second half of the year, we will incorporate changes as required from our beta testing and expect to have production-ready commercial models in place by year-end. We believe that revenues from these new products will help to reduce our reliance on the current markets we serve and enhance future growth.

Despite the challenges of the current economy, our financial position remains strong. At the end of the second quarter, our cash and investments totaled $3,757,000, up $323,000 from year-end, with no bank debt. We believe that we are structured to generate positive earnings at our current level of business and are confident in our ability to produce improved results once economic conditions in our industry improve.

Results of Operations (dollars in 000's)

Revenues

                                         Three Months Ended                                                         Six Months Ended
                                              June 30,                                                                  June 30,
                                                                                   Increase                                                                  Increase
(dollars in 000's)        2009        % of Rev.       2008        % of Rev.       (Decrease)       2009        % of Rev.        2008        % of Rev.       (Decrease)
Sales by Segment:
Laboratory Products      $ 3,684            75.6 %   $ 6,040            75.1 %   $     (2,356 )   $ 6,911            72.8 %   $ 11,590            75.4 %   $     (4,679 )
Air-Monitoring Systems     1,192            24.4 %     2,004            24.9 %           (812 )     2,586            27.2 %      3,781            24.6 %         (1,195 )
Total                    $ 4,876           100.0 %   $ 8,044           100.0 %   $     (3,168 )   $ 9,497           100.0 %   $ 15,371           100.0 %   $     (5,874 )

Total revenue declined $3,168,000, or 39.4%, for the three months ended June 30, 2009 compared to the same period in 2008, with sales down substantially in both of our operating segments.

In the Laboratory Products segment, domestic product sales decreased 50% compared to the second quarter of 2008 as customers continued to conserve cash due to economic conditions. The decline in international product sales during the second quarter was somewhat lower at 38%. Increased sales in China and Taiwan partially offset larger declines in Europe, Latin America and the Asia Pacific region. Service revenues remained largely unchanged from last year. While down from last year, sales in this segment increased 14% from the first quarter, leading us to believe that economic conditions affecting this segment have stabilized. We anticipate slight growth in the sales of these products over the balance of the year.

In the Air-Monitoring Systems segment, sales declined due to very sluggish orders from the U.S. Government for MINICAMS®. Sales are historically weak in this segment during the second quarter but should improve over the balance of the year as we approach the end of the U.S. Government's fiscal year. In addition, we expect to receive significant orders for MINICAMS® systems during the second half of 2009 in connection with projects that are currently underway.

On a year to date basis, our overall revenue declined $5,874,000, or 38.2%, compared to the six months ended June 30, 2008. Laboratory Products segment sales decreased 40.4% and Air-Monitoring Systems segment sales declined 31.6% during this period. Domestic product sales in the Laboratory Products segment declined 50% compared to the first six months of 2008, while international sales declined 38% during that same period. International sales declined in Europe, Latin America and the Asia Pacific region but remained consistent with last year's levels in China and Taiwan.

Gross Profit

                           Three Months Ended June 30,                      Six Months Ended June 30,
                          2009                    2008                    2009                    2008
(dollars in
000's)                $            %          $            %          $            %          $            %
Gross Profit by
Segment:
Laboratory
Products           $ 1,614        43.8 %   $ 2,682        44.4 %   $ 3,039        44.0 %   $ 5,184        44.7 %
Air-Monitoring
Systems                758        63.6 %     1,207        60.2 %     1,504        58.2 %     2,152        56.9 %
Total              $ 2,372        48.6 %   $ 3,889        48.3 %   $ 4,543        47.8 %   $ 7,336        47.7 %

Overall gross profit for the three months ended June 30, 2009 decreased $1,517,000, or 39.0%, compared to the second quarter of 2008 because of lower sales volume. Margins in our Laboratory Products segment were down slightly because of unfavorable manufacturing variances associated with our decreased production levels, while margins in our Air-Monitoring Systems segment increased due to a higher composition of service revenues in the overall sales mix.

On a year to date basis, gross profit decreased $2,793,000, or 38.1%, in 2009 compared to last year because of lower sales volume. However, gross profit margins were largely unchanged from last year.

Operating Expenses

                               Three Months Ended June 30,                              Six Months Ended June 30,
                            2009                        2008                        2009                        2008
(dollars in
000's)                $         % of Rev.         $         % of Rev.         $         % of Rev.         $         % of Rev.
SG&A Expenses by
Segment:
Laboratory
Products           $ 1,204            32.7 %   $ 1,839            30.4 %   $ 2,670            38.6 %   $ 3,528            30.4 %
Air-Monitoring
Systems                425            35.7 %       623            31.1 %       935            36.2 %     1,233            32.6 %
Total              $ 1,629            33.4 %   $ 2,462            30.6 %   $ 3,605            38.0 %   $ 4,761            31.0 %

R&D Expenses by
Segment:
Laboratory
Products           $   389            10.6 %   $   523             8.7 %   $   924            13.4 %   $   992             8.6 %
Air-Monitoring
Systems                357            29.9 %       434            21.7 %       768            29.7 %       873            23.1 %
Total              $   746            15.3 %   $   957            11.9 %   $ 1,692            17.8 %   $ 1,865            12.1 %

Selling, general and administrative ("SG&A") expenses for the three months ended June 30, 2009 decreased $833,000, or 33.8%, compared to the same period of the prior year due largely to cost cutting measures we implemented in response to the economic downturn. These cost reduction efforts lowered salary and benefit expenses, travel and entertainment, consulting fees and Board-related expenses. In the Laboratory Products segment, SG&A expenses also declined because of lower sales commissions. We anticipate continued lower SG&A expenses in comparison to last year as our cost savings measures remain in effect.

For the six months ended June 30, 2009, SG&A expenses decreased $1,156,000, or 24.3%, compared to the same period of the prior year. The decline in Laboratory Products related SG&A expenses was attributable to decreased sales commissions, lower wage-related expenses, travel expenses, consulting fees, insurance costs 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.

During the second quarter of 2009, research and development ("R&D") expenses decreased by $211,000, or 22.0%, compared to the same period of last year. The decline in Laboratory Products related R&D expenses during the second quarter was attributable to lower expenses related to compensation, contract labor, consulting and supplies. R&D expenses in the Air-Monitoring Systems segment were down because of lower wage-related and supplies expenses. Our cost control measures reduced R&D expenses during the second quarter and we anticipate lower R&D expenses compared to last year in the coming quarters.

R&D expenses for the six months ended June 30, 2009 decreased by $173,000, or 9.3%, compared to the same period of the prior year. The decline in Laboratory Products related R&D expenses during the second quarter was partially offset by higher R&D expenses in the first quarter of 2009 attributable the completion of beta units for our new process TOC analyzer. R&D expenses in the Air-Monitoring Systems declined in both quarters compared to the same periods last year.

Operating Income (Loss)

                                Three Months Ended June 30,                                Six Months Ended June 30,
                              2009                         2008                         2009                        2008
(dollars in
000's)                $            % of Rev.         $         % of Rev.         $          % of Rev.         $         % of Rev.
Operating (Loss)
Income by
Segment
Laboratory
Products           $     21               0.6 %   $   320             5.3 %   $   (555 )          -8.0 %   $   664             5.7 %
Air-Monitoring
Systems                 (24 )            -2.0 %       150             7.5 %       (199 )          -7.7 %        46             1.2 %
Total              $     (3 )            -0.1 %   $   470             5.8 %   $   (754 )          -7.9 %   $   710             4.6 %

We essentially broke even for the second quarter of 2009, generating an operating loss of $3,000 compared to operating income of $470,000 for the three months ended June 30, 2008. On a year to date basis, we incurred an operating loss of $754,000 compared to operating income of $710,000 during the first six months of 2008. This decrease in earnings was primarily attributable to a large decrease in sales and gross profit, partially offset by decreases in SG&A and R&D expenses during the second quarter.

Other Income, Net

During the three months ended June 30, 2009 we recorded $16,000 of other income, compared to a loss of $216,000 in the second quarter of 2008, when we recognized a loss on our investment holdings. Because of turbulent financial markets last year, we recorded a loss on our preferred stock and corporate bond holdings.

During the six months ended June 30, 2009 we recognized $27,000 of other income. Due to the second quarter of 2008 investment loss noted above, we incurred a net loss in other income of $136,000 for the six months ended June 30, 2008.

Liquidity and Capital Resources

Net cash flow provided by operating activities for the six months ended June 30, 2009 totaled $603,000 compared to $349,000 during the comparable period of 2008. Despite our year to date loss, 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 $1,868,000. This positive cash flow was partially offset by decreases in our current liabilities; the most significant was primarily attributable to reduced income taxes payable.

Net cash flow provided by investing activities totaled $109,000 through the first six months of 2009, compared to $849,000 for the same period in 2008. Our net investment activity was minimal in 2009, while we liquidated a substantial portion of our investment holdings in 2008. Purchases of property, plant and equipment decreased to $37,000 in 2009, down $143,000 from last year as we continue to minimize capital equipment purchases. We have no material commitments for capital expenditures as of June 30, 2009.

Net cash flow used in financing activities for the six months ended June 30, 2009, totaled $192,000, compared to $476,000 for the same period of the prior year. This decrease was primarily attributable to reduced purchases of treasury stock in 2009 compared to 2008. In addition, our purchases of treasury stock in 2008 reduced our shares outstanding, which lowered our dividend payments. During the third quarter of 2009, we expect to reinstate purchases of our stock in the open market pursuant to the 2008 plan authorized by our Board of Directors. We have authority to purchase approximately 37,000 additional shares under this plan and additional shares may be authorized for repurchase.

Cash, cash equivalents and short-term investments totaled $3,757,000 as of June 30, 2009, compared to $3,434,000 at the end of 2008. Despite the year to date loss we have incurred, our cash position has increased $323,000 from year-end. We believe our cash holdings 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. In view of our current financial position and anticipated liquidity, we plan to discontinue our bank line of credit that we initiated in May of 2008. We have made no borrowings under this line of credit and have no short term plans which are likely to require external financing.

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 May 14, 2009 of $0.05 per common share payable on May 29, 2009 to shareholders of record at the close of business on May 14, 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.