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-K.

US Operation

Our US manufacturing plant, located in Corpus Christi, Texas, is situated on the north side of the Corpus Christi Ship Channel and has its own dock frontage at the plant.  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.

Asian Operation

We acquired our Asian Operation, 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.

European Operation

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

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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 58% of net sales in 2006 as compared to approximately 43% in 2005 and 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.

ALUPREM

Our alumina trihydrate ("ATH") products were expanded in 2001 with the introduction of ALUPREM, which is manufactured at our European operation, TP&T, in the Netherlands.  ALUPREM, which stands for premium alumina, was developed by TOR's President and Chief Executive Officer, Dr. Olaf Karasch.  The details of the manufacturing 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.  ALUPREM represented approximately 24% of TOR's 2006 net sales as compared to 32% and 27% in 2005 and 2004, respectively.

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 contributed to the overall decrease in ALUPREM sales in 2006.  See "Customers" below under this Item 1.

SYNTHETIC RUTILE

SR, the basic building block for HITOX, is manufactured at our Asian operation using the Benilite process for producing SR.  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 were not significant in 2006, however, accounted for approximately 11% and 17% of the net sales in 2005 and 2004, respectively.

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BARTEX

BARTEX, manufactured at our US operation, 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 12% of our 2006 net sales compared to 9% and 10% in 2005 and 2004, respectively.

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 operation, is produced from Bayer grade aluminum hydroxide using some of the same production technologies of our other products.  In 2006, 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 2006, 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.

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.

As a result of these conditions affecting our Malaysian supply of ilmenite, we are actively seeking alternative sources of supply for ilmenite.  The average price for our ilmenite increased approximately 15% from 2005 to 2006.  In 2008 and 2009, we expect to start utilizing a limited quantity of offshore ilmenite which could be 70% to 100% higher in cost due to market conditions and freight, which will adversely impact our cost of sales and gross margins if we are unable to pass these costs on to our customers in the form of price increases.

HITOX:  TMM is the Company's sole supplier of SR, the raw material for HITOX.  The cost of SR has increased approximately 8% in 2006 primarily due to the increased cost of ilmenite.  In 2005, the cost to manufacture SR increased approximately 9% 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 58% of our sales in 2006.

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.  The average prices for ATH increased approximately 6% in 2006 and 5% in 2005.

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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 2005 the quality of our barites decreased thus decreasing our yield and increasing costs by approximately 17%.  In 2006, we were able to increase our yield over the 2004 and 2005 rates; however, the average price of our barites increased approximately 2%.

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 6% during 2006 and 40% during 2005.

ENERGY:  We are highly dependent on energy in our manufacturing processes.  Natural gas is the predominate source of energy in Corpus Christi.  Fuel oil is the predominate source of energy at TMM and electricity is the primary source of energy at TP&T.  The average energy price, primarily natural gas, in Corpus Christi decreased approximately 10% in 2006 compared to an increase of 28% in 2005.  Average energy prices at TMM, primarily fuel oil, increased 16% in 2006 and 47% in 2005.  Energy prices at TP&T, primarily electricity, remained stable in 2006 after an increase in 2005 of approximately 15%.

Research and Development / Technical Services

Our expenditures for research and development and technical services were down approximately 36% and 17% in 2006 and 2005, respectively.  The decrease in expenditures was primarily due to a reduction in staff in 2006 compared to 2005 and a decrease in expenditures in 2005 compared to 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 - Executive Officers

Dr. Olaf Karasch was appointed President and Chief Executive Officer by the Board on July 1, 2006.  Dr. Karasch resides in Germany and offices at our European operation, TP&T, located in Hattem, Netherlands.  Dr. Karasch had served as Executive Vice President, Operations, since September 4, 2002.  Dr. Karasch had served as Managing Director of 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 Executive Vice President by the Board on July 1, 2006.  Mr. Schomp had served as Vice President, Sales and Marketing since 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 for plastics and coatings applications.  Mr. Schomp joined the Company's sales department in 2001.

Mr. Hee Chew Lee, the Managing Director of TMM, was appointed Vice President of our Asian Operation 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.

Mr. Steven H. Parker was appointed Treasurer and Chief Financial Officer by the Board on January 1, 2007.  Prior to joining the Company, Mr. Parker served as Group Director of Financial Shared Services for the Orthopedic Global Business Unit of Smith and Nephew, a global medical device manufacturer, in 2006 and as the International Director of Finance from 1997 to 2005.  Mr. Parker has a Masters of Business Administration from the University of Memphis and is a CPA.

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Marketing and Customers

Sales and Marketing Department Organization

TOR's sales efforts are managed out of Corpus Christi, Texas, by the Executive Vice President.  We have sales offices at our US, Asian and European operations.  The Executive 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.

Customers

Our end use customers include companies in the paints, coatings, PVC pipe and solid surface industries.  For the year ended December 31, 2006, no single customer accounted for 10% or more of our total consolidated sales.  For the years ended December 31, 2005 and 2004, sales to the Engelhard Corporation represented approximately 20% and 16%, respectively; and Tronox Incorporated ("Tronox") represented approximately 11% and 17%, respectively.

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 did not sell any SR to Tronox in 2006 and do not anticipate a material amount of SR sales to Tronox in 2007.

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.  As a result, sales to Engelhard in 2006 were approximately 75% lower than in 2005.

The substantial reduction in business from these two customers materially impacted our 2006 net sales and results from operations since these two customers had accounted for 31%, on a combined basis, in 2005 and 33% in 2004.

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.  No individual foreign country accounted for 10% or more of our foreign sales in 2006.  In 2005, sales in the Netherlands accounted for 12% of our total sales and 32% of our foreign sales.  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.

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 March 23, 2007, we do not have a significant backlog of customer orders.

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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 (7/29/2013), HALTEX (7/28/2012), BARTEX (2/24/2017), 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, 2006, our US operation had 36 full-time employees, our European operation employed 18, and our Asian operation had 126 employees, of which 62 are covered by a collective bargaining agreement with an in-house union.  We have not experienced any work stoppages and believe that our relations with all our employees are good.

Available Information

TOR's internet website address is www.torminerals.com.  Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, 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-K.

In addition to the factors discussed in the Forward-Looking Statement section provided at the beginning of this Annual Report on Form 10-K, 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 banks 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, 2006, our foreign debt consisted of $811,000 under the short-term credit facilities and $2,764,000 under the term loans and financial lease agreements.

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, 2006, TP&T's bank debt totaled $2,984,000, of which, TOR (which conducts our US operations from Corpus Christi, Texas) has guaranteed $1,257,000.  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, it could result in TOR not being in compliance with the covenants relating to TOR's US credit facilities (which totaled $4,495,000 as of December 31, 2006), and could cause an acceleration/demand of the US debt.

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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 22 ).

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 58% of our sales for the year ended December 31, 2006.

We are dependent on a limited number of customers and could experience significant revenue reductions if they use alternative sources.

We derive a significant portion of our revenue each quarter from a limited number of customers.  Our top 10 customers accounted for 43%, 56% and 53% of our sales revenues in 2006, 2005 and 2004, respectively.  Though no single customer accounted for 10% or more of our 2006 sales revenue, 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.

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.  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 31 ).

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, 2006, we had a $400,000 loan outstanding to our Chairman, Bernard Paulson, a 15.9% shareholder, through Paulson Ranch, Ltd, which was paid off in March 2007.  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.

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.

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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 2006, 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 2008 or 2009. 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 US 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 are 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:

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

•         Terrorism

•         Disruptions caused by possible foreign conflicts

•         Hostility from local populations

•         Adverse effect of currency exchange controls

•         Restrictions on the withdrawal of foreign investment and earnings

•         Government policies against businesses owned by foreigners

•         Foreign exchange restrictions

•         Changes in taxation structure

As of the date of this report, we did not have any unresolved staff comments.