SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended: December 31, 2003

Commission file number: 0-6511

O. I. CORPORATION

Registrant’s Telephone Number, including area code: (979) 690-1711
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ü] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ü]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [   ] No [ü]

The aggregate market value, as of June 30, 2003, of the common stock (based on the average of the high and low trade prices of these shares on NASDAQ) of O. I. Corporation held by non-affiliates was approximately $12,291,473.

The number of shares outstanding of the common stock as of March 15, 2004 was 2,778,070.

DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2004 Annual Meeting of Shareholders
Part III information is incorporated by reference to the Proxy Statement

FORM 10-K
TABLE OF CONTENTS

Table of Contents

PART I

Item 1. Business

General

O. I. Corporation (the “Company”) is a corporation that 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, the Company moved from Oklahoma City, Oklahoma to College Station, Texas, and the Company’s name was changed to Oceanography International Corporation. The Company’s name was changed to O.I. Corporation in July 1980; and in January 1989, the Company filed an application to do business as OI Analytical to better align the company name with the products offered and markets served.

The Company designs, manufactures, markets, and services products primarily for specialized applications in the analytical instruments markets, including sample preparation, detection, measurement, and monitoring instruments used to analyze chemical compounds. The Company’s principal business strategy is to direct its product development capabilities, manufacturing processes, and marketing skills toward market niches, which it believes it can successfully penetrate and quickly assume a leading position. Management continually emphasizes product innovation, improvement in quality and product performance, on-time delivery, cost reductions, and other value-added activities. The Company seeks growth opportunities through technological and product improvement, the development of new applications for existing products, and by acquiring and developing new products, new markets, and new competencies.

The Company’s web site is located at www.oico.com. The Company makes available, free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is filed with the Securities and Exchange Commission (“SEC”). These filings are also available through the SEC’s website at www.sec.gov.

Recent Developments

The Company has historically expanded through internal development of new products and technologies, through the acquisition of technologies, product lines, market positions, competencies, and businesses, and through entering into alliances, distributorships, original equipment manufacturer supply agreements (OEMs), and value added reseller agreements (VARs). Such developments, acquisitions, and agreements have provided the Company additional technologies, specialized manufacturing or product development expertise, and broader capabilities in marketing and distribution. Recent developments include:

To better position the Company with the technology needed to provide leading edge products for use in homeland defense and security and other markets, the Company entered a strategic alliance with Intelligent Ion, Inc. (“III”). The alliance includes a commercial agreement and investment of $1,000,000 in a Series A Preferred Share offering by III. Upon conversion, the Company’s investment will represent, on a fully diluted basis, approximately 10% ownership in III common shares. In connection with the investment, the Company has the right to appoint two directors to serve on III’s Board of Directors. The Company named William W. Botts, president and CEO of O.I. Corporation, and Dr. Richard W. K. Chapman, a member of the Company’s Board of Directors, to serve in such capacity. Under the Commercial Agreement, the Company will provide up to $1,350,000 for the completion by III of certain product developments according to agreed upon milestones, and is entitled to certain intellectual property controlled by III. The Company is entitled to recover such funding through product purchase or license fee credits from III. The Commercial Agreement also provides the framework for future cooperation between the parties, including III manufacturing and selling products to the Company for incorporation into products developed and sold by the Company. III, founded in January 2000, is based in Seattle, Washington and is an early-stage company, which has a portfolio of technology through licensing and in-house development relating to miniaturized mass spectrometers. The investment in III is consistent with the Company’s strategy to significantly increase investment in new product development. The Company recognizes this investment might represent higher risk than an internal development, but believes the risk is appropriate, considering it provides access to intellectual property and development skills not possessed by the Company.

2

During the quarter ended September 30, 2002, the Company completed an evaluation of the future prospects of certain products and determined to discontinue manufacturing, sales, service, and support for certain sample preparation, gas chromatography, and ion analyzer products. The Company came to these decisions because purchase components are no longer available for support of those products, and sales volumes for those products no longer represent a viable business opportunity for the Company. As a result of these decisions, the Company has determined that certain intangible assets amounting to approximately $346,000 are impaired, and inventory amounting to approximately $200,000 is obsolete, together resulting in an expense of $546,000 for the period. The impaired intangible assets are from prior acquisitions and consist primarily of acquired trade names and patents that are no longer used, and the inventory write-off consists primarily of obsolete inventory resulting from the discontinuation of products.

The Company entered into an original equipment manufacturers’ (OEM) agreement with Agilent Technologies Inc. (Agilent), effective December 1, 2000, which was subsequently renewed in each of December 2001, 2002, and 2003. No assurances can be made that the OEM agreement will be renewed in the future. Since June 1988, the Company had operated as a value added reseller (VAR) of analytical instruments manufactured by Agilent (formerly Hewlett Packard Company). On September 15, 2000, Agilent notified the Company that the VAR agreement between the Company and Agilent would not be renewed upon its expiration on November 30, 2000. Under the terms of the expired VAR agreement with Agilent, the Company purchased analytical instruments, including gas chromatographs (GCs) and mass spectrometers (MS), integrated them with Company-manufactured components, and marketed these analytical systems for environmental analysis to comply with U.S. Environmental Protection Agency (USEPA) 500, 600, and 8000 Series Methods, and for other chemical analyses.

On February 1, 1999, the Company acquired certain assets of General Analysis Corporation (GAC), headquartered in South Norwalk, Connecticut. GAC designs, manufactures, and markets infrared gas and liquid analytical instruments and accessories used in laboratories, in-line and on-line liquid analysis and gas analysis in field monitoring applications. The Company acquired GAC for $259,459 in cash and the assumption of approximately $1,100,000 in liabilities. In addition, the Company was obligated to make earn-out payments to the former owner of GAC based upon the achievement of potential future revenue targets (See Note 13 of the consolidated financial statements). In 2000, the Company reviewed intangible assets including non-compete agreements, names, and unallocated goodwill related to this acquisition and determined that some of them were impaired; therefore, assets in the amount of $793,000, representing 91% of the then unamortized acquired intangible assets, were written off by a charge to expenses.

Products

The Company develops, manufactures, markets, and services analytical, monitoring, and sample preparation products, components, and systems used to detect, measure, and analyze chemical compounds. Such products include:

Gas Chromatography Instruments and Systems The Company designs, manufactures, markets, and services components for gas chromatographs (GCs), including detectors and sample introduction instruments. Gas chromatography is an analytical technique that separates organic compounds based on their unique physical and chemical properties. The use of gas chromatography in a number of diverse applications has led to the continuous development of a broad range of sample introduction and detector devices. Advances in the field are based on technology improvements that provide improved sample introduction, faster analysis, lower level and selective detection, ease-of-use, and increased reliability. GC instruments currently manufactured by the Company include the following:

Electrolytic Conductivity Detector (ELCD); Photoionization Detector (PID); Flame-Ionization Detector (FID); Tandem PID/ELCD; Tandem PID/FID; Halogen Specific Detector (XSD)™; Flame Photometric Detector (FPD); Pulsed Flame Photometric Detector (PFPD); Injectors and Inlets; Purge-and-Trap Sample Concentrator (P&T); P&T Autosamplers; Preconcentration and Thermo Desorption Device; Air Tube Concentrators, Volatile Organic Sample Train (VOST); and Multi-Point Sampling Inlet Module.

The Company purchases analytical instruments including GCs and GC mass spectrometers (GC/MS) manufactured by GC companies, including purchases under an OEM agreement with Agilent Technologies, Inc. (Agilent), formerly Hewlett Packard Company. The Company integrates GC components with GCs and GC/MS to form customized GC analyzer systems including: VOC (volatile organic carbon) analyzers, BTEX (Benzene, Toluene, Ethylbenzene, and

3

Xylenes) analyzers, pesticide analyzers, fluorinated by-products (FBA) analyzers, continuous emissions monitoring (CEM), continuous air monitoring analyzers for air toxins and VOCs, permeating testing, and ethyleneoxide analyzers.

The Company configures GC systems in standard and custom configurations to meet market needs in the laboratory, in the field, and on line. Configured systems can analyze chemical compounds in gas, liquids, or solids matrices using the appropriate components.

Total Organic Carbon Analyzer Systems The Company designs, manufactures, markets, and services Total Organic Carbon (TOC) analyzers and related accessories that are used to measure organic and inorganic carbon levels in ultrapure water, drinking water, groundwater, wastewater, soils, and solids. The Company’s TOC analyzers are used in testing required by the USEPA and testing ultrapure water used in U.S. pharmaceutical methods; the manufacturing of semiconductors; power generation; and oceanographic research. TOC products produced by the Company include: High Temperature Persulfate TOC Analyzer; Combustion TOC Analyzer; and TOC Solids Analyzer.

Ion Analysis Systems The Company designs, manufactures, markets, and services Segmented Flow Analyzers (SFA), Flow Injection Analyzers (FIA), and field portable instruments such as the Flow Solution® IV; Flow Solution 3000; and CNSolution™ 3000 (cyanide analyzer). These instruments perform a wide range of ion analyses, including the measurement of nitrate, nitrite, phosphate, ammonia, chloride, alkalinity, and sulfate in liquids. The Company’s CN Analyzer can perform total cyanide analysis in a number of industrial applications including cyanide testing in gold and silver mining, electroplating, metal finishing, and semiconductor operations. The SFA, FIA, and CN Analyzer products may be equipped with autosamplers to enhance productivity.

Sample Preparation Products and Systems The Company designs, manufactures, markets, and services sample preparation instrumentation used to prepare sample matrices for analysis. The most time-consuming part of chemical analysis is sample preparation. Procedures, techniques, and instruments that can reduce total sample preparation time are highly desirable for analysis of chemical compounds. The Company’s sample preparation products and systems include Microwave Digestion Systems; and Gel Permeation Chromatography (GPC) Systems.

Filtometers The Company designs, manufactures, markets, and services non-dispersive infrared instruments (NDIR) that are sometimes called filtometers. The filtometer uses a light source and an interference filter to send light of a specific wavelength through a sample. The sample’s absorbance of the light, as measured by a suitable detector, is a direct measure of the sample’s concentration. This makes the filtometer well suited to making repeated measurements on individual samples or continuously on a process stream or air. The Company provides two products employing filtometer technology including:

Continuous Refrigerant Monitors are used by the chiller/refrigerant industry for the rapid detection of low-level refrigerant leaks. These instruments can monitor for all refrigerants including CFCs (chlorofluorocarbons), HFCs (hydrofluorocarbons), HCFCs (hydrochlorofluorocarbons), and ammonia and meet ASHRAE (American Society of Heating, Refrigerating, and Air-conditioning Engineers) 15-1994 Safety Code Requirements.

Beverage Analyzers are used on-line and in the laboratory to measure dissolved Brix (sugar), diet syrup, and carbon dioxide in beverages. This equipment is currently used in soft-drink bottling plants, breweries, and wineries.

Sales by Location

All of the Company’s assets are located in the United States, and all sales are conducted in U.S. dollars. There have been no sales or transfers between geographic areas during the last five fiscal years. Estimated net revenues attributable to the United States, export revenues as a group, and the number of countries in which export revenues were generated, are as follows:

4

Sales to the Asia-Pacific region were approximately 13% of net revenues for 2003; and sales to the European-African region were approximately 13% of net revenues for 2002; however, sales did not exceed 10% of revenues to any particular international geographic area for any of the years 1999 to 2001.

For additional financial information, including financial information for the last three years on total assets, please see  “Item 8. Financial Statements and Supplementary Data” and the notes to the consolidated financial statements included in this annual report.

Manufacturing

The Company manufactures products by using similar techniques and methods at two locations in the U.S. The Company’s manufacturing capabilities include electro-mechanical assembly, testing, integration of components and systems, and calibration and validation of configured systems. The Company’s products have been certified pursuant to safety standards by one or more of the following agencies: Underwriters Laboratories (UL), Canadian Standards Association (CSA), and/or the European Committee for Electrotechnical Standardization (CE). These agencies and others also certify that instruments meet certain performance standards and that advertised specifications are accurate. In 1999, the Company obtained ISO 9001 certification for its College Station, Texas manufacturing operations, and in 2003, the Company obtained ISO 9001 certification for its Birmingham, Alabama manufacturing operations.

Marketing

The Company markets and sells analytical components and systems that it manufactures and that are purchased for resale, provides on-site installation and support services, and distributes expendables and accessories required to support the operation of products sold. The Company sells its products domestically to end users through a direct sales channel, manufacturers’ representatives, distributors, and resellers, and internationally through independent manufacturers’ representatives and distributors. The Company’s marketing program for its products and services, both domestically and internationally, includes advertising, direct mail, seminars, trade shows, telemarketing, and promotion on the Company’s Internet web site.

Technical Support

The Company employs a technical support staff that provides on-site installation, service, and after-sale support of its products in an attempt to ensure customer satisfaction. Technical support services are included in the initial sale of certain products and if not included in the initial purchase, may be purchased later by customers. The Company offers training courses, publishes technical bulletins containing product repair information, parts lists, and application support information for customers. Products sold by the Company generally include a 90-day to one-year warranty. Customers may also purchase extended warranty contracts that provide coverage after the expiration of the initial warranty. The Company installs and services its products through its field service personnel and through third party contractors in the United States and Canada and through distributors and manufacturers’ representatives internationally.

Research and Development

The analytical instrumentation industry is subject to rapid changes in technology. The Company’s success is heavily

5

dependent on its ability to continually improve its existing products, advance and broaden employed technologies, increase product reliability, improve product performance, and improve handling of data produced from analysis, and at the same time to reduce the physical size of the product, reduce cycle time of analysis, and maintain or reduce product cost. Research and development costs, relating to both present and future products, are expensed as incurred, and such expenses were $2,698,000 in 2003, $2,246,000 in 2002, and $2,157,000 in 2001. The Company actively pursues development of potential new products, including custom-configured GC systems and components, instrument control and data reporting software systems, dedicated analyzers, including TOC and ion analyzers, on-line beverage monitors, and continuous air monitoring systems to measure refrigerants.

Patents

The Company holds both U.S. and international patents and has both U.S. and international patent applications pending. The Company currently holds 30 patents as of year-end 2003, which expire between the years 2004 and 2023 compared to 26 patents in the prior year. As a matter of policy, the Company vigorously pursues and protects its proprietary technology positions and seeks patent coverage on technology developments that it regards as material and patentable. While the Company believes that all of its patents and applications have value, its future success is not dependent on any single patent or application.

Competition

The Company encounters aggressive competition in all aspects of its business activity. The Company competes with many firms in the design, manufacture, and sale of analytical instruments, principally on the basis of product technology and performance, product quality and reliability, sales and marketing capability, access to channels of distribution and product support, delivery, and price. Most of the Company’s competitors have significantly greater resources than the Company in virtually all aspects of competition, including financial and related resources, market coverage on a global basis, breadth of product(s) in each market segment(s) served, access to human and technical resources, buying power, and marketing strength, including brand recognition, market share, and bundled product sales.

Employees

As of December 31, 2003, the Company had 142 full-time employees. The Company employs scientists and engineers who research and develop potential new products. To protect the Company’s proprietary information, the Company has confidentiality agreements with its employees who come in contact with such information. None of the Company’s employees are covered by a collective bargaining agreement. Management believes that relations between the Company and its employees are good.

Executive Officers of the Registrant

The executive officers of the Company, their ages, positions, and offices, as of December 31, 2003, are as follows:

William W. Botts joined the Company as President and Chief Operating Officer on February 1, 1985, was named Chief Executive Officer of the Company on July 19, 1985, and Chairman of the Board of Directors of the Company on May 26, 1986. Prior to joining the Company, he was Vice President and General Manager of the Brandt Division of TRW Inc.; Executive Vice President and Chief Operating Officer of The Brandt Company; Division General Manager of Sheller-Globe, Inc.; Assistant Plant Manager, Arvin Industries; and Engineer, AMBAC Industries, Inc.

6

Jane A. Smith has been employed with the Company since 1973. She was named Assistant Corporate Secretary in 1976 and Corporate Secretary in 1986. On May 22, 1990, she was named Vice President/Corporate Secretary.

Juan M. Diaz joined the Company as Corporate Controller on June 30, 2001. Prior to joining the Company, he was Audit Manager for Arthur Andersen LLP in Houston, Texas. He received his Certified Public Accountant certification in 2000. On May 9, 2003, he was named Vice President/Corporate Controller.

Environmental Regulations

The Company believes it is in compliance with federal, state, and local laws and regulations involving the protection of the environment. The Company routinely handles small amounts of materials that might be deemed hazardous. Hazardous materials are primarily introduced into the Company’s products by end users rather than by the Company. The Company believes there will be no material effect upon its capital expenditures, earnings, and competitive position caused by its compliance with federal, state, or local provisions regulating the discharge of materials into the environment or relating to the protection of the environment. However, to the extent that analytical instruments designed and manufactured by the Company for environmental analysis are purchased by its customers to assist them in complying with environmental regulations, changes to these regulations could reduce demand for some of the Company’s products.

Sources of Raw Materials

The Company produces its products from raw materials, component parts, and other supplies that are generally available from a number of different sources. The Company has few long-term contracts with suppliers. For certain purchased materials, the Company has developed preferred sources on the basis of quality and service. Several purchased components are supplied by single source suppliers. There can be no assurance that these preferred or single sources will continue to make materials available in sufficient quantities, at prices, and on other terms and conditions that are adequate for the Company’s needs. However, there is no indication that any of these preferred or single sources will cease to do business with the Company. The Company believes that in the event of any such cessation, adequate alternate sources would be available, although perhaps at increased costs to the Company, or that the risk of cessation is only significant to the Company’s older products for which the Company plans to discontinue manufacturing and support and that have been or will be replaced by newer versions. The Company uses sub-contractors to manufacture certain components of its products. Subcontractors often are small businesses that can be affected by economics and other factors that would impact their ability to be a reliable supplier. Substitute suppliers and/or components may require reconfiguration of products, which might result in significant product changes in the view of customers, ultimately resulting in the Company having discontinued such products.

Backlog of Open Orders

The Company’s backlog of orders on December 31, 2003 was approximately $3,172,000, compared to $5,327,000 for December 31, 2002, and $3,529,000 for December 31, 2001. The Company’s policy is to include in its backlog only purchase orders or production releases that have firm delivery dates in the twelve-month period following December 31, 2003. Recorded backlog may not result in sales because of purchase order changes, cancellations, or other factors. The Company anticipates that substantially all of its present backlog of orders will be shipped or completed during 2004.

Seasonality

The Company believes that the demand for its products is not subject to significant seasonal variations.

Customers

The Company’s customers include various military agencies of the U.S. government, industrial businesses, semiconductor manufacturers, engineering and consulting firms, municipalities, environmental testing laboratories, beverage bottlers, and chiller-refrigerant companies. No single customer accounted for more than 10% of revenues in 2003. One customer accounted for approximately 10% of revenues in 2002, and 12% of revenues in 2001. Federal, state, and municipal governments and public and private research institutions in the aggregate accounted for 20% of revenues in 2003, 17% of revenues in 2002, and 13% of revenues in 2001. A decrease in sales to these groups could have a material adverse impact on the Company’s results of operations. Export sales accounted for 27% of revenues in 2003, compared to 25% of revenues in 2002, and 18% in 2001.

7

Item 2. Properties

The Company owns a facility with space of approximately 68,650 sq.ft. located on 11.29 acres of land in College Station, Texas and has good title, free of any encumbrances. The Company leases approximately 20,000 sq.ft. of office, engineering, laboratory, production, and warehouse space in Pelham, Alabama, a suburb of Birmingham, under a lease expiring in December 2006. The Company also leases 500 sq.ft. of office space in Edgewood, Maryland under a lease, which can be renewed annually. The Company believes that its facilities are in good condition and are suitable for its present operations and that suitable space is readily available for expansion or if any of its leases are not extended.

Item 3. Legal Proceedings

From time to time, in the ordinary course of business, the Company has received, and in the future may receive, notice of claims against it, which in some instances have developed, or may develop, into lawsuits. Management does not expect any pending claim to have a material adverse effect on the consolidated financial position and results of operations of the Company.

Certain claims are pending against the Company with respect to matters arising out of the ordinary conduct of its business. For all claims, in the opinion of management, based upon presently available information, either adequate provision for anticipated costs has been made by insurance, accruals or otherwise, or the ultimate anticipated costs resulting will not materially affect the Company’s consolidated financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the security holders of the Company, through solicitation of proxies or otherwise, during the fourth quarter of 2003.

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

Common Stock Market Information The Company’s Common Stock trades on the NASDAQ Stock Market under the symbol: OICO. Information below is contained in a statistical report obtained from the National Association of Securities Dealers, Inc. (NASD). The ranges of high and low trade prices per share of the Company’s Common Stock for each quarterly period during fiscal 2003 and 2002 were as follows:

NOTE:	The above quotations represent prices between dealers, do not include retail markup, markdown, or commission, and may not necessarily represent actual transactions.

Dividends The Company has never paid dividends on the Common Stock, and management does not anticipate paying any dividends in the foreseeable future.

Approximate Number of Holders of Common Stock As of March 15, 2004, there were approximately 846 holders of record of the Company’s Common Stock.

Equity Compensation Plan Information All existing equity compensation plans have been approved by security holders.

8

Item 6. Selected Financial Data

The following table sets forth the Company’s selected historical financial data from each of the five years in the period ended December 31, 2003. The selected historical financial data set forth below has been derived from our audited consolidated financial statements included elsewhere in this annual report on Form 10-K. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to implement critical accounting policies and to make estimates that could significantly influence the results of operations and financial position. The accounting policies and estimates, which significantly influence the results of the Company’s operations and its financial position, include revenue recognition policies, the valuation allowance for inventories and accounts receivable, evaluation of the impairment of and estimated useful lives of intangible assets, estimates for future losses on product warranties, and policies on accounting for stock-based compensation.

Revenue Recognition The Company derives revenues from three sources: system sales, part sales, and services. For system sales and parts sales, revenue is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the contract price is fixed or determinable, title and risk of loss has passed to the customer, and collection is reasonably assured. The Company’s sales are typically not subject to rights of return, and historically, sales returns have not been significant. System sales that do not involve unique customer acceptance terms or new specifications or technology with customer acceptance provisions, and that involve installation services are accounted for as multiple-element arrangements, where the larger of the contractual billing hold back or the fair value of the installation service is deferred when the product is delivered and recognized when the installation is complete. In all cases, the fair value of undelivered elements, such as accessories ordered by customers, is deferred until the related items are delivered to the customer. For certain other system sales that do involve unique customer acceptance terms or new specifications or technology with customer acceptance provisions, all revenue is generally deferred until customer acceptance. Revenue related to part sales is recognized when the parts have been shipped and title and risk of loss have passed to the customer. Deferred revenue is presented as unearned revenues in accrued liabilities in the accompanying consolidated balance sheets.

9

Products generally carry one year of warranty. Once the warranty period has expired, the customer may purchase an extended product warranty typically covering an additional period of one year. Extended warranty billings are generally invoiced to the customer at the beginning of the contract term. Revenue from extended warranties is deferred and recognized ratably over the duration of the contracts. Unearned maintenance and extended warranty revenue is included in deferred revenues in accrued liabilities in the accompanying consolidated balance sheets.

Revenues from bill and hold sales are recognized in accordance with the criteria specified in SAB 101. In addition to the criteria above, the customer must request that the transaction be on a bill and hold basis and have a substantial business purpose for ordering the goods on that basis; there must be a reasonable, fixed schedule for delivery consistent with the business purpose, the Company must no longer retain any performance obligations and the earnings process must be substantially complete, and the items sold must be segregated from the rest of the Company’s inventory and must be ready for final shipment to the customer.

Accounts Receivable The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of its customers to make required payments and for estimated sales returns. Customers may not make payments or return products due to a variety of reasons including deterioration of their financial condition or dissatisfaction with the Company’s products. Management makes regular assessments of doubtful accounts and uses the best information available including correspondence with customers and credit reports. If the Company determines that there is impairment in the ability to collect payments from customers, additional allowances may be required. However, the Company does not believe that there is significant likelihood of this risk from a single customer, since the Company does not have a significant credit consideration risk with any one single customer. Historically, the Company has not experienced significant bad debt losses, but the Company could experience increased losses if general economic conditions were to deteriorate, resulting in the impairment of a number of its customers’ ability to meet their obligations, or if management made different judgements or utilized different estimates for sales returns and allowances for doubtful accounts.

Inventories Inventories consist of electronic equipment and various components. The Company operates in an industry where technological advances or new product introductions are a frequent occurrence. Either one of these occurrences can make obsolete or significantly impair customer demand for a portion of the Company’s inventory on hand. The Company regularly evaluates its inventory and maintains a reserve for inventory obsolescence and excess inventory. As a policy, the Company provides a reserve for products with no movement in six months or more and which management determines, based on available market information, are no longer saleable. The Company also applies subjective judgment in the evaluation of the recoverability of the rest of its inventory based upon known and expected market conditions and company plans. If the Company’s competitors were to introduce a new technology or product that renders a product sold by the Company obsolete or unnecessary, it could have a significant adverse effect on the Company’s future operating results and financial position.

The Company had changes in required reserves in recent periods due to discontinuation of certain product lines and obsolescence related to new product introductions, as well as declining market conditions. As a result, the Company incurred net inventory charges of approximately $200,000 during fiscal 2002 and approximately $151,000 during fiscal 2003.

Intangible Assets The Company’s intangible assets primarily include product patents, trade names and trademarks. The Company adopted Statement of Financial Accounting Standards (FAS) No. 142, on January 1, 2002, as required. Accordingly, the Company annually reviews the recoverability and estimated useful lives of other intangible assets for impairment. During the quarter ended September 30, 2002, the Company completed an evaluation of the future prospects of certain products and determined to discontinue manufacturing, sales, service, and support for certain sample preparation, gas chromatography, and ion analyzer products. The Company came to these decisions because purchase components are no longer available for support of those products, and sales volume for those products no longer represent a viable business opportunity for the Company. As a result of these decisions, the Company has determined that certain intangible assets amounting to approximately $346,000 were impaired and written off by a charge to expense for the period ending December 31, 2002. The impaired intangible assets are from prior acquisitions and consist primarily of acquired trade names and patents that are no longer used, resulting from the discontinuation of products.

Product Warranties Products are sold with warranties ranging from 90 days to one year, and extended warranties may be purchased for some products. Estimated expenses associated with these warranties are provided for in the accompanying financial statements at the time of revenue recognition. The Company makes estimates of these costs based on historical experience and on various other assumptions including historical and expected product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage, or service delivery costs differ from estimates, revisions to the estimated warranty liability would be required.

Stock-Based Compensation The Company elected to account for fixed award stock options and non-employee directors’ options under the provisions of APB Opinion No. 25 “Accounting for Stock Issued to Employees.” As such, no compensation cost has been recorded in the financial statements relative to these options. The Company utilizes the Black-Scholes option pricing model to estimate the fair value of these options for disclosure purposes.

10

Stock granted to non-employee directors are accounted for in accordance with FAS No. 123 “Accounting for Stock-Based Compensation.” Accordingly, directors’ stock is recorded as compensation expense at estimated fair value on the date the stock is earned by the director.

Results of Operations

Overview

Net income increased $977,000, or 148%, during 2003 to $1,635,000, compared to $658,000 in 2002, primarily due to increases in revenues from GC components and systems, MINICAMS air-monitoring systems, and the introduction of new products combined with decreases in impairment charges and other costs. The Company continued to pursue its strategy of maintaining a presence in the environmental testing market, while seeking out opportunities in other markets, such as the pharmaceutical, petrochemical, semiconductor, refrigerant, and food and beverage markets. The Company continued to face intense competition for its products, and the markets for the Company’s products have not fundamentally improved as uncertainty about the U.S. economy continues. Nevertheless, the Company maintained its commitment to its plan to increase its research and development activities to develop potential new products to take advantage of opportunities in the homeland defense and security market. Net income decreased $1,348,000, or 67% during 2002 to $658,000, compared to $2,006,000 in 2001, primarily due to lower revenues, lower sales of higher gross margin products, and increased spending on research and development. Expenses from impairments of intangible assets increased 100% in 2002, due to impairments of intangible assets relating to past acquisitions and the discontinuation of manufacturing and support for certain products.

The following table summarizes the results of the Company’s operations for each of the past three years. All percentage amounts were calculated using the underlying data in thousands.

Net Revenues

2003 Compared to 2002

Total net revenues for the year ended December 31, 2003 increased 6% or $1,523,000 to $25,206,000, compared to $23,683,000 for the same period of 2002, primarily due to increases in revenues from GC components and systems, MINICAMS air-monitoring systems, and the introduction of new products.

Revenues from gas chromatography (GC) components and systems increased in 2003, compared to 2002, due to the introduction of a new purge-and-trap sample concentrator, the Eclipse, during the third quarter of 2003, increases in sales of selective detectors sold along with MINICAMS air-monitoring systems, and an increase in sales of the Company’s custom-configured GC systems. The Company continues to face intense competition from manufacturers of mass spectrometers, GC systems, and other components. Effective December 1, 2000, the

11

Company entered a one-year original equipment manufacturers (OEM) supply agreement with Agilent Technologies, Inc. (formerly Hewlett Packard Company), previously a value added reseller (VAR) agreement, which provided for sales and marketing cooperation. The Company now competes directly with Agilent and others for sales of GC components and systems in the environmental testing and other markets.

Revenues from MINICAMS air-monitoring systems increased in 2003, compared to 2002, as sales for systems used to detect chemical-warfare-agents in demilitarization programs increased, and as export sales increased. Also, during 2003, approximately $700,000 of $3,200,000 in purchase orders granted to the Company during 2001 and 2002 by Parsons Infrastructure & Technology Group, Inc. (“Parsons”), for MINICAMS was cancelled due to changes in the scope of the equipment needed. Parsons and the Company negotiated a cancellation fee of approximately $68,000. Total revenues recognized since the beginning of this order were approximately $2,500,000, through the quarter ended June 30, 2003, including the cancellation fee. The Company considers the order completed.

Revenues from total organic carbon (TOC) analyzers were flat in 2003, compared to 2002, due to competition from products with nitrogen detecting capabilities, which the Company’s product does not possess.

Revenues from continuous flow analyzers declined in 2003 due to increased competition internationally and the continued emergence of a competitive technology called discrete analyzers. Discrete analyzers do not perform all analyses as do continuous flow analyzers, but they impact the demand for continuous flow analyzers. Discrete analyzers are becoming the preferred technique for those applications it will perform.

Revenues from Gel Permeation Chromatography (GPC) products decreased in 2003, compared to 2002, primarily due to the discontinuation of the Soxtherm product.

Revenues from microwave digestion products were flat in 2003, compared to 2002.

Revenues from beverage analyzers increased in 2003, compared to 2002, due to shipment of the new LAN 9000, which began in the third quarter. The Company's success in penetrating the beverage analyzer market will be dependent upon the Company becoming a qualified supplier to major domestic soft drink producers. Since the Company’s purchase of GAC, sales of the LAN 9000 have been disappointing.

Revenues from refrigerant air monitor products, a product line obtained in the purchase of GAC, increased in 2003 compared to 2002. However, sales levels continue to fall short of our expectations. The Company is considering alternatives to improve the product’s performance.

Net revenues from customer services, including rentals of the Company’s products, decreased in 2003, compared to 2002, due to a decrease in new product installations and factory repair services performed, partially offset by an increase in customer training and on-site repair services performed.

Export revenues increased 13% in 2003 to $6,764,000, compared to $5,984,000 in 2002. Sales of air-monitoring systems, GC systems and components, TOC analyzers and beverage analyzers all increased, primarily due to increased demand for organic volatile and inorganic nutrient monitoring solutions within the environmental and industrial client base, although difficult local economic conditions and competition continue to affect export sales.

Despite the increase in net revenues for the year ended December 31, 2003, compared to 2002, improvement in the performance of some products is still offset by the below-expectations performance of certain other products. The Company continues to encounter strong competition and continues to seek improved distribution strategies for certain products in some channels and markets. Furthermore, the Company has not seen or experienced a fundamental improvement in the purchasing and capital spending activity in many of the markets that the Company serves. Uncertainty about the direction of the U.S. and other global economies has resulted in prolonged purchasing decisions, and has suppressed purchasing and capital spending activity in many of the markets that the Company serves, in particular, industrial and government customers. In addition, the environmental instruments market in which the Company competes has been flat or declining over the past several years. The Company has identified a number of strategies it believes will allow it to grow its business despite this decline, including the acquisition of complementary businesses or product lines, developing new products, developing new applications for its technologies, and strengthening its presence in selected geographic markets. No assurance can be given that the

12