TOR Minerals International 10Q 2008 Q2 Quarterly report

United States Securities and Exchange Commission Washington, D. C. 20549 ____________________________ FORM 10-Q ____________________________
(Mark One)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008 OR
[__]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________
Commission file number 0-17321 TOR MINERALS INTERNATIONAL, INC. (Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization)		74-2081929 (I.R.S. Employer Identification No.)
722 Burleson Street, Corpus Christi, Texas 78402 (Address of principal executive offices)
(361) 883-5591 (Issuer’s telephone number) ____________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ]		No [__]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [__]	Accelerated Filer [__]	Non-accelerated File [__]	Smaller Reporting Company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [__]		No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.
Class Common Stock, $0.25 par value		Shares Outstanding as of July 31, 2008 7,878,492

Table of Contents Part I - Financial Information
		Page No.
Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Statements of Operations -- Three months and six months ended June 30, 2008 and 2007	3

	Condensed Consolidated Statements of Comprehensive Income -- Three months and six months ended June 30, 2008 and 2007	4

	Condensed Consolidated Balance Sheets -- June 30, 2008 and December 31, 2007	5

	Condensed Consolidated Statements of Cash Flows -- Six months ended June 30, 2008 and 2007	6
	Notes to the Condensed Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operation	21
Item 4.	Controls and Procedures	32
	Part II - Other Information

Item 1.	Legal Proceedings	33
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 6.	Exhibits	34

Signatures

Forward Looking Information

Certain portions of this report contain forward-looking statements about the business, financial condition and prospects of the Company. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, changes in demand for the Company’s products, changes in competition, economic conditions, fluctuations in market price for TiO₂ pigments, changes in foreign currency exchange rates, increases in the price of energy and raw materials, such as ilmenite, interest rate fluctuations, changes in the capital markets, changes in tax and other laws and governmental rules and regulations applicable to the Company’s business, and other risks indicated in the Company’s filings with the Securities and Exchange Commission. These risks and uncertainties are beyond the ability of the Company to control, and, in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. The Company assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws. When used in this report, the words “believes,” “estimates,” “plans,” “expects,” “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.

TOR Minerals International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)


		Three Months Ended June 30,				Six Months Ended June 30,
		2008		2007		2008		2007
NET SALES	$	6,916	$	7,281	$	13,662	$	14,434
Cost of sales		5,912		5,906		11,998		11,657
GROSS MARGIN		1,004		1,375		1,664		2,777
Technical services and research and development		61		56		127		118
Selling, general and administrative expenses		1,154		1,078		2,229		2,221
Gain on disposal of assets		-		-		(2)		-
OPERATING INCOME (LOSS)		(211)		241		(690)		438
OTHER INCOME (EXPENSE):
Interest income		-		2		1		3
Interest expense		(131)		(180)		(275)		(339)
Gain (loss) on foreign currency exchange rate		(2)		46		(1)		51
Other, net		9		-		10		-
INCOME (LOSS) BEFORE INCOME TAX		(335)		109		(955)		153
Income tax expense (benefit)		3		27		(28)		32
NET INCOME (LOSS)	$	(338)	$	82	$	(927)	$	121
Less: Preferred Stock Dividends		15		15		30		30
Income (Loss) Available to Common Shareholders	$	(353)	$	67	$	(957)	$	91

Income (loss) per common share:
Basic	$	(0.04)	$	0.01	$	(0.12)	$	0.01
Diluted	$	(0.04)	$	0.01	$	(0.12)	$	0.01
Weighted average common shares outstanding:
Basic		7,878		7,839		7,875		7,839
Diluted		7,878		7,937		7,875		7,926

See accompanying notes.

TOR Minerals International, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)


		Three Months Ended June 30,				Six Months Ended June 30,
		2008		2007		2008		2007
NET INCOME (LOSS)	$	(338)	$	82	$	(927)	$	121
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
Net gain on derivative instruments designated and qualifying as cash flow hedges, net of tax:
Net gain arising during the period		-		(2)		-		(2)
Net (gain) loss reclassified to income		-		(81)		1		(81)
Currency translation adjustment, net of tax:
Net foreign currency translation adjustment gain		(301)		141		805		472
Other comprehensive income (loss), net of tax		(301)		58		806		389
COMPREHENSIVE INCOME (LOSS)	$	(639)	$	140	$	(121)	$	510

See accompanying notes.

TOR Minerals International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
		June 30,		December 31,
		2008		2007
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	209	$	376
Trade accounts receivable, net		5,325		3,791
Inventories, net		10,050		11,392
Other current assets		922		578
TOTAL CURRENT ASSETS		16,506		16,137
PROPERTY, PLANT AND EQUIPMENT, net		21,868		20,421
GOODWILL		2,299		2,131
OTHER ASSETS		43		47
TOTAL ASSETS	$	40,716	$	38,736

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	2,465	$	1,992
Accrued expenses		1,927		1,266
Notes payable under lines of credit		1,430		1,276
Export credit refinancing facility		366		-
Current deferred tax liability		16		16
Current maturities - Capital leases		93		80
Current maturities of long-term debt – Financial Institutions		5,016		4,207
TOTAL CURRENT LIABILITIES		11,313		8,837
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES
Capital leases		204		213
Long-term debt – Financial Institutions		2,254		2,678
Deferred Tax Liability		589		603
TOTAL LIABILITIES		14,360		12,331
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series A 6% convertible preferred stock $.01 par value: authorized, 5,000 shares; 200 shares issued and outstanding at 6/30/08 and 12/31/07		2		2
Common stock $.25 par value: authorized, 20,000 shares; 7,878 and 7,869 shares issued and outstanding at 6/30/08 and at 12/31/07, respectively		1,969		1,967
Additional paid-in capital		22,974		22,874
Accumulated deficit		(3,546)		(2,589)
Accumulated other comprehensive income:
Unrealized gain on derivatives		-		(1)
Cumulative translation adjustment		4,957		4,152
Total shareholders' equity		26,356		26,405
	$	40,716	$	38,736

See accompanying notes.

TOR Minerals International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

		Six Months Ended June 30,
		2008		2007
*CASH FLOWS FROM OPERATING ACTIVITIES:*
Net income (loss)	$	(927)	$	121
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		987		807
Non-cash compensation - Stock Options		90		114
Gain on sale/disposal of property, plant and equipment		(2)		-
Deferred income taxes		(31)		30
Provision for bad debt		1		-
Changes in working capital:
Receivables		(1,415)		(1,112)
Inventories		1,523		198
Other current assets		(332)		(279)
Accounts payable and accrued expenses		1,041		(591)
Net cash provided by (used in) operating activities		935		(712)
*CASH FLOWS FROM INVESTING ACTIVITIES:*
Additions to property, plant and equipment		(1,699)		(397)
Proceeds from sales of property, plant and equipment		3		-
Net cash used in investing activities		(1,696)		(397)
*CASH FLOWS FROM FINANCING ACTIVITIES:*
Net proceeds / (payments) from lines of credit		(72)		1,002
Net proceeds from export credit refinancing facility		365		-
Net proceeds / (payments) on capital leases		(17)		(33)
Proceeds from long-term bank debt		1,973		500
Payments on long-term bank debt		(1,628)		(233)
Payments on related party long-term debt		-		(400)
Proceeds from the issuance of common stock through exercise of common stock options		12		1
Preferred stock dividends paid		(30)		(30)
Net cash provided by financing activities		603		807
Effect of exchange rate fluctuations on cash and cash equivalents		(9)		(81)
Net decrease in cash and cash equivalents		(167)		(383)
Cash and cash equivalents at beginning of period		376		896
Cash and cash equivalents at end of period	$	209	$	513

Supplemental cash flow disclosures:
Interest paid	$	275	$	339
Taxes paid	$	5	$	18

See accompanying notes.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 1.

Accounting Policies

Going Concern

The accompanying financial statements 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 3, we have significant borrowings which require, among other things, compliance with certain financial ratios, 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 quarter ended June 30, 2008, we were not in compliance with these financial ratio covenants under our US credit facility (“Credit Facility”); however, we requested and received a waiver for the quarter ended June 30, 2008 contingent on the following (see Exhibit 10.1):

Payment of a waiver fee, in the amount of $10,000, to Bank of America
Increase in interest rates from prime to prime plus two percent (2%)
Injection of $1,000,000 in new capital within 30 days of signing of the Waiver and Amendment to the Agreement
Modification of the Current Ratio covenant from greater than or equal to 1.10 to greater than or equal to 1.70 on a quarterly basis
Execution of a release of claims

The Board of Directors has authorized a Private Placement of our common stock to raise a minimum of $1,000,000 and has agreed to the terms as outline above. 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, 2008, a total of $4,216,000 was outstanding on 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, TMM and TPT have short-term credit facilities and term loans at banks in Malaysia and the Netherlands, respectively. At June 30, 2008, TMM’s utilization under the credit facilities and term loans with HSBC Bank Malaysia Berhad (“HSBC”) and RHB Bank Berhad (“RHB”) totaled $1,238,000; and TPT’s utilization under the Credit Facility and term loans with Rabobank totaled $3,495,000. The credit facilities with HSBC, RHB and Rabobank are subject to demand provisions and are subject to certain subjective acceleration covenants based on the judgment of the banks. While the banks have made no indication that they will demand payment of the debt in Malaysia or the Netherlands, there can be no assurances that this debt will not be called for payment.

Over the last year, we have actively pursued new production methods and new product development. As a result, we introduced new products to the market earlier this year and completed our new powder treatment facility in May 2008. We believe the changes in our manufacturing process and the acceptance of our new products in the market will improve cash flows. However, our ability to continue to operate as a going concern is dependent on our ability to improve our operating cash flows to a sufficient level, successfully negotiate with our US lending institution, and/or raise sufficient new capital. There can be no assurance these changes in our operations or our financing initiatives will be successful.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Basis of Presentation and Use of Estimates

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The interim condensed consolidated financial statements include the consolidated accounts of TOR Minerals International, Inc. and its wholly-owned subsidiaries with all significant intercompany transactions eliminated. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2007, in our Annual Report on Form 10-K filed with the SEC on March 18, 2008. Operating results for the three month and six month periods ended June 30, 2008, are not necessarily indicative of the results for the year ending December 31, 2008.

Income Taxes

We record income taxes under SFAS No. 109, “Accounting for Income Taxes”, using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

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 is January 1, 2007, which means that our first Texas margins tax (“TMT”) return did not become due until May 15, 2008 and will be 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 determined the impact of the newly-enacted legislation in the determination of our reported state current and deferred income tax liability.

In accordance with the requirements of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), we evaluate all tax years still subject to potential audit under the applicable state, federal and foreign income tax laws. We are subject to taxation in the United States, Malaysia and the Netherlands. Our federal income tax returns in the United States are subject to examination for the tax years ended December 31, 2004 through December 31, 2007. Our state returns, which are filed in Texas and Michigan, are subject to examination for the tax years ended December 31, 2003 through December 31, 2006. Our tax returns in various non-US jurisdictions are subject to examination for various tax years ended December 31, 2003 through December 31, 2007.

As of January 1, 2008, we did not have any unrecognized tax benefits and there was no change during the six-month period ended June 30, 2008.

Fair Value Option for Financial Assets and Financial Liabilities

On January 1, 2008, we adopted FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. The adoption of SFAS 159 did not materially impact our consolidated financial position or results of operations.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Fair Value Measurements

On January 1, 2008, we adopted FASB Statement No. 157, Fair Value Measurement (“SFAS 157”), for our financial assets and financial liabilities. As permitted by FASB Staff Position No. 157-2 (“FSP 157-2”), we will adopt SFAS 157 for our non-financial assets and non-financial liabilities on January 1, 2009. SFAS 157 defines fair value, provides guidance for measuring fair value and requires certain disclosures. FSP 157-2 amends SFAS 157 to delay the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and non-financial liabilities. Non-financial assets and non-financial liabilities for which we have not applied the provisions of SFAS 157 include those measured at fair value in goodwill impairment testing and those initially measured at fair value in business combinations.

SFAS 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1 – Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3 – Unobservable inputs that reflect the reporting entity’s own assumptions.

The following table presents the Company’s financial assets and financial liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of fair value hierarchy as of June 30, 2008:

	June 30, 2008
(In thousands)	Balance at June 30, 2008		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liability for foreign currency derivative financial instruments (including forward contracts)	$	34	$	-	$	34	$	-

Our foreign currency derivative financial instruments mitigate foreign exchange risks and include forward contracts.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Recent Accounting and Regulatory Pronouncements

In December 2007, the FASB issued SFAS No. 141 (Revised 2007) Business Combinations and SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements, which are effective for fiscal years beginning after December 15, 2008. These new standards represent the completion of the FASB’s first major joint project with the International Accounting Standards Board (IASB) and are intended to improve, simplify and converge internationally the accounting for business combinations and the reporting of noncontrolling interests (formerly minority interests) in consolidated financial statements. We will adopt these standards at the beginning of our 2009 fiscal year. The effect of adoption will generally be prospectively applied to transactions completed after the end of our 2008 fiscal year, although the new presentation and disclosure requirements for pre-existing noncontrolling interests will be retrospectively applied to all prior-period financial information presented. We are currently evaluating the impact of adopting SFAS No. 141(R) and SFAS 160 on our consolidated financial statements.

The FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”, an amendment of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 161 requires entities to provide greater transparency in derivative disclosures by requiring qualitative disclosure about objectives and strategies for using derivatives and quantitative disclosures about fair value amounts of and gains and losses on derivative instruments. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We will be required to comply with the disclosure requirements of SFAS No. 161 in our 2009 first quarter financial statements.

The FASB has issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. Statement 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities. Effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.

Note 2.

Series A Convertible Preferred Stock Dividend

On June 7, 2008, the Company declared a dividend, in the amount of $15,000, or $0.075 per share, for the quarterly period ended June 30, 2008, payable on July 1, 2008, to the holders of record of the Series A Convertible Preferred Stock as of the close of business on June 7, 2008.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 3.

Long-Term Debt and Notes Payable

A summary of long-term debt and notes payable follows:

(In thousands)		June 30,		December 31,
		2008		2007
Term note payable to a U.S. bank, with an interest rate of 5.0% at June 30, 2008, due November 30, 2010.	$	649	$	723
Term note payable to a U.S. bank, with an interest rate of 5.0% at June 30, 2008, due May 1, 2012.		392		441
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 5.5% at June 30, 2008, due June 1, 2009. (135 Euro)		213		296
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 5.2% at June 30, 2008, due July 1, 2029. (411 Euro)		647		614
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 4.7% at June 30, 2008, due January 31, 2030. (407 Euro)		641		608
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 6.1% at June 30, 2008, due July 31, 2015. (358 Euro)		564		560
U.S. Dollar term note payable to a Malaysian bank, with an interest rate of 4.5% at June 30, 2008, due September 30, 2010.		691		343
U.S. Dollar term note payable to a Malaysian bank, with an interest rate of 4.57% at June 30, 2008, due June 30, 2011.		181		-
Term note payable to a U.S. equipment financing company, with an interest rate of 5.24% at June 30, 2008, due April 13, 2013		117		-
Revolving line of credit, payable to a U.S. bank, with an interest rate of bank prime, 5.0% at June 30, 2008, due April 1, 2009.		3,175		3,300
Total		7,270		6,885
Less current maturities		5,016		4,207
Total long-term debt and notes payable	$	2,254	$	2,678

The majority of the Company's debt is either floating rate or has been recently negotiated and the carrying values approximate fair value.

US Bank Credit Facility and Term Loans

Bank of America Credit Facility and Term Loans

We amended and restated our previous loan agreement with Bank of America, N.A. (the “Bank”) on March 19, 2008. Under the amendment, the Bank extended the maturity date on our Line of Credit (the “Line”) from October 1, 2008 to April 1, 2009. The Line provides us with a $5,000,000 revolving line of credit subject to a defined borrowing base. The Bank has also agreed to issue standby letters of credit for our account up to the amount available under the Line. At June 30, 2008, the outstanding balance on the Line was $3,175,000 and we had $491,000 available on that date based on eligible accounts receivable and inventory borrowing limitations.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

On December 13, 2005, we entered into a real estate term loan (the “Loan”) with the Bank, in the amount of $1,029,000. The Loan is secured by our US real estate and leasehold improvements. Interest, which is a rate equal to the Bank’s Prime Rate (currently 5.0%), is due and payable monthly. The monthly principal and interest payments commenced on December 30, 2005, and will continue through November 30, 2010 at which time the “final payment” of $294,000 is due. The monthly principal payment is $12,250. The Term Loan balance at June 30, 2008 was $649,000.

On May 7, 2007, we entered into a term loan (the “Term Loan”) with the bank in the amount of $500,000 which is secured by our US property, plant and equipment, as well as inventory and accounts receivable. Interest, which is a rate equal to the Bank’s Prime Rate (currently 5.0%), is due and payable monthly. The monthly principal and interest payments commenced on June 1, 2007, and will continue through May 1, 2012. The monthly principal payment is $8,333.33. The Term Loan balance at June 30, 2008, was $392,000.

The Agreement contains covenants that, among other things, require the maintenance of financial ratios based on our consolidated results of operations. The Agreement also requires us to notify the Bank upon the occurrence of a “material adverse event”, which among other items, is considered to be an event that may adversely affect our consolidated financial condition, business, properties, operations, the Bank’s collateral or the Bank’s ability to enforce its rights under the Agreement.

For the quarter ended June 30, 2008, the Company was not in compliance with the Consolidated Fixed Charge Ratio and a Consolidated Funded Debt to EBITDA Ratio covenants under our credit facility with Bank of America; however, we requested and received a waiver for the quarter ended June 30, 2008 contingent on the following (see Exhibit 10.1):

Payment of a waiver fee, in the amount of $10,000, to Bank of America
Increase in interest rates from prime to prime plus two percent (2%)
Injection of $1,000,000 in new capital within 30 days of signing of the Waiver and Amendment to the Agreement
Modification of the Current Ratio covenant from greater than or equal to 1.10 to greater than or equal to 1.70 on a quarterly basis
Execution of a release of claims

Other Term Loans

On March 31, 2008, we entered into a term loan with Holt Financing in the amount of $120,000. The proceeds of the loan were used to purchase a new Caterpillar front-end loader. The loan will be repaid over five years with interest fixed at a rate of 5.24%. Monthly principal and interest payments commenced on May 1, 2008, and will continue through April 1, 2013. The monthly principal and interest payment is $2,275. The loan balance at June 30, 2008 was $117,000.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Netherlands Bank Credit Facility, Mortgage and Term Loan

On March 20, 2007, our subsidiary, TP&T, entered into a new short-term credit facility (“Credit Facility”) with Rabobank which replaced the existing Euro 650,000 short-term credit facility (dated April 2, 2004). Under the terms of the Credit Facility, TP&T’s line of credit increased from Euro 650,000 to Euro 1,100,000. The Credit Facility, which has a variable interest rate of Bank prime plus 2.8% (currently at 8.05%), will mature on December 31, 2009 and is secured by TP&T’s accounts receivable and inventory. At June 30, 2008 TP&T had utilized Euro 908,000 ($1,430,000) of its short-term credit facility.

On April 2, 2004, TP&T entered into a term loan with Rabobank in the amount of Euro 676,000. The proceeds of the term loan were used to reduce TP&T’s credit facility and reduce inter-company payables to the US Operation. The term loan, which is secured by TP&T’s assets, will be repaid over a period of five years with a fixed interest rate until maturity of 5.5%. Monthly principal and interest payments commenced on July 1, 2004, and will continue through June 1, 2009. The monthly principal payment is Euro 11,266 ($17,742). The loan balance at June 30, 2008 was Euro 135,000 ($213,000). Under the terms of the Loan Agreement, the Company has guaranteed the term loan.

On July 7, 2004, TP&T entered into a mortgage loan (the “First Mortgage”) with Rabobank. The First Mortgage, in the amount of Euro 485,000, will be repaid over 25 years with interest fixed at 5.2% per year for the first four years. Under the terms of the agreement, the interest was adjusted to a fixed rate of 7.8%, effective August 1, 2008, for a period of five years. Thereafter, the rate will change to Rabobank prime plus 1.75%. TP&T utilized Euro 325,000 of the loan to finance the July 14, 2004, purchase of land and an office building, as well as to remodel the office building. The balance of the loan proceeds, Euro 160,000, was used for the expansion of TP&T’s existing building. Monthly principal and interest payments commenced on September 1, 2004, and will continue through July 1, 2029. The monthly principal payment is Euro 1,616 ($2,545). The loan balance at June 30, 2008 was Euro 411,000 ($647,000). The mortgage loan is secured by the land and office building purchased on July 7, 2004.

On January 3, 2005, TP&T entered into a second mortgage loan (the “Second Mortgage”) with Rabobank to fund the acquisition of a 10,000 square foot warehouse with a loading dock that is located adjacent to TP&T’s existing production facility. The Second Mortgage, in the amount of Euro 470,000, will be repaid over 25 years with interest fixed at 4.672% per year for the first five years. Thereafter, the rate will change to Rabobank prime plus 1.75%. Monthly principal and interest payments commenced on February 28, 2005 and will continue through January 31, 2030. The monthly principal payment is Euro 1,566 ($2,466). The mortgage is secured by the land and building purchased by TP&T on January 3, 2005. The loan balance at June 30, 2008 was Euro 407,000 ($641,000).

On July 19, 2005, TP&T entered into a new term loan with Rabobank to fund the completion of its building expansion. The loan, in the amount of Euro 500,000, will be repaid over 10 years with interest fixed at 6.1% per year for the first five years. Thereafter, the rate will change to Rabobank prime plus 1.75%. Monthly principal and interest payments commenced on August 31, 2005 and will continue through July 31, 2015. The monthly principal payment is Euro 4,167 ($6,562). The loan is secured by TP&T’s assets. The loan balance at June 30, 2008 was Euro 358,000 ($564,000).

TP&T’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 require additional debt or equity financing to meet our working capital and operational requirements, or if required, to refinance the demanded indebtedness.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Malaysian Bank Credit Facility and Term Loan

On September 14, 2005, the Company’s subsidiary, TMM, amended its banking facility with HSBC Bank Malaysia Berhad (“HSBC”). The amendment increased the Bankers Acceptance from Malaysian Ringgits (“RM”) 500,000 ($153,000) to RM 3,780,000 ($1,157,000) and added a US Dollar term loan (“HSBC Loan”) in the amount of $1,000,000. Monthly interest payments began in December 2005. Monthly principal payments began on August 26, 2007 and will continue through June 30, 2010. The interest rate at June 30, 2008 was 4.5% and the loan balance was $691,000.

TMM renewed its banking facility with HSBC on October 30, 2007, for the purpose of extending the maturity date of the current facility from October 31, 2007, to October 31, 2008. The HSBC facility provides for an overdraft line of credit up to RM 500,000 ($153,000), a bank guarantee of RM 300,000 ($92,000) and an ECR up to RM 8,000,000 ($2,449,000). The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of up to 120 to 180 days against customers’ and inter-company shipments.

On October 30, 2006, TMM renewed its banking facility with RHB Bank Berhad (“RHB”) for the purpose of extending the maturity date of the current facilities from October 31, 2006, to October 31, 2007. The RHB facility, which TMM is currently renegotiating, provides for an overdraft line of credit up to RM 1,000,000 ($306,000) and an ECR up to RM 9,300,000 ($2,847,000). The RHB facility was also amended to include the following:

Incorporate a Revolving Credit facility as part of the existing Overdraft facility of RM 1,000,000 ($306,000) (i.e. an interchangeable Overdraft/Revolving Credit facility) with a combined limit of RM 1.0 million to be used for working capital purposes.
Increase the Foreign Exchange Contract Line facility by an additional RM 10 million from RM 15 million to RM 25 million ($4,591,000 to $7,652,000) to be used for hedging purposes against TMM’s sales based in currencies other than the RM.
Increase the maximum length of financing for the Multi-Trade Line facility (ECR), which is used by TMM for short-term financing against customers’ and inter-company shipments, from the existing 150 days up to 180 days.

On May 30, 2008, TMM entered into a US Dollar term loan with RHB to fund the completion of its new powder processing facility. The loan, in the amount of $181,000, will be repaid over a period of 22 months with an interest rate of 0.75% above the RHB prime. Monthly principal ($8,350 per month) and interest payments commenced on July 1, 2008, and will continue through April 1, 2009. The interest rate at June 30, 2008 was 4.57% and the loan balance was $181,000.

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. At June 30, 2008, the outstanding balance on their ECR facilities was RM 1,194,000 ($366,000).

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. The credit facilities prohibit TMM from paying dividends and the HSBC facility further prohibits loans to related parties without the prior consent of HSBC.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Liquidity

The terms of the Company’s borrowings contain restrictions and covenants, including covenants based on the performance of the Company, and the failure of the Company to comply with such restrictions and covenants could also adversely affect the Company’s financial position. As noted above, the Company was not in compliance with certain financial covenant ratios under our credit facility with Bank of America for the quarter ended June 30, 2008.

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.

Note 4.

Capital Leases

On June 27, 2005, TP&T entered into a financial lease agreement with De Lage Landen Financial Services, BV for equipment related to the production of ALUPREM. The cost of the equipment under the capital lease is included in the balance sheets as property, plant and equipment and was $381,181. Accumulated amortization of the leased equipment at June 30, 2008 was approximately Euro 89,000 ($140,000). Amortization of assets under capital leases is included in depreciation expense. The capital lease is in the amount of Euro 377,351 including interest of Euro 62,113 (implicit interest rate 6.3%) and Euro 238 in executory costs. The lease term is 72 months with equal monthly installments of Euro 5,241 ($8,269). The net present value of the lease at June 30, 2008 was Euro 167,000 ($263,000).

On October 30, 2007, the Company entered into a financial lease agreement with Dell Financial Services for two computer servers. The cost of the equipment under the capital lease, in the amount of $12,420, is included in the balance sheets as property, plant and equipment. Accumulated amortization of the leased equipment at June 30, 2008 was $3,000. The capital lease is in the amount of $13,217 including interest of $800 (implicit interest rate 4.1%). The lease term is 36 months with equal monthly installments of $367. The net present value of the lease at June 30, 2008 was $10,000.

On March 13, 2008, the Company entered into a financial lease agreement with Toyota Financial Services for a forklift. The cost of the equipment under the capital lease, in the amount of $26,527, is included in the balance sheets as property, plant and equipment. Accumulated amortization of the leased equipment at June 30, 2008 was $1,000. The capital lease is in the amount of $31,164 including interest of $4,637 (implicit interest rate 6.53%). The lease term is 60 months with equal monthly installments of $519. The net present value of the lease at June 30, 2008 was $25,000.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 5.

Calculation of Basic and Diluted Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share:

(in thousands, except per share amounts)		Three Months Ended June 30,				Six Months Ended June 30,
		2008		2007		2008		2007
Numerator:
Net Income (Loss)	$	(338)	$	82	$	(927)	$	121
Preferred Stock Dividends		(15)		(15)		(30)		(30)
Numerator for diluted earnings per share - income (loss) available to common shareholders after assumed conversions	$	(353)	$	67	$	(957)	$	91

Denominator:
Denominator for basic earnings (loss) per share - weighted-average shares		7,878		7,839		7,875		7,839
Effect of dilutive securities:
Employee stock options		-		98		-		87
Dilutive potential common shares		-		98		-		87
Denominator for diluted earnings per share - weighted-average shares and assumed conversions		7,878		7,937		7,875		7,926

*Basic earnings (loss) per common share*	$	(0.04)	$	0.01	$	(0.12)	$	0.01

*Diluted earnings (loss) per common share*	$	(0.04)	$	0.01	$	(0.12)	$	0.01

Excluded from the computation of diluted earnings per share were a total of 168,000 common shares related to the 200,000 convertible preferred shares at June 30, 2008 and 2007. The convertible preferred shares were not included in the computation of diluted earnings per share as the effect would be antidilutive.

For the three month and six month periods ended June 30, 2008, all employee stock options (756,100) were excluded from the computation of diluted earnings per share because the effect would be antidilutive.

Employee stock options excluded from the computation of diluted earnings per share for the three month and six month periods ended June 30, 2007, were 319,500 and 252,000, respectively. These options were excluded from the computation of diluted earnings per share during these periods because the exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 6.

Segment Information

The Company and its 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. A summary of the Company’s manufacturing operations by geographic area is presented below:

(In thousands)		United States (Corpus Christi)		Europe (TP&T)		Asia (TMM)		Inter-Company Eliminations		Consolidated
As of and for the three months ended:
*June 30, 2008*
Net Sales:
Customer sales	$	3,998	$	2,134	$	784	$	-	$	6,916
Intercompany sales		69		329		1,151		(1,549)		-
Total Net Sales	$	4,067	$	2,463	$	1,935	$	(1,549)	$	6,916

Location loss	$	(577)	$	199	$	47	$	(7)	$	(338)

*June 30, 2007*
Net Sales:
Customer sales	$	4,923	$	1,621	$	737	$	-	$	7,281
Intercompany sales		-		567		1,678		(2,245)		-
Total Net Sales	$	4,923	$	2,188	$	2,415	$	(2,245)	$	7,281

Location profit (loss)	$	(57)	$	144	$	(37)	$	32	$	82
As of and for the six months ended:
*June 30, 2008*
Net Sales:
Customer sales	$	7,998	$	4,069	$	1,595	$	-	$	13,662
Intercompany sales		69		354		1,983		(2,406)		-
Total Net Sales	$	8,067	$	4,423	$	3,578	$	(2,406)	$	13,662

Location profit (loss)	$	(835)	$	199	$	(243)	$	(48)	$	(927)
Location assets	$	12,066	$	12,876	$	15,774	$	-	$	40,716

*June 30, 2007*
Net Sales:
Customer sales	$	9,801	$	3,051	$	1,582	$	-	$	14,434
Intercompany sales		-		1,408		3,710		(5,118)		-
Total Net Sales	$	9,801	$	4,459	$	5,292	$	(5,118)	$	14,434

Location profit (loss)	$	(72)	$	207	$	(108)	$	94	$	121
Location assets	$	14,539	$	11,088	$	13,417	$	-	$	39,044

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Product sales of inventory between Corpus Christi, TP&T and TMM are based on inter-company pricing, which includes an inter-company profit margin. In the geographic information, the location profit (loss) from all locations is reflective of these inter-company prices, as is inventory at the Corpus Christi location prior to elimination adjustments. Such presentation is consistent with the internal reporting reviewed by the Company’s chief operating decision maker. The elimination entries include an adjustment to the cost of sales resulting from the adjustment to ending inventory to eliminate inter-company profit, and the reversal of a similar adjustment from a prior period. To the extent there are net increases/declines period over period in Corpus Christi inventories that include an inter-company component, the net effect of these adjustments can decrease/increase location profit.

Sales from the subsidiary to the parent company are based upon profit margins which represent competitive pricing of similar products. Intercompany sales consisted of SR, HITOX and ALUPREM.

Note 7.

Stock Options and Equity Compensation Plan

The following table provides information as of June 30, 2008, about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under all of the Company’s existing equity compensation plans (including individual arrangements):

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)

Equity compensation plans approved by security holders	756,100	$2.563	372,811
Equity compensation plans not approved by security holders	--		--
Total	756,100	$2.563	372,811

The Company's 1990 Incentive Stock Option Plan (“ISO”) for TOR Minerals International, Inc. (the "1990 Plan") provided for the award of a variety of incentive compensation arrangements to such employees and directors as may be determined by a Committee of the Board. The ability to issue new options under the 1990 Plan expired in February of 2000, with options to acquire 372,200 shares of common stock still outstanding. At June 30, 2008, the 1990 Plan had 13,000 options outstanding.

On February 21, 2000, the Company's Board of Directors approved the adoption of the 2000 Incentive Stock Option Plan for TOR Minerals International, Inc. (the "Plan"). The Plan provides for the award of a variety of incentive compensation arrangements to such employees and directors as may be determined by a Committee of the Board. At the Annual Shareholders’ meeting on May 23, 2008, the maximum number of shares of the Company’s common stock that may be sold or issued under the Plan was increased from 1,050,000 shares to 1,250,000 shares subject to certain adjustments upon recapitalization, stock splits and combinations, merger, stock dividend and similar events; in addition the plan was extended to May 23, 2018. At June 30, 2008, the Plan had 743,100 options outstanding, 134,089 exercised and 372,811 available for future issuance.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Both the 1990 Plan and the 2000 Plan provide for the award of a variety of incentive compensation arrangements, including restricted stock awards, performance units or other non-option awards.

For the three month periods ended June 30, 2008 and 2007, the Company recorded an expense of $56,000 and $84,000, respectively, in stock-based employee compensation expense and for the six month periods ended June 30, 2008 and 2007, $90,000 and $114,000, respectively. This compensation expense is included in the general and administrative expenses in the accompanying consolidated income statements.

The Company granted 15,000 and 167,000 options during the six month periods ended June 30, 2008 and 2007, respectively. The weighted average fair value per option at the date of grant for options granted in the six month periods ended June 30, 2008 and 2007 was $2.09 and $2.01, respectively, as valued using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Six Months Ended June 30,
	2008	2007
Risk-free interest rate	3.52%	4.68%
Expected dividend yield	0.00%	0.00%
Expected volatility	0.70	0.75
Expected term (in years)	7.00	7.00

The risk free interest rate is based on the Treasury Constant Maturity Rate as quoted by the Federal Reserve at the time of the grant for a term equivalent to the expected term of the grant. The estimated volatility is based on the historical volatility of our stock and other factors. The expected term of options represents the period of time the options are expected to be outstanding from grant date.

The number of options exercisable at June 30, 2008 and 2007 was 571,760 and 707,340, respectively. The weighted-average remaining contractual life of those options is 6.0 years. Exercise prices on options outstanding at June 30, 2008 and 2007, ranged from $0.92 to $6.11 per share as noted in the following table.

Options Outstanding at June 30,
2008	2007	Range of Exercise Prices
64,900	92,100	$ 0.92 - $ 1.99
579,400	713,200	$ 2.00 - $ 2.99
600	600	$ 3.00 - $ 3.99
66,500	95,500	$ 4.00 - $ 4.99
17,700	20,200	$ 5.00 - $ 5.99
27,000	27,000	$ 6.00 - $ 6.11
756,100	948,600

As of June 30, 2008, there was $240,000 of option compensation expense related to non-vested awards which is expected to be recognized over a weighted average period of 2.6 years.

As all options issued under the Plan are Incentive Stock Options, the Company does not normally receive significant excess tax benefits relating to the compensation expense recognized on vested options.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 8.

Inventories

To improve inventory turns and cash flows, the Company made operational changes during the first quarter of 2008 to reduce the stock requirements of Synthetic Rutile (“SR”) on a worldwide basis. This reduction in inventory is reflected in the following schedule.

(In thousands)		June 30,		December 31,
		2008		2007
Raw materials	$	5,604	$	6,552
Work in progress		748		751
Finished goods		3,070		3,540
Supplies		642		573
Total Inventories		10,064		11,416
Inventory reserve		(14)		(24)
Net Inventories	$	10,050	$	11,392

9.	Derivatives and Hedging Activities

Foreign Currency Forward Contracts

The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies, including sales and purchases transacted in a currency other than the functional currency, will be adversely affected by changes in exchange rates. The Company has not entered into these contracts for trading or speculative purposes in the past, nor do we currently anticipate entering into such contracts for trading or speculative purposes in the future. Derivatives used to hedge forecasted transactions and specific cash flows associated with foreign currency denominated financial assets and liabilities which meet the criteria for hedge accounting are designated as cash flow hedges. Consequently, the effective portion of gains and losses is deferred as a component of accumulated other comprehensive income and is recognized in earnings at the time the hedged item affects earnings. The Company measures hedge effectiveness by formally assessing, at least quarterly, the historical and probable future high correlation of changes in the fair value or expected future cash flows of the hedged item. The ineffective portions, if any, are recorded in current earnings in the current period. If the hedging relationship ceases to be highly effective or if it becomes probable that an expected transaction will no longer occur, gains or losses on the derivative are recorded in current earnings. If no hedging relationship is designated, the derivative is marked to market through current earnings.

For the six month period ended June 30, 2007, we marked the contracts to market, recording a net gain of approximately $2,000 as a component of "Other Comprehensive Income" and as a current asset on the balance sheet at June 30, 2007. The recognition of this net gain had no effect on our cash flow.

In addition, we had foreign currency contracts not designated as cash flow hedges. At June 30, 2008, we marked these contracts to market, recording expense of approximately $34,000 as a component of our year to date net loss and as a current liability on the balance sheet at June 30, 2008.

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

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, located in Ipoh, Malaysia, manufactures SR and HITOX 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 US Dollar.

Our business is closely correlated with the construction industry and its demand for materials that use pigments, such as paints and plastic pipe. 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 and six month periods ended June 30, 2008 and 2007.

(In thousands, except per share amounts)		Three Months Ended June 30,				Six Months Ended June 30,
		2008		2007		2008		2007
NET SALES	$	6,916	$	7,281	$	13,662	$	14,434
Cost of sales		5,912		5,906		11,998		11,657
GROSS MARGIN		1,004		1,375		1,664		2,777
Technical services and research and development		61		56		127		118
Selling, general and administrative expenses		1,154		1,078		2,229		2,221
Gain on disposal of assets		-		-		(2)		-
OPERATING INCOME (LOSS)		(211)		241		(690)		438
OTHER INCOME (EXPENSE):
Interest income		-		2		1		3
Interest expense		(131)		(180)		(275)		(339)
Gain (loss) on foreign currency exchange rate		(2)		46		(1)		51
Other, net		9		-		10		-
INCOME (LOSS) BEFORE INCOME TAX		(335)		109		(955)		153
Income tax expense (benefit)		3		27		(28)		32
NET INCOME (LOSS)	$	(338)	$	82	$	(927)	$	121

Income (loss) per diluted common share:	$	(0.04)	$	0.01		(0.12)		0.01

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

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 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 and is currently our most profitable product.

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 colored pigments that will expand our target 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 expect to introduce by the end of the third quarter of 2008 four new colored pigments that are heat and UV stable and are branding these new products under the name TIOPREM Gray, Orange, Beige and Brown. In the future we will 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 in the second half of 2008.

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.

Results of Operations

Consolidated Net Sales: Following is a summary of our consolidated products sales for the three month and six month periods ended June 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 June 30,									Six Months Ended June 30,
Product		2008			2007			Variance			2008			2007			Variance
HITOX	$	3,501	51%	$	3,686	51%	$	(185)	-5%	$	7,306	53%	$	7,637	53%	$	(331)	-4%
ALUPREM		2,208	32%		2,455	34%		(247)	-10%		3,929	29%		4,524	31%		(595)	-13%
BARTEX		814	12%		847	12%		(33)	-4%		1,724	13%		1,608	11%		116	7%
HALTEX		284	4%		161	2%		123	76%		564	4%		397	3%		167	42%
TIOPREM		26	0%		-	0%		26			26	0%		-	0%		26
SR		-	0%		12	0%		(12)	-100%		-	0%		12	0%		(12)	-100%
OTHER		83	1%		120	1%		(37)	-31%		113	1%		256	2%		(143)	-56%
Total	$	6,916	100%	$	7,281	100%	$	(365)	-5%	$	13,662	100%	$	14,434	100%	$	(772)	-5%

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

For the quarter ended June 30, 2008, consolidated net sales decreased approximately $365,000 compared to the second quarter 2007 primarily due to decreases in both ALUPREM and HITOX sales.

ALUPREM sales were down 10% primarily due to a change in the order pattern of a significant US customer which accounted for $773,000 of the decrease in ALUPREM sales. Partially offsetting the decline in US sales, the European ALUPREM sales increased 41% or $526,000 in the second quarter 2008 and kept pace with the growth experienced in the last several quarters. The European market accounted for approximately 82% of the total ALUPREM sales for the quarter ended June 30, 2008 as compared to 53% for the same period 2007.
HITOX sales declined 5% as weakness in the North American market was only partially offset by growth in Asia.

For the six month period ended June 30, 2008, consolidated net sales decreased approximately $772,000 compared to the same period 2007 primarily due to decreases in both ALUPREM and HITOX sales.

ALUPREM sales were down 13% primarily due to a change in the order pattern of a significant US customer which accounted for $1,721,000 of the overall decrease in ALUPREM sales. Partially offsetting the decline in US sales, the European ALUPREM sales increased 47% or $1,126,000.
HITOX sales declined 4% primarily due to a weak North American market and the loss of a customer in Europe.

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, TP&T and TMM, for distribution in the Americas. Following is a summary of net sales for our Corpus Christi operation for the three month and six month periods ended June 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 June 30,									Six Months Ended June 30,
Product		2008			2007			Variance			2008			2007			Variance
HITOX	$	2,432	61%	$	2,664	54%	$	(232)	-9%	$	5,195	65%	$	5,475	56%	$	(280)	-5%
ALUPREM		391	10%		1,164	24%		(773)	-66%		414	5%		2,135	22%		(1,721)	-81%
BARTEX		814	20%		847	17%		(33)	-4%		1,724	22%		1,608	16%		116	7%
HALTEX		284	7%		161	3%		123	76%		564	7%		397	4%		167	42%
OTHER		77	2%		87	2%		(10)	-11%		101	1%		186	2%		(85)	-46%
Total	$	3,998	100%	$	4,923	100%	$	(925)	-19%	$	7,998	100%	$	9,801	100%	$	(1,803)	-18%

HITOX sales at the Corpus Christi operation decreased 9% and 5%, respectively, for the three month and six month periods ended June 30, 2008 as compared to the same periods 2007. For the second quarter 2008, HITOX sales in the North American market declined 21% and are down 12% year to date. This decline in the North American market has been partially offset by higher sales in South America.
ALUPREM sales in US are down for the three month and six month periods ended June 30, 2008 primarily due to a change in the order pattern of a significant customer.
HALTEX sales in US sales increased for both the second quarter and year to date primarily due to an increase in customer demand and the introduction of a new grade of HALTEX.

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

Netherlands Operation

Our subsidiary in the Netherlands, TP&T, manufactures and sells ALUPREM to third party customers, as well as to our Corpus Christi operation for distribution to our US customers. In addition, TP&T 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 TP&T’s ALUPREM and HITOX sales (in thousands) for the three month and six month periods ended June 30, 2008 and 2007 to third party customers. All inter-company sales have been eliminated.

		Three Months Ended June 30,									Six Months Ended June 30,
Product		2008			2007			Variance			2008			2007			Variance
ALUPREM	$	1,817	85%	$	1,291	80%	$	526	41%	$	3,515	86%	$	2,389	78%	$	1,126	47%
HITOX		291	14%		330	20%		(39)	-12%		528	13%		662	22%		(134)	-20%
TIOPREM		26	1%		-	0%		26			26	1%		-	0%		26
Total	$	2,134	100%	$	1,621	100%	$	513	32%	$	4,069	100%	$	3,051	100%	$	1,018	33%

ALUPREM sales in Europe increased 41% and 47%, respectively, for the three month and six month periods ended June 30, 2008. The increase is primarily related to an increase in volume and the effects of the foreign currency exchange rate as the Euro strengthens against the USD. The increase in volume is primarily due to an increase in TP&T’s customer base.

HITOX sales in Europe decreased for both the second quarter and year to date primarily due to the loss of a customer.

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 TP&T. The following table represents TMM’s sales (in thousands) for the three month and six month periods ended June 30, 2008 and 2007 to third party customers. All inter-company sales have been eliminated.

		Three Months Ended June 30,									Six Months Ended June 30,
Product		2008			2007			Variance			2008			2007			Variance
HITOX	$	778	100%	$	692	94%	$	86	12%	$	1,583	99%	$	1,500	95%	$	83	6%
SR		-	0%		12	1%		(12)	-100%		-	0%		12	1%		(12)	-100%
OTHER		6	0%		33	5%		(27)	-82%		12	1%		70	4%		(58)	-83%
Total	$	784	100%	$	737	100%	$	47	6%	$	1,595	100%	$	1,582	100%	$	13	1%

HITOX sales in Asia increased for both the second quarter and year to date primarily due to an increase in the customer base.

Other Consolidated Results

Gross Margin: For the three month period ended June 30, 2008, gross margin decreased approximately 4.4%, from 18.9% in 2007 to 14.5% in 2008 and for the six month periods ended June 30, 2008 and 2007, gross margin decreased approximately 7.0%, from 19.2% to 12.2%, respectively. The primary factors for the decline in gross margin are lower fixed cost absorption and increased energy, freight and raw material costs.

Technical Services, Selling, General and Administrative Expenses (SG&A): For the three month period ended June 30, 2008, SG&A expense increased approximately 7% primarily related to severance pay, sales commissions, product samples and consulting fees. For the six month period ended June 30, 2008, SG&A expense was relatively flat.

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

Interest Expense: Net interest expense decreased 27% and 19% for the three month and six month periods ended June 30, 2008 and 2007, respectively, primarily related to lower interest rates on our lines of credit.

Net Income / Loss: For the three month and six month periods ended June 30, 2008, we incurred a net loss of $338,000 and $927,000, respectively, on net sales of $6,916,000 and $13,662,000, respectively. This compares with net income of $82,000 and $121,000, on net sales of $7,281,000 and $14,434,000 for the three month and six month periods ended June 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.

Income Taxes: Income taxes consisted of state income tax expense of $3,000 for the three month period ended June 30, 2008, compared state income tax expense of $9,000 and foreign income tax expense of $18,000 for the same three month period in 2007. For the six month periods ended June 30, 2008 and 2007, we recorded state income tax expense of $5,000 and foreign income tax benefit of $33,000 and state income tax expense of $18,000 and foreign income tax expense of $14,000, respectively. Taxes are based on an estimated annualized consolidated effective rate of 3%.

Liquidity, Capital Resources and Other Financial Information

Cash and Cash Equivalents

As noted on the following table, cash and cash equivalents decreased $167,000 from December 31, 2007 to June 30, 2008 as compared to a decrease of $383,000 from December 31, 2006 to June 30, 2007.

		Six Months Ended June 30,
(In thousands)		2008		2007
Net cash provided by (used in)
Operating activities	$	935	$	(712)
Investing activities		(1,696)		(397)
Financing activities		603		807
Effect of exchange rate fluctuations		(9)		(81)
Net change in cash and cash equivalents	$	(167)	$	(383)

Operating Activities

Operating activities provided $935,000 during the first six months of 2008. Following are the major changes in working capital affecting cash provided by operating activities for the six month period ended June 30, 2008:

Accounts Receivable: Accounts receivable increased $1,415,000 as compared to an increase of $1,112,000 for the same period 2007. Accounts receivable increased primarily due to stronger sales in the second quarter 2008 as compared to the fourth quarter 2007. At the Corpus Christi operation, accounts receivable increased $1,112,000 and at TP&T $315,000, offset by a decrease at TMM $12,000.
Inventories: Inventories decreased $1,523,000 as compared to an decrease of $198,000 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 $1,369,000 and TMM’s decreased $245,000 primarily due to a decrease in SR at both locations. TP&T’s finished goods inventory increased $91,000.
Other Current Assets: Other current assets increased $332,000 as compared to an increase of $279,000 for the same period 2007. At the Corpus Christi operation, prepaid expenses increased $297,000 primarily due to prepaid deposits and insurance; at TP&T $97,000 related to prepaid insurance and pension expense; offset by a decrease TMM of $62,000.
Accounts Payable and Accrued Expenses: Trade accounts payable and accrued expenses increased $1,041,000 as compared to a decrease of $591,000 for the same period 2007. Accounts payable and accrued expenses increased at TMM $811,000; at the Corpus Christi operation $49,000; at TP&T $181,000. The primary factor leading to the increase in accounts payable and accrued expenses was the production of Synthetic Rutile at TMM during the month of June, 2008.

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

Investing Activities

We used cash of $1,696,000 in investing activities during the first six months of 2008 primarily for the purchase of fixed assets. Net investments for each of our three locations are as follows:

Corpus Christi Operation: We invested approximately $299,000 for new equipment, as compared to $161,000 for the same period 2007.
Netherlands Operation: We invested approximately $31,000 at TP&T for new equipment, as compared to $207,000 for the same period 2007.
Malaysian Operation: We invested approximately $1,366,000 at TMM for new equipment related to the new powder treatment facility, as compared to $29,000 for the same period 2007.

Financing Activities

We received $603,000 from financing activities during the six month period ended June 30, 2008. Significant factors relating to financing activities include the following:

Lines of Credit: Our borrowings on the domestic line of credit decreased $125,000 primarily as a result of the decrease in inventory levels, as compared to an increase of $625,000 for the same period 2007 which was primarily related to paying off the related party debt to Paulson Ranch, in the amount of $400,000, and working capital. Borrowings on our foreign line of credit, affected via TP&T, increased approximately $53,000 primarily for the purpose of financing working capital as compared to an increase of $377,000 for the same period 2007.
Export Credit Refinancing Facility (ECR): TMM’s borrowings on the ECR increased $365,000 primarily for working capital. TMM did not have any borrowings on the ECR for the same period 2007.
Capital Leases: Capital leases increased approximately $17,000 as compared to a reduction of $33,000 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, primarily at TP&T.
Long-term Debt – Financial Institutions: Long-term debt decreased approximately $345,000 as compared to decrease of $267,000 for the same period 2007. TMM’s net long-term debt increased $522,000 primarily related to new powder treatment facility. Net long-term debt at the Corpus Christi operation decreased approximately $2,000 and TP&T’s decreased approximately $175,000.
Proceeds from Issuance of Common Stock: We received $12,000 from the exercise of employee stock options.
Preferred Stock Dividends: We paid dividends of $30,000 on its 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

Payment of a waiver fee, in the amount of $10,000, to Bank of America
Increase in interest rates from prime to prime plus two percent (2%)
Injection of $1,000,000 in new capital within 30 days of signing of the Waiver and Amendment to the Agreement
Modification of the Current Ratio covenant from greater than or equal to 1.10 to greater than or equal to 1.70 on a quarterly basis
Execution of a release of claims

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

Liquidity

Following is a summary of our long-term debt and notes payable:

(In thousands)		June 30,		December 31,
		2008		2007
Term note payable to a U.S. bank, with an interest rate of 5.0% at June 30, 2008, due November 30, 2010.	$	649	$	723
Term note payable to a U.S. bank, with an interest rate of 5.0% at June 30, 2008, due May 1, 2012.		392		441
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 5.5% at June 30, 2008, due June 1, 2009. (135 Euro)		213		296
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 5.2% at June 30, 2008, due July 1, 2029. (411 Euro)		647		614
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 4.7% at June 30, 2008, due January 31, 2030. (407 Euro)		641		608
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 6.1% at June 30, 2008, due July 31, 2015. (358 Euro)		564		560
U.S. Dollar term note payable to a Malaysian bank, with an interest rate of 4.5% at June 30, 2008, due September 30, 2010.		691		343
U.S. Dollar term note payable to a Malaysian bank, with an interest rate of 4.57% at June 30, 2008, due June 30, 2011.		181		-
Term note payable to a U.S. equipment financing company, with an interest rate of 5.24% at June 30, 2008, due April 13, 2013		117		-
Revolving line of credit, payable to a U.S. bank, with an interest rate of bank prime, 5.0% at June 30, 2008, due April 1, 2009.		3,175		3,300
Total		7,270		6,885
Less current maturities		5,016		4,207
Total long-term debt and notes payable	$	2,254	$	2,678

US Operations

US Credit Facility:

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

Payment of a waiver fee, in the amount of $10,000, to Bank of America
Increase in interest rates from prime to prime plus two percent (2%)
Injection of $1,000,000 in new capital within 30 days of signing of the Waiver and Amendment to the Agreement
Modification of the Current Ratio covenant from greater than or equal to 1.10 to greater than or equal to 1.70 on a quarterly basis
Execution of a release of claims

Other US Long-term Debt:

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

Netherlands Operations

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

Malaysian Operations

Incorporate a Revolving Credit facility as part of the existing Overdraft facility of RM 1,000,000 ($306,000) (i.e. an interchangeable Overdraft/Revolving Credit facility) with a combined limit of RM 1.0 million to be used for working capital purposes.
Increase the Foreign Exchange Contract Line facility by an additional RM 10 million from RM 15 million to RM 25 million ($4,591,000 to $7,652,000) to be used for hedging purposes against TMM’s sales based in currencies other than the RM.
Increase the maximum length of financing for the Multi-Trade Line facility (ECR), which is used by TMM for short-term financing against customers’ and inter-company shipments, from the existing 150 days up to 180 days.

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

Off-Balance Sheet Arrangements and Contractual Obligations

No material changes have been made to the “Off-Balance Sheet Arrangements and Contractual Obligations” noted in the Company’s 2007 Annual Report on Form 10-K except as noted above.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company's Chief Executive Officer and Acting Chief Financial Officer, management of the Company has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Acting Chief Financial Officer concluded that, as of the date of the evaluation, the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

During the period covered by this report, the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) were impacted due to the termination of the Company’s Chief Financial Officer on May 23, 2008; and the temporary appointment of the Company’s Controller as Acting Chief Financial Officer. The Company is currently interviewing candidates for the position of Chief Financial Officer and anticipates filling the CFO position prior to September 30, 2008.

Part II - Other Information

Item 1.

Legal Proceedings

Subsequent to the end of the quarter ended June 30, 2008, we learned that our former chief financial officer, Steven H. Parker, filed a complaint with the Occupational Safety and Health Administration, U.S. Department of Labor. Parker’s complaint was filed on or about July 21, 2008, and alleges that TOR Minerals International, Inc. violated the whistleblower provisions of the Sarbanes-Oxley Act of 2002 by terminating Parker’s employment in response to Parker’s reporting to our CEO and a board member of the negative accounting treatment of a potential transaction. We believe our actions were appropriate and intend to vigorously defend this complaint. Relief sought by Parker includes back pay, reinstatement or front pay in lieu of reinstatement and reasonable attorney’s fees and costs.

Item 4.

Submission of Matters to a Vote of Security Holders

Our Annual Meeting of Shareholders was held on May 23, 2008, at the Omni Marina Hotel, Corpus Christi, Texas. The following matters were submitted for vote of the security holders:

Election of Directors		For		Withheld
David A. Hartman		7,458,618		18,004
Douglas M. Hartman		7,298,028		178,594
Olaf Karasch		7,436,218		40,404
Thomas W. Pauken		7,298,528		178,094
Bernard A. Paulson		7,456,518		20,104
Steven E. Paulson		7,458,118		18,504
Chin-Yong Tan		7,406,842		69,780

	For	Against	Abstain	- Vote
Amendment of the 2000 Incentive Stock Option Plan	4,513,504	592,872	6,500	2,363,746

Ratification of Auditors	7,467,507	5,425	3,690	--

Part II - Other Information

Item 6.	Exhibits
(a)	Exhibits
	Exhibit 10.1	Waiver and Sixth Amendment to Loan Agreement with Bank of America, Executed August 14, 2008
	Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Signatures: Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TOR Minerals International, Inc. _______________ (Registrant)

Date:	August 14, 2008		OLAF KARASCH Olaf Karasch President and CEO

Date:	August 14, 2008		BARBARA RUSSELL Barbara Russell Acting CFO and Controller

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TOR Minerals International (TORM) Inactive 10-Q2008 Q2 Quarterly report

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