A side-stream ceramic membrane reactor system was developed that can facilitate the in situ separation of ultrafine catalysts from the reaction mixture and make the production process continuous. Continuous hydroxylation of phenol to dihydroxybenzene over ultrafine titanium silicalites-1 (TS-1) was taken as a model reaction to evaluate the feasibility and performance of the membrane reactor system. The effects of membrane pore size and operation conditions (residence time, temperature, catalyst concentration, phenol/H2O2 molar ratio) on the performance of the reactor system were examined via single factor experiments. We demonstrated that the membrane pore size and operation conditions greatly affect the conversion, selectivity and filtration resistance. The phenol conversion and dihydroxybenzene selectivity remain stable at about 11% and 95% in a 20-h continuous run, respectively.