Original issue discount bonds, or OID bonds, are bonds issued at a discount to their face value. If you have an OID bond, you have to include a portion of the discount in your income each year, to approximate the interest income the bond would generate if it were a regular bond. The bond issuer gives you a Form 1099-OID each year reporting the portion of the discount you have to include in your income.
When you include the discount in your income, you also get to add the discount to your basis in the OID bond. That way, when you sell the bond or it is retired, your gain will be reduced (or your loss increased) by the discount you included in your income.