Company 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, HALTEX and TIOPREM. The facility is also the Global Headquarters for the Company. The Asian Operation, located in Ipoh, Malaysia, manufactures SR and HITOX and our European Operation, located in Hattem, Netherlands, manufactures Alumina based products. (See "Our Products" on page 4).

Approximately 49% of the 2008 sales are outside of the United States. Of these sales, approximately 55% are in currencies other than the US Dollar, primarily Euro based.

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. (See "Foreign Operations - Impact of Exchange Rate" on page 38).

Following are our results for the twelve-month periods ended December 31, 2008, 2007 and 2006.

(In thousands, except per share amounts)            Year Ended December 31,
                                                   2008      2007      2006
NET SALES                                       $ 25,304  $ 27,961  $ 26,079
Cost of sales                                     22,032    22,768    20,939
GROSS MARGIN                                       3,272     5,193     5,140
Technical services and research and development      244       245       239
Selling, general and administrative expenses       4,673     4,290     4,160
Goodwill impairment                                1,976         -         -
Loss on assets held for sale                         679         -         -
(Gain) loss on disposal of assets                     98       (12)        1
OPERATING INCOME (LOSS)                           (4,398)      670       740
OTHER INCOME (EXPENSES):
Interest income                                        2        18        17
Interest expense                                    (524)     (684)     (547)
Gain (loss) on foreign currency exchange rate        (38)       25      (135)
Other, net                                            15         -        20
INCOME (LOSS) BEFORE INCOME TAX                   (4,943)       29        95
Income tax expense (benefit)                          19       (42)        2
NET INCOME (LOSS)                               $ (4,962) $     71  $     93
Less:  Preferred Stock Dividends                      60        60        60
Income (Loss) Available to Common Shareholders  $ (5,022) $     11  $     33

Income (loss) per common share:
Basic                                           $  (0.64) $   0.00  $   0.00
Diluted                                         $  (0.64) $   0.00  $   0.00

Weighted average common shares outstanding:
Basic                                              7,881     7,849     7,836
Diluted                                            7,881     7,885     7,873

TOR Minerals International, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations December 31, 2008, 2007 and 2006

The loss we generated during 2008 was largely indicative of the cost pressures we faced this year, in particular energy and freight costs. To address these challenges, we have installed new technologies that reduced the consumption of fuel oil at our Malaysian operation, which increased in cost approximately 32% in 2008. To offset the cost of natural gas at our US operation, we are currently installing similar technologies which will convert a large portion of the manufacturing process from natural gas, which increased approximately 25% in 2008, to electricity. These new technologies are designed to make our costs less dependent on price fluctuations in these areas going forward.

However, due primarily to the increased cost of natural gas and freight related to shipping SR from Malaysia to our US operation, we reduced production in the US by approximately 31%. In addition, our Malaysian operation manufactured SR only four months in 2008. Because we charge overhead to inventory based on normal capacity, idle facility expense is recognized in the period incurred. As a result, we recorded approximately $2,020,000 related to idle facility expense, primarily at the US and Malaysian operations, in 2008.

Further impacting our 2008 results was a non-cash pretax impairment charge of approximately $1,976,000 relating to the carrying value of our goodwill. The impairment charge is the result of the annual assessment for impairment required by Statement No. 142 and reflects factors impacted by current market conditions and the completion of our annual budget and forecasting process.

Other factors impacting our 2008 results include the following:

º We increased our reserve for obsolescence or unmarketable inventory approximately $221,000 in the fourth quarter of 2008 for the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions primarily due to the decline in the global economy.

º We increased our allowance for doubtful accounts approximately $329,000 in the fourth quarter of 2008 primarily due to the possible impact the current economy may have on customers ability to make their payments.

º We recognized a loss on the sale and disposal of equipment, primarily in the fourth quarter of 2008, of approximately $98,000. In addition, we classified certain assets of the US operation as "held for sale" during the fourth quarter of 2008. As a result, we reduced the book value of these assets to fair market value, less estimated costs to sell, and recorded an expense of approximately $679,000.

º We incurred an increase of approximately $103,000 relating to legal fees and approximately $75,000 for accounting fees in our Selling, General and Administrative ("SG&A") expense for 2008.

Lastly, we recorded income tax expense of approximately $19,000 primarily related to valuation allowances at our US and Netherlands operations.

TOR Minerals International, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations December 31, 2008, 2007 and 2006

2009 Outlook:

Due to the downturn in the global economy, we anticipate a decrease in both HITOX and BARTEX sales in 2009. However, we anticipate this decrease to be offset in part by an increase in our specialty grade ALUPREM, as well as our new TIOPREM and HALTEX product lines. While the decline in the economy has impacted the introduction of these new products, we anticipate that we will be able to sell these products in plastics, top coat paint and paper applications which were not previously available to us with our traditional HITOX and HALTEX products.

Our new production technologies, installed at our Malaysian operation in May 2008 and at our US operation in March 2009, will replace fuel oil and natural gas with electricity as our primary source of energy, thereby reducing our overall energy costs. In addition, we have seen a decrease in the cost of freight between Malaysia and the US during the first quarter of 2009. As a result, we were able to secure the delivery on our first shipment of SR, due to arrive at our US operation in April 2009, at approximately 25% less than we paid for freight in 2008. Based on our current forecast, this shipment of SR should provide sufficient raw materials to meet most of our US production requirements for 2009.

However, as a result of our projected decrease in worldwide sales of HITOX, our Malaysian operation will be required to decrease their SR production from the 2008 production level of four months to only two months in 2009. As a result, we expect to incur additional costs related to idle facility expense in 2009 at our Malaysian operation of approximately $250,000 or 25% as compared to 2008.

At our US operation, we are scaling back our production requirements and reducing costs in 2009. Based on our forecast, we anticipate a reduction in direct and indirect production costs of approximately 30% and a reduction in our SG&A expense of approximately 25%. This is being accomplished through various cost cutting measures, including a reduction in salaries of approximately 20%, elimination of overtime, a reduction in staff and a delay in filling vacant positions. In addition, we are reducing and/or eliminating discretionary spending. Similar cost savings measures are also being implemented at our operations in Malaysia and the Netherlands. However, a portion of the savings may not be immediately recognized due to various laws and regulations relating to termination benefits in these countries. There is no assurance that cost reductions will offset our expected revenue decline in 2009, in which case we would continue to experience loss from our operations.

Looking to the future:

Our strategy focuses on pursuing niche markets for paints, plastics, papers and catalysts applications with high value-added products that produce attractive profit margins and have high barriers to entry by competitors. Our focus is on products that will provide 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 allow us to create close partnerships with our customers and develop long-term relationships with recurring and predictable revenue streams.

As we look at our HITOX business going forward, we expect our traditional HITOX business to remain tied to the strength of the US and global economy. Our key growth strategy is to introduce newly developed colored pigments that will expand our addressable market and increase our sales potential. We are applying technologies developed in our Netherlands 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 introduced four new colored pigments that are heat stable and are branding these new products under the name TIOPREM Gray, Orange, Beige and Brown in 2008. In addition, we introduced our new HALTEX line in late 2008. While the decline in the economy has impacted the introduction of these new products, we anticipate that we will be able to sell these products in plastics, top coat paint and paper applications, which were not previously available to us with our traditional HITOX and HALTEX products. However, we believe that these products have the potential to greatly expand our addressable market and we hope that they will be contributing to our results in the second half of 2009.

Actual results could differ materially from those indicated by these forward looking statements because of various risks and uncertainties. See the information under the caption "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 Operations December 31, 2008, 2007 and 2006

Results of Operations

Net Sales: Consolidated net sales for 2008 decreased approximately 11% compared with 2007. The decrease in net sales is primarily due to a decrease in volume (16%) relating to the decline in the global economy, partially offset by an increase in prices (2%) and the effects of fluctuations in the foreign exchange rate (3%).

Consolidated net sales for 2007 increased approximately 7% compared with 2006. The 2007 growth in net sales was primarily due to an increase in ALUPREM sales worldwide, offset by a reduction in HITOX sales primarily related to the decline in the housing market in the US.

Following is a summary of our consolidated products sales for 2008, 2007 and 2006 (in thousands), exclusive of inter-company sales:

Product       2008           2007           2006
HITOX   $ 13,182   52% $ 14,746   53% $ 15,091   58%
ALUPREM    7,425   30%    8,493   30%    6,201   24%
BARTEX     3,123   12%    3,215   11%    3,114   12%
HALTEX     1,219    5%      996    4%      924    3%
TIOPREM       30   <1%        -    0%        -    0%
SR             -    0%       12   <1%       11   <1%
OTHER        325    1%      499    2%      738    3%
Total   $ 25,304  100% $ 27,961  100% $ 26,079  100%

º HITOX sales decreased approximately 11% worldwide in 2008 primarily due to a decrease in volume of approximately 13% related to the decline in the global economy which was partially offset by the effect of fluctuations in the foreign exchange rate. In 2007, HITOX sales decreased approximately 2% worldwide primarily due to a decrease in volume related to the slowing US economy.

º ALUPREM sales decreased approximately 13% worldwide in 2008 primarily due to a decline in the sales volume of our commodity grade ALUPREM in the US market. Sales of this product line deceased approximately 83% compared to 2007. We expect to see our commodity grade ALUPREM sales in the US to continue to decline. Also contributing to the 2008 decrease was a decline in our specialty grade ALUPREM of approximately 53% due to the buying pattern of a large customer. Partially offsetting the decrease in US volume was an increase in volume in our European market of approximately 3% and the effect of fluctuations in the foreign exchange rate of approximately 10%. In 2007, ALUPREM sales increased approximately 36% worldwide primarily due to an increase in volume in our US and European markets of approximately 27% and 23%, respectively. The increase in US volume was primarily related to the buying pattern of a large customer of our specialty grade ALUPREM, while the increase in volume in the European market primarily related to an increase in our customer base.

º BARTEX sales decreased approximately 3% in 2008 primarily related to a decrease in volume following an increase in 2007 of approximately 3% as a result of increases in volume and price.

º HALTEX sales increased approximately 22% in 2008 primarily related to an increase in volume. Approximately 8% of the increase in volume for 2008 relates to the introduction of our new HALTEX LV product line. In 2007, HALTEX volume increased approximately 8%.

º SR sales were not material in either 2008 or 2007.

º Other Product sales decreased approximately 35% and 32% in 2008 and 2007, respectively, primarily relating to volume decreases in both the US and Asian markets.

               TOR Minerals International, Inc. and Subsidiaries
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations
                        December 31, 2008, 2007 and 2006

United States Operation

Following is a summary of net sales for our US operation for 2008, 2007 and 2006
(in thousands).  All inter-company sales have been eliminated.

Product       2008           2007           2006
HITOX   $  9,300   61% $ 10,409   57% $ 10,729   60%
ALUPREM    1,397    9%    3,325   18%    2,654   15%
BARTEX     3,123   20%    3,215   18%    3,114   17%
HALTEX     1,219    8%      996    5%      924    5%
TIOPREM        -    0%        -    0%        -    0%
OTHER        293    2%      345    2%      447    3%
Total   $ 15,332  100% $ 18,290  100% $ 17,868  100%

º HITOX sales decreased approximately 11% in 2008 primarily related to a decrease in volume related to the decline in the US economy. HITOX sales volume decreased approximately 34% during the fourth quarter 2008. In 2007, HITOX sales decreased approximately 3% primarily due to the decline in the US housing market.

º ALUPREM sales decreased approximately 58% in 2008 primarily due to a decline in the sales volume of our commodity grade ALUPREM sold in the US market. Sales of this product line decreased approximately 83% compared to 2007. We expect to see our commodity grade ALUPREM sales in the US to continue to decline. Also contributing to the 2008 decrease was a decline in our specialty grade ALUPREM of approximately 53% due to the buying pattern of a large customer. In 2007, ALUPREM sales increased approximately 25% primarily due to an increase in volume, offset by a decrease in price. The increase in volume was primarily related to the buying pattern of a large customer of our specialty grade ALUPREM.

               TOR Minerals International, Inc. and Subsidiaries
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations
                        December 31, 2008, 2007 and 2006

European Operation

Our subsidiary in the Netherlands, TPT, manufactures and sells ALUPREM to third
party customers, as well as to our US operation for distribution to our North
American customers.  TPT purchases HITOX from our Asian operation for
distribution in Europe.  The following table represents TPT's ALUPREM and HITOX
sales (in thousands) for 2008, 2007 and 2006 to third party customers.  All
inter-company sales have been eliminated.

Product      2008          2007          2006
ALUPREM $ 6,028   88% $ 5,168   82% $ 3,547   75%
HITOX       825   12%   1,106   18%   1,144   24%
TIOPREM      26   <1%       -    0%       -    0%
OTHER         -    0%       -    0%      66    1%
Total   $ 6,879  100% $ 6,274  100% $ 4,757  100%

º ALUPREM sales increased approximately 17% in 2008 due to an increase in volume of approximately 4% and the effect of fluctuations in the exchange rate of approximately 13%. In 2007, ALUPREM sales increased approximately 46% primarily due to an increase in volume related to TPT expanding the European customer base.

º HITOX sales volume decreased approximately 25% in 2008 primarily related to a decrease in volume, partially offset by the effect of fluctuations in the exchange rate. In 2007, HITOX sales decreased approximately 3% primarily related to volume.

Asian Operation

Our subsidiary in Malaysia, TMM, manufactures and sells SR and HITOX to third
party customers, as well as to our US and European operations.  The following
table represents TMM's sales (in thousands) for 2008, 2007 and 2006 to third
party customers.  All inter-company sales have been eliminated.

Product      2008          2007          2006
HITOX   $ 3,057   99% $ 3,231   95% $ 3,218   93%
TIOPREM       4   <1%       -    0%       -    0%
SR            -    0%      12   <1%      11   <1%
OTHER        32    1%     154    5%     225    7%
Total   $ 3,093  100% $ 3,397  100% $ 3,454  100%

º HITOX sales decreased approximately 5% in 2008 primarily related to a decrease in volume of approximately 9% which was partially offset by the effect of fluctuations in the exchange rate. In 2007, HITOX sales experienced only modest growth over the 2006 level, primarily due to an increase in volume year over year related to growth in the Asian customer base, offset by a decrease in 2007 sales to South America and the Middle East.

º SR sales were not material in either 2008 or 2007.

º Other product sales in 2008 and 2007 decreased approximately 79% and 32%, respectively.

               TOR Minerals International, Inc. and Subsidiaries
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations
                        December 31, 2008, 2007 and 2006

Gross Margin:  The following table represents our net sales, cost of sales and
gross margin (in thousands) for the years ended December 31, 2008, 2007 and
2006.

                     Year Ended December 31,
                   2008       2007       2006
NET SALES       $ 25,304   $ 27,961   $ 26,079
Cost of sales     22,032     22,768     20,939
GROSS MARGIN    $  3,272   $  5,193   $  5,140
GROSS MARGIN %      12.9%      18.6%      19.7%

Gross margin decreased 5.7% from 18.6% in 2007 to 12.9% in 2008. The primary factors affecting gross margin in 2008 include the following:

º increase in the cost of natural gas, the primary source of energy at our US operation
º increase in the cost of fuel oil, the primary source of energy at our Malaysian operation
º decrease in production at each of our three operations resulting in under absorption of manufacturing costs and/or idle facility expense
º increase in the cost of freight and raw materials

In 2007, gross margin decreased 1.1% from 19.7% in 2006 to 18.6%. The primary factors affecting gross margin in 2007 include an increase in the manufacturing cost of SR, primarily related to energy costs, and a decrease in SR production from seven months in 2006 to four months in 2007. Offsetting these negative factors were an increase in the average selling prices and process changes and manufacturing efficiencies.

Selling, General and Administrative Expenses: Selling, general and administrative expenses ("SG&A") in 2008 increased approximately $383,000 from 2007.

Primarily factors increasing SG&A in 2008 include:

º increase in bad debt expense of approximately $381,000 primarily relating to an increase in our allowance for doubtful accounts from $28,000 at December 31, 2007 to $357,000 at December 31, 2008, of which approximately $75,000 relating to the US operations and $254,000 to the European operation
º increase in legal expenses of approximately $103,000 relating primarily to the 2008 stock offering and employment issues
º increase in accounting fees of approximately $75,000

Offsetting the above increases were the following factors:

º decrease in salaries of approximately $140,000 primarily related to reductions in staff at the US operations
º decrease in travel related expenses of approximately $90,000
º decrease in option compensation of approximately $27,000

In 2007, SG&A increased approximately $130,000 from 2006 primarily due to an increase in salaries, travel and consulting, offset by a reduction in accounting fees.

TOR Minerals International, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations December 31, 2008, 2007 and 2006

Interest Expense: Interest expense decreased approximately $160,000 in 2008 and increased approximately $137,000 in 2007. In 2008, interest expense at the US operation decreased approximately $229,000 due primarily to a lower average outstanding balance on our line of credit and long term debt; in 2007, interest expense increased $77,000 due to a larger average outstanding balance on our line of credit and an increase in long term debt. TPT's interest expense increased approximately $16,000 and $56,000, respectively, due primarily to a larger average outstanding balance on its line of credit in 2008 as compared to 2007. TMM's interest expense increased approximately $51,000 and $4,000 in 2008 and 2007, respectively, primarily due to an increase in its long term debt and an increase in the utilization of its line of credit and ECR financing.

Income Taxes: We recorded an income tax expense of approximately $17,000 an state tax expense of approximately $2,000 in 2008 as compared to a tax benefit in 2007 of approximately $42,000. In 2006, we recorded an income tax expense of approximately $2,000. The following table represents the components of our income tax expense:

                                      Components of Income Tax Expense (Benefit)
                                               Year Ended December 31,
                            2008                         2007                         2006
(In thousands)   Current   Deferred   Total   Current   Deferred   Total   Current   Deferred   Total
Federal        $      -  $     199  $  199  $      -  $       -  $    -  $      -  $       -  $    -
State                 2          -       2        10          -      10        10          -      10
Foreign               -       (182)   (182)        5        (57)    (52)        -         (8)     (8)
Total Income
Tax Expense
(Benefit)      $      2  $      17  $   19  $     15  $     (57) $  (42) $     10  $      (8) $    2

In May 2006, the State of Texas enacted a new business tax that is imposed on gross revenues to replace the State's current franchise tax regime. The new legislation's effective date was January 1, 2007 and our first Texas margins tax ("TMT") return was due May 15, 2008 and was based on our 2007 operations.
Although the TMT is imposed on an entity's gross revenues rather than on its net income, certain aspects of the tax make it similar to an income tax. In accordance with the guidance provided in SFAS No. 109, we have properly determined the impact of the newly-enacted legislation in the determination of our reported state current and deferred income tax liability.

Liquidity, Capital Resources and Other Financial Information

Cash and Cash Equivalents

As noted in the following table, cash and cash equivalents decreased $185,000
from the end of 2007 to the end of 2008.  Operating activities provided cash of
$1,497,000.  We used cash of $2,392,000 relating to investing activities and
financing activities provided $873,000 in 2008.  The effect of the exchange rate
fluctuations accounted for a decrease in cash of $163,000.

                                            Year Ended December 31,
(In thousands)                              2008      2007      2006
Net cash provided by (used in)
Operating activities                    $   1,497  $    851  $  (971)
Investing activities                       (2,392)   (1,021)    (756)
Financing activities                          873      (375)   1,171
Effect of exchange rate fluctuations         (163)       25      172
Net change in cash and cash equivalents $    (185) $   (520) $  (384)

TOR Minerals International, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations December 31, 2008, 2007 and 2006

Operating Activities

Cash provided by operating activities increased approximately $646,000 and $1,822,000 in 2008 and 2007, respectively. The following are the major changes in working capital affecting cash provided by operating activities:

. . .