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

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, engineered fillers and flame retardants used in the manufacture of paints, industrial coatings, plastics, and catalysts applications. We have operations in the United States, Asia and Europe.

Our U.S. operation, located in Corpus Christi, Texas, manufactures HITOX, BARTEX, HALTEX/OPTILOAD and TIOPREM. The facility is also the global headquarters for the Company. The Asian operation, located in Ipoh, Malaysia, manufactures SR, HITOX and TIOPREM and our European operation, located in Hattem, Netherlands, 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 U.S. 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.

Following are our results for the three month periods ended March 31, 2012 and 2011.

                                                      (Unaudited)
                                                      Three Months
 (In thousands, except per share amounts)           Ended March 31,
                                                     2012      2011
 NET SALES                                       $  12,808  $ 9,585
 Cost of sales                                       9,618    7,494
 GROSS MARGIN                                        3,190    2,091
 Technical services and research and development        82       66
 Selling, general and administrative expenses        1,224    1,159
 OPERATING INCOME                                    1,884      866
 OTHER EXPENSE:
 Interest expense                                     (142)     (96)
 Gain (loss) on foreign currency exchange rate          23      (48)
 INCOME BEFORE INCOME TAX                            1,765      722
 Income tax expense                                    369       47
 NET INCOME                                      $   1,396  $   675

 Income per common share:
 Basic                                           $    0.58  $  0.34
 Diluted                                         $    0.41  $  0.22

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

Results of Operations

Net Sales: Consolidated net sales for the quarter ended March 31, 2012 increased approximately $3,223,000 or 34% as compared to the first quarter 2011. The quarterly increase consists of an increase in volume and selling price of 13% and 21%, respectively. This compares to an increase of approximately $2,729,000 or 40% during the first quarter 2011 consisting of an increase in volume and selling price of 35% and 5%, respectively.

Following is a summary of our consolidated products sales for the three month periods ended March 31, 2012 and 2011 (in thousands). All inter-company sales have been eliminated.

                                     (Unaudited)
                           Three Months Ended March 31,
 Product                 2012           2011         Variance
 HITOX             $  5,368   42%  $ 4,050   42%  $ 1,318   33%
 ALUPREM              4,168   33%    3,379   36%      789   23%
 BARTEX               1,439   11%      894    9%      545   61%
 HALTEX                 878    7%      763    8%      115   15%
 TIOPREM                336    3%      404    4%      (68) -17%
 SYNTHETIC RUTILE       431    3%        -    0%      431    -
 OTHER                  188    1%       95    1%       93   98%
 Total             $ 12,808  100%  $ 9,585  100%  $ 3,223   34%

HITOX sales increased 33% for the three month period ended March 31, 2012 primarily related to a global increase in the average selling price of approximately 43%. Increased selling prices were partially offset by a reduction in volume of approximately 10% primarily related to a reduction in Asia. This compares to an increase in HITOX sales of 40% during the three month period ended March 31, 2011, which was primarily due to an increase in global volume related to the stabilization and recovery in the paint and plastics end markets, as well as a tight supply of commodity titanium dioxide ("TiO2") resulting in an increase in volume and average selling price of 28% and 12%, respectively.

ALUPREM sales increased 23% during the first quarter of 2012 primarily due to an increase in volume of a significant U.S. customer, which was partially offset by a decrease in volume in European sales as this business is being affected by the slowdown in the European economy. This compares to an increase of 42% during the first three months of 2011 which was primarily due to a change in the order pattern of a significant U.S. customer, as well as a 29% increase in European sales during first quarter 2011.

BARTEX sales increased approximately 61% during the first three months of 2012 primarily due to an increase in volume and selling price of approximately 52% and 9%, respectively. During the first quarter of 2011, BARTEX sales increased 6%, of which approximately 3% represented an increase in volume and 3% an increase in selling price.

HALTEX sales increased primarily due to new business for our standard HALTEX and newer OPTILOAD specialty products which are gaining acceptance in the marketplace. For the first three months of 2012 and 2011, HALTEX sales increased 15% and 47%, respectively.

TIOPREM sales decreased 17% during the three month period ended March 31, 2012 primarily due to a decrease in volume which was partially offset by an increase in selling price. This compares to an increase during the first quarter 2011 of 425% as the product began to gain greater acceptance in the marketplace.

Synthetic Rutile ("SR") sales represented 3% of the overall sales for the three month period ended March 31, 2012. With the strong market demand, we are optimistic that the sale of available SR to third parties will continue in the future.

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

Corpus Christi Operation

Our Corpus Christi operation manufactures and sells HITOX, BARTEX, HALTEX/OPTILOAD and TIOPREM 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 periods ended March 31, 2012 and 2011 (in thousands), as well as a summary of the material changes. All inter-company sales have been eliminated.

 Product       2012           2011         Variance
 HITOX    $ 3,396   40%  $ 2,254   42%  $ 1,142   51%
 ALUPREM    2,431   29%    1,190   22%    1,241  104%
 BARTEX     1,439   17%      894   17%      545   61%
 HALTEX       878   10%      763   14%      115   15%
 TIOPREM      211    2%      186    4%       25   13%
 OTHER        184    2%       81    1%      103  127%
 Total    $ 8,539  100%  $ 5,368  100%  $ 3,171   59%

º HITOX sales in increased 51% for the three month period ended March 31, 2012 primarily due to an increase in selling price and volume of 48% and 3%, respectively. Sales in the U.S., Canada and Mexico increased 46%, 132%, 220%, respectively, and South America sales were down 38% as compared to the same period of 2011. During the first quarter 2011, HITOX sales in the U.S. trailed the first quarter of 2010 year by 4%; however, sales in Canada, Mexico and South America increased 43%, 115% and 99%, respectively, resulting in a net increase of 12% for the quarter of which approximately 9% represented an increase in selling price and 3% an increase in volume.

º ALUPREM sales during the first quarter 2012 increased 104% as compared to an increase of 73% for the same three month period of 2011. The year over year increases are primarily due to an increase in volume of a significant customer.

º TIOPREM sales during the first quarter 2012 increased 13% as compared to an increase of 100% for the same three month period of 2011. The current period increase consisted of an increase in selling price of 34% which was offset by a decrease in volume of 21%, whereas, the increase in the first quarter 2011 was related solely to an increase in volume.

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

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 U.S. customers. In addition, TPT purchases HITOX from TMM for distribution in Europe. The following table represents TPT's ALUPREM and HITOX sales (in thousands) for the three month periods ended March 31, 2012 and 2011 to third party customers. All inter-company sales have been eliminated.

 Product       2012           2011         Variance
 ALUPREM  $ 1,737   79%  $ 2,189   84%  $ (452) -21%
 HITOX        437   20%      363   14%      74   20%
 TIOPREM       13    1%       65    2%     (52) -80%
 Total    $ 2,187  100%  $ 2,617  100%  $ (430) -16%

º ALUPREM sales in Europe decreased 21% during the first three months of 2012 primarily due to a reduction in volume of approximately 24% which was partially offset by an increase in selling price of approximately 2% and the positive impact of the foreign currency exchange fluctuations of 1%. This compares to an increase of 29% during the first quarter of 2011 which was related to an increase in volume and selling price of 21% and 9%, respectively, and the negative impact of the foreign currency exchange fluctuations of 1%.

º HITOX sales in Europe increased approximately 20% during the three month period ended March 31, 2012, of which approximately 33% related to an increase in the selling price offset by a decrease in volume of 13%. This compares to an increase of 68% during the first three months of 2011 which consist of an increase in volume and selling price of 40% and 29%, respectively, and the negative impact of the foreign currency exchange rate fluctuations of 1%.

º TIOPREM sales during the first quarter 2012 increased 80% as compared to an increase of 100% for the same three month period of 2011 primarily due to a slow-down in the European market.

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

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 periods ended March 31, 2012 and 2011 to third party customers. All inter-company sales have been eliminated.

º HITOX sales in Asia increased 7% during the three month period ended March 31, 2012 primarily related to an increase in selling price of 38% which was partially offset by a decrease in volume of 31%. For the first three months of 2011, respectively, HITOX sales increased 114%, of which volume and selling price represented an increase of 113% and 1%.

º TIOPREM sales during the first quarter 2012 decreased 27% as compared to an increase of 100% for the same three month period of 2011. The current period decrease consisted of an decrease in volume of 42% which was offset by a increase in selling price of 15%, whereas, the increase in the first quarter 2011 was related solely to an increase in volume.

º SR sales represented 21% of TMM's sales for the three month period ended March 31, 2012. With the strong market demand, we are optimistic that the sale of available SR to third parties will continue in the future.

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

Other Consolidated Results

Gross Margin:  The following table represents our net sales, cost of sales and
gross margin for the three month periods ended March 31, 2012 and 2011.

                      (Unaudited)
                      Three Months
 (In thousands)     Ended March 31,
                    2012       2011
 NET SALES       $ 12,808   $ 9,585
 Cost of sales      9,618     7,494
 GROSS MARGIN       3,190     2,091
 GROSS MARGIN %     24.9 %    21.8 %

For the three month period ended March 31, 2012, gross margin increased 3.1% from 21.8% in 2011 to 24.9% in 2012. The primary factors affecting the first quarter 2012 gross margin include an increase in selling price of 15.7% which was partially offset by an increase in raw material and energy costs of 6.4% and maintenance/production costs of 4.9%.

Selling, General, Administrative and Expenses ("SG&A"): For the three month period ended March 31, 2012, SG&A expenses increased 6.6% as compared to the same quarter in 2011 primarily due to an increase in selling expenses of 39.3% and professional fees and services of 51.4% which were partially offset by a decrease in salaries of 7.4%.

Interest Expense: Net interest expense increased approximately $46,000 for the first quarter 2012 as compared to the same period of 2011 primarily due to an increase in short-term financing. This follows a decrease in interest expense during the first quarter of 2011 of approximately $25,000 due to a decrease in both short-term and long-term debt.

Income Taxes: Income taxes consisted of federal and state income tax expense of approximately $296,000 and $2,000, respectively, and foreign deferred tax expense of approximately $71,000 for the three month period ended March 31, 2012, compared to federal and state income tax expense of approximately $5,000 and $1,000, respectively, and foreign deferred tax expense of approximately $41,000 for the same three month period in 2011. Taxes are based on an estimated annualized consolidated effective rate of 20.9% for the year ended December 31, 2012.

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

Liquidity, Capital Resources and Other Financial Information

Long-term Debt - Financial Institutions

Following is a summary of our long-term debt to financial institutions:

                                                        (Unaudited)
 (In thousands)                                          March 31,       December 31,
                                                           2012             2011
 Fixed Rate term note payable to a U.S. bank, with
an interest rate of 6.65% at March 31, 2012, due
January 1, 2016, secured by real estate, leasehold
improvements, property, plant and equipment,
inventory and accounts receivable of our U.S.
operation.                                           $       1,589    $        1,680
 Term note payable to a U.S. equipment financing
company, with an interest rate of 5.24% at March
31, 2012, due April 1, 2013, secured by a
Caterpillar front-end loader.                                   29                35
 Fixed rate Euro term note payable to a
Netherlands bank, with an interest rate of 7.8% at
March 31, 2012, due July 1, 2029, secured by TPT's
land and office building purchased July 2004.
(€314)                                                         418               413
 Fixed rate Euro term note payable to a
Netherlands bank, with an interest rate of 4.6% at
March 31, 2012, due January 31, 2030, secured by
TPT's land and building purchased January 2005.
(€313)                                                         418               412
 Fixed rate Euro term note payable to a
Netherlands bank, with an interest rate of 4.05%
at March 31, 2012, due July 31, 2015, secured by
TPT's assets.  (€146)                                          195               205
 Fixed rate Euro term note payable to a
Netherlands bank, with an interest rate of 4.25%
at March 31, 2012, due July 5, 2014, secured by
TPT's assets.  (€509)                                          680               736
 Total                                                       3,329             3,481
 Less current maturities                                       832               813
 Total long-term debt and notes payable -
financial institutions                               $       2,497    $        2,668

Six-percent Convertible Subordinated Debentures

As reported in the Company's Forms 8-K filed with the SEC on May 6, 2009 and August 10, 2009, the Company's Board of Directors authorized the issuance of its six-percent (6%) convertible subordinated debentures with detachable warrants (the "Debentures") for the purpose of refinancing, in whole or in part, its debt to the bank and for general corporate purposes. Under the current authorization, the Company received, $1,500,000 from the sale of Debentures, due May 4, 2016, from nine accredited investors, four of which are directors of the Company and another of which is a greater than 5% shareholder. At March 31, 2012, a balance of $1,450,000 remained outstanding on the Debentures.

On May 3, 2012, the five remaining holders, four of which are directors of the Company and another which is a greater than 5% shareholder, of our six percent (6%) Convertible Subordinated Debentures due May 4, 2016 converted their Debentures, and the Company issued 547,172 shares of Common Stock upon conversion of the Debenture.

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

Short-term Debt

US Operations

On December 31, 2010, the Company entered into a U.S. credit agreement (the "Agreement") with American Bank, N.A. (the "Lender") which established a $1,000,000 line of credit (the "Line") which matures July 1, 2012. On March 1, 2012, the Company entered into the first amendment to the Agreement the Lender which increased the Line from $1,000,000 to $2,000,000 and extended the maturity date from July 1, 2012 to October 15, 2013. Under the terms of the Agreement, the amount the Company is entitled to borrow under the Line is subject to a borrowing base, which is based on the loan value of the collateral pledged to the Lender to secure the indebtedness owing to the Lender by the Company. Amounts advanced under the line of credit bear interest at a variable rate equal to one percent per annum point above the Wall Street Journal Prime Rate as such prime rate changes from time to time, with a minimum floor rate of 5.50%. At March 31, 2012, the Company had no outstanding funds borrowed on the Line.

Under the terms of the Agreement, the Company must maintain a ratio of cash flow to debt service of at least 1.25 to 1.0 measured on a rolling four quarter basis. At March 31, 2012, the ratio of cash flow to debt service was 7.05 to 1.0.

Netherlands Operations

On March 20, 2007, our subsidiary, TOR Processing and Trade, B.V. ("TPT"), entered into a short-term credit facility (the "Credit Facility") with Rabobank which increased TPT's line of credit from €650,000 to €1,100,000. The Credit Facility was renewed on January 1, 2010 and has no stated maturity date. The Credit Facility, which has a variable interest rate of Bank prime plus 2.8% (currently at 3.769%), is secured by TPT's accounts receivable and inventory. At March 31, 2012, TPT had utilized €944,000 ($1,260,000) of its short-term credit facility.

TPT's loan agreements covering both the credit facility and the term loans include subjective acceleration clauses that allow Rabobank to accelerate payment if, in the judgment of the bank, there are adverse changes in our business. We believe that such subjective acceleration clauses are customary in the Netherlands for such borrowings. However, if demand is made by Rabobank, we may be unable to refinance the demanded indebtedness, in which case the lenders could foreclose on the assets of TPT.

Malaysian Operations

On June 27, 2011, our subsidiary, TOR Minerals Malaysia, Sdn. Bhd ("TMM"), amended its banking facility with HSBC Bank Malaysia Berhad ("HSBC") to extend the maturity date from April 30, 2011 to April 30, 2012. TMM is currently negotiating an extenstion to the maturity date with HSBC. The HSBC facility includes the following in Malaysian Ringgits ("RM"): (1) overdraft of RM 500,000; (2) an import/export line ("ECR") of RM 6,460,000; and (3) a foreign exchange contract limit of RM 5,000,000 ($163,000, $2,110,000 and $1,633,000, respectively).

On June 1, 2011, TMM amended its banking facility with RHB Bank Berhad ("RHB") to extend the maturity date to April 30, 2012. TMM is currently negotiating an extension to the maturity date with RHB. The RHB facility includes the following: (1) an overdraft line of credit up to RM 1,000,000; (2) an ECR of RM 9,300,000; (3) a bank guarantee of RM 1,200,000; and (4) a foreign exchange contract limit of RM 25,000,000 ($326,000, $3,037,000, $392,000 and $8,164,000, respectively). At March 31, 2012, the outstanding balance on the line of credit was RM 550,000 ($179,000) at a current interest rate of 4.24%

The banking facilities with both HSBC and RHB bear an interest rate on the overdraft facilities at 1.25% over bank prime and the ECR facilities bear interest at 1.0% above the funding rate stipulated by the Export-Import Bank of Malaysia Berhad. The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of up to 180 days against customers' and inter-company shipments. At March 31, 2012, the outstanding balance on the ECR facilities was RM 7,525,000 ($2,457,000) at a current interest rate of 4.98%.

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

The borrowings under both the HSBC and the RHB short term credit facilities are subject to certain subjective acceleration covenants based on the judgment of the banks and a demand provision that provide that the banks may demand repayment at any time. We believe such a demand provision is customary in Malaysia for such facilities. The loan agreements are secured by TMM's property, plant and equipment. However, if demand is made by HSBC or RHB, we may be unable to refinance the demanded indebtedness, in which case, the lenders could foreclose on the assets of TMM. The credit facilities prohibit TMM from paying dividends and the HSBC facility further prohibits loans to related parties without the prior consent of HSBC.

Cash and Cash Equivalents

As noted on the following table, cash and cash equivalents decreased $495,000
from December 31, 2011 to March 31, 2012 as compared to a decrease of $163,000
from December 31, 2010 to March 31, 2011.

                                                         (Unaudited)
                                                 Three Months Ended March 31,
 (In thousands)                                    2012                2011
 Net cash provided by (used in)
 Operating activities                       $          1,246      $        464
 Investing activities                                 (1,315)             (513)
 Financing activities                                   (448)             (180)
 Effect of exchange rate fluctuations                     22                66
 Net decrease in cash and cash equivalents  $           (495)     $       (163)

Operating Activities

Operating activities provided $1,246,000 and $464,000 during the first three months of 2012 and 2011, respectively. Following are the major changes in working capital affecting cash provided by operating activities for the three month periods ended March 31, 2012 and 2011:

º Accounts Receivable: Accounts receivable increased $1,031,000 during the first three months of 2012. The increase is primarily due to stronger sales in the first quarter 2012 as compared to the fourth quarter of 2011. Accounts receivable increased $837,000 and $376,000 at the Corpus Christi operation and at TMM, respectively; and decreased $182,000 at TPT. During the first quarter of 2011, accounts receivable increased $897,000 primarily due to stronger sales in the first quarter 2011 at each of the Company's three operations. Accounts receivable increased $148,000 at the Corpus Christi operation and $187,000 and $562,000 at TPT and TMM, respectively.
º Inventories: Inventories increased $1,588,000 during the three month period ended March 31, 2012 primarily due to an increase in raw materials and finished goods at the Corpus Christi operation of approximately $1,824,000. Inventory at TPT increased $226,000 and decreased $462,000 at TMM. For the same three month period of 2011, inventories increased $290,000 primarily due to an increase in finished goods at the Corpus Christi operation of approximately $617,000. TPT's decreased $187,000 and TMM's decreased $140,000 both primarily related to a reduction in finished goods.
º Other Current Assets: Other current assets increased $142,000 during the first quarter 2012 primarily due to a raw material deposit paid by TMM of $112,000. TPT's increased approximately $69,000 and the other current assets at the Corpus Christi operation decreased $39,000. Other current . . .