Washington, D.C. 20549

(Mark One)

722 Burleson Street
Corpus Christi, Texas 78402
(Address, including zip code, of principal executive offices)

Issuer's telephone number: (361) 883-5591
Securities registered under Section 12(b) of the Act: None.

Securities registered under section 12(g) of the Act:
Common Stock, $0.25 par value

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 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.

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year: $24,127,445

State the aggregate market value of the voting stock (which consists solely of shares of Common Stock) held by non-affiliates of the registrant as of March 10, 2004, computed by reference to the closing sale price of the registrant's Common Stock on The NASDAQ SmallCap Market tier of the NASDAQ Stock Market on such date: $26,715,516.

Number of shares of the registrant's Common Stock outstanding as of March 10, 2004

7,701,753

TOR MINERALS INTERNATIONAL, INC.
Annual Report on Form 10-KSB

TOR Minerals International, Inc. ("TOR" or the "Company") is a global specialty chemical company engaged in the business of manufacturing and marketing mineral products for use as pigments, pigment extenders and flame retardants used in the manufacture of paints, industrial coatings, plastics and solid surface applications.

The Company was organized by Benilite Corporation of America ("Benilite") in 1973. Benilite, which was incorporated in Delaware in 1969, developed the then patented "Benilite process" for producing synthetic rutile, the principal ingredient used in the manufacture of HITOX®, from ilmenite ore. Benilite licensed and helped design several synthetic rutile plants located throughout the world which utilize this process (including the plant located in Ipoh, Malaysia, owned by the Company, as discussed below). Benilite concluded that synthetic rutile produced by the Benilite process could be further processed into a buff-colored titanium dioxide pigment having many of the characteristics of standard white titanium dioxide at a significant cost savings. These efforts by Benilite were the beginning of the Company's business. In 1980, the subsidiary of Benilite engaged in the development of HITOX was spun off by Benilite to its shareholders. In December 1988, the Company became a publicly owned company after completing a public offering of 1.38 million shares of its common stock.

At the Company's annual meeting of shareholders, held May 5, 2000, the shareholders voted to approve an amendment to the Company's Certificate of Incorporation to change the name of the Company from Hitox Corporation of America to TOR Minerals International, Inc. The Company's stock symbol changed from HXTA to TORM effective May 10, 2000.

The Company's corporate headquarters and US manufacturing plant are located in Corpus Christi, Texas, USA. This location houses senior management, customer service, logistics and corporate research and development laboratories. The Company's financial and accounting functions also operate from this location. The manufacturing plant is situated alongside its own docks which facilitates the easy handling of bulk mineral shipments by barge. The site has its own railhead and easy access to major highways linking it to the rest of the US and to Mexico.

The Company acquired TOR Minerals Malaysia, Sdn. Bhd. ("TMM") in 2000. TMM is located in Ipoh, Perak, Malaysia approximately 40 miles from the port of Lumut. The sales team and the sales support laboratory for Asia are located in the offices in Ipoh.

In 2001, the Company acquired TOR Processing and Trade, B.V. ("TP&T"). TP&T is situated within reach of the major shipping port of Rotterdam in Hattem, The Netherlands.

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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. The Company's products are currently marketed in the United States and in more than 60 other countries. The Company sells its products through a network of direct sales representatives employed by the Company and independent stocking distributors in the United States, as well as distributors and agents overseas. The Company's sales representatives sell directly to end-users and provide marketing support and guidance for the Company's independent distribution network.

The Company's principal product, HITOX (high-grade titanium dioxide), accounted for approximately 48% of net sales in 2003 and approximately 60% in 2002. HITOX, a light buff-colored titanium dioxide pigment, is made from synthetic rutile ("SR"). Titanium dioxide is the most widely used primary pigment in paints, coatings, plastics, paper and many other types of products. Normally titanium dioxide, or TiO₂, gives opacity and whiteness to end products. Most TiO₂ is white; however, HITOX is a unique color pigment that is beige. HITOX occupies a special marketing niche as a high quality, color pigment that can replace some of the other more costly color pigments and some of the white TiO₂. HITOX pigments are used by major international paint and plastics manufacturers. Uses include interior and exterior architectural paints, yellow traffic marking paints, industrial primers and coatings, roofing granules, PVC pipe and conduit, plastic sheeting and siding as well as plastic film.

HITOX, manufactured at plants located in both the US and Malaysia, utilizes SR manufactured at TMM as its primary raw material. In the milling process used to process HITOX, particles of SR mechanically abrade each other to form the end product, which after other processing, including testing and quality control procedures, is collected for bagging and shipping. The manufacturing process for producing HITOX is not simple and the details of the process and the operating parameters of the systems are not widely known. The HITOX manufacturing process is not patented.

The Company's alumina trihydrate ("ATH") products were expanded in 2001 with the introduction of ALUPREM which is manufactured at the Company's subsidiary, TP&T, in the Netherlands. ALUPREM, which stands for premium alumina, represented approximately 20% of the Company's 2003 net sales compared to approximately 12% in 2002. TP&T's Managing Director, Dr. Olaf Karasch, developed the manufacturing process for ALUPREM. The details of the process and the operating parameters of the systems are not widely known. The ALUPREM manufacturing process is not patented.

ALUPREM products are for color critical applications such as Solid Surface/Onyx and performance driven uses such as specialty wire and cable insulation, catalysts, high-tech polishing, pigments and specialty papers.

SR, the basic building block for HITOX, is manufactured at the Malaysian plant using the Benilite process for producing SR. Raw materials used in the manufacturing process include ilmenite, acid and fuel oil. The ilmenite is first treated in a reduction kiln and then subjected to leaching in hydrochloric acid where soluble iron and other impurities are removed. SR is also used as feed stock for white TiO₂ and as a component in welding rod flux. External sales of synthetic rutile accounted for approximately 15% of the net sales in 2003 compared to 0.3% in 2002.

BARTEX, manufactured at the US plant, is produced from high grade barites (barium sulfate) utilizing a milling process. The plant dedicates one of eight milling lines to the production of BARTEX which accounted for approximately 11% of the Company's 2003 net sales compared to approximately 16% in 2002.

Barium Sulfate's high density is one of the primary reasons it is used as a pigment. As an inert extender pigment, BARTEX, characterized as ultra fine with high brightness and narrow particle size distribution, gives weight and body to products ranging from powder coatings used in appliance and office furniture finishes to rubber products such as carpet and curtain backings and plastics including billiard balls and poker chips. BARTEX allows more expensive prime white pigments, such as white TiO₂, to be supplemented or replaced to some degree. BARTEX is manufactured in several different grades which are differentiated by average particle size and whiteness.

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HALTEX, manufactured at the US plant, is produced from Bayer grade aluminum hydroxide using some of the same production technologies of the Company's other products. In 2003, one of the plant's eight milling lines was dedicated to the production of a small particle size HALTEX pigment which accounted for approximately 4% of the Company's 2003 net sales compared to approximately 6% in 2002.

HALTEX features engineered narrow particle sizing and high purity for optimum physical properties. Quality is suitable for a broad range of technical applications including electrical wire and cable insulation, thermoset SMC/BMC molding compounds, thermoplastic profiles, PVC and rubber products, specialty coatings as well as adhesives and sealants.

The Company utilizes a variety of raw materials in the manufacture of its products. The Company has not experienced and does not anticipate having difficulty in acquiring adequate supplies of this material. Outlined below are the principal raw materials for the Company's products.

SR: Titanium dioxide pigment can be produced using ilmenite, natural rutile, SR or titanium slag. Ilmenite is a black material found in natural mineral deposits and typically has a titanium dioxide content ranging from 44% to 60%. Ilmenite is found throughout the world, including China, India, Australia and North America. In Malaysia, ilmenite historically has been recovered incidental to tin mining, but as tin mining has decreased in Malaysia, that source of ilmenite has been declining. SR is produced from ilmenite and typically has a titanium dioxide content ranging from 92% to 95%. There is only one other available source for the quality of SR required for the production of HITOX. If supplies of SR from TMM are interrupted, this could have a significant adverse effect on the Company.

HITOX: TMM is the Company's sole suppler of SR, the raw material for HITOX.

ALUPREM: Alumina trihydrate is manufactured throughout the world including Europe and North America. The ATH material used for chemicals, fillers and flame-retardants is produced by the Bayer alumina process. This grade of ATH accounts for approximately 5% of the total ATH produced worldwide. The Company purchases Alumina from various suppliers in Europe.

BARTEX: High grade barites (barium sulfate) are mined in China, India, Turkey and Mexico.

HALTEX: Bayer grade aluminum hydroxide is purchased from two of the three suppliers located in the US.

Natural gas is the predominate energy source for the Company's US manufacturing plant. The Company purchases natural gas from Crosstex, a local natural gas supplier. Fuel oil is the primary energy source for the Malaysian manufacturing plant.

A 5,000 square foot technical center was constructed at the Company's plant location in Corpus Christi, Texas in 1992 that houses process control, quality assurance, technical service, and research and development functions. The technical services group was expanded in 1998 and focused on customer service and development. During the last two years, the Company's research and development projects have focused on abrasive characteristics, pigments as a particle spacer, pigment durability and customer application studies. The Company did not incur significant research and development expense in 2003.

Mr. Richard L. Bowers was appointed President and Chief Executive Officer by the Board on May 23, 2001. Mr. Bowers had served as President and Chief Operating Officer since February 26, 2001. He had served as Executive Vice President/Director of Sales and Marketing since June 1, 1999. Previously, he had served from 1981 to 1994 as President and Chief Executive Officer of the Company. Since 1995, Mr. Bowers has served as a director and is a shareholder of Environmental Analytics, Inc., a company that monitors fugitive emissions at chemical plants. Mr. Bowers has a Bachelor of Arts degree from Furman University.

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Dr. Olaf Karasch was appointed Executive Vice President, Operations, by the Board on September 4, 2002. Dr. Karasch had served as Managing Director of TOR's wholly owned Netherlands subsidiary, TP&T, since joining the Company on May 16, 2001. In January 1996, Dr. Karasch was managing director for Flohme Chrome Plating and Plasma Coating. In 1997, he joined the Royal Begemann Group in the Netherlands, the predecessor of TP&T, until its purchase by TOR in 2001. Dr. Karasch received his Ph.D. in Mineralogy at Reinisch-Westfalische University in Aachen, Germany where he specialized in submicronization (particle size reduction below one micron).

Mr. Mark Schomp was appointed Vice President, Sales and Marketing, by the Board on September 4, 2002. Mr. Schomp is a Chemical Engineer who spent 15 years in sales and sales management with AluSussie-Lonza, a large European manufacturer of aluminum, aluminas, and other products. He has wide experience in selling pigments and fillers to plastics and coatings applications. Mr. Schomp joined the Company's sales department in 2001.

Mr. Lawrence W. Haas was appointed Treasurer and Chief Financial Officer by the Board on October 13, 2003. Prior to joining the Company, Mr. Haas served as the Vice President of Finance at Hi-Rise Recycling Systems, Inc., a manufacturer of solid waste processing equipment and recycling systems. Mr. Haas has a Masters of Business Administration degree from the University of Texas.

Mr. Hee Chew Lee, the Managing Director of TMM, was appointed Vice President of Asian Operations by the Board on December 5, 2002. Mr. Lee, a Chemical Engineer, joined the Company in 1994 as General Manager and has served as the Managing Director of TMM since 1998.

The technical services group in Corpus Christi deals with customer problems and offers technical advice to users of the Company's products. A second group has been formed in Malaysia to perform the same services in Asia.

The Company utilizes a network of both domestic and foreign distributors and agents. Within North America there are multiple agents serving the Company on either a regional or a product basis. In most other countries there is one stocking distributor who purchases directly from TOR and resells in their territory. In certain large countries there may be multiple distributors. In this way the Company gets the benefit of sales specialists with specific trade knowledge in each country.

End use customers of the Company's products include companies in the paints, coatings, solid surface, and PVC pipe industries. For the year ended December 31, 2003, sales to Kerr-McGee Chemical Corporation accounted for approximately 15% of the Company's total revenues. No single customer accounted for 10% or more of the Company's total revenue in 2002. We expect that a limited number of customers will continue to account for a substantial portion of our revenue for the foreseeable future. After eliminating the effects of Kerr-McGee Chemical Corporation, the next top 10 customers accounted for 42% of the remaining sales in 2003 and 53% of sales in 2002. The foreign customers accounted for 29% of total net sales in 2003 and 35% in 2002. The Company has historically maintained a relatively stable customer base.

The Company sells its products in North, Central and South America, Asia and Europe and markets them to customers located in more than 60 foreign countries. No individual Foreign country accounted for 10% or more of the foreign sales in either 2003 or 2002. Sales to external customers are attributed to geographic area based on country of distribution.

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A summary of the Company's sales by geographic area is presented below:

Competitors range from large corporations with a full line of production capabilities and products to small local firms specializing in one or two products. A number of these competitors are owned and operated by large diversified corporations. Many of these competitors, such as E.I. DuPont de Nemours & Co., Inc., Millenium Chemical Inc., Kerr-McGee Chemical Corporation, Kronos Inc. and J.M. Huber, have substantially greater financial and other resources, and their share of industry sales is substantially larger than the Company's.

In addition to the factors discussed in the Forward-Looking Statements section provided at the beginning of this Annual Report on Form 10-KSB, the following are important factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company. In addition, you should know that the risks and uncertainties described below are not the only ones we face. Unforeseen risks could arise and problems or issues that we now view as minor could become more significant. If we were unable to adequately respond to any risks, our business, financial condition and results of operations could be materially adversely affected. Additionally, we cannot be certain or give any assurances that any actions taken to reduce known risks or uncertainties will work.

The Company has borrowed domestically $2,825,000 under a Line of Credit and $580,833 under a term loan as of December 31, 2003 with Bank of America, N.A. (the "Bank"). The terms of the Company's borrowings contain restrictions and covenants, including subjective acceleration provisions based on the judgment of the Bank and covenants based on the performance of the Company. The Bank could determine based on the subjective covenants that the Company is in default and could demand payment.

The Company's subsidiaries have loan agreements with banks in Malaysia and the Netherlands that provide short-term credit facilities. At December 31, 2003, the subsidiaries had borrowed $1,500,947 under these facilities. All borrowings under the short term credit facilities are subject to demand provisions.

The banks have made no indication that they will demand payment of any of the Company's loans in the United States, Malaysia, or the Netherlands; however, there can be no assurances that this debt will not be called in the future. If demand is made by the banks, the Company may require additional debt or equity financing to meet its working capital and operational requirements or, if required, to refinance maturing or demanded indebtedness. (See "Liquidity, Capital Resources and Other Information" on page 14 and "Subsequent Events" on page 19).

TMM is the Company's sole source for SR. There is only one other available source for the quality of SR required for the production of HITOX. If supplies of SR from TMM are interrupted, this could have a significant adverse effect on the Company.

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TOR derives a significant portion of its revenue each quarter from a limited number of customers. For the year ended December 31, 2003, sales to Kerr-McGee Chemical Corporation accounted for approximately 15% of the Company's total revenues. No single customer accounted for 10% or more of the Company's total revenue in 2002. We expect that a limited number of customers will continue to account for a substantial portion of our revenue for the foreseeable future. As a result, if we lose a major customer, our revenue would be adversely affected.

TOR writes down its inventory for estimated obsolescence or unmarketable inventory such that inventory is carried at the lower of the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required which in turn could adversely affect the Company's profitability and compliance with its required loan covenants.

The Company reviews goodwill at least annually to determine if any impairment has occurred or more frequently if indicators of impairment are noted. As no indicators of impairment were noted in 2003, the Company performed this review in October 2003, and has determined that no impairments exists at December 31, 2003. There can be no assurance that future goodwill impairment tests will not result in a charge to net earnings (loss). (See "Critical Accounting Policies - Goodwill" on page 17).

Doing business in foreign countries carries with it certain risks that are not found in doing business in the US. We currently derive a portion of our revenues from operations in Malaysia and the Netherlands and sources of our SR from Malaysia, which is critical to the production of HITOX. The risks of doing business in foreign countries which could result in losses against which we are not insured include but are not limited to, the following:

• Potential adverse changes in the diplomatic relations of foreign countries with the United States
• Terrorism
• Disruptions caused by possible foreign conflicts, including North Korea, Iraq and others, involving the U.S.
• Hostility from local populations
• Adverse effect of currency exchange controls
• Restrictions on the withdrawal of foreign investment and earnings
• Government policies against businesses owned by foreigners
• Foreign exchange restrictions
• Changes in taxation structure

Because the Company owns assets located outside the United States and derives revenues from our international operations, we may incur currency transaction and translation losses due to changes in the values of foreign currencies and in the value of the US dollar. In 2003, due to the effect of the weakening dollar, as compared to 2002, we experienced a $358,000 reduction in net income. We cannot predict the effect of changes in exchange rate fluctuations upon future operating results. (See "Foreign Operations - Impact of Exchange Rate" on page 18).

The Company has adopted Statements of Financial Accounting Standards No. 144, Accounting for the Impairment of or Disposal of Long Lived Assets. We review for indicators that these assets are impaired in accordance with this standard, whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset or group of assets might not be recoverable. No impairments have been recorded during the years ended December 31, 2002 or 2003. There can be no assurance that future long-lived asset impairment tests will not result in a charge to net earnings (loss).

The Company's plant in Corpus Christi is subject to regulations promulgated by the Federal Environmental Protection Agency ("EPA") and state and local authorities with respect to the discharge of substances into the environment. The Company believes that the Corpus Christi plant is in compliance with all applicable federal, state and local laws and regulations relating to the discharge of substances into the environment, and it does not expect that any material capital expenditures for environmental control facilities will be necessary in order to continue such compliance.

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TMM's SR plant is required to be licensed by the Malaysian Atomic Energy Licensing Board ("AELB"), because the ilmenite used by the plant is derived from tin tailings which is also a source of small amounts of monazite and hafnium which are radioactive rare earth compounds. As part of the licensing requirements, TMM is required to maintain a monitoring program for various emissions from the plant. The monitoring is done in-house by TMM personnel and results are reported to the AELB as required. The plant is subject to various other licensing and permitting requirements, all of which TMM is currently in compliance.

TP&T operates an alumina processing plant in Hattem, the Netherlands, and is governed by rules promulgated by both The Netherlands and the European Community. The Company believes that the Hattem plant is in compliance with all environmental and safety regulations.

HITOX and the ingredient from which it is produced, SR, are non-toxic and non-hazardous. HITOX complies with all applicable laws and regulations enforced by the United States Food and Drug Administration (the "FDA") and is an acceptable component of packaging materials used in direct contact with meat, poultry and other food products; of paints used in incidental contact with such products; and of other packaging materials, such as paper and paperboard. HITOX also complies with current color additive regulations promulgated by the FDA. In addition, HITOX has been tested for compliance with the applicable standards promulgated by the National Sanitation Foundation (the "NSF"), and the Company is authorized to use applicable NSF seals and/or logos in connection with the marketing of HITOX. This authorization is significant in that end users of titanium dioxide pigments who wish their products to be NSF approved must use component materials that also meet NSF standards.

The Company normally manufactures its pigment products in anticipation of, and not in response to, customer orders and generally fills orders within a short time after receipt. Consequently, the Company seeks to maintain adequate inventories of its pigment products in order to permit it to fill orders promptly after receipt. As of March 10, 2004, the Company does not have a significant backlog of customer orders.

The Company's business is closely correlated with the construction industry and its demand for materials that use pigments, such as paints and plastic pipe. This has led to higher sales in the Company's second and third quarters due to the 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.

The Company currently holds no patents on the processes for manufacturing any of its products. Six of the Company's products, HITOX, ALUPREM, HALTEX, BARTEX, OSO®, and TITOX® are marketed under names which have been registered with the United States Patent and Trademark Office. Trademarks are also registered in certain foreign countries.

As of December 31, 2003, the Company had a total of 48 full-time employees in the US, 141 employed at TMM in Malaysia and 22 at TP&T in the Netherlands. Certain personnel employed by the Malaysian subsidiary are covered by a collective bargaining agreement with an in-house union.

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The Company's internet website address is www.torminerals.com. Our Annual Report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 are available through our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-KSB.

The Company operates a plant in Corpus Christi, Texas, that manufactures HITOX, BARTEX, and HALTEX. The facility is located in the Rincon Industrial Park on approximately 14.86 acres of land, with 12.86 acres leased from the Port of Corpus Christi Authority (the "Port") and approximately two acres owned by the Company. The first lease covers 10 acres of the plant site and the second covers 2.86 acres. The lease payments are subject to adjustment every 5 years for what the Port calls the "equalization valuation". This is used as a means of equalizing rentals on various Port lands and is determined solely at the discretion of the Port. The Company and the Port executed an amended lease agreement on July 11, 2000, which extended the expiration dates of both leases to June 30, 2027.

The Company owns the improvements on the plant site, including a 3,400 square-foot office, a 5,000 square-foot laboratory building, a maintenance shop and several manufacturing and warehousing buildings containing a total of approximately 90,000 square feet of space. The leased premises include approximately 350 lineal feet of bulkheaded industrial canal frontage, which provides access to the Gulf of Mexico intercoastal waterway system through the Corpus Christi ship channel. This property also is serviced by a railroad spur that is owned by the Company and runs through the Company's property to the canal.

TOR Minerals Malaysia operates the SR manufacturing plant in Ipoh, Malaysia and is close to the source of its major raw material - ilmenite. The plant site has 38 acres of land that TMM has a commitment to use through 2074.

The Company owns the improvements on the plant site, including a 3,960 square-foot office, a 1,980 square-foot laboratory, a spare parts storage warehouse, an employee cafeteria, and several manufacturing and warehousing buildings containing a total of approximately 106,500 square feet of space.

TOR Processing and Trade is located in Hattem, The Netherlands. It is located near the major shipping port of Rotterdam. The factory site, which the Company owns, is approximately one acre and consists of a steel frame metal building which is 10,000 square feet. Included within the factory are an office and laboratory.

Management believes that all of the facilities and equipment of the Company are adequately insured.

The Company is involved in routine litigation incidental to its business.

No matters were submitted to a vote of security holders during the fourth quarter of the Company's fiscal year ended December 31, 2003.

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The names of the members of the Company's executive officers at March 10, 2004, each of whom is elected annually, are set forth below:

Richard L. Bowers, President, Chief Executive Officer and Director - Richard Bowers was appointed President and Chief Executive Officer on May 23, 2001. He joined Benilite in 1969 and was stationed in Singapore and Malaysia. In 1971, Mr. Bowers joined the staff of the Hitox Division of Benilite in Corpus Christi and was employed until the spin-off of the Company in 1980. From 1981 until 1994 he held positions of President, Chief Executive Officer and Chairman of the Board of the Company. Since 1995, Mr. Bowers has served as a director and is a shareholder of Environmental Analytics, Inc., a company that monitors fugitive emissions at chemical plants. Mr. Bowers has a Bachelor of Arts degree from Furman University.

Dr. Olaf Karasch, Executive Vice President, Operations - Dr. Olaf Karasch was appointed Executive Vice President, Operations by the Board on September 4, 2002. Dr. Karasch had served as Managing Director of TOR's wholly owned Netherlands subsidiary, TP&T, since joining the company on May 16, 2001. In January 1996, Dr. Karasch was managing director for Flohme Chrome Plating and Plasma Coating. In 1997, he joined the Royal Begemann Group in the Netherlands until its purchase by TOR in 2001. Dr. Karasch received his Ph.D. in Mineralogy at Reinisch-Westfalische University in Aachen, Germany where he specialized in submicronization (particle size reduction below one micron).

Mark Schomp, Vice President, Sales and Marketing - Mark Schomp was appointed Vice President, Sales and Marketing, by the Board on September 4, 2002. Mr. Schomp is a Chemical Engineer who spent 15 years in sales and sales management with AluSussie-Lonza, a large European manufacturer of aluminum, aluminas, and other products. He has wide experience in selling pigments and fillers to plastics and coatings applications. Mr. Schomp joined the Company's sales department in 2001.

Lawrence W. Haas, Treasurer and Chief Financial Officer - Lawrence W. Haas was appointed Treasurer and Chief Financial Officer by the Board on October 13, 2003. Prior to joining the Company, Mr. Haas served as the Vice President of Finance at Hi-Rise Recycling Systems, Inc., a manufacturer of solid waste processing equipment and recycling systems. Mr. Haas has a Masters of Business Administration degree from the University of Texas.

Hee Chew Lee, Vice President, Asian Operations - Hee Chew Lee was appointed Vice President, Asian Operations, by the Board on December 5, 2002. Mr. Lee, a Chemical Engineer, joined TOR in 1994 as General Manager and has served as the Managing Director of TMM since 1998.

Elizabeth Morgan, Secretary - Elizabeth Morgan has served as Secretary since November 1988, Director Administration since 1999 and as Assistant to the President since September 1988. Prior to joining the Company, she served as Administrative Assistant to the President of Carl Oil & Gas Co., an independent oil and gas exploration company based in Corpus Christi, Texas.

No executive officer of the Company has any family relationship with any other director or executive officer of the Company.

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The Company became a publicly owned company in December 1988. Prior to that time, the Company's stock was not listed or traded on any stock exchange. From February 7, 1989 to February 10, 1995 the Company's common stock was listed and traded on the National Market System of the National Association of Securities Dealers Automated Quotation System (NASDAQ). A reduction in net tangible assets, along with annual net losses, required the Company's securities to be moved from the NASDAQ National Market System to the NASDAQ SmallCap Market System effective February 10, 1995 (symbol: TORM).

The table below sets forth the high and low closing sales price of the Company's common stock for the periods indicated, according to published sources.

No cash dividends have ever been paid on the Company's Common Stock.

The approximate number of holders of record of the Company's Common Stock as of December 31, 2003 was 117. In addition, there are approximately 400 beneficial shareholders.

On January 19, 2004, the Company announced that it had raised approximately $2,500,000 through the placement of 526,316 shares of common stock at $4.75 to existing shareholders and new institutional holders. The Company also raised $1,000,000 through the placement of 200,000 shares of convertible preferred stock at $5.00. The convertible preferred stock has a six per cent (6.0%) coupon rate, and each preferred share is convertible into 0.84 shares of common stock and is redeemable at the option of the Company after two years. The securities were issued pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933. The transactions were privately negotiated without any general solicitation or advertising. The purchasers are "sophisticated investors" within the meaning of the Securities Act of 1933 and have access to all information concerning the Company needed to make an informed decision regarding the transaction. At the date of issue, the common and preferred shares were not registered under the Securities Act of 1933 and, therefore, could not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. However, the Company has agreed to file a registration statement with the Securities and Exchange Commission covering the resale of the common shares within 90 days.

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The following table provides information as of December 31, 2003, about our Common Stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans (including individual arrangements):

The Company's 1990 Incentive Plan for TOR Minerals International, Inc. (the "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 Plan expired in February of 2000, with options to acquire 372,200 shares of common stock still outstanding. At December 31, 2003 the Plan had 195,850 options outstanding.

On February 21, 2000, the Company's Board of Directors approved the adoption of the 2000 Incentive Plan for TOR Minerals International (the "2000 Plan"). The 2000 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. The maximum number of shares of the Company's common stock that may be sold or issued under the 2000 Plan is 750,000 subject to certain adjustments upon recapitalization, stock splits and combinations, merger, stock dividend and similar events.

In 1999 an additional 75,000 options were issued outside the Plan at an exercise price of $2.125.

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.

Exercise prices on options outstanding at December 31, 2003 ranged from $0.92 to $5.40 per share. The weighted-average remaining contractual life of those options is 7.82 years. The number of options exercisable at December 31, 2003 was 421,650.

The Company has no reportable purchases of equity securities.

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TOR is a global specialty chemical company engaged in the business of manufacturing and marketing mineral products for use as pigments, pigment extenders and flame retardants used in the manufacture of paints, industrial coatings, plastics and solid surface applications. The Company has three production facilities located in Corpus Christi, Texas, Ipoh, Malaysia and in the Netherlands.

The facility in Corpus Christi, Texas, manufactures HITOX, BARTEX, and HALTEX. The facility is also the Global Headquarters for the Company. The facility in Ipoh, Malaysia, manufactures SR and HITOX. SR is the main raw material for HITOX. The Company also supplies SR to outside customers. The facility in Hattem, the Netherlands, manufactures Alumina based products. (See "Our Products" on page 4).

Approximately $7,094,000 or 29% of the 2003 sales are outside of the United States. Of these sales, approximately 8% are in currencies other than the US dollar, primarily Euro based.

Operating expenses in the foreign locations are primarily in local currencies. Accordingly, the Company has exposure to fluctuation in foreign currency exchange rates. These fluctuations impact the translation of sales, earnings, assets and liabilities from local currency to the US dollar. (See "Foreign Operation - Impact of Rate Changes" on page 18).

Critical success factors for the Company include managing its overall global manufacturing facilities to maximize efficiencies in the manufacturing process, controlling costs and the effects of foreign currency fluctuations and increasing market share and developing new markets for our products.

The Company's 2003 sales were $24,127,445, up approximately 48% from 2002. Net income was $1,263,840, up approximately 309% from 2002. The Company benefited from an increase in sales of SR and ALUPREM, as well as its traditional product, HITOX.

Net Sales: Consolidated net sales for 2003 were approximately $24,127,000, an increase of approximately $7,858,000 or 48% compared with 2002 net sales of approximately $16,269,000. Net sales at the Corpus Christi location increased approximately $3,398,000 or 27% during the twelve-month period ended December 31, 2003 as compared to the same period last year. TMM's net sales to third party customers increased from approximately $2,340,000 in 2002 to $6,795,000 in 2003, a net increase of $4,455,000 or 190%. TP&T's net sales to third party customers increased from approximately $1,495,000 in 2002 to $1,500,000 in 2003, a net increase of approximately $5,000 or 0.04%. The majority of TP&T sales are inter-company to TOR's Corpus Christi operation, who then sells Alumina products to third party US customers.

The Company's net sales to customers in the US increased approximately $6,522,000 or 62% from approximately $10,511,000 in 2002 to $17,033,000 in 2003. Foreign net sales increased from approximately $5,758,000 in 2002 to $7,094,000 in 2003, an increase of approximately $1,336,000 or 23%. Included in the foreign sales increase is the foreign exchange effect on translating TP&T's Euro based sales into US dollars. TP&T's Euro based sales amounted to approximately $1,500,000 in 2003, or 6% of total net sales. The effect of the weakening US dollar was to increase these net sales by approximately $237,000. (See "Foreign Operation - Impact of Rate Changes" on page 18).

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. The following table provides sales information related to the Company's major product lines. (See "Our Products" on page 4).

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The Company's financial performance continues to be heavily dependent on sales of a single product line, HITOX pigment, which accounted for approximately 48% of the 2003 total sales as compared with 60% in 2002. Of the increase in HITOX US dollar sales, approximately 96% was related to an increase in volume and 4% was due to an increase in price.

The Company is striving to diversify its sales. As a result, ALUPREM sales increased approximately 149% in 2003. The increase is primarily due to sales of ALUPREM based product to one customer which represented approximately 9% of the total consolidated sales. Of the remaining increase in ALUPREM sales, approximately 53% was due to an increase in volume, 15% was due to an increase in the sales price and 32% was due to the effect of translating Euro based sales to US dollars.

SR sales increased primarily as a result of a multi-year purchase agreement announced earlier this year. Shipments under the agreement began during the third quarter 2003.

Sales of the Company's products other than HITOX, ALUPREM, and SR decreased approximately $211,000 or 1%.

Gross Margin: Gross margin as a percentage of sales was approximately 24% and 25% for 2003 and 2002, respectively. The decrease in margin percent is primarily due to increases in various production related costs. Price increases in natural gas, the primary source of energy at the Corpus Christi plant, increased approximately $544,000 (2.3% of sales). Repairs and maintenance expenses at the Corpus Christi and Malaysian locations increased approximately $721,000 (3.0% of sales). The repairs and maintenance expenses are necessary in order to maintain present and future operating efficiencies. Also affecting the gross margin percentage is the foreign exchange effect on translating Euro based production expenses into US dollars, resulting in increased expenses of approximately $423,000 (1.7% of sales). (See "Foreign Operations - Impact of Rate Changes" on page 18).

Offsetting the increases in production related expenses were the efficiencies obtained from volume increases in the HITOX, ALUPREM, and SR product lines.

General, Administrative and Selling Expenses: Total general, administrative and selling expenses ("SG&A") for 2003 were $4,153,134, an increase of $737,492 or 21.6%, compared with 2002. As a result of the adoption of FASB Statement 148, Accounting for Stock Based Compensation, the Company recorded a non-cash expense of approximately $347,000 for option compensation. Prior to adoption of Statement 148 on January 1, 2003, the Company accounted for stock based compensation using the intrinsic value method prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, which did not require the Company to record option compensation expense. The primary factors contributing to the remaining increase in SG&A include (1) bonuses of approximately $82,000 paid to TMM's management during the fourth quarter; (2) termination expenses of $85,000 relating to personnel terminations in the second quarter; (3) accounting fees of approximately $66,000; (4) investor relations expense of approximately $67,000, and (5) increase in bad debt reserves by approximately $52,000 to $60,000. The foreign exchange translation effect on translating Euro based expenses to US dollars resulted in an increase of approximately $64,000. The remaining change in SG&A expense is due to immaterial net decrease in various expense accounts.

Interest Expense: Interest expense in 2003 decreased $22,468 or 7.1% from $317,235 in 2002 to $294,767 in 2003. Interest expense at the Corpus Christi operation decreased $6,650 compared to 2002 and TMM's interest expense decreased $48,512 primarily due to a decrease in TMM's utilization of its line of credit and ECR financing. TP&T's interest expense increased $32,694 compared to 2002 as a result of increased utilization of its line of credit.

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Income Taxes: The Company recorded $60,608 in State income taxes in 2003 compared to $16,839 in 2002. The Company expects to utilize net operating loss carryforwards to fully offset current year federal and foreign income tax expense. Since these net operating loss carryforwards had been previously fully reserved, the release of valuation allowances against these net operating losses fully offsets the current year income tax expense, resulting in a 4.6% effective rate in 2003 compared to 5.1% in 2002 which is reflective primarily of state income taxes. The Company has additional net operating loss and other carryforwards available to offset the Company's regular taxable income, in the US, as well as, in Malaysia and the Netherlands, which have been fully reserved due to uncertainties related to future taxable income levels. In 2004, the Company expects to recognize deferred tax expense at TMM. (See "Note 8 to the Notes to the Consolidated Financial Statements" on page F-16).

• Net Income: Net income increased approximately $955,000 from the end of 2002 to the end of 2003.
• Depreciation and Amortization: Depreciation and amortization increased approximately $332,000 from the end of 2002 to the end of 2003 due primarily to an increase in assets at the Company's three operations.
• Non-Cash Compensation - Stock Options: As a result of the adoption of FASB Statement 148, Accounting for Stock Based Compensation, the Company recorded a non-cash expense of approximately $347,000 for option compensation. Prior to adoption of Statement 148 on January 1, 2003, the Company accounted for stock based compensation using the intrinsic value method prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees which did not require the Company to record option compensation expense.
• Accounts Receivable: Accounts receivable increased approximately $2,445,000 from the end of 2002 to the end of 2003 due primarily to sales to the Kerr-McGee Chemical Corporation and other large customers during the fourth quarter 2003.
• Inventories: Inventories increased approximately $280,000 from the end of 2002 to the end of 2003 primarily as a result of an increase in the Company's SR and ALUPREM inventories.
• Accounts Payable and Accrued Expenses: Trade accounts payable increased approximately $1,247,000 from the end of 2002 to the end of 2003. Accounts payable increased approximately $254,000 at the Corpus Christi operation, $685,000 TMM and $308,000 at TP&T due primarily to timing of purchases. Accrued expenses increased approximately $347,000 from the end of 2002 to the end of 2003.

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Cash used in investing activities increased approximately $1,575,000 or 273% from the end of 2002 to the end of 2003 primarily for the purchase of fixed assets. Net investments for each of the Company's three locations are as follows:

• US Operation: The Company invested approximately $704,000 primarily related to facility upgrades and manufacturing equipment.
• Malaysian Operation: The Company invested approximately $652,000 in equipment at TMM primarily related to the production of SR.
• Netherlands Operation: The Company invested approximately $796,000 in equipment at TP&T to expand the ALUPREM production capacity.

Financing activities provided cash of approximately $829,000 for the twelve-month period ending December 31, 2003. Factors relating to financing activities include the following:

• Line of Credit - Domestic: The Company's borrowings on the domestic line of credit ("US Line") increased $2,325,000 from $500,000 at the end of 2002 to $2,825,000 at the end of 2003. The increase in the Company's US Line was due primarily to the financing of equipment and SR purchases.
• Line of Credit - Netherlands: The balance outstanding on TP&T's bank line of credit increased from $250,000 at the end of 2002 to approximately $591,000 at the end of 2003. The increase in TP&T's line of credit was due primarily to the financing of new equipment.
• Export Credit Refinancing - Malaysia: TMM's borrowings under the export credit refinancing facility ("ECR") decreased approximately $2,284,000 from $3,124,000 at the end of 2002 to $840,000 due primarily to the timing of inter-company sales in 2003 compared to 2002. The ECR is a government supported financing arrangement specifically for exporters. TMM uses the ECR short-term financing of 150 days against customers' and inter-company purchase orders.
• Related Party Term Loan: The Company received a $1,000,000 term loan from three members of the Company's Board of Directors. The proceeds of the loan were used to pay for the inter-company shipments of SR. TMM used these funds to directly reduce the outstanding balance on the ECR.
• Current Maturities of Long-term Debt: The current maturities on the Company's long-term debt was reduced from $644,000 at December 31, 2002 to approximately $240,000 at December 31, 2003.
• Issuance of Common Stock Options: The Company received proceeds of $72,000 in 2003 as a result of employees and Directors exercising their common stock options during the third and fourth quarters of 2003.

The terms of the Company's borrowings contain restrictions and covenants, including subjective acceleration clauses and covenants based on the performance of the Company, as well as demand clauses. The failure of the Company to comply with such restrictions and covenants, or the exercise of subjective acceleration or demand clauses could also adversely affect the Company's financial position.

The Company entered into a loan agreement with Bank of America, N.A. (the "Bank") on May 1, 2002, which amended and restated the loan agreement between the Bank and the Company dated August 31, 1995, as amended. The loan agreement increased the Company's line of credit (the "Line") from $1,300,000 to $1,500,000. On August 23, 2002, the Company and the Bank entered into a new loan agreement (the "Agreement"). The Agreement amended and restated the loan agreement between the Bank and the Company dated May 1, 2002. The Agreement, which matured on August 31, 2003, increased the Company's Line from $1,500,000 to $3,000,000. On December 13, 2003, the Company and the Bank entered into the Third Amendment to the Agreement which extended the Line from August 31, 2004 to August 31, 2005. The amendment also authorized the Company to borrow up to $1,000,000 from its Directors. The Company entered into the Fourth Amendment to the Agreement with the Bank on January 13, 2004, which increased the Line to $5,000,000, subject to a defined borrowing base limited to the lesser of $5,000,0000 or 80% of eligible accounts receivable and 50% of eligible inventory up to a maximum of $2,850,000. On February 2, 2004, the Company entered into the Fifth Amendment to the Agreement with the Bank which amended the Company's term loan as noted below.

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The Agreement contains covenants that, among other things, require maintenance of certain financial ratios based on the results of the consolidated operations. The covenants are calculated at the end of each quarter. For the twelve-month period ending December 31, 2003, the Company was in compliance with all financial ratios contained in the amended Agreement dated December 13, 2003. However, the Company was not in compliance with certain covenants that require Bank of America's approval prior to the Company acting as a guarantor or co-signer on any other loan and, therefore, has been in technical default since May 2003. The Company was in violation of this covenant when it signed TP&T's Euro based short-term credit facility with Rabobank. As a result, the Bank issued a waiver dated March 18, 2004. Under the terms of the Agreement, payment of the Line and the term loan are secured by the Company's property, plant and equipment, as well as inventory and accounts receivable.

The Company's Line expires August 31, 2005. The interest rate on the Line is the Bank's prime. At December 31, 2003, the amount of credit available to the Company under the Line is limited to the lesser of (a) $3,500,000 or (b) a defined borrowing base of 80% of eligible accounts receivable and 50% of eligible inventory up to a maximum of $2,000,000. At December 31, 2003, the Company had $2,825,000 outstanding on the Line and $645,000 was available to the Company on that date based on eligible accounts receivable and inventory borrowing limitations.

The Company's one term loan with the Bank, which was scheduled to mature on May 1, 2007, had a balance of $580,833 on December 31, 2003. The Fifth Amendment to the Agreement increased the term loan to $782,500 on January 13, 2004. The loan proceeds were used to refinance the Company's term loan that was due to mature on May 1, 2007, and pay the balance outstanding on the Company's loan with Paulson Ranch, a related party, that was due to mature on April 5, 2005. The interest rate for the loan is fixed until maturity at 5.2%. Monthly principal and interest payments will commence on March 1, 2004 and continue through May 1, 2007. The monthly principal payment is $20,064.

In addition to the covenants described above, the loan agreements covering both the Line and the term loan include subjective acceleration clauses that allow the Bank to accelerate payment on the occurrence of certain conditions that, in the judgment of the Bank, are considered adverse changes in the Company's business.

The Company entered into a loan and security agreement on April 5, 2001 with the Company's Chairman of the Board, Bernard Paulson, a 15.5% shareholder, through Paulson Ranch, Ltd. Paulson Ranch made a loan to the Company in the amount of $600,000 with an interest rate of 10.0%. The principal balance outstanding on December 31, 2003 was $230,735. On February 6, 2004, the Company paid the outstanding principal balance of $230,735 to Paulson Ranch.

On December 12, 2003, the Company entered into a loan and security agreement with the Company's Chairman of the Board, Bernard Paulson, through the Paulson Ranch, Ltd., under which Paulson Ranch made a loan to the Company in the amount $500,000 with a variable interest rate of 4% per annum above the "Wall Street Journal Prime Rate". Principal is due and payable on or before February 15, 2005. Accrued interest is paid monthly. The principal balance outstanding on December 31, 2003 was $500,000. The proceeds of the loan were used for working capital.

On December 12, 2003, the Company entered into a loan and security agreement with David Hartman, a member of the Company's Board of Directors and 7.9% shareholder, through the D & C H Trust, under which the D &C H Trust made a loan to the Company in the amount $250,000 with a variable interest rate of 4% per annum above the "Wall Street Journal Prime Rate". The principal balance outstanding on December 31, 2003 was $250,000. The Company paid the outstanding principal balance of $250,000 and accrued interest to the D & C H Trust on February 6, 2004. The proceeds of the loan were used for working capital.

On December 12, 2003, the Company entered into a loan and security agreement with Douglas Hartman, a member of the Company's Board of Directors and a 7.9% shareholder, through the Douglas MacDonald Hartman Family Irrevocable Trust (the "Trust"), under which the Trust made a loan to the Company in the amount $250,000 with a variable interest rate of 4% per annum above the "Wall Street Journal Prime Rate". The principal balance outstanding on December 31, 2003 was $250,000. The Company paid the outstanding balance of $250,000 and accrued interest to the Trust on February 6, 2004. The proceeds of the loan were used for working capital.

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The Company's subsidiary, TMM, has loan agreements with two banks in Malaysia, HSBC Bank Malaysia Berhad and RHB Bank Berhad, which provide a total short-term credit facility of $5,394,737. At December 31, 2003 TMM had utilized $839,809 of that facility under the ECR with a weighted average interest rate of 3.5%. The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of 150 days or less against customers' and inter-company purchase orders. The borrowings under the short-term credit facility are subject to a demand provision that is customary in Malaysia regarding short-term banking facilities. The credit facility with HSBC Bank also prohibits loans to related parties and prohibits TMM from paying dividends without prior consent of the bank. In the event dividends are declared, the payment would be subject to a 28% Malaysian income tax. The facility is subject to annual review and renewal.

TMM has two term loans with HSBC Bank Labuan and RHB Bank Labuan. At December 31, 2003, the outstanding principal balance on each of the two term loans was $34,998 for a total outstanding borrowings of $69,996. The loans are secured by TMM's inventory, accounts receivable, and property, plant and equipment and are payable in monthly payments of $17,500 each, plus interest. The term loans are subject to certain subjective acceleration covenants based on the judgement of the banks. Additionally, if repayment of the short-term credit facilities are demanded, these term loans would also become due immediately. These loans were fully paid on February 26, 2004.

The Company's subsidiary, TP&T, has a loan agreement with a bank in the Netherlands, Rabobank, which provides a total short-term credit facility of EURO 504,235 ($635,185 at December 31, 2003). The credit facility is secured by TP&T's inventory and accounts receivable. The Company has also co-signed this credit facility. At December 31, 2003, TP&T had utilized EURO 469,272 ($591,142 at December 31, 2003) of their short-term credit facility. TP&T's borrowings are also subject to a demand provision.

In April 2001, the Company raised $3,010,000 in a private placement of common stock and convertible debentures. In the private placement, the Company issued 301,000 shares of its common stock and $2,709,000 principal amount of convertible debentures. On April 3, 2003, the Renaissance Group exercised its option to convert the remaining 200,000 debentures into the Company's common stock at the $1.80 per share conversion rate.

To increase liquidity, the Company took a number of steps in January and February of 2004. On January 13, 2004, the Company increased its domestic line of credit from $3,500,000 to $5,000,000, subject to a defined borrowing base limited to the lesser of $5,000,0000 or 80% of eligible accounts receivable and 50% of eligible inventory up to a maximum of $2,850,000.

On January 19, 2004, the Company announced that it had raised approximately $2,500,000 through the placement of 526,316 shares of common stock at $4.75 to existing shareholders and new institutional holders. The Company also raised $1,000,000 through the placement of 200,000 shares of convertible preferred stock at $5.00. The convertible preferred stock has a 6.0% coupon rate, and each preferred share is convertible into 0.84 shares of common stock and is redeemable at the option of the Company after two years. The securities were issued pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933. The transactions were privately negotiated without any general solicitation or advertising. The purchasers are "sophisticated investors" within the meaning of the Securities Act of 1933 and have access to all information concerning the Company needed to make an informed decision regarding the transaction. At the date of issue, the common and preferred shares were not registered under the Securities Act of 1933 and, therefore, could not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The Company has agreed to file a registration statement with the Securities and Exchange Commission covering the resale of the common shares within 90 days. The funds were used to pay down the Company's domestic line of credit by $2,700,000, $500,000 was used to payoff the $250,000 loans from our Directors, David Hartman and Douglas Hartman, and the balance was used for working capital purposes.

On February 2, 2004, the Company increased its domestic term loan of $580,833 on December 31, 2003, to $782,500. The additional proceeds were used to pay off the remaining balance of a loan from a Director carrying a 10% interest rate. The term loan has a fixed interest rate of 5.2%.

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TP&T is currently negotiating with its bank in the Netherlands to increase the line of credit from 504,235 Euros ($635,185 at December 31, 2003) to 650,000 Euros ($818,805 at December 31, 2003 exchange rate of 1.2597 US dollars to 1 Euro). The increase is for working capital purposes. TP&T is also negotiating a five (5) year term loan of 676,000 Euro ($851,557 at December 31, 2003 exchange rate) to finance an expansion of the plant's warehouse and office facilities. There is no guarantee that the Company will be successful in obtaining the increased financing.

On March 18, 2004, Bank of America issued the Company a waiver allowing the Company to co-sign TP&T's Euro based short term credit facility.

Management believes that it has adequate liquidity for fiscal year 2004 and expects to maintain compliance with all financial covenants throughout 2004.

The Company's policy is to depreciate the SR production equipment (with a net book value of at December 31, 2003 and 2002 of $6,666,771 and $6,583,505, respectively which is included in machinery and equipment) over its remaining useful life using the units of production method and to evaluate the remaining life and recoverability of such equipment based on the projected units of production.

TOR maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of TOR's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

The Company's effective tax rate is based on pre-tax income, statutory rates and tax planning strategies. Significant management judgment is required in determining the effective rate and in evaluating the Company's tax position. The Company has domestic and foreign net deferred tax assets resulting primarily from net operating loss carryforwards. These deferred tax assets have been fully reserved due to uncertainties related to future taxable income levels.

TOR writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

The Company adopted the provisions of Financial Accounting Standards Board Statement No. 142, Goodwill and Intangible Assets, effective January 1, 2002. Under the provisions of Statement No. 142, the value of the Company's goodwill (with a carrying value of $1,283,000 relating to TP&T) will no longer be subject to amortization. We evaluate the carrying value of the goodwill at least annually, or more frequently if indicators of impairment are noted. First, the Company identifies potential impairments by comparing the fair value of the reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired. If the carrying amount exceeds the fair value, the Company calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the carrying amount, a write-down is recorded. Based upon its most recent analysis, the Company believes that no impairment exists at December 31, 2003. There can be no assurance that future goodwill impairment tests will not result in a charge to net earnings (loss).

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General inflation has not had a significant impact on the Company's business, and it is not expected to have a major impact in the foreseeable future.

The Company has two foreign operations, TMM in Malaysia and TP&T in the Netherlands.

TMM measures and records its transactions in terms of the local Malaysian currency, the ringgit which is also the functional currency. If the value of the ringgit compared with the US dollar floated, the Company would report the effects of translating the ringgit to the US dollar in an equity account in the consolidated balance sheet. However, Malaysia imposed capital controls and fixed its ringgit currency at 3.8 ringgits per 1 US dollar in September of 1998 to stem the outflow of short-term capital in the wake of the Asian financial crisis. The Malaysian government has not changed the fixed exchange rate since that time. The majority of TMM's sales are denominated in US dollars and expenses are denominated in the Malaysian ringgit. As the Malaysian ringgit is pegged to the US dollar, there is insignificant translation and/or transaction effects of changing foreign currency rates. Because there is no guarantee that the Malaysian Government will maintain the pegged rate to the US dollar, TMM's non-ringgit transactions and balance sheet items are hedged using forward exchange contracts. (See "Foreign Currency Forwards Contracts" on page 19). As of December 31, 2003, the translation adjustments resulted in a gain of approximately $22,000.

TP&T's functional currency is the US dollar. As a result of the changes in exchange rate, gains and losses in the value of any Euro denominated transactions are recorded on the Company's consolidated statement of operations. Because the majority of TP&T's sales are denominated in US dollar, approximately 64%, (primarily inter-company sales) and approximately 67% of their expenses are Euro based, the Company has to exchange US dollars for Euro's. As the exchange rate fluctuates, material increases and decreases in the amount of the US dollar needed to pay Euro based expenses can occur. The exchange rate for 2003 averaged 1.1320 US dollar to 1 Euro compared to an average of 0.9460 US dollar to 1 Euro in 2002. For the twelve-month period ending December 31, 2003, the US dollar had a low of 1.0361 and a high of 1.2597 US dollar (at December 31, 2003) to 1 Euro compared to the same period 2002 with a low of 0.8584 and a high of 1.0483 US dollar to 1 Euro. TP&T did not utilize derivative instruments to reduce its exposure to translation and/or transaction risk between the Euro and the US dollar during either 2003 or 2002. The weakening of the US dollar against the Euro had a material effect on the Company. The net effect of the weakening US dollar, when comparing average rates between 2003 and 2002, is to reduce net income by $358,000. The $358,000 consists of the following: (1) a gain of $237,000 translating Euro based sales in US dollars; (2) a loss of $496,000 translating Euro based expenses to US dollars; and, (3) a loss of $99,000 when translating Euro based Balance Sheet accounts (primarily Euro based receivables, payables and debt) into US dollars.

Dr. Olaf Karasch was appointed Executive Vice President, Operations by the Board on September 4, 2002. Dr. Karasch had served as Managing Director of TOR's wholly owned Netherlands subsidiary, TP&T, since joining the Company on May 16, 2001. Dr Karasch received his Ph.D. in Mineralogy at Reinisch-Westfalische University in Aachen, Germany where he specialized in submicronization (particle size reduction below one micron).

Mr. Mark Schomp was appointed Vice President, Sales and Marketing, by the Board on September 4, 2002. Mr. Schomp is a Chemical Engineer who spent 15 years in sales and sales management with AluSussie-Lonza, a large European manufacturer of aluminum, aluminas, and other products. He has wide experience in selling pigments and fillers to plastics and coatings applications. Mr. Schomp joined the Company's sales department in 2001.

Mr. Hee Chew Lee was appointed Vice President, Asian Operations, by the Board on December 5, 2002. Mr. Lee, a Chemical Engineer, joined TOR in 1994 as General Manager and has served as the Managing Director of TMM since 1998.

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Mr. Lawrence W. Haas was appointed Treasurer and Chief Financial Officer by the Board on October 13, 2003. Prior to joining the Company, Mr. Haas served as the Vice President of Finance at Hi-Rise Recycling Systems, Inc., a manufacturer of solid waste processing equipment and recycling systems. Mr. Haas has a Masters of Business Administration degree from the University of Texas.

To protect against the increase in the cost of natural gas used in the manufacturing process, the Company has instituted a natural gas hedging program. The Company hedges portions of its forecasted natural gas purchases with forward contracts. When the price of natural gas increases, its cost is offset by the gains in the value of the forward contracts designated as hedges. Conversely, when the price of natural gas declines, the decrease in the cash flows on natural gas purchases is offset by losses in the value of the forward contract.

During the first quarter 2002, the Company had a swap agreement with Coral Energy Holdings, LP ("Coral Energy") to exchange monthly payments on notional quantities amounting to 57,000 MM Btu's. This contract was a derivative that had not been designated as a hedge. Under the swap agreement, the Company paid fixed prices averaging $4.6265 per MM Btu. For the year ended December 31, 2001, the Company marked the gas contract to market, recording a loss of $113,000. The Company recorded the loss as a component of "Cost of Goods Sold" on the income statement. The Company settled this swap agreement during the first quarter 2002 by paying cash of $136,000, recording an additional loss of $23,000.

On September 3, 2002, the Company entered into a natural gas contract with Bank of America, N.A. to achieve the objectives of the hedging program. The Company designated the contract as a cash flow hedge. The contract was settled based on natural gas market prices for January 1, 2003 through April 30, 2003. The Company paid fixed prices averaging $3.90 per MM Btu on notional quantities amounting to 60,000 MM Btu's. The fair value of the hedge decreased $56,145 from December 31, 2002, to April 30, 2003 due to the settlement of the hedge.

On September 16, 2003, the Company entered into a new natural gas contract with Bank of America, N.A. to achieve the objectives of the hedging program. The Company designated the contract as a cash flow hedge, with the expectation that it would be highly effective in offsetting the price of natural gas. The contract will be settled based on natural gas market prices from January 1, 2004 through April 30, 2004. The Company will pay fixed prices averaging $5.26 per MM Btu on notional quantities amounting to 80,000 MM Btu's. For the year ended December 31, 2003, the Company marked the gas contract to market, recording a gain of $72,820 as a component of "Other Comprehensive Income" and also recorded it as an asset on the balance sheet at December 31, 2003. The recognition of this gain had no effect on the Company's cash flow.

To protect its exposure to foreign exchange risks, TMM enters into foreign currency forward contracts. Gains and losses on foreign exchange contracts designated as hedges of identified exposure are offset against the foreign exchange gains and losses on the hedged financial assets and liabilities. Where the instrument is used to hedge against anticipated future transactions, gains and losses are not recognized until the transaction occurs. On December 31, 2003, TMM marked the contracts to market, recording a gain of $6,883 as a component of "Other Comprehensive Income" and also recorded it as an asset on the balance sheet at December 31, 2003. The recognition of this gain had no effect on the Company's cash flow.

-22-

On January 13, 2004, the Company increased its domestic line of credit with Bank of America, NA (the "Bank") from $3,500,000 to $5,000,000, subject to a defined borrowing base limited to the lesser of $5,000,0000 or 80% of eligible accounts receivable and 50% of eligible inventory up to a maximum of $2,850,000.

On January 19, 2004, the Company announced that it had raised approximately $2,500,000 through the placement of 526,316 shares of common stock at $4.75 to existing shareholders and new institutional holders. The Company also raised $1,000,000 through the placement of 200,000 shares of convertible preferred stock at $5.00. The convertible preferred stock has a 6.0% coupon rate, and each preferred share is convertible into 0.84 shares of common stock and is redeemable at the option of the Company after two years. The securities were issued pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933. The transactions were privately negotiated without any general solicitation or advertising. The purchasers are "sophisticated investors" within the meaning of the Securities Act of 1933 and have access to all information concerning the Company needed to make an informed decision regarding the transaction. At the date of issue, the common and preferred shares were not registered under the Securities Act of 1933 and, therefore, could not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The Company has agreed to file a registration statement with the Securities and Exchange Commission covering the resale of the common shares within 90 days. The funds were used to pay down the Company's domestic line of credit $2,700,000, $500,000 was used to payoff the $250,000 loans from our Directors, David Hartman and Douglas Hartman, and the balance was used for working capital purposes.

On February 2, 2004, the Company increased its domestic term loan of $580,833 on December 31, 2003, to $782,500. The additional proceeds were used to pay off the remaining balance of a loan from a Director carrying a 10% interest rate. The term loan has a fixed interest rate of 5.2%.

The Company announced on March 9, 2004, that it intends to file a registration statement with the Securities and Exchange Commission covering the resale of 526,316 shares of its common stock issued in the January 19, 2004, private placement. The Company also intends to include in the registration statement approximately 2,855,000 additional shares of common stock held by other investors and affiliates, including directors and entities the Company is associated with. The Company will not receive any proceeds as a result of the sales.

TP&T is currently negotiating with its bank in the Netherlands to increase the line of credit from 504,235 Euros ($635,185 at December 31, 2003) to 650,000 Euros ($818,805 at December 31, 2003 exchange rate of 1.2597 US dollars to 1 Euro).The increase is for working capital purposes. TP&T is also negotiating a five (5) year term loan of 676,000 Euro ($851,557 at December 31, 2003 exchange rate) to finance an expansion of the plant's warehouse and office facilities. There is no guarantee that the Company will be successful in obtaining the increased financing.

On March 18, 2004, Bank of America issued the Company a waiver allowing the Company to co-sign TP&T's Euro based short term credit facility.

The Financial Statements are set out in this annual report on Form 10-KSB commencing on page F-1.

No disagreements between the Company and its accountants have occurred within the 24-month period prior to the date of the Company's most recent financial statements or during any subsequent interim period.

-23-

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) and Rule 15d-14 under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the date of the evaluation, the Company's disclosure controls and procedures are effective in timely alerting them to the material information relating to the Company required to be included in its periodic filings with the Securities and Exchange Commission.

Changes in Internal Controls. During the period covered by this report, there were no significant changes in the Company's internal controls or, to management's knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation.

The Company had adopted a Code of Ethics that applies to all of its directors, officers (including its chief executive officer, chief financial officer, controller and any person performing similar functions) and employees. The Code of Ethics, which will be contained in the Company's Definitive Proxy Statement for its 2004 Annual Meeting of Shareholders, is incorporated herein by reference. The Code of Ethics can also be viewed on the Company's web site at www.torminerals.com. The Company intends to post amendments to, or waivers from, its Code of Ethics that apply to its Chief Executive Officer, Chief Financial Officer, Controller and any other person performing similar functions, on its website.

Information under the caption "Executive Compensation", which will be contained in the Company's Definitive Proxy Statement for its 2004 Annual Meeting of Shareholders, is incorporated herein by reference.

Information under the caption "Executive Compensation - Security Ownership of Management", which will be contained in the Company's Definitive Proxy Statement for its 2004 Annual Meeting of Shareholders, is incorporated herein by reference.

The discussion under the caption "Certain Transactions", which will be contained in the Company's Definitive Proxy Statement for its 2004 Annual Meeting of Shareholders, is incorporated herein by reference.

-24-

-25-

-27-

TOR MINERALS INTERNATIONAL, INC.
Annual Report on Form 10-KSB

Board of Directors and Shareholders

TOR Minerals International, Inc.

We have audited the accompanying consolidated balance sheets of TOR Minerals International, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated income statements, statements of shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TOR Minerals International, Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the financial statements, in 2003 the Company changed its method of accounting for stock-based compensation.

As discussed in Note 1 to the financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets.

San Antonio, Texas

February 3, 2004

F-2

See accompanying notes.

F-3

See accompanying notes.

F-4

See accompanying notes.

F-5

See accompanying notes.

F-6

See accompanying notes.

F-7

TMM measures and records its transactions in terms of the local Malaysian currency, the ringgit which is also the functional currency. Malaysia imposed capital controls and fixed its ringgit currency at 3.8 ringgits per 1 US dollar in September of 1998 to stem the outflow of short-term capital. The Malaysian government has not changed the fixed exchange rate since that time. However, there can be no assurance that the Malaysian government will maintain this fixed rate of currency exchange.

TP&T uses the US dollar as its functional currency. As a result of the changes in the exchange rate, gains and losses due to fluctuations in the value of any Euro denominated transactions are recorded on the Company's consolidated statement of operations.

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from these estimates.

The Company considers all highly liquid investments readily convertible to known cash amounts and with a maturity of three months or less at the date of purchase to be cash equivalents.

The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The allowance for non-collection of accounts receivable is based upon the expected collectibility of all accounts receivable including review of agings and current economic conditions. At December 31, 2003, the Company maintained a reserve for doubtful accounts of $60,000.

Inventories are stated at the lower of cost or market with cost being determined principally by use of the average-cost method. At December 31, 2003, the Company maintained a reserve for inventory obsolescence of $30,000. TMM is the Company's sole suppler of SR, the raw material for the Company's primary titanium product HITOX. There are other available sources of SR that would be available if this supply was interrupted.

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of depreciable assets which range from 3 to 35 years, except in Malaysia where most of the Company's production facility is depreciated using the units of production method. Maintenance and repair costs are charged to operations as incurred and major improvements extending asset lives are capitalized.

The impairment of tangible assets, other than goodwill and intangible assets with definite lives, is assessed when changes in circumstances indicate that their current carry value may not be recoverable. Under Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which the Company adopted effective January 1, 2002, assets held for use are tested for impairment if events or circumstances indicate potential impairment. Determination of impairment, if any, is made based on comparison of the undiscounted value of estimated future cash flows to carrying value. Asset impairment losses are then measured as the excess of the carrying value over the estimated fair value of such assets.

F-8

In July 2001 the FASB issued Statements of Financial Accounting Standards No. 141, Business Combinations. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Intangible assets with finite lives will continue to be amortized over their estimated useful lives

Definite-lived Intangibles:
The Company adopted the provisions of SFAS 141 effective January 1, 2002. In connection with the Company's purchase of assets from the Royal Begemann Group in May 2001, the Company recorded intangible assets related to non-compete agreements in the amount of $300,000. These intangible assets will be amortized over three (3) years. As of December 31, 2003, the Company had accumulated amortization of $258,333 related to these assets and will record amortization of $41,667 in 2004.

Indefinite-lived Intangibles:
The Company has no indefinite-lived intangible assets.

The Company adopted the provisions of SFAS 142 effective January 1, 2002. Under the provisions of SFAS 142, the value of the Company's goodwill (with a carrying value of $1,283,000 relating to TP&T) is no longer subject to amortization but will be reviewed at least annually for impairment or more frequently if impairment indicators exist. The Company completed its annual impairment test October 1, 2003, and concluded that there was no impairment of recorded goodwill, as the fair value of the reporting unit exceeded the carrying amount as of October 1, 2003. There can be no assurance that future goodwill impairment tests will not result in a charge to net earnings (loss).

The Company recognizes revenue when each of the following four criteria are met: 1) a contract or sales arrangement exists; 2) products have been shipped; 3) the price of the products is fixed or determinable; 4) collectibility is reasonably assured. The Company's pigment business has generally experienced higher sales during the second and third calendar quarters, due to increased activity in construction and maintenance during warm weather and the associated increase in demand for materials which use pigments such as paints and plastic pipe. The Company's principal product line, HITOX pigments, accounted for 48% and 60% of total sales in 2003 and 2002, respectively.

The Company records shipping and handling costs as a component of cost of goods sold.

The Company records income taxes under Financial Accounting Standards Board Statement ("FASB") No. 109, 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.

Basic earnings per share are based on the weighted average number of shares outstanding and exclude any dilutive effects of options. Diluted earnings per share reflect the effect of all dilutive items.

Effective January 1, 2001, the Company adopted the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The fair value of all outstanding derivative instruments are recorded on the Consolidated Balance Sheet in other current and non-current assets and liabilities. Derivatives are held as part of a formally documented risk management (hedging) program. All derivatives are straightforward and are held for purposes other than trading. 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 other income or expense in the current period. If the hedging relationship ceases to be highly effective or if becomes probable that an expected transaction will no longer occur, gains or losses on the derivative are recorded in other income or expense. Changes in the fair value of derivatives are recorded in current earnings along with the change in fair value of the underlying hedged item if the derivative is designated as a fair value hedge or in other comprehensive income if the derivative is designated as a cash flow hedge. If no hedging relationship is designated, the derivative is marked to market through earnings. The Company utilizes natural gas forward contracts to hedge a portion of its TOR US natural gas needs and foreign currency forward contracts at TMM to hedge a portion of its foreign currency risk. (See Note 12 to the "Notes to the Consolidated Financial Statements" on page 19)

F-9

On January 1, 2003, the Company adopted FASB Statement 148, Accounting for Stock Based Compensation - Transition and Disclosure. Statement 148 amended FASB Statement 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to Statement 123's fair value method of accounting for stock-based employee compensation. Statement 148 also amends the disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements.

Upon adoption of Statement 148, effective January 1, 2003, the Company elected to change its method of accounting for stock options from the intrinsic value method of Opinion 25 to the fair value method of Statement 123. The Company has utilized the "Modified Prospective Method" of transition as provided for in Statement 148. Under the Modified Prospective Method, the Company has recorded compensation expense of $346,713 for the twelve-month period ending December 31, 2003 related to all options outstanding through December 31, 2003. The result of which reduced the diluted earnings per share $0.05. (Had the Company not elected to change its method of accounting for stock options from the intrinsic value method to the fair value method of Statement 123, the diluted earnings per share would have been $0.22)

Pro forma information regarding net income and earnings per share is required by Statement 148, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using a Black-Scholes option-pricing model.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for the twelve-month period ending December 31, 2002 follows:

Exercise prices on options outstanding at December 31, 2003, ranged from $0.92 to $5.40 per share. The weighted-average remaining contractual life of the options is 7.82 years. The number of options exercisable at December 31, 2003 and 2002 was 421,650 and 305,600, respectfully.

On January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. Statement 143 applies to legal obligations associated with the retirement of long-lived assets that result from acquisition, construction, development and/or normal operation of a long-lived asset. The adoption of this statement did not materially impact the Company's financial position or results of operations.

F-10

On January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Statement 146 addresses the accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Terminations Benefits and Other Costs to Exit an Activity." It also substantially nullifies EITF Issue No. 88-10, "Costs Associated with Lease Modification or Termination." The adoption of this statement did not materially impact the Company's financial position or results of operations.

On January 1, 2003, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 addresses consolidation of business enterprises of variable interest entities. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003, and for the first fiscal year or interim period ending after December 15, 2003, for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has not acquired any variable interest entities subsequent to January 31, 2003, and will therefore adopt FIN 46 during the quarter ending March 31, 2004. Adoption of FIN 46 is not expected to materially impact the Company's financial position or results of operations.

Certain 2002 balances have been reclassified for comparative purposes.

The Company entered into a loan and security agreement on April 5, 2001 with the Company's Chairman of the Board, Bernard Paulson, a 15.5% shareholder, through Paulson Ranch, Ltd. Paulson Ranch made a loan to the Company in the amount of $600,000 with an interest rate of 10.0%. The principal balance outstanding on December 31, 2003 was $230,735. On February 6, 2004, the Company paid the outstanding principal balance of $230,735 to Paulson Ranch.

On December 12, 2003, the Company entered into a loan and security agreement with the Company's Chairman of the Board, Bernard Paulson through the Paulson Ranch, Ltd., under which Paulson Ranch made a loan to the Company in the amount $500,000 with a variable interest rate of 4% per annum above the "Wall Street Journal Prime Rate". Principal is due and payable on or before February 15, 2005. Accrued interest is paid monthly. The principal balance outstanding on December 31, 2003 was $500,000. The loan proceeds were used for working capital.

On December 12, 2003, the Company entered into a loan and security agreement David Hartman, a member of the Company's Board of Directors and a 7.9% shareholder, through the D & C H Trust, under which the D &C H Trust made a loan to the Company in the amount $250,000 with a variable interest rate of 4% per annum above the "Wall Street Journal Prime Rate". The principal balance outstanding on December 31, 2003 was $250,000. The Company paid the outstanding principal balance of $250,000 and accrued interest to the D & C H Trust on February 6, 2004. The loan proceeds were used for working capital.

On December 12, 2003, the Company entered into a loan and security agreement with Douglas Hartman, a member of the Company's Board of Directors and a 7.9% shareholder, through the Douglas MacDonald Hartman Family Irrevocable Trust (the "Trust"), under which the Trust made a loan to the Company in the amount $250,000 with a variable interest rate of 4% per annum above the "Wall Street Journal Prime Rate". The principal balance outstanding on December 31, 2003 was $250,000. The Company paid the outstanding balance of $250,000 and accrued interest to the Trust on February 6, 2004. The loan proceeds were used for working capital.

F-11

A summary of long-term debt follows:

The majority of the Company's non-related party debt is either floating rate or has been recently negotiated and carrying value approximates fair value.

The Company entered into a new loan agreement with Bank of America, N.A. (the "Bank") on May 1, 2002, which amended and restated the loan agreement between the Bank and the Company dated August 31, 1995, as amended. The loan agreement increased the Company's line of credit (the "Line") from $1,300,000 to $1,500,000. On August 23, 2002, the Company and the Bank entered into a new loan agreement (the "Agreement"). The Agreement amended and restated the loan agreement between the Bank and the Company dated May 1, 2002. The Agreement, which matured on August 31, 2003, increased the Company's Line from $1,500,000 to $3,000,000. On December 13, 2003, the Company and the Bank entered into the Third Amendment to the Agreement which extended the Line from August 31, 2004 to August 31, 2005. The amendment also authorized the Company to borrow up to $1,000,000 from its Directors. The Company entered into the Fourth Amendment to the Agreement with the Bank on January 13, 2004, which increased the Line $5,000,000, subject to a defined borrowing base limited to the lesser of $5,000,0000 or 80% of eligible accounts receivable and 50% of eligible inventory up to a maximum of $2,850,000. On February 2, 2004, the Company entered into the Fifth Amendment to the Agreement with the Bank which amended the Company's term loan as noted below.

The Agreement contains covenants that, among other things, require maintenance of certain financial ratios based on the results of the consolidated operations. The covenants are calculated at the end of each quarter. For the twelve-month period ending December 31, 2003, the Company was in compliance with all financial ratios contained in the amended Agreement dated December 13, 2003. However, the Company was not in compliance with certain covenants that require Bank of America's approval prior to the Company acting as a guarantor or co-signer on any other loan and, therefore, was in technical default since May 2003. The Company was in violation of this covenant when it signed TP&T's Euro based short-term credit facility with Rabobank. As a result, the Bank issued a waiver dated March 18, 2004. Under the terms of the Agreement, payment of the Line and the term loan are secured by the Company's property, plant and equipment, as well as inventory and accounts receivable.

The Company's Line expires August 31, 2005. The interest rate on the Line is the Bank's prime. At December 31, 2003, the amount of credit available to the Company under the Line is limited to the lesser of (a) $3,500,000 or (b) a defined borrowing base of 80% of eligible accounts receivable and 50% of eligible inventory up to a maximum of $2,000,000. At December 31, 2003, the Company had $2,825,000 outstanding on the Line and $645,000 was available to the Company on that date based on eligible accounts receivable and inventory borrowing limitations.

F-12

The Company's one term loan with the Bank, which was scheduled to mature on May 1, 2007, had a balance of $580,833 on December 31, 2003. The Fifth Amendment to the Agreement increased the term loan to $782,500 on January 13, 2004. The loan proceeds were used to refinance the Company's term loan that was due to mature on May 1, 2007, and pay the balance outstanding on the Company's loan with Paulson Ranch, a related party, that was due to mature on April 5, 2005. The interest rate for the loan is fixed until maturity at 5.2%. Monthly principal and interest payments will commence on March 1, 2004 and continue through May 1, 2007. The monthly principal payment is $20,064.

In addition to the covenants described above, the loan agreements covering both the Line and the term loan include subjective acceleration clauses that allow the Bank to accelerate payment in the event that, in the judgment of the Bank, adverse changes in the Company's business.

In April 2001, the Company raised $3,010,000 in a private placement of common stock and convertible debentures. In the private placement, the Company issued 301,000 shares of its common stock and $2,709,000 principal amount of convertible debentures. On December 14, 2001, Richard Bowers, the Company's President and Chief Executive Officer, exercised his option to convert $27,000 of debentures into 15,000 common shares at the $1.80 per share conversion rate. On August 9, 2002, Bernard Paulson, David Hartman, Douglas Hartman, Thomas Pauken, Craig Epperson, and Christopher McGougan exercised their option(s) to convert $2,322,000 of debentures into 1,290,000 common shares at the $1.80 per share conversion rate. On April 3, 2003, the Renaissance Group exercised its option to convert the remaining 200,000 debentures with a carrying value of $360,000 into 200,000 common shares at the $1.80 per share conversion rate.

The Company's subsidiary, TMM, has loan agreements with two banks in Malaysia, HSBC Bank Malaysia Berhad and RHB Bank Berhad, which provide a total short-term credit facility of $5,394,737. At December 31, 2003 TMM had utilized $839,809 of that facility under the ECR with a weighted average interest rate of 3.5%. The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of 150 days or less against customers' and inter-company purchase orders. The borrowings under the short-term credit facility are subject to a demand provision which is customary in Malaysia regarding short-term banking facilities. The credit facility with HSBC Bank also prohibits loans to related parties and prohibits TMM from paying dividends without prior consent of the bank. In the event dividends are declared, the payment would be subject to a 28% Malaysian income tax. The facility is subject to annual review and renewal.

TMM has two term loans with HSBC Bank Labuan and RHB Bank Labuan. At December 31, 2003 the outstanding principal balance on each of the two term loans was $34,998 for a total outstanding borrowings of $69,996. The loans are secured by TMM's inventory, accounts receivable, and property, plant and equipment and are payable in monthly payments of $17,500 each, plus interest. The term loans are subject to certain subjective acceleration covenants based on the judgment of the banks. Additionally, if repayment of the short-term credit facilities are demanded, these term loans would also become due immediately. These loans were fully paid on February 26, 2004.

The Company's subsidiary, TP&T, has a loan agreement with a bank in the Netherlands, Rabobank, which provides a total short-term credit facility of EURO 504,235 ($635,185 at December 31, 2003) with a weighted average interest rate of 6%. The credit facility is secured by TP&T's inventory and accounts receivable. The Company has also co-signed this credit facility. At December 31, 2003 TP&T had utilized EURO 469,272 ($591,142 at December 31, 2003) of their short-term credit facility. TP&T's borrowings are also subject to a demand provision.

Management believes that it has adequate liquidity for fiscal year 2004 and expects to maintain compliance with all financial covenants throughout 2004.

The following is a summary of maturities of long-term debt as of December 31, 2003:

F-13

A summary of inventories follows: