Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

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 operations in the US, Asia and Europe.

Our US Operation, located in Corpus Christi, Texas, manufactures HITOX, BARTEX, and HALTEX. The facility is also the Global Headquarters for the Company. The Asian Operation, operated through our wholly owned subsidiary TOR Minerals Malaysia, Sdn. Bhd. ("TMM"), is located in Ipoh, Malaysia and manufactures SR and HITOX, while our European Operation, operated through our wholly owned subsidiary TOR Processing and Trade, BV ("TPT"), is located in Hattem, Netherlands and manufactures Alumina based products.

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.

Our business is closely correlated with the construction industry and its demand for materials that use pigments, such as paints and plastics. 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.

As noted below, the decline in the US economy has had an adverse impact on the sale of both our HITOX, which is a pigment used in paints and plastics, and our commodity grade ALUPREM, which is used in solid surface applications. For the nine-month period ended September 30, 2008, our sales in North America of HITOX and ALUPREM have decreased by $1,120,000 and $406,000, respectively.

Following are our results for the three month and nine month periods ended September 30, 2008 and 2007.

                                                  Three Months                Nine Months
(In thousands, except per share amounts)       Ended September 30,        Ended September 30,
                                               2008          2007          2008          2007
NET SALES                                  $    7,503    $    7,558    $   21,165    $  21,992
Cost of sales                                   6,527         6,082        18,525       17,739
GROSS MARGIN                                      976         1,476         2,640        4,253
Technical services and research and
development                                        62            65           189          183
Selling, general and administrative
expenses                                        1,058         1,055         3,287        3,276
Gain on disposal of assets                          -             -            (2)           -
OPERATING INCOME (LOSS)                          (144)          356          (834)         794
OTHER INCOME (EXPENSE):
Interest income                                     -             8             1           11
Interest expense                                 (134)         (179)         (409)        (518)
Gain (loss) on foreign currency exchange
rate                                               (4)          (35)           (5)          16
Other, net                                          1             -            11            -
INCOME (LOSS) BEFORE INCOME TAX                  (281)          150        (1,236)         303
Income tax expense (benefit)                       89           (15)           61           17
NET INCOME (LOSS)                          $     (370)   $      165    $   (1,297)   $     286

Income (loss) per diluted common share     $    (0.05)   $     0.02         (0.17)        0.03


22

TOR Minerals International, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operation

In 2008, we have focused on reducing our inventory levels of Synthetic Rutile ("SR") and related finished goods inventory, primarily HITOX, on a worldwide basis. To accomplish this, TMM manufactured approximately 32% less SR and our Corpus Christi operation reduced HITOX production approximately 60% during the nine month period ended September 30, 2008 as compared to the same period in 2007. While improving our inventory turns and cash flow, the lower fixed cost absorption has had a negative impact on our financial results for 2008. However, our inventory levels are now at the desired level and we anticipate our production levels to increase during the fourth quarter.

Looking to the future, our strategy focuses on pursuing niche markets for paints, plastics, papers and catalyst applications with high value-added products that produce good profit margins and have high barriers to entry. These products have a solid value proposition with our customers and therefore sell at a higher average price and produce more attractive gross margins for TOR. In addition, the high value-added nature of these products allows us to create close partnerships with our customers and develop long-term relationships with recurring and predictable revenue streams.

With the success of our alumina business, we are no longer dependent on one group of products for our success. Our alumina business now accounts for approximately one-fourth of our overall revenue. In 2009, we expect our alumina business to continue to increase in both the US and Europe.

As we look at our HITOX business going forward, we expect our traditional HITOX business to remain tied to the strength of the U.S. economy. Our key growth strategy is to introduce newly developed, technically advanced colored pigments that will expand our target market and increase our sales potential. We are applying technologies developed in our European Operation to create new high performance fillers and pigments. Unlike our traditional HITOX products, our new products have high performance characteristics, much broader end market applications and provide for value-added premium pricing.

We expect to introduce by the end of 2008 four new colored pigments that are heat stable and are branding these new products under the names TIOPREM Gray, TIOPREM Orange, TIOPREM Beige and TIOPREM Brown. In the future we expect to be able to sell our products for use in plastics, top coat paint and paper applications which were not previously available to us with our traditional HITOX. We expect these products to greatly expand our target market. We believe these products have great potential and will positively contribute to our results going forward.

However, actual results may differ materially from those indicated by these forward looking statements because of various risks and uncertainties. For more information on these risks and uncertainties, please see the "Forward Looking Information" appearing below the Table of Contents of this report.

               TOR Minerals International, Inc. and Subsidiaries
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operation

Results of Operations

Consolidated Net Sales:  Following is a summary of our consolidated products
sales for the three month and nine month periods ended September 30, 2008 and
2007 (in thousands), as well as a summary of the material changes.  All
inter-company sales have been eliminated.

             Three Months Ended September 30,            Nine Months Ended September 30,
Product       2008           2007       Variance        2008           2007        Variance
HITOX   $  4,030    54% $ 3,962   53% $  68    2% $ 11,336   54% $ 11,599   53% $ (263)   -2%
ALUPREM    2,288    31%   2,301   30%   (13)  -1%    6,217   29%    6,825   31%   (608)   -9%
BARTEX       740    10%     839   11%   (99) -12%    2,464   12%    2,447   11%     17     1%
HALTEX       328     4%     322    4%     6    2%      892    4%      719    3%    173    24%
TIOPREM        4              -           4             30              -           30
SR             -              -           -              -             12          (12) -100%
OTHER        113     1%     134    2%   (21) -16%      226    1%      390    2%   (164)  -42%

For the quarter ended September 30, 2008, consolidated net sales decreased approximately $55,000 compared to the third quarter 2007 primarily due to decreases in both ALUPREM and BARTEX sales, offset by higher HITOX sales.

º HITOX sales increased 2% due to the continued growth of HITOX sales in Asia and South America which increased approximately $323,000 and $270,000, respectively, over the same period last year. Offsetting this increase was a decline in North America and Europe of approximately $477,000 and $48,000, respectively. The decline in sales in North America is primarily due to the decline in the US housing/construction market and the economy.
º ALUPREM sales were down 1% primarily due to a decrease in the sale of our commodity grade ALUPREM in the US Market. Sales of this product line deceased approximately $150,000 compared to the third quarter 2007. We expect to see our commodity grade ALUPREM sales to continue to decline in the US due to the economy. Offsetting the decline in the US market was an increase in high grade ALUPREM sales in Europe which increased approximately $142,000 over the same period last year.
º BARTEX sales were down 12% primarily due to the decline in the US economy.

For the nine month period ended September 30, 2008, consolidated net sales decreased approximately $827,000 compared to the same period in 2007 primarily due to decreases in both HITOX and ALUPREM sales, offset by higher HALTEX sales.

º HITOX sales declined 2% primarily due to a weak North American market and the loss of a customer in Europe. Sales in North America and Europe decreased approximately $1,120,000 and $182,000, respectively. Offsetting this decline were higher sales in Asia and South America of $406,000 and $633,000, respectively.
º ALUPREM sales were down 9% primarily due to a change in the order pattern of a significant US customer which accounted for $1,450,000 of the overall decrease in ALUPREM sales. Commodity grade ALUPREM sales in the US were down $426,000 primarily due to the US economy. Partially offsetting the decline in US sales, the European ALUPREM sales increased $1,268,000.
º HALTEX sales increased 24% primarily due to an increase in customer demand and the introduction of a new grade of HALTEX.
º OTHER product sales decreased 42% primarily due to a decrease in the requirements of Zircon by a customer in Asia.

               TOR Minerals International, Inc. and Subsidiaries
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operation

Corpus Christi Operation

Our Corpus Christi operation manufactures and sells HITOX, BARTEX and HALTEX to
third party customers.  In addition, we purchase ALUPREM and HITOX from our
subsidiaries, TPT and TMM, for distribution in the Americas.  Following is a
summary of net sales for our Corpus Christi operation for the three month and
nine month periods ended September 30, 2008 and 2007 (in thousands), as well as
a summary of the material changes.  All inter-company sales have been
eliminated.

             Three Months Ended September 30,            Nine Months Ended September 30,
Product       2008          2007        Variance        2008           2007         Variance
HITOX   $  2,653   58% $ 2,860   57% $ (207)  -7% $  7,848   63% $  8,335   56% $   (487)  -6%
ALUPREM      751   17%     906   18%   (155) -17%    1,165    9%    3,041   21%   (1,876) -62%

Netherlands Operation

Our subsidiary in the Netherlands, TPT, manufactures and sells ALUPREM to third party customers, as well as to our Corpus Christi operation for distribution to our US customers. In addition, TPT purchases HITOX from TMM for distribution in Europe. Our increased sales efforts in Europe have resulted in an increase in our customer base, as well as our sales volume. The following table represents TPT's ALUPREM and HITOX sales (in thousands) for the three month and nine month periods ended September 30, 2008 and 2007 to third party customers. All inter-company sales have been eliminated.

             Three Months Ended September 30,           Nine Months Ended September 30,
Product       2008           2007       Variance       2008          2007        Variance
ALUPREM $  1,537    90% $ 1,395   86% $ 142   10% $ 5,052   87% $ 3,784   81% $ 1,268   34%
HITOX        177    10%     225   14%   (48) -21%     705   12%     887   19%    (182) -21%
TIOPREM        -              -           -            26    1%       -            26
Total   $  1,714   100% $ 1,620  100% $  94    6% $ 5,783  100% $ 4,671  100% $ 1,112   24%

Malaysian Operation

Our subsidiary in Malaysia, TMM, manufactures and sells HITOX and SR to third
party customers, as well as to our Corpus Christi operation and TPT.  The
following table represents TMM's sales (in thousands) for the three month and
nine month periods ended September 30, 2008 and 2007 to third party customers.
All inter-company sales have been eliminated.

             Three Months Ended September 30,           Nine Months Ended September 30,
Product       2008            2007      Variance       2008          2007        Variance
HITOX   $  1,200    98%  $  877   92% $ 323   37% $ 2,783   99% $ 2,377   94% $  406    17%
BARTEX         1              -           1             1             -            1
TIOPREM        4              -           4             4             -            4
SR             -              -           -             -            12          (12) -100%
OTHER         17     2%      72    8%   (55) -76%      29    1%     142    6%   (113)  -80%

TOR Minerals International, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operation

Other Consolidated Results

Gross Margin: For the three month period ended September 30, 2008, gross margin decreased approximately 6.5%, from 19.5% in 2007 to 13.0% in 2008 and for the nine month periods ended September 30, 2008 and 2007, gross margin decreased approximately 6.8%, from 19.3% to 12.5%, respectively. The primary factors for the decline in gross margin are lower fixed cost absorption and increased energy, freight and raw material costs. As discussed above, the lower fixed cost absorption is primarily related to reduced levels of SR production at TMM and HITOX production at the Corpus Christi operation of approximately 32% and 60%, respectively, as compared to the same nine month period during 2007.

Technical Services, Selling, General and Administrative Expenses (SG&A): For the three and nine month periods ended September 30, 2008, SG&A expense was relatively flat despite a decrease in staff as this reduction was offset by higher expense relating to accounting, legal and bad debt expense. As a result of the downturn in the US economy, our bad debt expense increased approximately $49,000 for the three and nine month periods ended September 30, 2008 as compared to the same period last year.

Interest Expense: Net interest expense decreased 25% and 21% for the three month and nine month periods ended September 30, 2008 and 2007, respectively, primarily related to lower interest rates and a decrease in our average outstanding debt.

Income Taxes: Income taxes consisted of state income tax expense of $3,000 and a foreign income tax expense of $86,000 for the three month period ended September 30, 2008, compared state income tax expense of $9,000 and foreign income tax benefit of $24,000 for the same three month period in 2007. For the nine month periods ended September 30, 2008 and 2007, we recorded state income tax expense of $8,000 and foreign income tax expense of $53,000 and state income tax expense of $27,000 and foreign income tax benefit of $10,000, respectively. Taxes are based on an estimated annualized consolidated effective rate of 5%.

Net Income / Loss: For the three month and nine month periods ended September 30, 2008, we incurred a net loss of $370,000 and $1,297,000, respectively, on net sales of $7,503,000 and $21,165,000, respectively. This compares with net income of $165,000 and $286,000, on net sales of $7,558,000 and $21,992,000 for the three month and nine month periods ended September 30, 2007, respectively. Lower sales combined with higher cost of energy, freight and raw materials, as well as lower fixed cost absorption, contributed to the loss in 2008.

               TOR Minerals International, Inc. and Subsidiaries
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operation

Liquidity, Capital Resources and Other Financial Information

Cash and Cash Equivalents

As noted on the following table, cash and cash equivalents increased $67,000
from December 31, 2007 to September 30, 2008 as compared to a decrease of
$157,000 from December 31, 2006 to September 30, 2007.

                                                     (Unaudited)
                                           Nine Months Ended September 30,
(In thousands)                                  2008                2007
Net cash provided by (used in)
Operating activities                    $            3,891    $         (79)
Investing activities                                (1,737)            (621)
Financing activities                                (1,971)             596
Effect of exchange rate fluctuations                  (116)             (53)
Net change in cash and cash equivalents $               67    $        (157)

Operating Activities

Operating activities provided $3,891,000 during the first nine months of 2008. Following are the major changes in working capital affecting cash provided by operating activities for the nine month period ended September 30, 2008:

º Accounts Receivable: Accounts receivable increased $1,240,000 as compared to an increase of $1,088,000 for the same period 2007. Accounts receivable increased primarily due to stronger sales in the third quarter 2008 as compared to the fourth quarter 2007. At the Corpus Christi operation, accounts receivable increased $805,000, at TPT $78,000 and at TMM $357,000.
º Inventories: Inventories decreased $1,223,000 as compared to a decrease of $197,000 for the same period 2007 primarily due to our overall strategy to reduce our stock of SR worldwide and improve inventory turns and cash flows. Inventories at the Corpus Christi operation decreased $363,000 primarily due to a decrease in finished goods of approximately $1,010,000, offset by an increase in raw materials of approximately $647,000. Inventories at TMM decreased $786,000 primarily related to SR and TPT's inventory decreased approximately $74,000 primarily related to ALUPREM finished goods.
º Other Current Assets: Other current assets increased $189,000 as compared to an increase of $425,000 for the same period 2007. At the Corpus Christi operation, prepaid expenses increased $206,000 primarily due to prepaid deposits and insurance; at TPT $41,000 related to prepaid insurance and pension expense; offset by a decrease TMM of $58,000.
º Accounts Payable and Accrued Expenses: Trade accounts payable and accrued expenses increased $1,592,000 as compared to a decrease of $523,000 for the same period 2007. Accounts payable and accrued expenses increased at TMM $1,163,000 primarily due to the production of SR during the month of September, 2008, while at the Corpus Christi operation accounts payable and accrued expenses increased $534,000 primarily related to the timing of our purchase of Barite inventory. TPT's accounts payable and accrued expenses decreased $105,000.
º Accrued Expenses - Private Placement Stock Offering: Accrued expenses increased $2,100,000 related to the subscription agreements received in our private placement stock offering. As noted below, the funds were utilized to decrease our outstanding balance on the US line of credit. As of September 30, 2008, the stock offering had not been finalized.

TOR Minerals International, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operation

Investing Activities

We used cash of $1,737,000 in investing activities during the first nine months of 2008 primarily for the purchase of fixed assets. Net investments for each of our three locations are as follows:

º Corpus Christi Operation: We invested approximately $376,000 for new equipment, as compared to $303,000 for the same period 2007.
º Netherlands Operation: We invested approximately $37,000 at TPT for new equipment, as compared to $278,000 for the same period 2007.
º Malaysian Operation: We invested approximately $1,324,000 at TMM for new equipment related to the new powder treatment facility, as compared to $40,000 for the same period 2007.

Financing Activities

We used cash of $1,971,000 in financing activities during the nine month period ended September 30, 2008. Significant factors relating to financing activities include the following:

º Lines of Credit: Our borrowings on the domestic line of credit decreased $2,950,000 primarily as a result of the funds received as a result of subscription agreements ($2,100,000) related to our Private Placement stock offering, as compared to an increase of $350,000 for the same period 2007. Borrowings on our foreign line of credit, affected via TPT, increased approximately $47,000 primarily for the purpose of financing working capital as compared to an increase of $525,000 for the same period 2007.
º Export Credit Refinancing Facility (ECR): TMM's borrowings on the ECR increased $759,000 primarily for working capital. TMM did not have any borrowings on the ECR for the same period 2007.
º Capital Leases: Capital leases decreased approximately $34,000 as compared to a reduction of $52,000 for the same period 2007. We received $26,000 in proceeds under a new capital lease relating to the acquisition of a new forklift at the Corpus Christi operation offset by a reduction in capital leases of $60,000, primarily at TPT.
º Long-term Debt - Financial Institutions: Long-term debt increased approximately $240,000 as compared to decrease of $182,000 for the same period 2007 which was primarily related to paying off the related party debt to Paulson Ranch. TMM's net long-term debt increased $543,000 primarily related to new powder treatment facility. Net long-term debt at the Corpus Christi operation decreased approximately $67,000 and TPT's decreased approximately $236,000.
º Proceeds from Issuance of Common Stock: We received $12,000 from the exercise of employee stock options.
º Preferred Stock Dividends: We paid dividends of $45,000 on our Series A convertible preferred stock.

TOR Minerals International, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operation

Going Concern

The consolidated financial statements included in this report have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in Note 4 to our financial statements, we have significant borrowings which require, among other things, compliance with certain financial covenants, specifically a Consolidated Fixed Charge Ratio and a Consolidated Funded Debt to EBITDA Ratio, on a quarterly basis. As a result of operating losses incurred during the quarters ended June 30 and September 30, 2008, we were not in compliance with these financial ratio covenants under our US credit facility ("Credit Facility") with Bank of America ("BOA"); however, we have received a waiver from BOA for the quarters ended June 30 and September 30, 2008.

Under the terms of the waiver, we agreed to:

º Pay a waiver fee, in the amount of $10,000 and $5,000 for the quarters ended June 30 and September 30, 2008, respectively, to BOA;
º Accept an increase in interest rates applicable to all BOA borrowings from BOA's prime rate to BOA's prime rate plus two percent (2%);
º Obtain an injection of $1,000,000 in new capital;
º Reduce line of credit from $5,000,000 to $2,500,000;
º Modify the Current Ratio covenant set forth in the Credit Facility from greater than or equal to 1.10 to greater than or equal to 1.70 on a quarterly basis; and
º Execute a release of claims we may have against BOA regarding the Credit Facility.

During the quarter ended September 30, 2008, our Board of Directors authorized a Private Placement of our common stock to raise a minimum of $1,000,000 on terms more fully set forth in Note 3 to the consolidated financial statements included in this report as well as on the Form 8-K we filed with the Securities and Exchange Commission on October 14, 2008.. However, based on the Company's current projections for the next twelve month period, an extension of the existing waiver, a new waiver covering certain terms and conditions of the Credit Facility, an amendment to the Credit Facility or some combination of the above may be required.

At June 30 and September 30, 2008, a total of $4,216,000 and $1,330,000, respectively, was outstanding under the Credit Facility. A breach of any of the terms and conditions of the waiver, or subsequent breaches of the financial covenants under the Credit Facility could result in acceleration of our indebtedness, in which case the debt would become immediately due and payable.

In addition, the Company's two subsidiaries, Tor Minerals Malaysia, Sdn. Bhd ("TMM") and TOR Processing and Trade, BV ("TPT") have short-term credit facilities and term loans at banks in Malaysia and the Netherlands, respectively. At September 30, 2008, TMM's utilization under the credit facilities and term loans with HSBC Bank Malaysia Berhad ("HSBC") and RHB Bank Berhad ("RHB") totaled $1,634,000, while TPT's utilization under the Credit Facility and term loans with Rabobank totaled $3,046,000. The credit facilities . . .