##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 29, 2008

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number 000-17297





BTU INTERNATIONAL, INC.

(Exact name of Registrant as specified in its
charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|DELAWARE                                                       |  | 04-2781248                             
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|23 Esquire Road, North Billerica, Massachusetts                |  | 01862-2596                             
|(Address of principal executive offices)                       |  | (Zip Code)                             

Registrants telephone number, including area code: (978) 667-4111





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large Accelerated Filer |  |  ̈ |  | Accelerated Filer         |  | x
|                        |  |   | 
|Non-Accelerated Filer   |  |  ̈ |  | Smaller Reporting Company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).    Yes   ̈    No  x

Indicate the number of shares outstanding of the Registrants Common Stock, par value $.01 per share, as of the latest practicable date: As of August 6, 2008: 9,388,311 shares.









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##### Table of Contents

BTU INTERNATIONAL, INC.

TABLE OF CONTENTS



|                                                                                              |  |      
|--------------------------------------------------------------------------------------------- |  | -----
|PART I. FINANCIAL INFORMATION                                                                 |  |      
|                                                                                              | 
|Item 1. Financial Statements (Unaudited)                                                      |  |      
|                                                                                              | 
|Unaudited Condensed Consolidated Balance Sheets                                               |  | 1    
|Unaudited Condensed Consolidated Statements of Operations                                     |  | 2    
|Unaudited Condensed Consolidated Statements of Stockholders Equity and Comprehensive Income  |  | 3    
|Unaudited Condensed Consolidated Statements of Cash Flows                                     |  | 4-5  
|Notes to Unaudited Condensed Consolidated Financial Statements                                |  | 6-11 
|                                                                                              | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11-15
|                                                                                              | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  | 15   
|                                                                                              | 
|Item 4. Controls and Procedures                                                               |  | 15-16
|                                                                                              | 
|PART II. OTHER INFORMATION                                                                    |  |      
|                                                                                              | 
|Item 1A. Risk Factors                                                                         |  | 16   
|Item 5. Other Information                                                                     |  | 16   
|Item 6. Exhibits                                                                              |  | 17   
|                                                                                              | 
|Signatures                                                                                    |  | 18   
|EX-3.1 Amended and Restated By-Laws                                                           |  |      
|EX-31.1 Section 302 Certification of C.E.O.                                                   |  |      
|EX-31.2 Section 302 Certification of C.F.O.                                                   |  |      
|EX-32.1 Section 906 Certification of C.E.O.                                                   |  |      
|EX-32.2 Section 906 Certification of C.F.O.                                                   |  |      



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##### Table of Contents

BTU INTERNATIONAL, INC

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)



|                                                                                                                                                                                                                           |  |              |        |   |                  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                                                                                                                                                                                                           |  | June 29,2008 |        |   | December 31,2007 |  
|Assets                                                                                                                                                                                                                     |  |              |        |   |                  |   |        |  
|                                                                                                                                                                                                                           |  |             
|Current assets                                                                                                                                                                                                             |  |              |        |   |                  |   |        |  
|Cash and cash equivalents                                                                                                                                                                                                  |  | $            | 27,589 |   |                  | $ | 25,065 |  
|Accounts receivable, net                                                                                                                                                                                                   |  |              | 19,841 |   |                  |   | 18,832 |  
|Inventories, net                                                                                                                                                                                                           |  |              | 18,263 |   |                  |   | 16,891 |  
|Other current assets                                                                                                                                                                                                       |  |              | 1,116  |   |                  |   | 787    |  
|                                                                                                                                                                                                                           |  |              |        |   |                  |   |        |  
|Total current assets                                                                                                                                                                                                       |  |              | 66,809 |   |                  |   | 61,575 |  
|                                                                                                                                                                                                                           |  |             
|Property, plant and equipment, net                                                                                                                                                                                         |  |              | 5,955  |   |                  |   | 5,536  |  
|                                                                                                                                                                                                                           |  |             
|Other assets, net                                                                                                                                                                                                          |  |              | 2,148  |   |                  |   | 2,401  |  
|                                                                                                                                                                                                                           |  |              |        |   |                  |   |        |  
|Total assets                                                                                                                                                                                                               |  | $            | 74,912 |   |                  | $ | 69,512 |  
|                                                                                                                                                                                                                           |  |              |        |   |                  |   |        |  
|Liabilities and stockholders equity                                                                                                                                                                                       |  |              |        |   |                  |   |        |  
|                                                                                                                                                                                                                           |  |             
|Current liabilities                                                                                                                                                                                                        |  |              |        |   |                  |   |        |  
|Current portion of long-term debt                                                                                                                                                                                          |  | $            | 284    |   |                  | $ | 277    |  
|Accounts payable                                                                                                                                                                                                           |  |              | 7,451  |   |                  |   | 5,645  |  
|Other current liabilities                                                                                                                                                                                                  |  |              | 6,873  |   |                  |   | 5,088  |  
|                                                                                                                                                                                                                           |  |              |        |   |                  |   |        |  
|Total current liabilities                                                                                                                                                                                                  |  |              | 14,608 |   |                  |   | 11,010 |  
|                                                                                                                                                                                                                           |  |             
|Long-term debt, less current portion                                                                                                                                                                                       |  |              | 9,127  |   |                  |   | 9,267  |  
|                                                                                                                                                                                                                           |  |             
|Other long-term liabilities                                                                                                                                                                                                |  |              |       |   |                  |   | 300    |  
|                                                                                                                                                                                                                           |  |              |        |   |                  |   |        |  
|Total liabilities                                                                                                                                                                                                          |  |              | 23,735 |   |                  |   | 20,577 |  
|                                                                                                                                                                                                                           |  |              |        |   |                  |   |        |  
|Commitments and contingencies                                                                                                                                                                                              |  |              |        |   |                  |   |        |  
|                                                                                                                                                                                                                           |  |             
|Stockholders equity                                                                                                                                                                                                       |  |              |        |   |                  |   |        |  
|Preferred stock, $1.00 par value - 5,000,000 shares authorized; no shares issued or outstanding                                                                                                                            |  |              |       |   |                  |   |       |  
|Common stock, $0.01 par value - 25,000,000 shares authorized; 10,537,321 shares issued and 9,388,311 shares outstanding at June 29,2008 and 10,502,311 shares issued and 9,353,301 shares outstanding at December 31, 2007 |  |              | 105    |   |                  |   | 105    |  
|Additional paid in capital                                                                                                                                                                                                 |  |              | 44,728 |   |                  |   | 44,046 |  
|Retained earnings                                                                                                                                                                                                          |  |              | 8,201  |   |                  |   | 7,814  |  
|Treasury stock, at cost, 1,149,010 shares at June 29, 2008 and December 31, 2007                                                                                                                                           |  |              | (4,177 | ) |                  |   | (4,177 | )
|Accumulated other comprehensive income                                                                                                                                                                                     |  |              | 2,320  |   |                  |   | 1,147  |  
|                                                                                                                                                                                                                           |  |              |        |   |                  |   |        |  
|Total stockholders equity                                                                                                                                                                                                 |  |              | 51,177 |   |                  |   | 48,935 |  
|                                                                                                                                                                                                                           |  |              |        |   |                  |   |        |  
|Total liabilities and stockholders equity                                                                                                                                                                                 |  | $            | 74,912 |   |                  | $ | 69,512 |  
|                                                                                                                                                                                                                           |  |              |        |   |                  |   |        |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per
share data)

(unaudited)



|                                               |  |                    |           |   |                  |   |           |               |  |   |              |   |  |   |           |  
|---------------------------------------------- |  | ------------------ | --------- | - | ---------------- | - | --------- | ------------- |  | - | ------------ | - |  | - | --------- | -
|                                               |  | Three Months Ended |           |   | Six Months Ended |  
|                                               |  | June 29, 2008      |           |   | July 1, 2007     |   |           | June 29, 2008 |  |   | July 1, 2007 |  
|Net sales                                      |  | $                  | 20,384    |   |                  | $ | 13,770    |               |  | $ | 37,003       |   |  | $ | 28,934    |  
|Costs of goods sold                            |  |                    | 11,064    |   |                  |   | 7,833     |               |  |   | 21,060       |   |  |   | 16,434    |  
|                                               |  |                    |           |   |                  |   |           |               |  |   |              |   |  |   |           |  
|Gross profit                                   |  |                    | 9,320     |   |                  |   | 5,937     |               |  |   | 15,943       |   |  |   | 12,500    |  
|                                               |  |                    |           |  
|Operating expenses:                            |  |                    |           |   |                  |   |           |               |  |   |              |   |  |   |           |  
|Selling, general and administrative            |  |                    | 6,401     |   |                  |   | 4,121     |               |  |   | 11,313       |   |  |   | 8,665     |  
|Research, development and engineering          |  |                    | 1,787     |   |                  |   | 1,524     |               |  |   | 3,390        |   |  |   | 2,895     |  
|                                               |  |                    |           |   |                  |   |           |               |  |   |              |   |  |   |           |  
|Operating income                               |  |                    | 1,132     |   |                  |   | 292       |               |  |   | 1,240        |   |  |   | 940       |  
|                                               |  |                    |           |  
|Interest income                                |  |                    | 78        |   |                  |   | 245       |               |  |   | 178          |   |  |   | 512       |  
|Interest expense                               |  |                    | (174      | ) |                  |   | (120      | )             |  |   | (354         | ) |  |   | (286      | )
|Foreign exchange loss                          |  |                    | (395      | ) |                  |   | (194      | )             |  |   | (271         | ) |  |   | (315      | )
|Other income, net                              |  |                    |          |   |                  |   | 4         |               |  |   |             |   |  |   | 110       |  
|                                               |  |                    |           |   |                  |   |           |               |  |   |              |   |  |   |           |  
|Income before provision for income taxes       |  |                    | 641       |   |                  |   | 227       |               |  |   | 793          |   |  |   | 961       |  
|                                               |  |                    |           |  
|Provision for income taxes                     |  |                    | 353       |   |                  |   | 21        |               |  |   | 406          |   |  |   | 96        |  
|                                               |  |                    |           |   |                  |   |           |               |  |   |              |   |  |   |           |  
|Net income                                     |  | $                  | 288       |   |                  | $ | 206       |               |  | $ | 387          |   |  | $ | 865       |  
|                                               |  |                    |           |   |                  |   |           |               |  |   |              |   |  |   |           |  
|Income per share:                              |  |                    |           |   |                  |   |           |               |  |   |              |   |  |   |           |  
|Basic                                          |  | $                  | 0.03      |   |                  | $ | 0.02      |               |  | $ | 0.04         |   |  | $ | 0.09      |  
|Diluted                                        |  | $                  | 0.03      |   |                  | $ | 0.02      |               |  | $ | 0.04         |   |  | $ | 0.09      |  
|                                               |  |                    |           |  
|Weighted average number of shares outstanding: |  |                    |           |   |                  |   |           |               |  |   |              |   |  |   |           |  
|Basic shares                                   |  |                    | 9,375,097 |   |                  |   | 9,275,349 |               |  |   | 9,365,175    |   |  |   | 9,218,358 |  
|Effect of dilutive options                     |  |                    | 149,559   |   |                  |   | 171,618   |               |  |   | 158,193      |   |  |   | 167,316   |  
|                                               |  |                    |           |   |                  |   |           |               |  |   |              |   |  |   |           |  
|Diluted shares                                 |  |                    | 9,524,656 |   |                  |   | 9,446,967 |               |  |   | 9,523,368    |   |  |   | 9,385,674 |  
|                                               |  |                    |           |   |                  |   |           |               |  |   |              |   |  |   |           |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 29, 2008

(in thousands)

(unaudited)



|                             |  |              |  |                   |     |          |   |                |  |             |                               |   |       |  |        |        |       |  |   |       |  |   |       
|---------------------------- |  | ------------ |  | ----------------- | --- | -------- | - | -------------- |  | ----------- | ----------------------------- | - | ----- |  | ------ | ------ | ----- |  | - | ----- |  | - | ------
|                             |  | Common Stock |  | AdditionalPaid-In |     | Retained |   | Treasury Stock |  |             | AccumulatedOtherComprehensive |   |      
|                             |  | # of shares  |  | $                 |     | Capital  |   | Earnings       |  | # of shares |                               | $ |       |  | Income |        | Total
|Balance at December 31, 2007 |  | 10,502       |  | $                 | 105 |          | $ | 44,046         |  | $           | 7,814                         |   | 1,149 |  | $      | (4,177 | )     |  | $ | 1,147 |  | $ | 48,935
|Net income                   |  |             |  |                   |    |          |   |               |  |             | 387                           |   |      |  |        |       |       |  |   |      |  |   | 387   
|Exercise of stock options    |  | 30           |  |                   |    |          |   | 93             |  |             |                              |   |      |  |        |       |       |  |   |      |  |   | 93    
|Issuance of stock under ESPP |  | 5            |  |                   |    |          |   | 46             |  |             |                              |   |      |  |        |       |       |  |   |      |  |   | 46    
|Stock-based compensation     |  |             |  |                   |    |          |   | 543            |  |             |                              |   |      |  |        |       |       |  |   |      |  |   | 543   
|Translation adjustment       |  |             |  |                   |    |          |   |               |  |             |                              |   |      |  |        |       |       |  |   | 1,173 |  |   | 1,173 
|                             |  |              |  |                   |     |          |   |                |  |             |                               |   |       |  |        |        |       |  |   |       |  |   |       
|Balance at June 29, 2008     |  | 10,537       |  | $                 | 105 |          | $ | 44,728         |  | $           | 8,201                         |   | 1,149 |  | $      | (4,177 | )     |  | $ | 2,320 |  | $ | 51,177
|                             |  |              |  |                   |     |          |   |                |  |             |                               |   |       |  |        |        |       |  |   |       |  |   |       



|                                               |  |                  |     |                |   |      
|---------------------------------------------- |  | ---------------- | --- | -------------- | - | -----
|                                               |  | ThreeMonthsEnded |     | SixMonthsEnded
|                                               |  | June 29, 2008   
|Comprehensive income is calculated as follows: |  |                  |     |                |   |      
|Net income                                     |  | $                | 288 |                | $ | 387  
|Other comprehensive gain                       |  |                  |     |                |   |      
|Foreign currency translation adjustment        |  |                  | 339 |                |   | 1,173
|                                               |  |                  |     |                |   |      
|Comprehensive income                           |  | $                | 627 |                | $ | 1,560
|                                               |  |                  |     |                |   |      

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 29, 2008
AND JULY 1, 2007

(in thousands)

(unaudited)



|                                                                              |  |              |        |   |             |   |        |  
|----------------------------------------------------------------------------- |  | ------------ | ------ | - | ----------- | - | ------ | -
|                                                                              |  | June 29,2008 |        |   | July 1,2007 |  
|Cash flows from operating activities:                                         |  |              |        |   |             |   |        |  
|Net income                                                                    |  | $            | 387    |   |             | $ | 865    |  
|Adjustments to reconcile net cash provided by (used in) operating activities: |  |              |        |   |             |   |        |  
|Depreciation                                                                  |  |              | 609    |   |             |   | 449    |  
|Amortization                                                                  |  |              | 261    |   |             |   | 242    |  
|Provision (recovery) for bad debt                                             |  |              | 34     |   |             |   | (24    | )
|Provision for inventory obsolescense                                          |  |              | (69    | ) |             |   | (47    | )
|Stock-based compensation                                                      |  |              | 543    |   |             |   | 284    |  
|Gain on foreign currency forward contract                                     |  |              | (115   | ) |             |   |       |  
|Net change in operating assets and liabilities:                               |  |              |        |   |             |   |        |  
|Accounts receivable                                                           |  |              | (702   | ) |             |   | 489    |  
|Inventories                                                                   |  |              | (983   | ) |             |   | 1,350  |  
|Other current assets                                                          |  |              | (283   | ) |             |   | (101   | )
|Other assets                                                                  |  |              | 19     |   |             |   | 193    |  
|Accounts payable and other current liabilities                                |  |              | 3,173  |   |             |   | (1,871 | )
|                                                                              |  |              |        |   |             |   |        |  
|Net cash provided by operating activities                                     |  |              | 2,874  |   |             |   | 1,829  |  
|                                                                              |  |              |        |   |             |   |        |  
|Cash flows from (used in) investing activities:                               |  |              |        |   |             |   |        |  
|Purchases of property, plant and equipment                                    |  |              | (990   | ) |             |   | (883   | )
|Settlement of foreign currency forward contract                               |  |              | 60     |   |             |   |       |  
|                                                                              |  |              |        |   |             |   |        |  
|Net cash used in investing activities                                         |  |              | (930   | ) |             |   | (883   | )
|                                                                              |  |              |        |   |             |   |        |  
|Cash flows from (used in) financing activities:                               |  |              |        |   |             |   |        |  
|Principal payments under loan and capital lease agreements                    |  |              | (132   | ) |             |   | (151   | )
|Proceeds from the exercise of stock options                                   |  |              | 93     |   |             |   | 328    |  
|                                                                              |  |              |        |   |             |   |        |  
|Net cash provided by (used in) financing activities                           |  |              | (39    | ) |             |   | 177    |  
|                                                                              |  |              |        |   |             |   |        |  
|Effects of exchange rates on cash                                             |  |              | 619    |   |             |   | 113    |  
|                                                                              |  |              |        |   |             |   |        |  
|Net increase in cash and cash equivalents                                     |  |              | 2,524  |   |             |   | 1,236  |  
|Cash and cash equivalents, beginning of period                                |  |              | 25,065 |   |             |   | 25,100 |  
|                                                                              |  |              |        |   |             |   |        |  
|Cash and cash equivalents, end of period                                      |  | $            | 27,589 |   |             | $ | 26,336 |  
|                                                                              |  |              |        |   |             |   |        |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

FOR THE SIX MONTHS ENDED JUNE 29, 2008 AND JULY
1, 2007

(in thousands)

(unaudited)



|                                                   |  |              |    |             |   |      |  
|-------------------------------------------------- |  | ------------ | -- | ----------- | - | ---- | -
|                                                   |  | June 29,2008 |    | July 1,2007 |  
|Supplemental disclosures of cash flow information: |  |              |    |             |   |      |  
|Cash paid (received) during the periods for:       |  |              |    |             |   |      |  
|Interest                                           |  | $            | 76 |             | $ | (156 | )
|Income taxes                                       |  |              | 17 |             |   | 57   |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Basis for Presentation

The condensed consolidated balance
sheet, financial information and related disclosures as of and for the year ended December 31, 2007 have been derived from our consolidated financial statements, which have been audited as of that date. The condensed consolidated balance sheet
as of June 29, 2008 and the related condensed consolidated statements of operations and comprehensive income for the three and six months ended June 29, 2008 are unaudited. The condensed consolidated statements of cash flows and statement
of stockholders equity for the six months ended June 29, 2008 are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of such financial statements have been included. Such adjustments consisted
only of normal recurring items. Interim results are not necessarily indicative of results for any other period or for the full year. These financial statements do not include all disclosures associated with annual financial statements and,
accordingly, should be read in conjunction with the footnotes contained in the Companys consolidated financial statements as of and for the year ended December 31, 2007, together with the auditors report, included in the
Companys Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

(2) Summary of Significant Accounting Policies

The accounting policies underlying the accompanying unaudited condensed consolidated financial statements are those set forth in Note 1 to the consolidated
financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission.

(3) Inventories



|                                          |  |                |        |                  |   |       
|----------------------------------------- |  | -------------- | ------ | ---------------- | - | ------
|                                          |  | June 29,2008   |        | December 31,2007
|                                          |  | (in thousands)
|Raw materials and manufactured components |  | $              | 9,943  |                  | $ | 11,439
|Work-in-process                           |  |                | 5,821  |                  |   | 3,718 
|Finished goods                            |  |                | 2,499  |                  |   | 1,734 
|                                          |  |                |        |                  |   |       
|                                          |  | $              | 18,263 |                  | $ | 16,891
|                                          |  |                |        |                  |   |       

(4) Debt

Long-Term Debt at June 29, 2008 and December 31, 2007 consisted of (in thousands):



|                                                  |  |              |       |                  |   |      
|------------------------------------------------- |  | ------------ | ----- | ---------------- | - | -----
|                                                  |  | June 29,2008 |       | December 31,2007
|Mortgage note payable, interest rate of 6.84%     |  | $            | 9,407 |                  | $ | 9,538
|Capital lease obligations, interest rate of 6.75% |  |              | 4     |                  |   | 6    
|                                                  |  |              |       |                  |   |      
|                                                  |  |              | 9,411 |                  |   | 9,544
|Less - current maturities                         |  |              | 284   |                  |   | 277  
|                                                  |  |              |       |                  |   |      
|                                                  |  | $            | 9,127 |                  | $ | 9,267
|                                                  |  |              |       |                  |   |      

On March 30, 2006, we entered into a new mortgage note that is secured by our real property in Billerica, MA,
in the amount of $10 million. The mortgage note requires monthly payments of $76,280, which includes interest calculated at the rate of 6.84% per annum. This mortgage note payable has a balloon payment of $6.8 million due and payable
at maturity on December 23, 2015. The mortgage note had an outstanding balance at June 29, 2008 of approximately $9.4 million.



6



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BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



On March 1, 2007, the Company entered into an amended revolving loan agreement with a bank that allows for
unsecured aggregate borrowings, including letters of credit, up to a maximum of $15 million against a borrowing base of accounts receivable, inventory and fixed assets. The Company may elect to borrow at interest rates related to the banks
prime rate or LIBOR. This loan agreement extends to December 31, 2010.

As of June 29, 2008, the borrowing base would support the maximum
borrowings of $15 million, and there were no borrowings outstanding under the loan agreement.

(5) Earnings Per Share (EPS)

Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is
computed using the weighted average number of common and dilutive potential common shares outstanding during the period, using the treasury stock method. The number of common shares underlying options that were not included in the determination of
diluted EPS, because their effect would be anti-dilutive, was 338,838 and 365,931 for the three and six months ended June 29, 2008 and 222,602 and 304,759 for the three and six months ended July 1, 2007, respectively. The Company has
elected to adopt the Alternative Transition method provided by the FASB Staff Position 123(R)-3 for calculating the tax effects of stock-based compensation expense pursuant to Statement of Financial Accounting Standards No. 123R, Share-Based
Payment (SFAS 123R).

(6) Accounting for Stock-Based Compensation

The Companys stock option compensation expense was $306,283 and $536,183 respectively, for the three and six months ended June 29, 2008 and $152,489 and $284,782 for the three and six months ended July 1, 2007. These amounts
do not include expense related to restricted stock awards.

The fair value of each option is estimated on the date of grant using the Black-Scholes
option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected option life and expected volatility in the market value of the
underlying common stock. The Company is also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Historical data was used to estimate pre-vesting
forfeitures and record stock-based compensation expense only for those awards that are expected to vest. We used the following assumptions for options issued in the following periods:



|                                               |  |                    |   |  |          |  
|---------------------------------------------- |  | ------------------ | - |  | -------- | -
|                                               |  | Three Months Ended |  
|                                               |  | 29-Jun-08          |   |  | 1-Jul-07 |  
|Calculation of Fair Values - Assumptions Used: |  |                    |   |  |          |  
|Expected Volatility                            |  | 66.46              | % |  | 65.00    | %
|Expected Life                                  |  | 4.75               |   |  | 5.00     |  
|Risk-Free Interest Rate                        |  | 2.81               | % |  | 4.79     | %
|Expected Dividend Yield                        |  | None               |   |  | None     |  

Expected volatilities are based on the historical volatility of the Companys common stock. The Company had
significant historical data to help evaluate the expected lives of options in developing its assumption. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities. The expected dividend yield is based
upon the Companys history of having never issued a dividend and managements current expectation of future action surrounding dividends.



7



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##### Table of Contents

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



The following table summarizes the stock option activity during the six months ended June 29, 2008:



|                                 |  |           |   |  |                               |       |                                 |      |                         |   |          
|-------------------------------- |  | --------- | - |  | ----------------------------- | ----- | ------------------------------- | ---- | ----------------------- | - | ---------
|                                 |  | Shares    |   |  | Weighted-AverageExercisePrice |       | AverageRemainingContractualTerm |      | AggregateIntrinsicValue
|Options                          |  |           |   |  |                               |       |                                 |      |                         |   |          
|Outstanding at December 31, 2007 |  | 756,466   |   |  | $                             | 6.66  |                                 |      |                         |   |          
|Granted                          |  | 446,295   |   |  | $                             | 10.06 |                                 |      |                         |   |          
|Exercised                        |  | (30,015   | ) |  | $                             | 3.39  |                                 |      |                         |   |          
|Forfeited                        |  | (8,463    | ) |  | $                             | 12.22 |                                 |      |                         |   |          
|                                 |  |           |   |  |                               |       |                                 |      |                         |   |          
|Outstanding at June 29, 2008     |  | 1,164,283 |   |  | $                             | 9.94  |                                 | 5.12 |                         | $ | 2,781,888
|Exercisable at June 29, 2008     |  | 187,426   |   |  | $                             | 6.34  |                                 | 4.98 |                         | $ | 1,118,635

The weighted-average grant-date fair value of options granted during the six month period ended June 29, 2008
and July 1, 2007 was $5.55 and $6.00, respectively. The fair value of options exercised during the six month period ended June 29, 2008 and July 1, 2007 was $59,552 and $1,351,416, respectively.

As of June 29, 2008, there was $3,830,120 of total unrecognized compensation cost related to non-vested options granted under all of the Companys option
plans. That cost is expected to be recognized over a weighted average period of 2.1 years. The total fair value of shares vested during the six month period ended June 29, 2008 was $946,345.

On March 18, 2008, the Compensation Committee of the Board of Directors adopted a 2008 Key Employee Incentive Compensation Plan (the Plan).
Approximately 20 key employees, including all of the Companys executive officers, will participate in the Plan. Participants are eligible to earn a 2008 bonus equal to a percentage of their annual base salary ranging from 10% to 80%. The
achievement of the bonus will be based solely on meeting targets in two performance measures: 1) net income per share, before tax, from continuing operations and 2) bookings and revenue for solar equipment. Any bonus earned under the Plan will be
paid in the form of stock options issued under the Companys 2003 Equity Incentive Plan. An initial option representing one-half of the maximum will be awarded currently, but the number of shares subject to the options will be reduced if the
Companys aggregate performance against the targets for 2008 is less than 100%. If aggregate performance exceeds 100%, participants will be entitled to an additional option award in 2009. In addition to the performance vesting, the options will
be subject to time-based vesting requirements as set forth in the Plan.

As of June 29, 2008, there was $11,250 of unrecognized compensation costs
related to restricted stock grants which were issued in a prior year. These grants have a remaining life of less than one year.



8



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##### Table of Contents

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



(7) Revenue Recognition

For the three and six months ended June 29, 2008, there was $1,371,024 and $2,551,225, respectively, of revenue recognized using the percentage of completion method. For the three and six months ended July 1, 2007, there was
$103,129 and $103,129, respectively, of revenue recognized using the percentage of completion method.

(8) Fair Value Disclosures

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing
accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

SFAS No. 157 emphasizes
that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for
considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the
reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entitys own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Assets Measured at Fair Value on a Recurring Basis at June 29, 2008

(Unaudited, dollars in thousands)



|                                 |  |                                                             |   |                                            |   |                                         |  |                        |   |  |   |   
|-------------------------------- |  | ----------------------------------------------------------- | - | ------------------------------------------ | - | --------------------------------------- |  | ---------------------- | - |  | - | --
|Description                      |  | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |   | SignificantOtherObservableInputs (Level 2) |   | SignificantUnobservableInputs (Level 3) |  | Balance atJune 29,2008
|Derivative financial instruments |  | $                                                           |  |                                            | $ | 85                                      |  | $                      |  |  | $ | 85

Included in Other current assets in the accompanying consolidated balance sheet. The market value of
the non-deliverable foreign currency forward contract is determined by reference to widely published exchange rates, thus is established using Level II criteria.

In February 2008, the FASB proposed a one-year deferral of fair value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. Accordingly,
the Companys adoption of this standard in 2008 was limited to financial assets and liabilities, which affects the valuation of the Companys derivative contracts.

As of June 29, 2008 the Company held a non-deliverable foreign currency forward contract. At December 31, 2007, the Company held a foreign currency contract which had been marked-to-market and carried in
other current assets at $34 thousand, and an unrealized gain of $34 thousand was recorded to other income in 2007. That contract expired in January 2008, during which time the decline of the US dollar against the Chinese RMB generated a further gain
in 2008 of $29 thousand. A new contract was entered into in January 2008 which generated an additional gain of $334 thousand in the first quarter of 2008. During the second quarter of 2008, the value of the Chinese RMB declined relative to the US
dollar, generating a loss of $249 thousand on this contract. Of the total gain of $115 thousand recognized related to these foreign currency forward contracts in the first half of 2008, $85 thousand was unrealized as of June 29, 2008.

(9) Product Warranty Costs

The Company provides
standard warranty coverage for parts and labor for 12 months and special extended material-only coverage on certain other products. The Company estimates and records an accrual for anticipated warranty claims based on revenue. The accrual for
warranty covers the estimated costs of material, labor and travel. Actual warranty claims incurred are charged to the accrual. Factors that affect the Companys product warranty liability include the number of installed units, the anticipated
cost of warranty repairs and historical and anticipated rates of warranty claims.

The following table reflects changes in the Companys accrued
warranty account during the six months ended June 29, 2008 (in thousands):



|                                     |  |                               |      |  
|------------------------------------ |  | ----------------------------- | ---- | -
|                                     |  | Six Months EndedJune 29, 2008 |     
|Beginning balance, December 31, 2007 |  | $                             | 638  |  
|Plus: accruals related to new sales  |  |                               | 242  |  
|Less: warranty claims incurred       |  |                               | (298 | )
|                                     |  |                               |      |  
|Ending balance, June 29, 2008        |  | $                             | 582  |  
|                                     |  |                               |      |  



9



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##### Table of Contents

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



(10) Recent Accounting Pronouncements

In February 2008, the FASB issued FASB Staff Position on Statement 157 Effective Date of FASB Statement No. 157 (FSP 157-2). FSP
157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed on a recurring basis, to fiscal years beginning after November 15, 2008. The adoption of FSP
157-2 is not expected to have a significant impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations (SFAS 141R). SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition
costs, in-process research and development, and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will
impact the provision for income taxes. SFAS 141R is effective for fiscal years beginning after December 15, 2008, which is the Companys fiscal year beginning January 1, 2009, and will impact the accounting for any business combinations
entered into after the effective date.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin (ARB) No. 51,(SFAS 160) which changes the accounting and reporting for minority interests. Minority interests will be re-characterized as
non-controlling interests and will be reported as a component of equity separate from the parents equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In
addition, net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at
fair value with any gain or loss recognized in earnings. SFAS 160 will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. SFAS 160 is effective for periods beginning on or after
December 15, 2008 and will impact the accounting for non-controlling interests after the effective date.

In March 2008, the FASB
issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133. SFAS 161 will require companies to disclose their objectives and strategies for using derivative
instruments, whether or not their derivatives are designated as hedging instruments. The new pronouncement requires disclosure of the fair value of derivative instruments by primary underlying risk exposures (e.g., interest rate, credit, foreign
exchange rate, combination of interest rate and foreign exchange rate, or overall price). It also requires detailed disclosures about the income statement impact of derivative instruments by designation as fair-value hedges, cash-flow hedges, or
hedges of the foreign-currency exposure of a net investment in a foreign operation. SFAS 161 will also require disclosure of information that will enable financial statement users to understand the level of derivative activity entered into by the
company. The principles of SFAS 161 may be applied on a prospective basis and are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged. For the
Company, SFAS 161 will be effective at the beginning of its 2009 fiscal year. Management is currently evaluating the impact of adopting SFAS 161 on the Companys financial statements.

(11) Segment Reporting

Segments are defined as components of an
enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company operates as a single business
segment called thermal processing capital equipment.

The thermal processing capital equipment segment consists of the designing, manufacturing, selling
and servicing of thermal processing equipment and related process controls for use in the electronics, energy



10



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##### Table of Contents

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



generation and other industries. This business segment includes the supply of equipment used in a number of process steps to produce electronic devices such
as: solder reflow systems used for surface mount applications in printed circuit board assembly; integrated circuit packaging and sealing; and processing multi-chip modules. In addition, the thermal process equipment is used in several process steps
for alternative energy generation such as: metallization and diffusion of photovoltaic solar cells; sintering nuclear fuel for commercial power generation; and the doping and firing of solid oxide fuel cells. The business segments customers
are multi-national electronics manufacturers and electronic manufacturing service providers, as well as manufacturers of fuel and components used to generate energy.

Tangible Long-lived assets by geographic location are as follows (in thousands):



|              |  |              |       |                  |   |      
|------------- |  | ------------ | ----- | ---------------- | - | -----
|              |  | June 29,2008 |       | December 31,2007
|North America |  | $            | 5,087 |                  | $ | 5,002
|Asia Pacific  |  |              | 868   |                  |   | 534  
|              |  |              |       |                  |   |      
|              |  | $            | 5,955 |                  | $ | 5,536
|              |  |              |       |                  |   |      



|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

OVERVIEW

BTU International, founded in 1950 and headquartered in Billerica, Massachusetts, is a supplier of advanced
thermal processing equipment to the electronics manufacturing and energy generation markets. We manufacture reflow furnaces for printed circuit board assembly as well as semiconductor wafer-level and die-level packaging equipment. In addition, we
participate in the fast growing alternative energy market for which we provide thermal process equipment for the manufacturing of solar cells, fuel cells and nuclear fuels.

Our customers require high throughput, high yield and highly reliable thermal processing systems with tightly controlled temperature and atmospheric parameters. Our convection solder reflow systems are used to attach
electronic components to the printed circuit boards, primarily in the advanced high-density surface mount segments of this market. In the semiconductor market, we participate in both wafer level and die level packaging, where our thermal processing
systems are used to connect and seal integrated circuits into a package. Our customers in the energy generation market use our thermal systems to process silicon, ceramics and metal alloys which are used in solar cell, fuel cell and nuclear fuel
manufacturing applications.



11



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##### Table of Contents

RESULTS OF OPERATIONS

The
following table sets forth, for the periods indicated, selected items in our statements of operations (in thousands) expressed as a percentage of net sales and percent change:



|                                               |  |                    |        |               |               |   |  |   |               |  |       |   |  |       |   
|---------------------------------------------- |  | ------------------ | ------ | ------------- | ------------- | - |  | - | ------------- |  | ----- | - |  | ----- | --
|                                               |  | Three Months Ended |        |               | Percentchange |  
|                                               |  | June 29, 2008      |        |               | July 1, 2007  |   | 
|                                               |  | ($ in thousands)   |        |              
|                                               |  |                    |        | % ofnet sales |               |   |  |   | % ofnet sales |  |      
|Net sales                                      |  | $                  | 20,384 |               | 100.0         | % |  | $ | 13,770        |  | 100.0 | % |  | 48.0  | % 
|Cost of goods sold                             |  |                    | 11,064 |               | 54.3          | % |  |   | 7,833         |  | 56.9  | % |  | 41.2  | % 
|                                               |  |                    |        |               |               |   |  |   |               |  |       |   |  |       |   
|Gross profit                                   |  |                    | 9,320  |               | 45.7          | % |  |   | 5,937         |  | 43.1  | % |  | 57.0  | % 
|                                               |  |                    |        |               |              
|Selling, general and administrative expenses   |  |                    | 6,401  |               | 31.4          | % |  |   | 4,121         |  | 29.9  | % |  | 55.3  | % 
|Research, development and engineering expenses |  |                    | 1,787  |               | 8.8           | % |  |   | 1,524         |  | 11.1  | % |  | 17.3  | % 
|                                               |  |                    |        |               |               |   |  |   |               |  |       |   |  |       |   
|Operating income                               |  |                    | 1,132  |               | 5.6           | % |  |   | 292           |  | 2.1   | % |  | 287.7 | % 
|                                               |  |                    |        |               |              
|Income before provision for income taxes       |  |                    | 641    |               | 3.1           | % |  |   | 227           |  | 1.6   | % |  | 182.4 | % 
|                                               |  |                    |        |               |               |   |  |   |               |  |       |   |  |       |   
|Net income                                     |  | $                  | 288    |               | 1.4           | % |  | $ | 206           |  | 1.5   | % |  | 39.8  | % 
|                                               |  |                    |        |               |               |   |  |   |               |  |       |   |  |       |   
|                                               |  |                   
|                                               |  | Six Months Ended   |        |               | Percentchange |  
|                                               |  | June 29, 2008      |        |               | July 1, 2007  |   | 
|                                               |  | ($ in thousands)   |        |              
|                                               |  |                    |        | % ofnet sales |               |   |  |   | % ofnet sales |  |      
|Net sales                                      |  | $                  | 37,003 |               | 100.0         | % |  | $ | 28,934        |  | 100.0 | % |  | 27.9  | % 
|Cost of goods sold                             |  |                    | 21,060 |               | 56.9          | % |  |   | 16,434        |  | 56.8  | % |  | 28.1  | % 
|                                               |  |                    |        |               |               |   |  |   |               |  |       |   |  |       |   
|Gross profit                                   |  |                    | 15,943 |               | 43.1          | % |  |   | 12,500        |  | 43.2  | % |  | 27.5  | % 
|                                               |  |                    |        |               |              
|Selling, general and administrative expenses   |  |                    | 11,313 |               | 30.6          | % |  |   | 8,665         |  | 29.9  | % |  | 30.6  | % 
|Research, development and engineering expenses |  |                    | 3,390  |               | 9.2           | % |  |   | 2,895         |  | 10.0  | % |  | 17.1  | % 
|                                               |  |                    |        |               |               |   |  |   |               |  |       |   |  |       |   
|Operating income                               |  |                    | 1,240  |               | 3.4           | % |  |   | 940           |  | 3.2   | % |  | 31.9  | % 
|                                               |  |                    |        |               |              
|Income before provision for income taxes       |  |                    | 793    |               | 2.1           | % |  |   | 961           |  | 3.3   | % |  | (17.5 | )%
|                                               |  |                    |        |               |               |   |  |   |               |  |       |   |  |       |   
|Net income                                     |  | $                  | 387    |               | 1.0           | % |  | $ | 865           |  | 3.0   | % |  | (55.3 | )%
|                                               |  |                    |        |               |               |   |  |   |               |  |       |   |  |       |   

Net Sales. Net sales increased by 48% and 28% in the second quarter and six month periods of 2008
respectively, as compared to the same periods in 2007. The primary factor for the improved net sales was increased demand for our products designed for the alternative energy markets, while for the first six months of 2008, the sales to the
Companys electronic markets also showed improvement over the same period last year.



12



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##### Table of Contents

The following table sets forth, for the periods indicated, select geographical data (in thousands) expressed in dollars
and as a percentage of total revenue. The values shown represent the amount sold into each of the listed geographical areas.



|                  |  |                    |        |              |                  |   |   |               |              |  |              |   |  |              |        |  |      |   |              |   |        |  |      |  
|----------------- |  | ------------------ | ------ | ------------ | ---------------- | - | - | ------------- | ------------ |  | ------------ | - |  | ------------ | ------ |  | ---- | - | ------------ | - | ------ |  | ---- | -
|                  |  | Three Months Ended |        |              | Six Months Ended |  
|                  |  | June 29 , 2008     |        |              | July 1, 2007     |   |   | June 29, 2008 |              |  | July 1, 2007 |  
|                  |  | $                  |        | % ofrevenues |                  |   | $ |               | % ofrevenues |  |              | $ |  | % ofrevenues |        |  | $    |   | % ofrevenues |  
|United States     |  | $                  | 4,082  |              | 20.0             | % |   | $             | 3,301        |  | 24.0         | % |  | $            | 8,126  |  | 22.0 | % |              | $ | 5,867  |  | 20.3 | %
|Europe, Near East |  |                    | 2,616  |              | 12.8             | % |   |               | 2,736        |  | 19.9         | % |  |              | 6,112  |  | 16.5 | % |              |   | 5,902  |  | 20.4 | %
|Asia Pacific      |  |                    | 12,794 |              | 62.8             | % |   |               | 6,931        |  | 50.3         | % |  |              | 21,366 |  | 57.7 | % |              |   | 14,920 |  | 51.6 | %
|Other Americas    |  |                    | 892    |              | 4.4              | % |   |               | 802          |  | 5.8          | % |  |              | 1,399  |  | 3.8  | % |              |   | 2,245  |  | 7.8  | %
|                  |  |                    |        |              |                  |   |   |               |              |  |              |   |  |              |        |  |      |   |              |   |        |  |      |  
|Total Revenue     |  | $                  | 20,384 |              |                  |   |   | $             | 13,770       |  |              |   |  | $            | 37,003 |  |      |   |              | $ | 28,934 |  |      |  
|                  |  |                    |        |              |                  |   |   |               |              |  |              |   |  |              |        |  |      |   |              |   |        |  |      |  

In the first six months of 2008 as compared to the same periods in 2007, the total revenue has increased in each
of our significant geographical areas. The largest geographical increase is in our Asia Pacific region where the increase was primarily from the Companys alternative energy products.

Gross Profit. In the second quarter and first six months of 2008 as compared to the same periods in 2007, gross margin has improved in line with the increase in
net sales. The year to date gross margin as a percentage of net sales for 2008 compared to 2007 is relatively unchanged.

Selling, General and
Administrative.In the second quarter of 2008 as compared to the same period in 2007, the Companys SG&A costs as a percentage of net sales increased from 29.9% to 31.4%. The increased costs were in support of the second quarter year
over year 48% increase in revenue along with the announced intention to increase service, sales, marketing and administrative support for our continued expansion into the alternative energy markets. The increase in the six month year to date
SG&A spending for 2008 as compared to the same period in 2007 is for the same reasons as stated above for the second quarter.

Research, Development
and Engineering.In the second quarter and first six months of 2008 the Company has increased its spending on RD&E versus the same periods in 2007 primarily for its development efforts towards new products for our alternative energy markets.

Operating Income.Notwithstanding the increase in operating costs, operating income, for the second quarter and first six months of 2008 as
compared with the same periods of 2007, increased as a result of the increased revenue.

Foreign Exchange (loss).The $0.4 million foreign exchange
loss for the second quarter of 2008 as compared to a loss of $0.2 million in the same period last year is due primarily to a loss of $250 thousand on a foreign currency forward contract. The $0.3 million foreign exchange loss for the six months year
to date 2008 is approximately the same as recorded the same period in 2007.

Income Taxes. In the second quarter and for the first six months of
2008,we estimated our annual effective income tax rate for each corporate entity and applied this rate to the year to date profits before income tax for each of our profitable corporations. In addition, we calculated the estimated
withholding tax on royalty and other taxable corporate services charged in the first six months of 2008 to our China operations. The results were recorded as our tax provisions.

The effective income tax rate was 55% for the three months ended June 29, 2008, compared to 9% for the three months ended July 1, 2007. The effective income tax rate for the six months ended June 29,
2008 and July 1, 2007 was 51% and 10%, respectively. The change in the Companys effective income tax rate is primarily attributable to increases in income tax rates and the inclusion of the withholding tax in China as well as changes to
the ratio of current tax provision to consolidated pre-tax income, which is in-turn significantly influenced by income and losses at foreign and domestic subsidiaries.



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##### Table of Contents

The Company has federal and state net operating loss carry forwards of approximately $7 million. The Company has
recorded a full valuation allowance to offset the deferred tax asset arising as a result of these loss carry forwards because of uncertainty surrounding realization. Our statutory federal income tax rate is 34.0%.

LIQUIDITY AND CAPITAL RESOURCES

As of June 29, 2008, the Company had
$27.6 million in cash and cash equivalents.

Cash generated by Operations:

During the six months ended June 29, 2008, the Company generated net cash resources of approximately $2.9 million from operating activities. This source of cash was primarily the result of an increase in accounts
payable and accrued expenses of $3.2 million, net profit of $0.4 million, non-cash stock-based compensation of $0.5 million, depreciation and amortization of $0.9 million, and was offset by an increase in inventories of $1.0 million, accounts
receivable of $0.7 million, and other current assets of $0.2 million.

Cash Used in Investing Activities:

For the six months ended June 29, 2008, the Company used $0.9 million in investing activities, the same amount used in the comparable period of 2007. Approximately
$1.0 million was related to capital expenditures in the first half of 2008, compared to $0.9 million in 2007. Offsetting the capital expenditures in the first half of 2008 was $60 thousand received in settlement of a foreign currency forward
contract.

Cash provided by (used in) financing activities:

The Company used approximately $39 thousand in financing activities in the first six months of 2008, compared to generating $0.2 million in the first six months of the prior year. In the first six months of 2008, approximately $0.1 million
was related to principal payments on loans and capital leases, compared to approximately $0.2 million in 2007. In 2008, approximately $93 thousand was generated through the exercise of stock options by employees, compared to $328 thousand in the
comparable period of 2007.

On March 30, 2006, the Company entered into a new mortgage note that is secured by its real property in Billerica, MA. The
amount of the mortgage note executed was $10 million. The mortgage note requires monthly payments of $76,280, which includes interest calculated at the rate of 6.84% per annum. This mortgage note payable has a balloon payment of $6.8 million
due and payable at maturity on December 23, 2015. The mortgage note had an outstanding balance at June 29, 2008 of approximately $9.4 million.

On March 1, 2007, the Company entered into an amended revolving loan agreement with a bank that allows for unsecured aggregate borrowings, including letters of credit, up to a maximum of $15 million against a borrowing base of accounts
receivable, inventory and fixed assets. The Company may elect to borrow at interest rates related to the banks prime rate or LIBOR. This loan agreement extends to December 31, 2010 and is subject to maintaining certain financial
covenants, with which the Company is in full compliance. At June 29, 2008, the borrowing base would support the maximum borrowings of $15 million, and there were no borrowings outstanding under the loan agreement.

As of June 29, 2008, the Company has no material commitments relating to capital expenditures.

The Companys business forecasts project that our cash position, cash flow and our working capital line of credit will be sufficient to meet our corporate, operating and capital requirements through 2008.

OTHER MATTERS

Given that the Company invoices the vast
majority of its sales in U.S. dollars and that the Company has a substantial manufacturing presence in China, and that sales into China are primarily in U.S. dollars, should the U.S. dollar decline in relation to the Chinese RMB the Companys
financial results will continue to be adversely affected.



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The impact of inflation in the first two quarters of 2008 had no material impact on our business and financial results
versus costs in the fourth quarter of 2007.

FORWARD LOOKING STATEMENTS

This Report, other than historical financial information, includes forward-looking statements that involve known and unknown risks and uncertainties, including quarterly fluctuations in results. In particular, our
forecast of the sufficiency of capital resources through 2008 is a forward-looking statement. Such statements are made pursuant to the safe harbor provisions under the securities laws, and are based on the assumptions and expectations of
the Companys management at the time such statements are made. Important factors that could cause actual results to differ include the cyclicality of our business; our shift of manufacturing to China; a failure to maintain cost reductions;
risks related to sales to the energy generation market; a failure to increase sales across our industries; a failure to effectively develop and market our products; changes in the economic, political, legal and business environments in the countries
in which we operate; a failure of our business systems; the time and costs related to complying with the requirements of the Sarbanes-Oxley Act; and the loss of key personnel. Actual results may vary materially. Accordingly, you should not place
undue reliance on any forward-looking statements. Unless otherwise required by law, the Company disclaims any obligation to revise or update such forward-looking statements in order to reflect future events or developments.



|Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We are exposed
to market risk from changes in interest rates primarily through our revolving loan agreement. As of June 29, 2008, we had no debt outstanding under our revolving loan agreement.

A significant percentage of consolidated revenues are derived from foreign sources. Accordingly, our financial results are impacted by changes in foreign currency exchange rates with respect to the U.S. dollar.



|Item 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

1. Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the
Companys Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

The Companys management carried out an evaluation, under the supervision and with the
participation of the Chief Executive Officer and the Chief Accounting Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934) as of June 29, 2008, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Securities Exchange Act of 1934.

Based upon that evaluation, management concluded that as of June 29, 2008 our disclosure controls and procedures were effective.

2. Changes in Internal Control over Financial Reporting

Effective
January 1, 2008, the Company, at its Billerica, Massachusetts headquarters, moved most accounting processes to a new enterprise reporting programming environment. Many of the financial processes and procedures related to producing financial
statements and disclosures prior to that date have



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changed as a result. Management is engaged in re-documenting these processes and developing testing procedures to be able to demonstrate the effectiveness of
the new controls as required by the Sarbanes-Oxley Act of 2002.

PART II. OTHER INFORMATION



|Item 1A. | RISK FACTORS
|-------- | ------------

Risk factors are disclosed in the Companys 2007 Annual
Report on Form 10-K. During the quarter ended June 29, 2008, there were no material changes to the risk factors for the business.



|Item 5. | OTHER INFORMATION
|------- | -----------------

On and effective August 7, 2008, the Board of
Directors (the Board) of the Company amended and restated the Companys by-laws (the By-Laws and as amended and restated, the Amended and Restated By-Laws). The following is a summary of the material changes
effected by adoption of the Amended and Restated By-Laws:

Section 2.2 (Special Meetings): The section was amended to reflect that
only the president of the Company or the Board may call a special meeting of stockholders. The By-Laws had previously allowed holders of at least ten percent of the Companys outstanding capital stock to call a special meeting.

Section 2.4 (Remote Communications): The section was added to allow the Board to determine that shareholders and proxy holders not physically
present at a meeting may participate and be deemed present at a stockholder meeting via remote communications.

Section 2.5 (Notice of
Meetings): The section was amended to provide that notice may be given to a stockholder by any electronic means to which that stockholder has consented.

Section 2.6 (Nomination of Directors): The section was added to require that a stockholder proposing to nominate persons for election to the board of directors must give the Company timely notice thereof in
writing. The notice is required to include information about the proposing stockholder and certain affiliated stockholders, including their ownership interests in the Companys capital stock and any derivative positions held or beneficially
held or any hedging transactions entered into by them.

Section 2.7 (Advance Notice of Business at Annual Meetings): The section was
added to require that a stockholder proposing to bring business before the annual meeting give the Company timely notice thereof in writing. The notice shall include a brief description of the business desired to be brought and the reasons for
conducting such business at the annual meeting and information about the proposing stockholder and certain affiliated stockholders, including their ownership interests in the Companys capital stock and any derivative positions held or
beneficially held or any hedging transactions entered into by them.

Section 2.10 (Action without Meetings) (formerly
Section 2.8): The section was amended to reflect that stockholders may not take any action by written consent in lieu of a meeting, to conform to the provisions in the Companys certificate of incorporation.

Section 3.1 (Number): The section was amended to provide that the Board has the power to set the number of directors. The By-Laws previously
required that the number of directors be between one and seven, as determined by the stockholders at the annual meeting.

Section 3.5
(Committees): The section was amended to conform to the provisions of Delaware General Corporation Law, which allows a committee to exercise all the powers of the Board, unless otherwise prohibited by law, by the Companys certificate of
incorporation or by the Amended and Restated By-Laws.

Sections 3.8 (Notice), 3.11 (Action Without a Meeting), The Amended and Restated
By-Laws change the reasonable notice requirement for meetings of the Board from three days to 24 hours and allow such notice to



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be sent by telecopy or electronic mail, in addition to hand-delivery, mail and telephone (which were previously allowed). The Amended and Restated By-Laws
allow a written consent of the Board to be sent through electronic transmission.

Section 7.1 (Stock Certificates) and
Section 8.1 (Transfer on Books): These sections were amended to grant the Board the authority to issue uncertificated shares of the Companys capital stock and to outline the procedure for the transfer of uncertificated shares on the books
of the Company.

Section 13 (Indemnification): The section was amended to add the following provisions: (i) the Company shall
indemnify a director or officer in connection with a proceeding initiated by such person only if such proceeding was approved by the Board; (ii) the Company shall advance the fees and expenses incurred by a director in defending any proceeding
prior to final disposition, provided that the director undertake to repay such amount if it is ultimately determined that he is not entitled to indemnification; and (iii) any repeal or modification of Section 13 shall not affect any rights
or protection of directors or officers with respect to acts or omissions which occurred prior to such repeal or modification.

Section 14 (Voting of Securities): The section was added to authorize certain of the Companys officers to act as attorney-in-fact for the Company at any meeting of stockholders or owners of other interests of any other
corporation or organization the securities of which may be held by the Company.

In addition to the amendments described above, the
following sections of the Amended and Restated By-Laws include certain other changes to clarify language and to comply or be consistent with Delaware General Corporation Law and various technical edits and non-substantive changes: Sections 2.1
(Annual Meeting), 2.12 (Inspectors), 2.13 (List of Shareholders), 3.6 (Regular Meetings), 4.4 (Tenure), 4.5 (Chairman of the Board of Directors), 5.1 (Resignations and Removals), 6.1 (Vacancies) and 8.2 (Record Date and Closing Transfer Books).

The Amended and Restated By-Laws of BTU International, Inc. are filed herewith as Exhibit 3.1 and incorporated herein by reference.



|Item 6. | EXHIBITS
|------- | --------

(a) Exhibits

Exhibit   3.1 - Amended and Restated By-Laws

Exhibit 31.1 - Section 302 Certification

Exhibit 31.2 - Section 302 Certification

Exhibit 32.1 - Section 906 Certification

Exhibit 32.2 - Section 906 Certification



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SIGNATURES

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



|                     |  |                         |  |                                                                                                               
|-------------------- |  | ----------------------- |  | --------------------------------------------------------------------------------------------------------------
|                     |  | BTU INTERNATIONAL, INC.
|                     |  |                        
|DATE: August 8, 2008 |  | BY:                     |  | /s/ Paul J. van der Wansem                                                                                    
|                     |  |                         |  | Paul J. van der Wansem                                                                                        
|                     |  |                         |  | President, Chief Executive Officer (principal executive officer) and Chairman of the Board of Directors       
|                     |  |                        
|DATE: August 8, 2008 |  | BY:                     |  | /s/ Thomas P. Kealy                                                                                           
|                     |  |                         |  | Thomas P. Kealy                                                                                               
|                     |  |                         |  | Vice President, Corporate Controller and Chief Accounting Officer (principal financial and accounting officer)



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