We are a global specialty chemical company engaged in the business of manufacturing and marketing mineral products for use as pigments, pigment extenders and flame retardants used in the manufacture of paints, industrial coatings, plastics, catalysts and solid surface applications. We have three production facilities located in Corpus Christi, Texas, Ipoh, Malaysia, and in the Netherlands.

The facility in Corpus Christi, Texas, manufactures HITOX, BARTEX, and HALTEX. The facility is also the Global Headquarters for the Company. The facility in Ipoh, Malaysia, manufactures SR and HITOX. SR is the main raw material for HITOX. The Company also supplies SR to outside customers. The facility in Hattem, the Netherlands, manufactures Alumina based products. (See "Our Products" on page 4).

Approximately $7,689,000 or 25% of the 2004 sales are outside of the United States. Of these sales, approximately 31% are in currencies other than the US dollar, primarily Euro based. Of the $22,787,000 sales in the United States, $4,758,000 or 21% were Euro denominated sales.

Operating expenses in the foreign locations are primarily in local currencies. Accordingly, we have exposure to fluctuation in foreign currency exchange rates. These fluctuations impact the translation of sales, earnings, assets and liabilities from local currency to the US dollar. "Foreign Operations - Impact of Exchange Rate" on page 27).

Our business is closely correlated with the construction industry and its demand for materials that use pigments, such as paints and plastic pipe. This has generally led to higher sales in our second and third quarters due to increases in construction and maintenance during warmer weather. Also, pigment consumption is closely correlated with general economic conditions. When the economy is in an expansionary state, there is typically an increase in pigment consumption while a slow down typically results in decreased pigment consumption. When the construction industry or the economy is in a period of decline, TOR's sales and profit are likely to be adversely affected.

Critical success factors for the Company include managing its overall global manufacturing facilities to maximize efficiencies in the manufacturing process, controlling costs, increasing market share, developing new markets for our products and the effects of foreign currency fluctuations.

Our 2004 sales were $30,476,000, up approximately 26% from 2003. Net income was $1,104,000, down approximately 13% from 2003 net income of $1,264,000. The primary reason for the reduction in net income is due to significant increases in energy, freight and raw material costs which negatively affected our gross margin. While we generally increase prices to offset cost increases, these actions tend to lag the cost increases.

Our financial performance continues to be heavily dependent on sales of a single product line, HITOX pigment, which accounted for approximately 40% of the 2004 total sales as compared with 48% in 2003. As a result, we continually strive to diversify our sales by developing new products and expanding our existing product lines. During 2004 we designed and constructed a new HITOX processing line at the Corpus Christi operation specifically to allow for the production of .3 Micron HITOX-SF. Final production tests were conducted in January and February 2005 and commercial production commenced in March 2005. In addition, TP&T began producing commercial quantities of both TOR COAT and TOR BRITE in late 2004, which are alumina mono oxyhydrate based pigments for use in the coatings industry. We have established one European customer for TOR COAT and are shipping truckload quantities to this customer. Sampling of TOR BRITE is underway in the US and Canadian markets and both TOR COAT and TOR BRITE are being tested in Europe. TP&T has received approval from one large manufacturer of automotive coatings for the production of TOR COAT and intends to begin supplying later in 2005.

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Net Sales : Consolidated net sales for 2004 were approximately $30,476,000, an increase of approximately $6,349,000 or 26% compared with 2003 net sales of approximately $24,127,000. Net sales are higher primarily due to increased volumes in all of our major product lines and to pricing increases. These increases are primarily due to the continued strengthening of the economy in the US and the rest of the world. Also contributing to the increase is the foreign currency exchange rate effect of the weakening US dollar against the Euro.

Following is a summary of our consolidated products sales for 2004 and 2003 (in thousands):

The increase in sales of our HITOX, BARTEX and HALTEX is primarily due to the continued strengthening of the US economy.

Our net sales to customers in the US increased approximately $5,754,000 or 34% from $17,033,000 in 2003 to $22,787,000 in 2004. Of the 2004 US sales, approximately $4,758,000 were denominated in Euros. The effect of the US dollar weakening against the Euro was to increase these sales by approximately $434,000 as compared to 2003 exchange rates.

Foreign net sales increased approximately $595,000 or 8% from approximately $7,094,000 in 2003 to $7,689,000 in 2004. The effect of the weakening US dollar was to increase these sales by approximately $182,000 as compared to 2003 exchange rates.

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Following is a summary of net sales for our Corpus Christi operation for 2004 and 2003 (in thousands):

Our subsidiary in the Netherlands, TP&T, manufactures and sales ALUPREM to third party customers, as well as to our Corpus Christi operation for distribution to our US customers. The following table represents TP&T's ALUPREM sales (in thousands) for 2004 and 2003 to third party customers. All inter-company sales have been eliminated.

Our subsidiary in Malaysia, TMM, manufactures and sells SR and HITOX to third party customers, as well as to our Corpus Christi operation. The following table represents TMM's sales (in thousands) for 2004 and 2003 to third party customers. All inter-company sales have been eliminated.

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• HITOX Sales - Decreased $55,000 as a result of a decrease in volume of $187,000 over 2003 offset by price increases of $132,000. The volume decrease is primarily due to a reduction in TMM's third party sales to one customer.
• Other Product Sales - Decreased $147,000 due primarily to a one time sale of Zircon in 2003.
• TMM also supplies SR to the Corpus Christi operation which is used in the production of HITOX and supplies the Corpus Christi operation HITOX which is sold to the US customers on the West Coast (these sales are excluded from the above table).

Gross Margin : Gross margin increased $735,000 over 2003, however, as a percentage of sales the margin decreased 2% from 24% in 2003 to 22% in 2004. Significant factors contributing to the gross margin increase are:

• Volume increases of approximately $1,575,000 primarily due to volume increases throughout all of our product lines.
• Net sales price increases of approximately $750,000 primarily related to HITOX, BARTEX and HALTEX sold through the Corpus Christi location. The price effect increased margin percentage by approximately 3%.
• Reduction of TMM's shutdown costs of approximately $190,000. The main production facility at TMM was shutdown during the first quarter of 2003 and was in production during all of 2004. This improved the margin by approximately 1%.
• The effect of the Euro strengthening against the US dollar on translating Euro denominated sales and expenses resulted in approximately $190,000 increase in the margin. The change in mix of Euro based sales and expenses resulted in a 1% increase to the margin.

Offsetting the margin improvements are increased costs of production which are primarily due to:

• Fuel price increases at all locations of approximately $630,000 (2% of sales).
• Raw material cost increases related to the production of ALUPREM at TP&T and BARTEX and HALTEX at Corpus Christi of approximately $515,000 (2% of sales).
• Freight cost increases, primarily relating to freight-in costs associated with transporting SR from TMM to Corpus Christi, of approximately $480,000 (2% of sales).
• Maintenance expenses, primarily at TMM and Corpus Christi, increased approximately $350,000 (1% of sales). The increase in maintenance expenses are necessary in order to maintain present and future operating efficiencies.

General, Administrative and Selling Expenses : Total general, administrative and selling expenses ("SG&A") increased from $3,680,000 in 2003 to $4,567,000 in 2004, an increase of $887,000 or 24%. Significant factors contributing to the increase are:

• Salary and benefits increased approximately $325,000 primarily due to an increase in personnel and wage/benefit increases.
• Stock option expense increased $110,000 due to additional options granted during the year.
• Travel and entertainment and sales promotion expenses increased approximately $115,000 due to activity promoting our products.

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• Accounting fees increased $185,000 primarily due to an increase in audit fees and Sarbanes-Oxley Section 404 implementation costs.
• Legal fees increased approximately $50,000.
• Investor relations increased $40,000 and various other SG&A expenses increased approximately $62,000

Interest Expense : Net interest expense in 2004 decreased $67,000 from $295,000 in 2003 to $228,000 in 2004. Included in the decrease was an adjustment in the amount of $33,000 which we recorded in the first quarter 2004 to reduce interest expense which represented a refund of excess interest payments made in 2003. Interest expense at the Corpus Christi operation decreased approximately $24,000 compared to 2003 primarily related to a reduction in related party debt and outstanding debt on the line of credit. TMM's interest expense decreased $54,000 primarily due to a decrease in TMM's utilization of its line of credit and ECR financing. TP&T's interest expense increased $44,000 compared to 2003 primarily due to new long-term debt on equipment financing and their facility expansion.

Income Taxes : We recorded $183,000 in income taxes in 2004, a $122,000 increase over 2003. Income taxes consisted of approximately $32,000 in State income taxes in the US and $151,000 of deferred tax expense recorded for TMM.

As noted on the following table, cash and cash equivalents decreased $40,000 from the end of 2003 to the end of 2004. Cash provided by operations accounted for $2,326,000 and financing activities provided $3,359,000. The Company used $5,665,000 in investment activities related primarily to the facility expansion at TP&T and the purchase of fixed assets at both the Corpus Christi operation and TP&T. The effect of the exchange rate fluctuations accounted for a decrease in cash of $60,000.

Cash provided by operating activities in 2004 increased approximately $743,000 or 47% compared to 2003. The following are the major non-cash adjustments to net income and changes in working capital affecting cash provided by operating activities:

• Deferred Income Taxes : The increase in our deferred income taxes was due to the recognition of deferred tax liabilities at both TMM and TP&T.
• Accounts Receivable : Accounts receivable increased approximately $526,000 from the end of 2003 to the end of 2004 primarily due to the increase in sales volume offset by an increase in collection efforts during the fourth quarter 2004. Accounts receivable at the Corpus Christi operation decreased $350,000 on higher fourth quarter sales due primarily to increased collection efforts; TP&T's increased $195,000 due primarily to higher sales in the fourth quarter 2004; and TMM's increased $681,000 primarily due to a larger the fourth quarter sale of SR to KMG.

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• Inventories : Inventories increased approximately $1,054,000 from the end of 2003 to the end of 2004. Inventories at the Corpus Christi operation increased $1,087,000 primarily as a result of an increase in their raw materials of $2,125,000 (primarily SR and Barite) which was offset by a decrease in HITOX finished goods inventories of approximately $1,038,000. TP&T's inventories increased $131,000 primarily as a result of an increase their raw materials due to an increase in the operation's production requirements. TMM's inventories decreased $164,000 primarily relating to a decrease in their SR inventory.
• Other Current Assets : Other current assets increased approximately $123,000 primarily due to an increase in VAT tax at TP&T which is refundable.
• Accounts Payable and Accrued Expenses : Trade accounts payable and accrued expenses increased approximately $1,033,000 from the end of 2003 to the end of 2004. Of the increase, the Corpus Christi operation accounted for approximately $1,029,000 primarily related to the HITOX plant expansion that came on line the end of 2004. TP&T's increased approximately $502,000 primarily due to the expansion of their plant facility and TMM's decreased $498,000 due to the timing of funds received from inter-company sales.

Cash used in investing activities increased approximately $5,665,000 from the end of 2003 to the end of 2004 primarily for the purchase of fixed assets related to the expansion of our HITOX and ALUPREM production and the facility expansion at TP&T. Net investments for each of the Company's three locations are as follows:

• Corpus Christi Operation : We invested approximately $2,983,000 primarily related to the new HITOX production facility. The plant expansion will increase production of HITOX titanium dioxide pigment at Corpus Christi by approximately 10,000 tons annually and utilize a new proprietary production process, which is expected to reduce costs and we believe has the potential to increase the size of the market for HITOX.
• Netherlands Operation : We invested approximately $2,301,000 at TP&T primarily relating to their facility expansion and equipment to expand the ALUPREM production capacity. TP&T purchased the property adjacent to their existing plant site consisting of land and a small office building. In addition, TP&T has nearly completed the expansion of their existing building that effectively added another 10,000 square feet of plant space. The estimated cost to complete the facility expansion, which is scheduled for the first quarter 2005, is approximately $170,000. The equipment purchased in 2004 will allow TP&T to double their output of alumina and ultra fine white pigments. On January 3, 2005, TP&T finalized their purchase commitment for the acquisition of a 10,000 square foot warehouse with a loading dock at a cost of approximately $674,000. TP&T has restricted cash of approximately $219,000 that will be utilized during the first quarter 2005 towards the cost to complete the building expansion.
• Malaysian Operation : Our net investment in 2004 at TMM of approximately $162,000 was primarily related to equipment upgrades for the production of SR.

Financing activities provided cash of approximately $3,359,000 for the twelve-month period ending December 31, 2004. Significant factors relating to financing activities include the following:

• Lines of Credit : Our borrowings on the domestic line of credit ("US Line") decreased $700,000 from $2,825,000 at the end of 2003 to $2,125,000 at the end of 2004. The decrease in the Company's US Line was due primarily to the funds received in the placement of common and preferred stock issued in January 2004. TP&T's bank line of credit increased approximately $115,000 from the end of 2003 to the end of 2004. The increase in TP&T's line of credit was due primarily to the financing of new equipment and their facility expansion.

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• Export Credit Refinancing - Malaysia : TMM's borrowings under the export credit refinancing facility ("ECR") decreased approximately $280,000 from $840,000 at the end of 2003 to $560,000 at the end of 2004 due primarily to the timing of cash receipts related to large SR sales to Corpus Christi and third parties. The ECR is a government supported financing arrangement specifically for exporters. TMM uses the ECR short-term financing of 150 days against customers' and inter-company purchase orders.
• Related Party Term Loan : In February 2004, we reduced the term loan received from members of our Board of Director's from $1,000,000 to $500,000. In addition, our loan to Paulson Ranch, in the amount of $231,000 was paid off in February 2004.
• Long-term Debt - Financial Institutions : TP&T's net long-term debt increased approximately $1,475,000 due to a new term loan for the purchase of equipment ($825,000) and a mortgage loan ($650,000). On January 3, 2005, TP&T entered into a new mortgage loan, in the amount of $633,000 to fund the acquisition of a 10,000 square foot warehouse located adjacent to their existing production facility. TMM paid off their long-term debt of approximately $70,000 in February 2004.
• Issuance of Preferred and Common Stock : In January 2004, we raised approximately $2,500,000 through the placement of 526,316 shares of common stock and $1,000,000 through the placement of 200,000 shares of convertible preferred stock. We used $2,700,000 of the proceeds to pay amounts owed under our domestic line of credit and $500,000 to reduce the related party term loan from members of our Board of Directors (David Hartman and Douglas Hartman). The balance of the proceeds was used for working capital purposes.
• Issuance of Common Stock Options: The Company received proceeds of $253,000 in 2004 as a result of employees and Directors exercising their common stock options.

The terms of the our borrowings contain restrictions and covenants, including subjective acceleration clauses and demand clauses on our foreign debt and covenants on our US debt based on our performance. Our failure to comply with such restrictions and covenants, or the exercise of subjective acceleration or demand clauses, could adversely affect our financial position. Management believes that it has adequate liquidity for fiscal year 2005 and expects to maintain compliance with all financial covenants throughout 2005.

On January 3, 2005, TP&T entered into a new mortgage loan with Rabobank to fund the acquisition of a 10,000 square foot warehouse with a loading dock that is located adjacent to TP&T's existing production facility. The mortgage, in the amount of Euro 470,000 ($633,000 on January 3, 2005), will be repaid over 25 years with interest fixed at 4.672% per year for the first five years. Thereafter, the rate will change to Rabobank prime plus 1.75%. Monthly principal and interest payments will commence on February 28, 2005 and will continue through January 31, 2030. The monthly principal payment will be Euro 1,566 ($2,125 at December 31, 2004). The mortgage is secured by the land and building purchased on January 3, 2005.

On February 1, 2005, Paulson Ranch, Ltd. extended the maturity date of its $500,000 loan to us from February 15, 2005 to February 15, 2006 under the same terms and conditions.

TOR's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principals generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debt, inventories, investments, intangible assets, income taxes, financing operations, and contingencies and litigation. TOR bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Results of operations for our foreign subsidiaries, TMM and TP&T, are translated from the designated functional currency to the US dollar using average exchange rates during the period, while assets and liabilities are translated at the exchange rate in effect at the reporting date. Resulting gains or losses from translating foreign currency financial statements are reported as other comprehensive income (loss). The effect of changes in exchange rates between the designated functional currency and the currency in which a transaction is denominated are recorded as foreign currency transaction gains (losses) in earnings. However, the effects of changes in exchange rates associated with our US dollar denominated loans to TP&T that are of a long-term investment nature are reported as part of the cumulative foreign currency translation adjustment in our consolidated financial statements.

Our policy is to depreciate the SR production equipment (with a net book value of at December 31, 2004 and 2003 of $5,563,000 and $6,667,000, respectively which is included in machinery and equipment) over its remaining useful life using the units of production method and to evaluate the remaining life and recoverability of such equipment based on the projected units of production. There have been no material changes in the estimates of the units to produce upon which the units of production method of depreciation is based. All other property, plant and equipment is depreciated on the straight line basis from three to 39 years.

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TOR maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Our effective tax rate is based on our level of pre-tax income, statutory rates and tax planning strategies. Significant management judgment is required in determining the effective rate and in evaluating our tax position. We have domestic and foreign net deferred tax assets resulting primarily from net operating loss carryforwards. These deferred tax assets are netted against our deferred tax liabilities in the jurisdiction in which they arose. If the result is a net deferred tax asset, it is fully reserved due to uncertainties related to future taxable income levels.

We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

We adopted the provisions of Financial Accounting Standards Board Statement No. 142, " Goodwill and Intangible Assets" , effective January 1, 2002. Under the provisions of Statement No. 142, the value of our goodwill (with a carrying value of approximately Euro 1,460,000 or $1,981,000 based on December 31, 2004 exchange rate) is not subject to amortization. We evaluate the carrying value of the goodwill at least annually, or more frequently if indicators of impairment are noted. First, we identify potential impairments by comparing the fair value of the reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired. If the carrying amount exceeds the fair value, we calculate the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the carrying amount, a write-down is recorded. Based upon our most recent analysis, we believe that no impairment exists at December 31, 2004. There can be no assurance that future goodwill impairment tests will not result in a charge to net earnings (loss).

The impairment of tangible and intangible assets is assessed when changes in circumstances (such as, but not limited to, a decrease in market value of an asset, current and historical operating losses or a change in business strategy) indicate that their carrying value may not be recoverable. This assessment is based on estimates of future cash flows, salvage values or net sales proceeds. These estimates take into account management's expectations and judgments regarding future business and economic conditions, future market values and disposal costs. Actual results and events could differ significantly from management's estimates.

As of December 31, 2004, the Company leased 12.86 of the land at the facility located in Corpus Christi, Texas, from the Port of Corpus Christi Authority and manufacturing equipment from Banc of America Leasing & Capital, LLC. The minimum future rental payments under these and other immaterial operating leases as of December 31, 2004 are as follows:

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On July 20, 2004, we announced that our subsidiary, TP&T, has committed to the purchase of a 10,000 square foot warehouse with a loading dock located adjacent to TP&T's existing production facility for Euro 470,000 ($633,000). TP&T purchased this property on January 3, 2005.

At December 31, 2004, the expansion of TP&T's existing facility from 10,000 square feet to 20,000 square feet was approximately 80% complete. The expansion is scheduled for completion during the first quarter 2005. The estimated cost to complete the project is approximately Euro 125,000 ($170,000 at December 31, 2004)

Except as noted above, we did not have any off-balance sheet arrangements that have or are likely to have a material current or future effect on our financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

The following is a summary of all significant contractual obligations, both on and off Balance Sheet, as of December 31, 2004, that will impact our liquidity.

At December 31, 2004, we had $681,000 in assets not yet placed in service. These assets consist primarily of equipment and other construction costs related to the US Alumina plant construction. We originally planned to complete construction of the Alumina plant and begin US production in 2004. However, due to the need to quickly add Alumina production capacity in 2003, we elected to add production capacity at our existing Alumina plant at TP&T. We expect to complete construction and begin production of the US Alumina plant in the next two to three years. The expected costs to complete the US Alumina production line are approximately $4,000,000 to $6,000,000 depending upon the final scope of the project.

General inflation has not had a significant impact on our business, and it is not expected to have a major impact in the foreseeable future.

We have two foreign operations, TMM in Malaysia and TP&T in the Netherlands. TMM measures and records its transactions in terms of the local Malaysian currency, the Ringgit, which is also the functional currency. If the value of the Ringgit compared with the US dollar floated, the Company would report the effects of translating the Ringgit to the US dollar in an equity account in the consolidated balance sheet. However, Malaysia imposed capital controls and fixed its Ringgit currency at 3.8 Ringgits per 1 US dollar in September of 1998 to stem the outflow of short-term capital in the wake of the Asian financial crisis. The Malaysian government has not changed the fixed exchange rate since that time. The majority of TMM's sales are denominated in US dollars and expenses are denominated in the Malaysian Ringgit. As the Malaysian Ringgit is pegged to the US dollar, there is insignificant translation and/or transaction effects of changing foreign currency rates. Because there is no guarantee that the Malaysian Government will maintain the pegged rate to the US dollar, TMM's non-Ringgit transactions and balance sheet items are hedged using forward exchange contracts. (See "Foreign Currency Forward Contracts" on page 28).

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In the first quarter 2004, we changed TP&T's functional currency from U.S. dollar (USD) functional to Euro functional currency primarily as a result in a shift of a substantial majority of TP&T's sales contracts to Euro based contracts. In 2003, a substantial majority (approximately 64%) of TP&T's sales were USD denominated. Gains and losses resulting from translating the Balance Sheet from Euros to US dollars (including long-term Intercompany investments which are considered part of the net-investment in TP&T) are now recorded as cumulative translation adjustments (which are included in accumulated other comprehensive income, a separate component of shareholders' equity) on the Consolidated Balance Sheet. As a result of this change in functional currency, non-monetary assets and liabilities that had previously been accounted for using historical exchange rates between the Euro and USD have been translated at current exchange rates. Had the Company not made this change, year to date pretax income would have decreased approximately $135,000. As of December 31, 2004, the cumulative translation adjustment related to the change in functional currency totaled $1,737,000, net of taxes of $128,000. Such adjustment had an effect on the following balance sheet items:

To protect against the increase in the cost of natural gas used in the manufacturing process, we have instituted a selective natural gas hedging program. We hedge portions of our forecasted natural gas purchases with forward contracts. When the price of natural gas increases, its cost is offset by the gains in the value of the forward contracts designated as hedges. Conversely, when the price of natural gas declines, the decrease in the cash flows on natural gas purchases is offset by losses in the value of the forward contract.

On September 3, 2002, we entered into a natural gas contract with Bank of America, N.A. to achieve the objectives of the hedging program. The contract was designated as a cash flow hedge. The contract was settled based on natural gas market prices for January 1, 2003 through April 30, 2003. We paid fixed prices averaging $3.90 per MM Btu on notional quantities amounting to 60,000 MM Btu's. The fair value of the hedge decreased $56,145 from December 31, 2002, to April 30, 2003 due to the settlement of the hedge.

On September 16, 2003, we entered into a new natural gas contract with Bank of America, N.A. to achieve the objectives of the hedging program. We designated the contract as a cash flow hedge, with the expectation that it would be highly effective in offsetting the price of natural gas. The contract was settled based on natural gas market prices from January 1, 2004 through April 30, 2004. We paid fixed prices averaging $5.26 per MM Btu on notional quantities amounting to 80,000 MM Btu's. The fair value of the hedge decreased $73,000 from December 31, 2003 to April 30, 2004 due to the settlement of the hedge. The recognition of this gain had no effect on our cash flow.

At December 31, 2004, we did not have a natural gas hedge contract outstanding.

To protect our exposure to foreign exchange risks, we enter into foreign currency forward contracts. Gains and losses on foreign exchange contracts designated as hedges of identified exposure are offset against the foreign exchange gains and losses on the hedged financial assets and liabilities. Where the instrument is used to hedge against anticipated future transactions, gains and losses are not recognized until the transaction occurs. At December 31, 2004, we marked the contracts to market, recording a net gain of approximately $37,000 as a component of "Other Comprehensive Income", $54,000 as a current asset and $17,000 as a current liability on the balance sheet at December 31, 2004. The recognition of this net gain had no effect on our cash flow.

The US Internal Revenue Service ("IRS") is currently examining our 2002 tax year. Although the IRS has yet to issue any proposed assessments, they have questioned the allowability of a 1994 NOL carryforward of approximately $9,810,000 that is scheduled to expire in 2009. We believe that our position complies with applicable tax law and we do not anticipate any material earnings impact.

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