##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 1, 2006
 OR
 o
    
    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.
  DELAWARE
    
    04-2781248(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (I.R.S. Employer
Identification Number)23 Esquire Road, North Billerica, Massachusetts
(Address of principal executive offices)
    
    01862-2596
(Zip Code)
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




---



##### 



Item 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    2Condensed Consolidated Statement of Stockholders Equity
and Comprehensive Income
    
    
    3Condensed Consolidated Statements of Cash Flows
    
    
    4-5Notes to Condensed Consolidated Financial Statements
    
    
    6-12Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12-15Item 3. Quantitative and Qualitative Disclosures
About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15-17PART II. OTHER INFORMATIONItem 1A. Risk Factors
    
    
    17-21Item 6. Exhibits
    
    
    21Signatures
    
    
    22Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO




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##### Table of Contents



October 1,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assetsCash and cash equivalents
    
    $
    20,113
    
    
    $
    15,460Accounts receivable, net
    
    
    19,415
    
    
    
    16,519Inventories
    
    
    16,780
    
    
    
    13,933Other current assets
    
    
    850
    
    
    
    489Total current assets
    
    
    57,158
    
    
    
    46,401Property, plant and equipment, net
    
    
    3,972
    
    
    
    2,343Other assets, net
    
    
    2,347
    
    
    
    161Total assets
    
    $
    63,477
    
    
    $
    48,905Liabilities and stockholders equityCurrent liabilitiesCurrent portion of long-term debt
    
    $
    253
    
    
    $
    183Accounts payable
    
    
    3,977
    
    
    
    6,069Other current liabilities
    
    
    5,140
    
    
    
    4,781Total current liabilities
    
    
    9,370
    
    
    
    11,033Long-term debt, less current portion
    
    
    9,639
    
    
    
    5,106Long-term deferred compensation
    
    
    283
    
    
    
    283Other long-term liabilities
    
    
    600
    
    
    
    Total liabilities
    
    
    19,892
    
    
    
    16,422Commitments and contingenciesStockholders equityPreferred 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; 10,319,817 shares issued and 9,170,807
shares outstanding at October 1, 2006 and 10,039,759
shares issued and 8,890,749 shares
outstanding at December 31, 2005
    
    
    103
    
    
    
    100Additional paid in capital
    
    
    42,388
    
    
    
    39,746Deferred compensation
    
    
    
    
    
    
    (49
    )Accumulated earnings (deficit)
    
    
    4,849
    
    
    
    (3,356
    )Treasury stock, at cost
    
    
    (4,177
    )
    
    
    (4,177
    )Accumulated other comprehensive income
    
    
    422
    
    
    
    219Total stockholders equity
    
    
    43,585
    
    
    
    32,483Total liabilities and
stockholders equity
    
    $
    63,477
    
    
    $
    48,905
  1




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedOctober 1, 2006
    
    
    October 2, 2005
    
    
    October 1, 2006
    
    
    October 2, 2005Net sales
    
    $
    18,254
    
    
    $
    18,543
    
    
    $
    61,726
    
    
    $
    47,141Costs of goods sold
    
    
    10,627
    
    
    
    11,880
    
    
    
    37,047
    
    
    
    30,375Gross profit
    
    
    7,627
    
    
    
    6,663
    
    
    
    24,679
    
    
    
    16,766Operating expenses:Selling, general
and
administrative
    
    
    3,871
    
    
    
    4,031
    
    
    
    12,733
    
    
    
    11,288Research,
development and
engineering
    
    
    1,377
    
    
    
    893
    
    
    
    3,559
    
    
    
    2,532Operating income
    
    
    2,379
    
    
    
    1,739
    
    
    
    8,387
    
    
    
    2,946Interest income
    
    
    193
    
    
    
    2
    
    
    
    423
    
    
    
    2Interest expense
    
    
    (157
    )
    
    
    (149
    )
    
    
    (389
    )
    
    
    (420
    )Other loss, net
    
    
    (18
    )
    
    
    (1
    )
    
    
    (48
    )
    
    
    Income before
provision for
income taxes
    
    
    2,397
    
    
    
    1,591
    
    
    
    8,373
    
    
    
    2,528Provision for
income taxes
    
    
    (48
    )
    
    
    
    
    
    
    (168
    )
    
    
    Net income
    
    $
    2,349
    
    
    $
    1,591
    
    
    $
    8,205
    
    
    $
    2,528Income per share:Basic
    
    $
    0.26
    
    
    $
    0.22
    
    
    $
    0.90
    
    
    $
    0.35Diluted
    
    $
    0.25
    
    
    $
    0.20
    
    
    $
    0.87
    
    
    $
    0.34Weighted average
number of shares
outstanding:Basic shares
    
    
    9,161,509
    
    
    
    7,383,503
    
    
    
    9,100,874
    
    
    
    7,282,603Effect of
dilutive options
    
    
    270,753
    
    
    
    395,873
    
    
    
    292,944
    
    
    
    219,674Diluted shares
    
    
    9,432,262
    
    
    
    7,779,376
    
    
    
    9,393,818
    
    
    
    7,502,277
  2




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##### Table of Contents



Retained
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    Earnings
    
    
    
    
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Deferred
    
    
    (Accum.
    
    
    Treasury Stock
    
    
    Comprehensive# of shares
    
    
    $
    
    
    Capital
    
    
    Comp.
    
    
    Deficit)
    
    
    # of shares
    
    
    $
    
    
    Income
    
    
    TotalNine months ended October 1, 2006Balance at December 31, 2005
    
    
    10,040
    
    
    $
    100
    
    
    $
    39,746
    
    
    $
    (49
    )
    
    $
    (3,356
    )
    
    
    1,149
    
    
    $
    (4,177
    )
    
    $
    219
    
    
    $
    32,483Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,205Exercise of
stock options
    
    
    119
    
    
    
    1
    
    
    
    344
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    345Employee stock plan purchases
    
    
    3
    
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34Issuance of common stock, net of
issuance costs of $63
    
    
    158
    
    
    
    2
    
    
    
    2,069
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,071Reclass of deferred compensation and
compensation expense related to SFAS 123R
    
    
    
    
    
    
    
    
    
    
    187
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203
    
    
    
    203Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Balance at October 1, 2006
    
    
    10,320
    
    
    $
    103
    
    
    $
    42,388
    
    
    $
    
    
    
    $
    4,849
    
    
    
    1,149
    
    
    $
    (4,177
    )
    
    $
    422
    
    
    $
    43,585
 Nine Months EndedOctober 1, 2006Comprehensive income is calculated as follows:Net income
    
    $
    8,205Other comprehensive gain
Foreign currency translation adjustment
    
    
    203Comprehensive income
    
    $
    8,408
  3




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##### Table of Contents



October 1,
    
    
    October 2,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    8,205
    
    
    $
    2,528Adjustments to reconcile net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    881
    
    
    
    731Loss on disposal of fixed assets
    
    
    
    
    
    
    19Provision for bad debt
    
    
    8
    
    
    
    Provision for inventory
    
    
    144
    
    
    
    Stock based compensation
    
    
    244
    
    
    
    (53
    )Net change in operating assets and liabilities:Accounts receivable
    
    
    (2,795
    )
    
    
    (6,584
    )Inventories
    
    
    (2,848
    )
    
    
    (568
    )Other current assets
    
    
    
    
    
    
    (145
    )Other assets
    
    
    (434
    )
    
    
    611Customer deposits
    
    
    (47
    )
    
    
    Accounts payable
    
    
    (2,364
    )
    
    
    652Accrued expenses
    
    
    (114
    )
    
    
    1,528Deferred compensation
    
    
    
    
    
    
    (229
    )Net cash provided by (used in) operating activities
    
    
    880
    
    
    
    (1,510
    )Cash flows from investing activities:Acquisition of assets of Radiant Technology Corporation
    
    
    (500
    )
    
    
    Acquisition of Atmoplas Technology and Research
    
    
    (475
    )
    
    
    Purchases of property, plant and equipment
    
    
    (1,313
    )
    
    
    (183
    )Net cash used in investing activities
    
    
    (2,288
    )
    
    
    (183
    )Cash flows from financing activities:Principal payments under loan and capital lease agreements
    
    
    (154
    )
    
    
    (129
    )Proceeds from bank loan
    
    
    4,686
    
    
    
    Net borrowings under revolving credit agreement
    
    
    
    
    
    
    1,403Issuance of common stock
    
    
    1,070
    
    
    
    Proceeds from the exercise of stock options
    
    
    379
    
    
    
    700Net cash provided by financing activities
    
    
    5,981
    
    
    
    1,974Effects of exchange rates on cash
    
    
    80
    
    
    
    (72
    )Net increase in cash and cash equivalents
    
    
    4,653
    
    
    
    209Cash and cash equivalents, beginning of period
    
    
    15,460
    
    
    
    372Cash and cash equivalents, end of period
    
    $
    20,113
    
    
    $
    581
  4




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##### Table of Contents



October 1,
    
    
    October 2,2006
    
    
    2005Supplemental disclosures of cash flow information:Cash paid (received) during the periods for:Interest
    
    $
    15
    
    
    $
    420Income taxes
    
    
    25
    
    
    
    67Non-cash disclosure:Acquisition of Radiant Technology CorporationFair value of assets acquired
    
    
    1,591
    
    
    
    Less fair value of liabilities assumed
    
    
    (1,091
    )
    
    
    Cash paid
    
    $
    500
    
    
    $
    Acquisition of Atmoplas Technology and ResearchFair value of assets acquired
    
    
    1,390
    
    
    
    Less fair value of liabilities assumed
    
    
    (915
    )
    
    
    Cash paid
    
    $
    475
    
    
    $
    
  5




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##### Table of Contents



(1)
    
    Basis for Presentation
  (2)
    
    Inventories
  October 1,
    
    
    December 31,2006
    
    
    2005Raw materials and manufactured components
    
    $
    11,914
    
    
    $
    8,491Work-in-process
    
    
    2,659
    
    
    
    3,571Finished goods
    
    
    2,207
    
    
    
    1,871$
    16,780
    
    
    $
    13,933
 (3)
    
    Debt
  October 1,
    
    
    December 31,2006
    
    
    2005Mortgage note payable
    
    $
    9,878
    
    
    $
    5,272Capital lease obligations, interest rate of 6.75%
    
    
    14
    
    
    
    179,892
    
    
    
    5,289Less  current maturities
    
    
    253
    
    
    
    183$
    9,639
    
    
    $
    5,106
  6




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##### Table of Contents



(4)
    
    Earnings Per Share (EPS)
  (5)
    
    Accounting for Stock-Based Compensation
 Share-Based Payment
   123R Effect on Reported Income:
    
    Three months ended October 1, 2006
    
    Nine months ended October 1, 2006(in thousands, except per share data)
    
    Previous
    
    123R Adj.
    
    As Reported
    
    Previous
    
    123R Adj.
    
    As ReportedOperating income
    
    
    2,497
    
    
    
    118
    
    
    
    2,379
    
    
    
    8,619
    
    
    
    232
    
    
    
    8,387Earnings before income taxes
    
    
    2,515
    
    
    
    118
    
    
    
    2,397
    
    
    
    8,604
    
    
    
    232
    
    
    
    8,373Net income
    
    
    2,465
    
    
    
    115
    
    
    
    2,349
    
    
    
    8,432
    
    
    
    227
    
    
    
    8,205Basic earnings per share
    
    $
    0.27
    
    
    $
    0.01
    
    
    $
    0.26
    
    
    $
    0.93
    
    
    $
    0.02
    
    
    $
    0.90Diluted earnings per share
    
    $
    0.26
    
    
    $
    0.01
    
    
    $
    0.25
    
    
    $
    0.90
    
    
    $
    0.02
    
    
    $
    0.87
 7




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##### Table of Contents



Three months ended
    
    Nine months endedOctober 2, 2005
    
    October 2, 2005Net Income, as Reported
    
    
    1,591
    
    
    
    2,528Value of Stock-Based Comp Exp
Under Fair Value-Based Method
    
    
    (114
    )
    
    
    (341
    )Pro Forma Net Income
    
    
    1,477
    
    
    
    2,187Basic EPS  as Reported
    
    $
    0.22
    
    
    $
    0.35Basic EPS  Pro Forma
    
    $
    0.20
    
    
    $
    0.30Diluted EPS  as Reported
    
    $
    0.20
    
    
    $
    0.34Diluted EPS  Pro Forma
    
    $
    0.19
    
    
    $
    0.29
  Nine months endedOctober 1, 2006
    
    October 2, 2005Expected Volatility
    
    
    60
    %
    
    
    60
    %Expected Life
    
    
    5
    
    
    
    7Risk-Free Interest Rate
    
    
    4.96
    %
    
    
    4.13
    %Expected Dividend Yield
    
    None
    
    None
  8




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##### Table of Contents



Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOptionsOutstanding at December 31, 2005
    
    
    525,378
    
    
    $
    2.99Granted
    
    
    207,920
    
    
    
    13.35Exercised
    
    
    (119,365
    )
    
    
    3.78Forfeited
    
    
    (14,962
    )
    
    
    2.96Outstanding at October 1, 2006
    
    
    598,971
    
    
    $
    6.61
    
    
    
    6.63
    
    
    $
    3,246,019Exercisable at October 1, 2006
    
    
    159,357
    
    
    $
    2.96
    
    
    
    5.91
    
    
    $
    1,446,130
   Weighted-AverageGrant-DateShares
    
    
    Fair ValueNonvested optionsNonvested at December 31, 2005
    
    
    299,826
    
    
    $
    1.89Granted
    
    
    207,920
    
    
    
    7.26Vested
    
    
    (53,170
    )
    
    
    1.93Forfeited
    
    
    (14,962
    )
    
    
    1.82Nonvested at October 1, 2006
    
    
    439,614
    
    
    $
    4.43
   (6)
    
    Segment Reporting
  9




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedOctober 1,
    
    
    October 2,
    
    
    October 1,
    
    
    October 2,2006
    
    
    2005
    
    
    2006
    
    
    2005United States
    
    $
    4,428
    
    
    $
    2,647
    
    
    $
    9,490
    
    
    $
    7,975Europe, Near East
    
    
    3,583
    
    
    
    5,214
    
    
    
    14,377
    
    
    
    12,263Asia Pacific
    
    
    8,733
    
    
    
    9,849
    
    
    
    31,107
    
    
    
    24,130Other Americas
    
    
    1,510
    
    
    
    833
    
    
    
    6,752
    
    
    
    2,773$
    18,254
    
    
    $
    18,543
    
    
    $
    61,726
    
    
    $
    47,141
  October 1,
    
    
    December 31,2006
    
    
    2005North America
    
    $
    5,705
    
    
    $
    2,156Asia Pacific
    
    
    614
    
    
    
    348$
    6,319
    
    
    $
    2,504
 (7)
    
    Revenue Recognition
    10




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##### Table of Contents



(8)
    
    Product Warranty Costs
   Nine Months EndedOctober 1, 2006Beginning balance, December 31, 2005
    
    $
    1,036Plus: accruals related to new sales
    
    
    827Less: warranty claims incurred
    
    
    (434
    )Less: reversal of excess requirements
    
    
    (481
    )Balance, end of period
    
    $
    948
 (9)
    
    Recent Accounting Pronouncements
 Inventory Costs  An Amendment of ARB No. 43, Chapter 4
 Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3 . , Accounting Changes Reporting Accounting Changes in Interim Financial Statements
 11




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##### Table of Contents



Accounting for Uncertainty in Income Taxes  an interpretation of FASB No. 109
 Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
 (10)
    
    Acquisitions
   
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
    12




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##### Table of Contents



Three Months EndedOctober 1, 2006
    
    
    October 2, 2005% of
    
    
    
    
    
    
    % of
    
    
    Percent$ thousands
    
    
    revenues
    
    
    $ thousands
    
    
    revenues
    
    
    changeNet sales
    
    $
    18,254
    
    
    
    100.0
    %
    
    $
    18,543
    
    
    
    100.0
    %
    
    
    (1.6
    )%Cost of goods sold
    
    
    10,627
    
    
    
    58.2
    %
    
    
    11,880
    
    
    
    64.1
    %
    
    
    (10.5
    )%Gross profit
    
    
    7,627
    
    
    
    41.8
    %
    
    
    6,663
    
    
    
    35.9
    %
    
    
    14.5
    %Selling, general and administrative expenses
    
    
    3,871
    
    
    
    21.2
    %
    
    
    4,031
    
    
    
    21.7
    %
    
    
    (4.0
    )%Research, development and engineering
    
    
    1,377
    
    
    
    7.5
    %
    
    
    893
    
    
    
    4.8
    %
    
    
    54.2
    %Operating income
    
    
    2,379
    
    
    
    13.1
    %
    
    
    1,739
    
    
    
    9.4
    %
    
    
    36.8
    %Income before provision for income taxes
    
    
    2,397
    
    
    
    13.1
    %
    
    
    1,591
    
    
    
    8.6
    %
    
    
    50.7
    %Net income
    
    $
    2,349
    
    
    
    12.9
    %
    
    $
    1,591
    
    
    
    8.6
    %
    
    
    47.6
    %
 Nine Months EndedOctober 1, 2006
    
    
    October 2, 2005% of
    
    
    
    
    
    
    % of
    
    
    Percent$ thousands
    
    
    revenues
    
    
    $ thousands
    
    
    revenues
    
    
    changeNet sales
    
    $
    61,726
    
    
    
    100.0
    %
    
    $
    47,141
    
    
    
    100.0
    %
    
    
    30.9
    %Cost of goods sold
    
    
    37,047
    
    
    
    60.0
    %
    
    
    30,375
    
    
    
    64.4
    %
    
    
    22.0
    %Gross profit
    
    
    24,679
    
    
    
    40.0
    %
    
    
    16,766
    
    
    
    35.6
    %
    
    
    47.2
    %Selling, general and administrative expenses
    
    
    12,733
    
    
    
    20.6
    %
    
    
    11,288
    
    
    
    23.9
    %
    
    
    12.8
    %Research, development and engineering
    
    
    3,559
    
    
    
    5.8
    %
    
    
    2,532
    
    
    
    5.4
    %
    
    
    40.6
    %Operating income
    
    
    8,387
    
    
    
    13.6
    %
    
    
    2,946
    
    
    
    6.3
    %
    
    
    184.7
    %Income before provision for income taxes
    
    
    8,373
    
    
    
    13.6
    %
    
    
    2,528
    
    
    
    5.4
    %
    
    
    231.2
    %Net income
    
    $
    8,205
    
    
    
    13.3
    %
    
    $
    2,528
    
    
    
    5.4
    %
    
    
    224.6
    %
 Net Sales
  13




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Three Months Ended
    
    
    Nine Months EndedOctober 1, 2006
    
    
    October 2, 2005
    
    
    October 1, 2006
    
    
    October 2, 2005% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of$
    
    
    revenues
    
    
    $
    
    
    revenues
    
    
    $
    
    
    revenues
    
    
    $
    
    
    revenuesUnited States
    
    $
    4,428
    
    
    
    24.3
    %
    
    $
    2,647
    
    
    
    14.3
    %
    
    $
    9,490
    
    
    
    15.4
    %
    
    $
    7,975
    
    
    
    16.9
    %Europe, Near East
    
    
    3,583
    
    
    
    19.6
    %
    
    
    5,214
    
    
    
    28.1
    %
    
    
    14,377
    
    
    
    23.3
    %
    
    
    12,263
    
    
    
    26.0
    %Asia Pacific
    
    
    8,733
    
    
    
    47.8
    %
    
    
    9,849
    
    
    
    53.1
    %
    
    
    31,107
    
    
    
    50.4
    %
    
    
    24,130
    
    
    
    51.2
    %Other Americas
    
    
    1,510
    
    
    
    8.3
    %
    
    
    833
    
    
    
    4.5
    %
    
    
    6,752
    
    
    
    10.9
    %
    
    
    2,773
    
    
    
    5.9
    %$
    18,254
    
    
    
    
    
    
    $
    18,543
    
    
    
    
    
    
    $
    61,726
    
    
    
    
    
    
    $
    47,141
  Gross Profit
 Selling, General and Administrative.
 Research, Development and Engineering.
 Operating Income.
 Income Taxes.
      14




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(a)
    
    Evaluation of Disclosure Controls and Procedures.
  15




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##### Table of Contents



(b)
    
    Changes in Internal Control Over Financial Reporting.
  
    
    With respect to the first significant deficiency, we have selected an ERP
solution. Our project plan has the new ERP system being implemented in our Chinese
subsidiary and in the United States by end of 2007. Additionally, we have engaged
consultants to help us determine if additional controls can be placed around the current
business system to minimize the current systems inherent risks. We are taking the
following actions related to out current system:
 1.
    
    We have secured both hardware and software support currently and for
the foreseeable future.2.
    
    We have contracted with a third party to provide a warm-site, which
is a complete duplicate of our current system residing in a secure remote
location.3.
    
    In 2006, we installed a complete (hardware and software) redundant
version of our current system on-site. This redundant system will utilize the
last nightly data backup to restore the system in the event of a major hardware or
software failure on the current system.
 
    
    With respect to the second significant deficiency, we have begun to implement
and formally document a disaster recovery plan as it relates to information technology.
We have secured consultants to assist us in developing the disaster recovery plan as a
component of a larger business continuity plan. We anticipate this initiative to be
completed in 2006.
    
    With respect to the third significant deficiency, we have increased the
accounting staff to provide additional expertise in GAAP, taxation and SEC reporting
requirements. Additionally, we have engaged several consultants to assist us with complex
accounting and taxation related matters. We are continuing training of our current staff
and evaluating the need for additional financial resources.
    
    With respect to the fourth significant deficiency, we are aggressively securing
resources and technologies to comply with Sarbanes  Oxley. Actions we are taking include
the following:
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##### Table of Contents



1.
    
    We have secured and evaluated our dedicated internal resources and
have identified and secured various consultants to enhance areas of weakness.2.
    
    We have identified and have begun to document and test the key
controls of our significant financial processes and are reviewing all relevant
policies and procedures and where appropriate, changes will be made to our
internal controls over financial reporting.3.
    
    We have committed to a new ERP system that, when fully implemented,
will provide increased controls over financial reporting by replacing our current
manual process.4.
    
    We are enhancing our core IT infrastructure to provide increased
security to our networks and financial information.
 
    
    With respect to the fifth significant deficiency, we believe the successful
implementation of the new ERP system will remediate this issue. Our ERP selection criteria
evaluated the manufacturers financial consolidation program and we concluded that, when
fully tested in our environment, will provide accurate and repeatable financial information
in an automated process. We are reviewing our current process and will make changes to our
internal controls over financial reporting as required.
  
  
   We are subject to cyclical downturns in the electronics and semiconductor industries. Recent
favorable financial trends in our business may not be sustained.
  We have shifted a significant and growing portion of our production capacity to a new and expanding
manufacturing facility in Shanghai, China. We may encounter manufacturing problems associated with
managing these operations.
  In the past year, we have substantially improved our global supply chain and reduced our material
costs. Failure to maintain these cost reductions would negatively affect our profit margins.
 17




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##### Table of Contents



Sales of our products to the energy generation markets are subject to substantial risks.
 Solar Energy.
 Nuclear Energy.
 Fuel Cells.
 If we are unable to increase sales and reduce costs, our profitability may be affected negatively.
  Our future success will depend on our ability to effectively develop and market our products
against those of our competitors.
  Our international sales and operations are subject to the economic, political, legal and business
environments of the countries in which we do business, and our failure to operate successfully or
adapt to changes in these environments could cause our international sales and operations to be
limited or disrupted.
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##### Table of Contents




    
    fluctuations in currency exchange rates;
    
    the imposition of governmental controls;
    
    import and export license requirements;
    
    political instability;
    
    difficulties enforcing contractual and intellectual property rights;
    
    terrorist activities and armed conflict;
    
    restrictions on direct investments by foreign entities and trade restrictions;
    
    changes in tax laws and tariffs;
    
    costs and difficulties in staffing and managing international operations; and
    
    longer payment cycles.
   A majority of our revenue is generated from sales in the Asia Pacific region. Our operations are
particularly vulnerable to instability in this region and competition from organizations based in
this region.
  Our business systems to manage our operations are still being developed. If they are not developed
and implemented, it could have a material adverse effect on our business.
  Our primary computer business system in the U.S. is outdated. A significant malfunction could
disrupt our business operations.
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Some of the requirements of Sarbanes-Oxley affect us as a small company disproportionately, and we
may not be able to comply despite substantial effort and expense.
  If we fail to maintain positive relationships with key personnel, we may be unable to successfully
grow our business.
  Failure of critical suppliers to deliver sufficient quantities of parts in a timely and
cost-effective manner would adversely impact our operations.
  The occurrence of natural disasters in the Asia Pacific region may adversely impact our operations
and sales.
  Provisions in our organizational documents could prevent or frustrate attempts by stockholders to
replace our current management and could make acquisitions more difficult.
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Our officers and directors may be able to block proposals for a change in control.
  
    
    the election of directors;
    
    the amendment of our organizational documents; or
    
    the approval of a merger, sale of assets, or other major corporate transaction.
 
   Exhibit 31.1   Section 302 CertificationExhibit 31.2   Section 302 CertificationExhibit 32.1    Section 906 CertificationExhibit 32.2    Section 906 Certification
 21




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##### Table of Contents



BTU INTERNATIONAL, INC.DATE: November 7, 2006
    
    BY:
    
    /s/ Paul J. van der WansemPaul J. van der WansemPresident, Chief Executive Officer(principal executive officer) and Chairman of the
Board of DirectorsDATE: November 7, 2006
    
    BY:
    
    /s/ Thomas P. KealyThomas P. KealyVice President, Corporate Controller andChief Accounting Officer (principal
financial and accounting officer)
 22