General

TOR Minerals International, Inc. (“TOR”, “We” or the “Company”) is 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 were organized by Benilite Corporation of America (“Benilite”) in 1973.  Benilite, which was incorporated in Delaware in 1969, developed the then patented “Benilite process” for producing synthetic rutile, the principal ingredient used in the manufacture of HITOX ^® ( hi gh-grade t itanium di ox ide), from ilmenite ore.  Benilite licensed and helped design several synthetic rutile plants located throughout the world which utilize this process (including the plant located in Ipoh, Malaysia, owned by the Company, as discussed below).  Benilite concluded that synthetic rutile produced by the Benilite process could be further processed into a buff-colored titanium dioxide pigment having many of the characteristics of standard white titanium dioxide at a significant cost savings.  These efforts by Benilite were the beginning of the Company's business.  In 1980, the subsidiary of Benilite engaged in the development of HITOX was spun off by Benilite to its shareholders.  In December 1988, the Company became a publicly owned company after completing a public offering of 1.38 million shares of its common stock.  Our stock symbol is TORM.

Global Headquarters

We are headquartered in Corpus Christi, Texas, USA.  This location houses senior management, customer service, logistics, and corporate research and development/technical service laboratories.  Our financial and accounting functions also operate from this location.  Our principal offices in Corpus Christi are located at 722 Burleson Street, Corpus Christi, Texas 78402, and our telephone number is (361) 883-5591.  Our website is located at www.torminerals.com.  Information contained in our website or links contained on our website is not part of this Annual Report of Form 10-KSB.

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US Manufacturing Site

The US manufacturing plant, located on the north side of the Corpus Christi Ship Channel, is situated alongside its own docks in Corpus Christi.  This facilitates the easy handling of bulk mineral shipments by barge.  We also utilize the Bulk Terminal, operated by the Port of Corpus Christi Authority, to discharge bulk shipments of SR and Barite from cargo vessels directly into trucks for delivery to our plant.   The site has its own railhead and easy access to major highways linking it to the rest of the US and to Mexico.  HITOX, BARTEX ^® and HALTEX ^® are all produced at this location.

Asia Headquarters & Manufacturing

We acquired TOR Minerals Malaysia, Sdn. Bhd. (“TMM”) in 2000.  Located in Ipoh, Perak, Malaysia, close to the port of Lumut, TMM is a processor of local ilmenite, upgrading it to synthetic rutile (“SR”).  This material is the basic building block for HITOX, but also is used as feed stock for white TiO ₂ and used as a component in welding rod flux.  The site also has its own processing lines to manufacture HITOX.  The sales team and the quality assurance laboratory for Asia are located at the offices in Ipoh.

Netherlands Manufacturing Site

In 2001, we acquired TOR Processing and Trade, B.V. (“TP&T”).  Situated within reach of the major shipping port of Rotterdam in Hattem, Netherlands, TP&T specializes in the manufacturing of premium alumina products (“ALUPREM ^® “) for use worldwide.  Customer applications, quality assurance laboratory and support facilities are located in Hattem.  TOR Minerals’ global headquarters in Texas provides customer service and shipping logistics for TP&T’s North American customers.

Our Products

TOR and our subsidiaries operate in the business of pigment manufacturing and related products in three geographic segments.  All United States manufacturing is done at the facility located in Corpus Christi, Texas.  Foreign manufacturing is done by the Company’s wholly-owned subsidiaries, TMM, located in Malaysia and TP&T, located in the Netherlands.  Our products are currently marketed in the United States and in more than 60 other countries.  We sell our products through a network of direct sales representatives employed by the Company and independent stocking distributors in the United States, as well as distributors and agents overseas.  Our sales representatives sell directly to end-users and provide marketing support and guidance for our independent distribution network.

HITOX

Our principal product, HITOX, accounted for approximately 43% of net sales in 2005 and approximately 40% in 2004.  HITOX, a light buff-colored titanium dioxide pigment, is made from SR.  Titanium dioxide is the most widely used primary pigment in paints, coatings, plastics, paper and many other types of products.  Titanium dioxide, or TiO ₂ , gives opacity and whiteness to end products.  Most TiO ₂ is white; however, HITOX is a unique color pigment that is beige.  HITOX occupies a special marketing niche as a high quality, color pigment that can replace some of the other more costly color pigments and some of the white TiO ₂ .  HITOX pigments are used by major international paint and plastics manufacturers.  Uses include interior and exterior architectural paints, yellow traffic marking paints, industrial primers and coatings, roofing granules, PVC pipe and conduit, plastic sheeting and siding as well as plastic film.

HITOX, manufactured at plants located in both the US and Malaysia, utilizes SR manufactured at TMM as its primary raw material.  The manufacturing process for producing HITOX is not simple and the details of the process and the operating parameters of the systems are not widely known.  The HITOX manufacturing process is not patented.

In 2004, we completed a new HITOX production facility in Corpus Christi.  The plant expansion, which increased production capacity of HITOX by approximately 10,000 tons annually, utilizes a new proprietary production process that reduces the reliance on natural gas and potentially increases the size of the market for HITOX products.  (See “New Products” on page 5).

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ALUPREM

Our alumina trihydrate (“ATH”) products were expanded in 2001 with the introduction of ALUPREM, which is manufactured at our subsidiary, TP&T, in the Netherlands.  ALUPREM, which stands for premium alumina, represented approximately 32% of TOR’s 2005 net sales compared to approximately 27% in 2004.  As discussed below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Net Sales”, in 2005 approximately 20% of our total consolidated net sales, representing 63% of our total net sales of ALUPREM, were made to the Engelhard Corporation under a one year agreement which expired at the end of 2005 and was not renewed, which is expected to adversely affect our ALUPREM business in 2006.  See “Customers” below under this Item 1.  TP&T’s Managing Director, Dr. Olaf Karasch, developed the manufacturing process for ALUPREM.  The details of the process and the operating parameters of the systems are not widely known.  The ALUPREM manufacturing process is not patented.

ALUPREM products are for color critical applications as fillers and flame retardants, such as Solid Surface/Onyx and performance driven uses such as specialty wire and cable insulation, catalysts, high-tech polishing, pigments and specialty papers.

SYNTHETIC RUTILE

SR, the basic building block for HITOX, is manufactured at our Malaysian plant using the Benilite process for producing SR.  The ilmenite, the raw material used in the manufacturing process, is first treated in a reduction kiln and then subjected to leaching in hydrochloric acid where soluble iron and other impurities are removed.  SR is also used as feed stock for white TiO ₂ and as a component in welding rod flux.  Sales of synthetic rutile to third parties accounted for approximately 11% of the net sales in 2005 compared to 17% in 2004.

BARTEX

BARTEX, manufactured at our US plant, is produced from high grade barites (barium sulfate) utilizing a milling process.  The plant dedicates one of eight milling lines to the production of BARTEX, which accounted for approximately 9% of our 2005 net sales compared to 10% in 2004.

Barium Sulfate's high density is one of the primary reasons it is used in coatings.  As an inert extender pigment, BARTEX, characterized as ultra fine with high brightness and narrow particle size distribution, gives weight and body to products ranging from powder coatings used in appliance and office furniture finishes to rubber products such as carpet and curtain backings and plastics including billiard balls and poker chips.  BARTEX allows more expensive prime white pigments, such as white TiO ₂ , to be supplemented or replaced to some degree.  BARTEX is manufactured in several different grades which are differentiated by average particle size and whiteness.

HALTEX

HALTEX, manufactured at our US plant, is produced from Bayer grade aluminum hydroxide using some of the same production technologies of our other products.  In 2005, one of the plant’s eight milling lines was dedicated to the production of a small particle size HALTEX pigment which accounted for approximately 3% of the Company’s net sales in both 2005 and 2004.

HALTEX features engineered narrow particle sizing and high purity for optimum physical properties.  The quality of our HALTEX is suitable for a broad range of technical applications including electrical wire and cable insulation, thermoset SMC/BMC molding compounds, thermoplastic profiles, PVC and rubber products, specialty coatings as well as adhesives and sealants.

New Products

TP&T began producing commercial quantities of both TOR COAT and TOR BRITE in late 2004, which are specialty alumina based pigments for use in the coatings industry.  We have established one European customer for TOR COAT in the automotive coatings industry and product evaluations are currently underway for both TOR COAT and TOR BRITE at other potential accounts in Europe, the US and Canada.

Laboratory testing to begin manufacturing a 0.45 micron titanium dioxide pigment made from SR, which we have named HITOX SF, occurred in 2001 through 2003.  Based on successful lab results, we conducted in late 2003

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and early 2004 commercial scale production tests at our Ipoh, Malaysia plant and manufactured a commercial lot in March 2004.  During 2004, we designed and constructed a new HITOX processing line at the Corpus Christi operation, in part, to allow for the production of 0.45 micron HITOX-SF.  HITOX-SF potentially broadens our market base over traditional HITOX as the finer particle size allows for greater opacity and can be utilized in more color applications.  Final production tests were conducted in the first quarter 2005 and commercial shipments began in the fourth quarter 2005.  Sampling with potential customers in the US, Asia and Europe will continue throughout 2006.

Raw Materials and Energy

We utilize a variety of raw materials in the manufacture of our products.  Outlined below are the principal raw materials for TOR’s products.

SR:   Titanium dioxide pigment can be produced using ilmenite, natural rutile, SR or titanium slag.  SR is produced from ilmenite and typically has a titanium dioxide content ranging from 92% to 95%.  Ilmenite is a black material found in natural mineral deposits and typically has a titanium dioxide content ranging from 44% to 60%.  Ilmenite is found throughout the world, including China, India, Australia and North America.  In Malaysia, ilmenite historically has been recovered incidental to tin mining, but as tin mining has decreased in Malaysia, the source and quality of ilmenite has been declining. 

We are actively seeking alternative sources of supply for ilmenite.  The price for our ilmenite has remained fairly stable, however, alternative offshore supplies could be 70% to 100% higher due to market conditions and freight.  We expect to start utilizing a limited quantity of offshore ilmenite in 2007.

HITOX:  TMM is the Company's sole suppler of SR, the raw material for HITOX.  The cost of SR has increased approximately 9% in 2005 primarily due to increases in energy costs.  Other than TMM, there is only one other available source for the quality of SR required for the production of HITOX.  If supplies of SR from TMM are interrupted and we are unable to arrange for alternative sources, this could result in our inability to produce HITOX, which accounted for 43% of our sales in 2005.

ALUPREM:  Alumina trihydrate, the chief raw material for ALUPREM, is manufactured throughout the world including Europe and North America.  The ATH material used for chemicals, fillers and flame-retardants is produced by the Bayer alumina process.  This grade of ATH accounts for approximately 95% of the total ATH produced worldwide.  The Company purchases Alumina from various suppliers in Europe.  In 2005, the average prices for ATH increased approximately 5%.

BARTEX:   High grade barites (barium sulfate) are mined in China, India, Turkey and Mexico and are the raw materials used to produce BARTEX.  In 2004 and most of 2005 the quality of our barites decreased thus decreasing our yield and increasing costs by approximately 17%.  In the later half of 2005, a new supplier with higher quality ore was identified and we anticipate our yields to improve going forward.

HALTEX:  Bayer grade aluminum hydroxide, used to produce HALTEX, is purchased from one of the four suppliers located in the US.  The average price for the Bayer grade aluminum has increased approximately 40% during 2005.

ENERGY:  We are highly dependent on energy in our manufacturing processes.  Natural gas is the predominate energy source in Corpus Christi.  Fuel oil is the predominate energy source at TMM and electricity is the primary source of energy at TP&T.  Energy pricing has been highly volatile in 2005.  The average energy price, primarily natural gas, in Corpus Christi increased approximately 28% in 2005.  Average energy prices at TMM, primarily fuel oil, increased 47% in 2005; and the average energy prices at TP&T, primarily electricity, increased 15% in 2005.

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Research and Development / Technical Services

Our expenditures for research and development and technical services were down approximately 17% in 2005, primarily due to increased expenditures in 2004 related to development costs for HITOX production.  We conduct our research and technical service primarily at our facilities in Corpus Christi and our efforts are principally focused on process technology, product development and technical service to our customers.  There are no research and development costs borne directly by our customers.

Management

Mr. Richard L. Bowers was appointed President and Chief Executive Officer by the Board on May 23, 2001.  Mr. Bowers had served as President and Chief Operating Officer since February 26, 2001.  He had served as Executive Vice President/Director of Sales and Marketing since June 1, 1999.  Previously, he had served from 1981 to 1994 as President and Chief Executive Officer of the Company.  Since 1995, Mr. Bowers has served as a director and is a shareholder of Environmental Analytics, Inc., a company that monitors fugitive emissions at chemical plants.  Mr. Bowers has a Bachelor of Arts degree from Furman University.

Dr. Olaf Karasch was appointed Executive Vice President, Operations, by the Board on September 4, 2002.  Dr. Karasch had served as Managing Director of TOR's wholly owned Netherlands subsidiary, TP&T, since joining the Company on May 16, 2001.  In January 1996, Dr. Karasch was managing director for Flohme Chrome Plating and Plasma Coating.  In 1997, he joined the Royal Begemann Group in the Netherlands, the predecessor of TP&T, until its purchase by TOR in 2001.  Dr. Karasch received his Ph.D. in Mineralogy at Reinisch-Westfalische University in Aachen, Germany where he specialized in submicronization (particle size reduction below one micron).

Mr. Mark Schomp was appointed Vice President, Sales and Marketing, by the Board on September 4, 2002.  Mr. Schomp is a Chemical Engineer who spent 15 years in sales and sales management with Alusuisse-Lonza, a large European manufacturer of aluminum, specialty aluminas, and other products.  He has wide experience in selling pigments and fillers to plastics and coatings applications.  Mr. Schomp joined the Company’s sales department in 2001.

Mr. Lawrence W. Haas was appointed Treasurer and Chief Financial Officer by the Board on October 13, 2003.  Prior to joining the Company, Mr. Haas served as the Vice President of Finance at Hi-Rise Recycling Systems, Inc., a manufacturer of solid waste processing equipment and recycling systems.  Mr. Haas has a Masters of Business Administration degree from the University of Texas and is a CPA.

Mr. Hee Chew Lee, the Managing Director of TMM, was appointed Vice President of Asian Operations by the Board on December 5, 2002.  Mr. Lee, a Chemical Engineer, joined the Company in 1994 as General Manager and has served as the Managing Director of TMM since 1998.

Marketing and Customers

Sales and Marketing Department Organization

TOR’s sales efforts are managed out of Corpus Christi, Texas, by the Vice President, Sales and Marketing.  We have sales offices at each of our three locations.  The Vice President has a number of area and product managers that work for the Company and help him both deal directly with customers and manage agent and distributor relations.

Independent Distributors and Agents

We utilize a network of both domestic and foreign independent distributors and agents.  Within North America there are multiple agents serving us on either a regional or a product basis.  In most other countries there is one stocking distributor who purchases directly from TOR and resells in their territory.  In certain large countries there may be multiple distributors.  In this way we get the benefit of sales specialists with specific trade knowledge in each country.

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Customers

Our end use customers include companies in the paints, coatings, solid surface and PVC pipe industries.  For the year ended December 31, 2005, approximately 20% and 11% of our sales were to the Engelhard Corporation and Tronox Incorporated (“Tronox”) (formerly a division of the Kerr-McGee Chemical Corporation), respectively.  For the year ended December 31, 2004, sales to the Engelhard Corporation and Tronox were approximately 16% and 17%, respectively.  We expect that a limited number of customers will continue to account for a substantial portion of our revenue for the foreseeable future.  After eliminating the effects of sales to Engelhard Corporation and Tronox, the next top 10 customers accounted for 40% of the remaining sales in 2005 and 34% of sales in 2004.  Foreign customers accounted for 37% of total net sales in 2005 and 25% in 2004.

In March 2003, we entered into a five year sales agreement with Tronox.  Under the agreement, Tronox agreed to purchase a minimum amount of SR from us annually for the term of the agreement; however, the agreement does not require us to sell a minimum quantity.  The parties negotiate the price on an annual basis.  If the parties cannot agree on the product price after negotiation, Tronox is not required to purchase the minimum amount of SR from us that year.  Due to the tight supply of local Ilmenite and the price increases associated with our purchasing the Ilmenite, required for the production of SR, outside Malaysia, coupled with the increased price for energy, we do not anticipate a material amount of SR sales to Tronox in 2006.

In February 2004, we entered into an agreement with Engelhard Corporation to supply 100% of their 2004 requirements for a specific grade of ALUPREM.  On December 20, 2004, we entered into a new agreement with Engelhard Corporation to supply 100% of their 2005 requirement for a specific grade of ALUPREM.  We were notified on December 28, 2005 that the Engelhard Corporation would not renew the purchase order to supply 100% of their 2006 requirements.  They also notified us that they would purchase, in 2006, any related inventory in the “TOR System” as of the end of 2005.

The substantial reduction in business from the Engelhard Corporation and Tronox will materially and adversely affect our 2006 net sales and results from operations since these two customers had accounted for 31%, on a combined basis, in 2005, unless we are able to replace approximately $8.8 million in sales after taking into account expected sales of approximately $1.5 million in 2006 from the Engelhard Corporation..

Geographic Distribution

We sell our products globally and market them in North, Central and South America, Asia and Europe to customers located in more than 60 countries.  Sales in the Netherlands accounted for 12% of our total sales and 32% of our foreign sales in 2005.  The increase in sales in the Netherlands in 2005 was a direct result of TMM’s sale of SR to Tronox being shipped to the Netherlands in 2005 whereas the 2004 Tronox sales were shipped to the United States.  No other individual foreign country accounted for 10% or more of the foreign sales in either 2005 or 2004.  Sales to external customers are attributed to geographic area based on country of distribution.

A summary of the Company’s sales by geographic area is presented below:

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Competition

We experience competition with respect to each of our products.  Each product sold by TOR is in direct competition in the market with products which are similar.  In order to maintain sales volumes, we must rely on our ability to manufacture and distribute products at competitive prices.  We believe that quality, delivery on schedule and price are the principal competitive factors.  However, due to the nature of our main product, HITOX, and the size of our company as compared to others in the industry, we are not price leaders, but are price followers and while we generally attempt to increase prices to offset cost increases, these actions tend to lag the cost increases.

Competitors range from large corporations with a full line of production capabilities and products to small local firms specializing in one or two products.  A number of these competitors are owned and operated by large diversified corporations.  Many of these competitors, such as E.I. DuPont de Nemours & Co., Inc., Millennium Chemicals, Tronox Incorporated, Kronos Inc. and J.M. Huber, have substantially greater financial and other resources, and their share of industry sales is substantially larger than TOR’s.

Risks Related to Our Business

In addition to the factors discussed in the Forward-Looking Statement section provided at the beginning of this Annual Report on Form 10-KSB, the following are important factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company.  In addition, you should know that the risks and uncertainties described below are not the only ones we face.  Unforeseen risks could arise and problems or issues that we now view as minor could become more significant.  If we were unable to adequately respond to any risks, our business, financial condition and results of operations could be materially adversely affected.  Additionally, we cannot be certain or give any assurances that any actions taken to reduce known risks or uncertainties will work.

Our foreign debt is subject to subjective acceleration provisions and demand provisions that allow our lending institutions to accelerate payment at any time.  If our foreign debt were accelerated under the demand provisions, our working capital and financial condition would be severely impacted.

Our subsidiaries have loan agreements with banks in Malaysia and the Netherlands that provide short-term credit facilities and term loans.  These borrowings are subject to certain subjective acceleration provisions based on the judgment of the bank and demand provisions that provide that the banks may demand repayment at any time.  We believe such a demand provision is customary in Malaysia and the Netherlands for such facilities.  At December 31, 2005, our foreign debt consisted of $262,000 under the short-term credit facilities and $2,584,000 under the term loans.

The foreign banks have made no indication that they will demand payment of any of our loans in Malaysia or the Netherlands; however, there can be no assurances that this debt will not be called in the future.  At December 31, 2005, TP&T’s bank debt totaled $2,524,000, of which, TOR (which conducts our domestic operations from Corpus Christi, Texas) has guaranteed $870,000.  If the Netherlands bank were to make demand of TP&T’s debt and TP&T could not refinance that debt with another lending institution, TOR’s guarantee could be enforced by TP&T’s lender.  If this were to occur, this could result in TOR not being in compliance with the covenants in TOR’s line of credit and term loan agreement relating to TOR’s U.S. operations (which totaled $3,583,000 as of December 31, 2005), which could cause an acceleration/demand of the US debt.  If demand is made by the banks, we may require additional debt or equity financing to meet our working capital and operational requirements or, if required, to refinance maturing or demanded indebtedness.  Should we find it necessary to raise additional funds, we may find that such funds are either not available or available only on terms that are unattractive in terms of shareholders’ interest, or both, and if this debt could not be repaid or refinanced, the banks could foreclose and sell our foreign operations or hold same as collateral security for these loans, and pursue collection against our guarantees of such loans which would adversely affect our financial condition and liquidity.  (See “Liquidity, Capital Resources and Other Financial Information” on page 21).

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We have one primary source for SR and if that source was not available, we could not produce our primary product, HITOX.

TMM is our primary source for SR.  There is only one other available source for the quality of SR required for the production of HITOX.  If supplies of SR from TMM are interrupted and we are unable to arrange for an alternative source, this could result in our inability to produce HITOX which accounted for approximately 43% of our sales for the year ended December 31, 2005.

We are dependent on a limited number of customers and could experience significant revenue reductions if they use alternative sources.  The loss of sales to our two largest customers, which occurred at the end of 2005, could adversely affect anticipated 2006 results from operations.

We derive a significant portion of our revenue each quarter from a limited number of customers.  For the year ended December 31, 2005, sales to the Engelhard Corporation through a one year agreement and Tronox through a multi-year contract accounted for approximately 20% and 11%, respectively, of our total revenues in 2005 and 16% and 17%, respectively in 2004.  Our top 10 customers in 2005, including Tronox and Engelhard, accounted for 56% of our revenues and in 2004, 53%.

As discussed in this Item 1 under “Customers”, in 2006, we do not expect sales to Tronox to be material, nor do we expect sales to the Engelhard Corporation to be greater than $1,500,000.  As a result, our 2006 revenue and our 2006 results of operations could be adversely affected by the loss of these customers by a maximum of approximately $8.8 million, representing approximately 27% of our 2005 revenues, if sales of other products / customers remain at 2005 levels.

We review impairment of goodwill annually to determine if the carrying value has been impaired.  If we were to determine that our goodwill has been impaired, it could result in a significant charge to our results from operations and income.

We review goodwill at least annually to determine if any impairment has occurred or more frequently if indicators of impairment are noted.  Because no indicators of impairment were noted in 2005, we performed this review in October 2005 and have determined that no impairment exists at December 31, 2005, relating to the $1,729,000 carrying value of goodwill.  There can be no assurance that future goodwill impairment tests will not result in a charge to net earnings.  (See “Critical Accounting Policies – Impairment of Goodwill” on page 29).

Foreign currency fluctuations could adversely impact our financial condition.

Because we own assets located outside the United States and have revenues and expenses in currencies other than the US Dollar, we may incur currency transaction and translation losses due to changes in the values of foreign currencies and in the value of the US Dollar.  Foreign currency exposure from transactions and commitments denominated in currencies other than the functional currency are managed by selectively entering into derivative transactions pursuant to our hedging practices.  Translation exposure associated with translating the functional currency financial statements of our foreign subsidiaries into US Dollars is generally not hedged.  Upon translation to the US Dollar, operating results could be significantly affected by foreign currency exchange rate fluctuations.  We cannot predict the effect of changes in exchange rate fluctuations upon future operating results.  (See “Foreign Operations – Impact of Exchange Rate” on page 30).

We review our assets for impairment whenever events or changes dictate a review which may require us to take a charge to net earnings (loss).

We have adopted Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets .  We review for indicators that these assets are impaired in accordance with this standard, whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset or group of assets might not be recoverable.  No impairment has been recorded during the years ended December 31, 2005 or 2004.  There can be no assurance that future long-lived asset impairment tests will not result in a charge to earnings.

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We borrow funds from time to time from members of our board of directors for working capital purposes.

In the past, we have had to borrow funds from members of our board of directors for working capital purposes.  At December 31, 2005 and 2004, we had a loan amounting to $500,000 outstanding to our Chairman, Bernard Paulson, a 15.4% shareholder, through Paulson Ranch, Ltd.  It is possible we could require additional working capital loans in the future, but also that such loans from our board members would not be available because they have made no commitment to provide additional loans  (See “Subsequent Liquidity Events” on page 28).

Our competitors are established companies that have greater experience than us in a number of crucial areas, including manufacturing and distribution.

There is intense competition with respect to each of our products.  In order to maintain sales volume, we must consistently deliver high quality products on schedule at competitive prices.  Our competitors range from large corporations with full lines of production capabilities and products, such as E. I. DuPont de Nemours & Co., Inc., Millenium Chemicals, Tronox Incorporated, Kronos, Inc., and J. M. Huber, to small local firms specializing in one or two products.  The established companies have significantly greater experience than us in manufacturing and distributing our products and have considerably more resources and market share, and we may have difficulty in competing with these companies.

Increases in energy, freight and certain raw material costs could negatively affect future gross margins.

Increases in the costs of our energy, freight and certain raw materials have negatively affected our 2005 and 2004 gross margins.  In addition, the local Malaysian supply of Ilmenite is diminishing and it is anticipated that we will be required to purchase Ilmenite offshore at 70% to 100% higher prices starting in 2007. The extent of these price increases on future gross margins will depend on future product mix and whether the cost increases can be absorbed through end customer price increases.  It is possible that increases in energy, freight costs and prices of raw materials will adversely impact our future results from operations if these increased costs cannot be offset by correspondingly higher sales prices.

Our Corpus Christi operation is located on the Gulf of Mexico coastline and could be adversely affected by hurricanes.

We may be subject to work stoppages for hurricanes, particularly during the period ranging from June to November.  If a hurricane is severe and the plant incurs heavy damage and prolonged downtime, which may not be covered fully by insurance, it would adversely impact our financial results.

Doing business in foreign countries carries with it certain risks that are not found in doing business in the US.

We currently derive a portion of our revenues from operations in Malaysia and the Netherlands and we source our SR from Malaysia, which is the critical raw material we require for the production of our primary product, HITOX.  We believe that currently the risks of doing business in Malaysia and the Netherlands is not significant, however, future risks of doing business in these countries which could result in losses against which we are not insured include, but are not limited to, the following:

Ø       Potential adverse changes in diplomatic relations of foreign countries with the United States

Ø       Terrorism

Ø       Disruptions caused by possible foreign conflicts

Ø       Hostility from local populations

Ø       Adverse effect of currency exchange controls

Ø       Restrictions on the withdrawal of foreign investment and earnings

Ø       Government policies against businesses owned by foreigners

Ø       Foreign exchange restrictions

Ø       Changes in taxation structure

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Environmental Regulations and Product Safety

Our plant in Corpus Christi is subject to regulations promulgated by the Federal Environmental Protection Agency ("EPA") and state and local authorities with respect to the discharge of substances into the environment.  We believe that the Corpus Christi plant is in compliance with all applicable federal, state and local laws and regulations relating to the discharge of substances into the environment, and we do not expect that any material capital expenditures for environmental control facilities will be necessary in order to continue such compliance.

TMM's SR plant is required to be licensed by the Malaysian Atomic Energy Licensing Board ("AELB") because the ilmenite used by the plant is derived from tin tailings, which are a source of small amounts of monazite and hafnium which are radioactive rare earth compounds.  As part of the licensing requirements, TMM is required to maintain a monitoring program for various emissions from the plant.  The monitoring is done in-house by TMM personnel and results are reported to the AELB as required.  The plant is subject to various other licensing and permitting requirements, all of which TMM is currently in compliance.

TP&T operates an alumina processing plant in Hattem, the Netherlands, and is governed by rules promulgated by both The Netherlands and the European Community.  We believe that the Hattem plant is in compliance with all environmental and safety regulations.

HITOX and the ingredient from which it is produced, SR, are non-toxic and non-hazardous.  HITOX complies with all applicable laws and regulations enforced by the United States Food and Drug Administration (the "FDA") and is an acceptable component of packaging materials used in direct contact with meat, poultry and other food products; of paints used in incidental contact with such products; and of other packaging materials, such as paper and paperboard.  HITOX also complies with current color additive regulations promulgated by the FDA.  In addition, HITOX has been tested for compliance with the applicable standards promulgated by the National Sanitation Foundation (the "NSF"), and we are authorized to use applicable NSF seals and/or logos in connection with the marketing of HITOX.  This authorization is significant in that end users of titanium dioxide pigments who wish their products to be NSF approved must use component materials that also meet NSF standards.

Backlog

We normally manufacture our pigment products in anticipation of, and not in response to, customer orders and generally fill orders within a short time after receipt.  Consequently, we seek to maintain adequate inventories of our pigment products in order to permit us to fill orders promptly after receipt.  As of February 28, 2006, we do not have a significant backlog of customer orders.

Patents and Trademarks

We currently hold no patents on the processes for manufacturing any of our products.  Six of TOR’s products, HITOX (4/30/2015), ALUPREM (8/13/2011), HALTEX (7/28/2012), BARTEX (2/24/2007), OSO ^® (6/6/2009) and TITOX ^® (5/26/2012), are marketed under names which have been registered with the United States Patent and Trademark Office.  Trademarks are also registered in certain foreign countries.

Employees

As of December 31, 2005, we had a total of 46 full-time employees in the US, 28 at TP&T in the Netherlands and 137 at TMM in Malaysia, of which 79 are covered by a collective bargaining agreement with an in-house union.  We are negotiating the renewal of our current collective bargaining agreement which expired on December 31, 2005.  We do not anticipate any problems associated with the renewal/negotiations.  We have not experienced any work stoppages and believe that our relations with all our employees are good.

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Available Information

TOR’s internet website address is www.torminerals.com.  Our Annual Report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 are available through our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.  Our internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-KSB.