##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended September 30, 2007

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



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BTU
INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|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, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated
filer ̈Accelerated filer  x    Non-accelerated filer ̈

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
November 7, 2007: 9,331,388 shares.



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##### Table of Contents

BTU INTERNATIONAL, INC.

TABLE OF CONTENTS



|                                                                                              |  |      
|--------------------------------------------------------------------------------------------- |  | -----
|PART I. FINANCIAL INFORMATION                                                                
|Item 1. Financial Statements (Unaudited)                                                      |  |      
|                                                                                              | 
|Condensed Consolidated Balance Sheets                                                         |  | 1    
|Condensed Consolidated Statements of Operations                                               |  | 2    
|Condensed Consolidated Statements of Stockholders Equity and Comprehensive Income            |  | 3    
|Condensed Consolidated Statements of Cash Flows                                               |  | 4-5  
|Notes to Condensed Consolidated Financial Statements                                          |  | 6-12 
|                                                                                              | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12-16
|                                                                                              | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  | 16   
|                                                                                              | 
|Item 4. Controls and Procedures                                                               |  | 16-17
|                                                                                             
|PART II. OTHER INFORMATION                                                                   
|                                                                                              | 
|Item 1A. Risk Factors                                                                         |  | 18   
|                                                                                              | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 18   
|                                                                                              | 
|Item 5. Exhibits                                                                              |  | 18   
|                                                                                              | 
|Signatures                                                                                    |  | 18   
|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 data)

(unaudited)



|                                                                                                                                                                                                                                 |  |                   |        |   |                  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                                                                                                                                                 |  | September 30,2007 |        |   | December 31,2006 |  
|Assets                                                                                                                                                                                                                           |  |                   |        |   |                  |   |        |  
|Current assets                                                                                                                                                                                                                   |  |                   |        |   |                  |   |        |  
|Cash and cash equivalents                                                                                                                                                                                                        |  | $                 | 26,069 |   |                  | $ | 25,100 |  
|Accounts receivable, net                                                                                                                                                                                                         |  |                   | 16,549 |   |                  |   | 16,149 |  
|Inventories, net                                                                                                                                                                                                                 |  |                   | 16,974 |   |                  |   | 17,357 |  
|Other current assets                                                                                                                                                                                                             |  |                   | 713    |   |                  |   | 528    |  
|                                                                                                                                                                                                                                 |  |                   |        |   |                  |   |        |  
|Total current assets                                                                                                                                                                                                             |  |                   | 60,305 |   |                  |   | 59,134 |  
|                                                                                                                                                                                                                                 |  |                   |        |   |                  |   |        |  
|Property, plant and equipment, net                                                                                                                                                                                               |  |                   | 5,133  |   |                  |   | 4,156  |  
|Other assets, net                                                                                                                                                                                                                |  |                   | 2,399  |   |                  |   | 2,397  |  
|                                                                                                                                                                                                                                 |  |                   |        |   |                  |   |        |  
|Total assets                                                                                                                                                                                                                     |  | $                 | 67,837 |   |                  | $ | 65,687 |  
|                                                                                                                                                                                                                                 |  |                   |        |   |                  |   |        |  
|Liabilities and stockholders equity                                                                                                                                                                                             |  |                   |        |   |                  |   |        |  
|Current liabilities                                                                                                                                                                                                              |  |                   |        |   |                  |   |        |  
|Current portion of long-term debt                                                                                                                                                                                                |  | $                 | 273    |   |                  | $ | 268    |  
|Accounts payable                                                                                                                                                                                                                 |  |                   | 6,131  |   |                  |   | 5,023  |  
|Other current liabilities                                                                                                                                                                                                        |  |                   | 3,538  |   |                  |   | 5,029  |  
|                                                                                                                                                                                                                                 |  |                   |        |   |                  |   |        |  
|Total current liabilities                                                                                                                                                                                                        |  |                   | 9,942  |   |                  |   | 10,320 |  
|Long-term debt, less current portion                                                                                                                                                                                             |  |                   | 9,337  |   |                  |   | 9,552  |  
|Long-term liabilities                                                                                                                                                                                                            |  |                   | 600    |   |                  |   | 883    |  
|                                                                                                                                                                                                                                 |  |                   |        |   |                  |   |        |  
|Total liabilities                                                                                                                                                                                                                |  |                   | 19,879 |   |                  |   | 20,755 |  
|                                                                                                                                                                                                                                 |  |                   |        |   |                  |   |        |  
|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; 10,480,398 shares issued and 9,331,388 shares outstanding at September 30,
2007 and 10,332,631 shares issued and 9,183,621 shares outstanding at December 31, 2006 |  |                   | 105    |   |                  |   | 103    |  
|Additional paid in capital                                                                                                                                                                                                       |  |                   | 43,687 |   |                  |   | 42,592 |  
|Retained earnings                                                                                                                                                                                                                |  |                   | 7,254  |   |                  |   | 5,866  |  
|Treasury stock, at cost, 1,149,010 shares at September 30, 2007 and December 31, 2006                                                                                                                                            |  |                   | (4,177 | ) |                  |   | (4,177 | )
|Accumulated other comprehensive income                                                                                                                                                                                           |  |                   | 1,089  |   |                  |   | 548    |  
|                                                                                                                                                                                                                                 |  |                   |        |   |                  |   |        |  
|Total stockholders equity                                                                                                                                                                                                       |  |                   | 47,958 |   |                  |   | 44,932 |  
|                                                                                                                                                                                                                                 |  |                   |        |   |                  |   |        |  
|Total liabilities and stockholders equity                                                                                                                                                                                       |  | $                 | 67,837 |   |                  | $ | 65,687 |  
|                                                                                                                                                                                                                                 |  |                   |        |   |                  |   |        |  

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



1



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##### Table of Contents

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and
per share data)



|                                               |  |                    |           |   |                   |   |           |                    |  |   |                 |   |  |   |           |  
|---------------------------------------------- |  | ------------------ | --------- | - | ----------------- | - | --------- | ------------------ |  | - | --------------- | - |  | - | --------- | -
|                                               |  | Three Months Ended |           |   | Nine Months Ended |  
|                                               |  | September 30, 2007 |           |   | October 1, 2006   |   |           | September 30, 2007 |  |   | October 1, 2006 |  
|Net sales                                      |  | $                  | 16,522    |   |                   | $ | 18,254    |                    |  | $ | 45,456          |   |  | $ | 61,726    |  
|Costs of goods sold                            |  |                    | 9,347     |   |                   |   | 10,627    |                    |  |   | 25,781          |   |  |   | 37,047    |  
|                                               |  |                    |           |   |                   |   |           |                    |  |   |                 |   |  |   |           |  
|Gross profit                                   |  |                    | 7,175     |   |                   |   | 7,627     |                    |  |   | 19,675          |   |  |   | 24,679    |  
|Operating expenses:                            |  |                    |           |   |                   |   |           |                    |  |   |                 |   |  |   |           |  
|Selling, general and administrative            |  |                    | 5,127     |   |                   |   | 3,871     |                    |  |   | 13,792          |   |  |   | 12,733    |  
|Research, development and engineering          |  |                    | 1,284     |   |                   |   | 1,377     |                    |  |   | 4,179           |   |  |   | 3,559     |  
|                                               |  |                    |           |   |                   |   |           |                    |  |   |                 |   |  |   |           |  
|Operating income                               |  |                    | 764       |   |                   |   | 2,379     |                    |  |   | 1,704           |   |  |   | 8,387     |  
|Interest income                                |  |                    | 221       |   |                   |   | 193       |                    |  |   | 732             |   |  |   | 423       |  
|Interest expense                               |  |                    | (163      | ) |                   |   | (157      | )                  |  |   | (450            | ) |  |   | (389      | )
|Foreign exchange gain (loss)                   |  |                    | (204      | ) |                   |   | (20       | )                  |  |   | (520            | ) |  |   | (53       | )
|Other income (expense), net                    |  |                    | (3        | ) |                   |   | 2         |                    |  |   | 110             |   |  |   | 5         |  
|                                               |  |                    |           |   |                   |   |           |                    |  |   |                 |   |  |   |           |  
|Income before provision for income taxes       |  |                    | 615       |   |                   |   | 2,397     |                    |  |   | 1,576           |   |  |   | 8,373     |  
|Provision for income taxes                     |  |                    | (92       | ) |                   |   | (48       | )                  |  |   | (188            | ) |  |   | (168      | )
|                                               |  |                    |           |   |                   |   |           |                    |  |   |                 |   |  |   |           |  
|Net income                                     |  | $                  | 523       |   |                   | $ | 2,349     |                    |  | $ | 1,388           |   |  | $ | 8,205     |  
|                                               |  |                    |           |   |                   |   |           |                    |  |   |                 |   |  |   |           |  
|Income per share:                              |  |                    |           |   |                   |   |           |                    |  |   |                 |   |  |   |           |  
|Basic                                          |  | $                  | 0.06      |   |                   | $ | 0.26      |                    |  | $ | 0.15            |   |  | $ | 0.90      |  
|Diluted                                        |  | $                  | 0.06      |   |                   | $ | 0.25      |                    |  | $ | 0.15            |   |  | $ | 0.87      |  
|Weighted average number of shares outstanding: |  |                    |           |   |                   |   |           |                    |  |   |                 |   |  |   |           |  
|Basic shares                                   |  |                    | 9,275,349 |   |                   |   | 9,161,509 |                    |  |   | 9,283,618       |   |  |   | 9,100,874 |  
|Effect of dilutive options                     |  |                    | 175,102   |   |                   |   | 270,753   |                    |  |   | 185,999         |   |  |   | 292,944   |  
|                                               |  |                    |           |   |                   |   |           |                    |  |   |                 |   |  |   |           |  
|Diluted shares                                 |  |                    | 9,450,451 |   |                   |   | 9,432,262 |                    |  |   | 9,469,617       |   |  |   | 9,393,818 |  
|                                               |  |                    |           |   |                   |   |           |                    |  |   |                 |   |  |   |           |  

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



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##### Table of Contents

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE
INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007

(unaudited)

(in thousands)



|                                         |  |              |  |         |     |            |   |                |  |             |               |   |       |  |             |        |       |  |   |       |  |   |       
|---------------------------------------- |  | ------------ |  | ------- | --- | ---------- | - | -------------- |  | ----------- | ------------- | - | ----- |  | ----------- | ------ | ----- |  | - | ----- |  | - | ------
|                                         |  |              |  |         |     |            |   |                |  |             |               |   |       |  | Accumulated |        |      
|                                         |  |              |  |         |     | Additional |   |                |  |             |               |   |       |  | Other       |        |      
|                                         |  | Common Stock |  | Paid-In |     | Retained   |   | Treasury Stock |  |             | Comprehensive |   |      
|                                         |  | # of shares  |  | $       |     | Capital    |   | Earnings       |  | # of shares |               | $ |       |  | Income      |        | Total
|Balance at December 31, 2006             |  | 10,333       |  | $       | 103 |            | $ | 42,592         |  | $           | 5,866         |   | 1,149 |  | $           | (4,177 | )     |  | $ | 548   |  | $ | 44,932
|Net income                               |  |             |  |         |    |            |   |               |  |             | 1,388         |   |      |  |             |       |       |  |   |      |  |   | 1,388 
|Exercise of stock options                |  | 117          |  |         | 2   |            |   | 288            |  |             |              |   |      |  |             |       |       |  |   |      |  |   | 290   
|Issuance of stock under ESPP             |  | 9            |  |         |    |            |   | 38             |  |             |              |   |      |  |             |       |       |  |   |      |  |   | 38    
|Issuance of common stock for acquisition |  | 21           |  |         |    |            |   | 283            |  |             |              |   |      |  |             |       |       |  |   |      |  |   | 283   
|Stock-based compensation                 |  |             |  |         |    |            |   | 486            |  |             |              |   |      |  |             |       |       |  |   |      |  |   | 486   
|Translation adjustment                   |  |             |  |         |    |            |   |               |  |             |              |   |      |  |             |       |       |  |   | 541   |  |   | 541   
|                                         |  |              |  |         |     |            |   |                |  |             |               |   |       |  |             |        |       |  |   |       |  |   |       
|Balance at October 1, 2007               |  | 10,480       |  | $       | 105 |            | $ | 43,687         |  | $           | 7,254         |   | 1,149 |  | $           | (4,177 | )     |  | $ | 1,089 |  | $ | 47,958
|                                         |  |              |  |         |     |            |   |                |  |             |               |   |       |  |             |        |       |  |   |       |  |   |       



|                                               |  |                    |     |                 |   |      
|---------------------------------------------- |  | ------------------ | --- | --------------- | - | -----
|                                               |  | ThreeMonthsEnded   |     | NineMonthsEnded
|                                               |  | September 30, 2007
|Comprehensive income is calculated as follows: |  |                    |     |                 |   |      
|Net income                                     |  | $                  | 523 |                 | $ | 1,388
|Other comprehensive gain (loss)                |  |                    |     |                 |   |      
|Foreign currency translation adjustment        |  |                    | 224 |                 |   | 541  
|                                               |  |                    |     |                 |   |      
|Comprehensive income                           |  | $                  | 747 |                 | $ | 1,929
|                                               |  |                    |     |                 |   |      

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



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##### Table of Contents

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND OCTOBER 1, 2006

(unaudited)

(in thousands)



|                                                                              |  |                   |        |   |                |   |        |  
|----------------------------------------------------------------------------- |  | ----------------- | ------ | - | -------------- | - | ------ | -
|                                                                              |  | September 30,2007 |        |   | October 1,2006 |  
|Cash flows from operating activities:                                         |  |                   |        |   |                |   |        |  
|Net income                                                                    |  | $                 | 1,388  |   |                | $ | 8,205  |  
|Adjustments to reconcile net income to cash provided by operating activities: |  |                   |        |   |                |   |        |  
|Depreciation                                                                  |  |                   | 670    |   |                |   | 616    |  
|Amortization                                                                  |  |                   | 386    |   |                |   | 265    |  
|Provision for bad debts                                                       |  |                   | (10    | ) |                |   | 8      |  
|Provision for inventory                                                       |  |                   | (113   | ) |                |   | 144    |  
|Stock-based compensation                                                      |  |                   | 486    |   |                |   | 244    |  
|Net change in operating assets and liabilities:                               |  |                   |        |   |                |   |        |  
|Accounts receivable                                                           |  |                   | (290   | ) |                |   | (2,795 | )
|Inventories                                                                   |  |                   | 665    |   |                |   | (2,848 | )
|Other current assets                                                          |  |                   | (131   | ) |                |   |       |  
|Other assets                                                                  |  |                   | (52    | ) |                |   | (434   | )
|Customer deposits                                                             |  |                   | (132   | ) |                |   | (47    | )
|Accounts payable                                                              |  |                   | 947    |   |                |   | (2,364 | )
|Accrued expenses                                                              |  |                   | (1,670 | ) |                |   | (114   | )
|                                                                              |  |                   |        |   |                |   |        |  
|Net cash provided by operating activities                                     |  |                   | 2,144  |   |                |   | 880    |  
|                                                                              |  |                   |        |   |                |   |        |  
|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                                    |  |                   | (1,520 | ) |                |   | (1,313 | )
|                                                                              |  |                   |        |   |                |   |        |  
|Net cash used in investing activities                                         |  |                   | (1,520 | ) |                |   | (2,288 | )
|                                                                              |  |                   |        |   |                |   |        |  
|Cash flows from financing activities:                                         |  |                   |        |   |                |   |        |  
|Principal payments under loan and capital lease agreements                    |  |                   | (210   | ) |                |   | (154   | )
|Proceeds from bank loan                                                       |  |                   |       |   |                |   | 4,686  |  
|Issuance of common stock for ESPP                                             |  |                   | 38     |   |                |   | 1,070  |  
|Proceeds from the exercise of stock options                                   |  |                   | 290    |   |                |   | 379    |  
|                                                                              |  |                   |        |   |                |   |        |  
|Net cash provided by financing activities                                     |  |                   | 118    |   |                |   | 5,981  |  
|                                                                              |  |                   |        |   |                |   |        |  
|Effects of exchange rates on cash                                             |  |                   | 227    |   |                |   | 80     |  
|                                                                              |  |                   |        |   |                |   |        |  
|Net increase in cash and cash equivalents                                     |  |                   | 969    |   |                |   | 4,653  |  
|Cash and cash equivalents, beginning of period                                |  |                   | 25,100 |   |                |   | 15,460 |  
|                                                                              |  |                   |        |   |                |   |        |  
|Cash and cash equivalents, end of period                                      |  | $                 | 26,069 |   |                | $ | 20,113 |  
|                                                                              |  |                   |        |   |                |   |        |  

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



4



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##### Table of Contents

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND
OCTOBER 1, 2006

(unaudited)

(in
thousands)



|                                                   |  |                   |      |   |                |   |        |  
|-------------------------------------------------- |  | ----------------- | ---- | - | -------------- | - | ------ | -
|                                                   |  | September 30,2007 |      |   | October 1,2006 |  
|Supplemental disclosures of cash flow information: |  |                   |      |   |                |   |        |  
|Cash paid (received) during the periods for:       |  |                   |      |   |                |   |        |  
|Interest                                           |  | $                 | (214 | ) |                | $ | 15     |  
|Income taxes                                       |  |                   | 57   |   |                |   | 25     |  
|Non-cash disclosure:                               |  |                   |      |   |                |   |        |  
|Acquisition of Radiant Technology Corporation      |  |                   |      |   |                |   |        |  
|Fair value of assets acquired                      |  |                   |     |   |                |   | 1,591  |  
|Fair value of common stock issued                  |  |                   | 283  |   |                |   | (1,001 | )
|Less fair value of liabilities assumed             |  |                   | (283 | ) |                |   | (90    | )
|                                                   |  |                   |      |   |                |   |        |  
|Cash paid                                          |  | $                 |     |   |                | $ | 500    |  
|Acquisition of Atmoplas Technology and Research    |  |                   |      |   |                |   |        |  
|Fair value of assets acquired                      |  |                   |     |   |                |   | 1,390  |  
|Less fair value of liabilities assumed             |  |                   |     |   |                |   | (915   | )
|                                                   |  |                   |      |   |                |   |        |  
|Cash paid                                          |  | $                 |     |   |                | $ | 475    |  

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



5



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##### Table of Contents

BTU INTERNATIONAL, INC.

NOTES TO 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, 2006 have been derived from our
consolidated financial statements, which have been audited as of that date. The condensed consolidated balance sheet as of September 30, 2007 and the related condensed consolidated statements of operations and the condensed consolidated
statements of stockholders equity and comprehensive income for the three and nine months ended September 30, 2007 and October 1, 2006 are unaudited. The condensed consolidated statements of cash flows for the nine months ended
September 30, 2007 and October 1, 2006 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 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, 2006, 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) Inventories

Inventories at September 30, 2007 and December 31, 2006 consisted of (in thousands):



|                                          |  |                   |        |                  |   |       
|----------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                          |  | September 30,2007 |        | December 31,2006
|Raw materials and manufactured components |  | $                 | 11,073 |                  | $ | 11,276
|Work-in-process                           |  |                   | 4,209  |                  |   | 3,672 
|Finished goods                            |  |                   | 1,692  |                  |   | 2,409 
|                                          |  |                   |        |                  |   |       
|                                          |  | $                 | 16,974 |                  | $ | 17,357
|                                          |  |                   |        |                  |   |       

(3) Debt

Long-Term Debt at September 30, 2007 and December 31, 2006 consisted of (in thousands):



|                                                  |  |                   |       |                  |   |      
|------------------------------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                                                  |  | September 30,2007 |       | December 31,2006
|Mortgage note payable                             |  | $                 | 9,601 |                  | $ | 9,808
|Capital lease obligations, interest rate of 6.75% |  |                   | 9     |                  |   | 12   
|                                                  |  |                   |       |                  |   |      
|                                                  |  |                   | 9,610 |                  |   | 9,820
|Less - current maturities                         |  |                   | 273   |                  |   | 268  
|                                                  |  |                   |       |                  |   |      
|                                                  |  | $                 | 9,337 |                  | $ | 9,552
|                                                  |  |                   |       |                  |   |      

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 September 30, 2007 of approximately $9.6 million.



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##### Table of Contents

BTU INTERNATIONAL, INC.

NOTES TO 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 and is subject to maintaining certain financial covenants, of which the Company is in full compliance. At September 30, 2007, the borrowing base would support the
maximum borrowings of $15 million, and there were no borrowings outstanding under the loan agreement.

(4) 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 481,920 and 486,500 for the three and nine months ended September 30, 2007 and 207,920 and 209,722 for the three and nine months ended October 1, 2006, respectively. The Company
has elected to adopt the Alternative Transition method provided by the FASB Staff Position for calculating the tax effects of stock-based compensation expense pursuant to Financial Accounting Standards Board Statement 123R, Share-Based Payment (SFAS
123R).

(5) Accounting for Stock-Based Compensation

Effective January 1, 2006, the Company adopted the provisions of Financial Accounting Standards Board Statement 123R, Share-Based Payment (SFAS 123R). This statement establishes standards for accounting for transactions in which an
entity exchanges its equity instruments for goods or services. The Company has elected to adopt the standard using the modified prospective application under which compensation cost is recognized on or after the required effective date for the fair
value of all future share-based award grants and for the portion of outstanding awards at the date of adoption of this statement for which the requisite service has not been rendered, based on the grant-date fair value of those awards calculated
under Statement 123 for pro forma disclosures. The Companys stock option compensation expense was $202,128 and $486,410 respectively, for the three and nine months ended September 30, 2007 and $117,579 and $231,908 for the three and nine
months ended October 1, 2006.

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 period:

Calculation of Fair Values - Assumptions Used:



|                        |  |                    |   |  |                 |  
|----------------------- |  | ------------------ | - |  | --------------- | -
|                        |  | Nine Months Ended  |  
|                        |  | September 30, 2007 |   |  | October 1, 2006 |  
|Expected Volatility     |  | 65                 | % |  | 60              | %
|Expected Life           |  | 5                  |   |  | 5               |  
|Risk-Free Interest Rate |  | 4.79               | % |  | 4.96            | %
|Expected Dividend Yield |  | None               |   |  | None            |  



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##### Table of Contents

BTU INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



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 Unites 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.

The
following table summarizes the stock option activity during the nine months ended September 30, 2007:

2007 Option Activity:



|                                  |  |          |   |  |                               |       |                                 |      |                         |   |          
|--------------------------------- |  | -------- | - |  | ----------------------------- | ----- | ------------------------------- | ---- | ----------------------- | - | ---------
|                                  |  | Shares   |   |  | Weighted-AverageExercisePrice |       | AverageRemainingContractualTerm |      | AggregateIntrinsicValue
|Options                           |  |          |   |  |                               |       |                                 |      |                         |   |          
|Outstanding at December 31, 2006  |  | 588,237  |   |  | $                             | 6.66  |                                 |      |                         |   |          
|Granted                           |  | 276,500  |   |  | $                             | 11.92 |                                 |      |                         |   |          
|Exercised                         |  | (117,283 | ) |  | $                             | 2.48  |                                 |      |                         |   |          
|Forfeited                         |  | (3,426   | ) |  | $                             | 10.81 |                                 |      |                         |   |          
|                                  |  |          |   |  |                               |       |                                 |      |                         |   |          
|Outstanding at September 30, 2007 |  | 744,029  |   |  | $                             | 9.29  |                                 | 4.66 |                         | $ | 2,634,385
|Exercisable at September 30, 2007 |  | 202,674  |   |  | $                             | 5.90  |                                 | 4.44 |                         | $ | 1,405,388

The weighted-average grant-date fair value of options granted during the nine-month periods ended
September 30, 2007 and October 1, 2006 was $6.87 and $7.26, respectively. The fair value of options exercised during the nine-month periods ended September 30, 2007 and October 1, 2006 was $1,214,196 and $838,284, respectively.

As of September 30, 2007, there was $2,326,561 of total unrecognized compensation cost related to nonvested options granted under all of the
Companys option plans. That cost is expected to be recognized over a weighted average period of 2.2 years. The total fair value of shares vested during the three-month period ended September 30, 2007 was $0.

As of September 30, 2007, there was $22,500 of unrecognized compensation costs related to restricted stock grants which were issued in a prior year. These grants
have a remaining life of 1.5 years.

(6) 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.



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##### Table of Contents

BTU INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



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 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.

Revenue by geographic location is as follows (in thousands):



|                  |  |                    |        |                   |   |                   |  |                |        |  |   |       
|----------------- |  | ------------------ | ------ | ----------------- | - | ----------------- |  | -------------- | ------ |  | - | ------
|                  |  | Three Months Ended |        | Nine Months Ended
|                  |  | September 30,2007  |        | October 1,2006    |   | September 30,2007 |  | October 1,2006
|United States     |  | $                  | 1,856  |                   | $ | 4,428             |  | $              | 7,722  |  | $ | 9,490 
|Europe, Near East |  |                    | 3,535  |                   |   | 3,583             |  |                | 9,438  |  |   | 14,377
|Asia Pacific      |  |                    | 9,644  |                   |   | 8,733             |  |                | 24,564 |  |   | 31,107
|Other Americas    |  |                    | 1,487  |                   |   | 1,510             |  |                | 3,732  |  |   | 6,752 
|                  |  |                    |        |                   |   |                   |  |                |        |  |   |       
|                  |  | $                  | 16,522 |                   | $ | 18,254            |  | $              | 45,456 |  | $ | 61,726
|                  |  |                    |        |                   |   |                   |  |                |        |  |   |       

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



|              |  |                   |       |                  |   |      
|------------- |  | ----------------- | ----- | ---------------- | - | -----
|              |  | September 30,2007 |       | December 31,2006
|North America |  | $                 | 6,877 |                  | $ | 5,758
|Asia Pacific  |  |                   | 655   |                  |   | 795  
|              |  |                   |       |                  |   |      
|              |  | $                 | 7,532 |                  | $ | 6,553
|              |  |                   |       |                  |   |      

(7) Revenue Recognition

The Company recognizes revenue in accordance with the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements as updated by SEC Staff Accounting
Bulletin No. 104, Revenue Recognition. Under these guidelines, revenue is recognized when persuasive evidence of an arrangement exists, shipment has occurred or services rendered, the price is fixed or determinable and payment is
reasonably assured. Under these requirements, when the terms of sale include customer acceptance provisions, and compliance with those provisions has not been previously demonstrated, revenues are recognized upon acceptance. Furthermore, revenues
for products that require installation for which the installation is essential to functionality and is not deemed inconsequential or perfunctory are recognized upon completion of installation. Revenues for products sold where installation is not
essential to functionality and is deemed inconsequential or perfunctory are recognized upon shipment with estimated installation and warranty costs accrued.



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##### Table of Contents

BTU INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Applying the requirements of SAB No. 104 to future sales arrangements used in the Companys equipment sales
may result in the deferral of the revenue for some equipment sales.

The Company also has certain sales transactions for projects that are not completed
within the normal operating cycle of the business. These contracts are accounted for on a percentage completion basis. Under the percentage completion method, revenues are recognized based upon the ratio of costs incurred to the total estimated
costs. Revisions in costs and profit estimates are reflected in the period in which the facts causing the revisions become known. Provisions for total estimated losses on uncompleted contracts, if any, are made in the period in which such losses are
determined.

For the three and nine months ended September 30, 2007, there was $389,177 and $492,306, respectively, of revenue recognized using the
percentage of completion method. For the three and nine months ended October 1, 2006, there was $0 and $1,211,000, respectively, of revenue recognized using the percentage of completion method.

The Company accounts for shipping and handling costs billed to customers in accordance with the Emerging Issues Task Force (EITF) Issue 00-10 Accounting for
Shipping and Handling Fees and Cost. Amounts billed to customers for shipping and handling costs are recorded as revenues with the associated costs reported as cost of goods sold.

(8) 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 sets aside a reserve for anticipated warranty claims based on revenue. The reserve for warranty covers the estimated costs of material, labor and travel. Actual warranty
claims incurred are charged to expense. 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 nine months ended September 30, 2007 (in thousands):



|                                      |  |                                     |      |  
|------------------------------------- |  | ----------------------------------- | ---- | -
|                                      |  | Nine Months EndedSeptember 30, 2007 |     
|Beginning balance, December 31, 2006  |  | $                                   | 748  |  
|Plus: accruals related to new sales   |  |                                     | 579  |  
|Less: warranty claims incurred        |  |                                     | (419 | )
|Less: reversal of excess requirements |  |                                     | (271 | )
|                                      |  |                                     |      |  
|Balance, end of period                |  | $                                   | 637  |  
|                                      |  |                                     |      |  



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##### Table of Contents

BTU INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)



(9) Recent Accounting Pronouncements

The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, the
Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48. In this regard, an uncertain tax position represents the Companys expected treatment of a tax
position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. The Company believes that it has appropriate support for the income
tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of
each matter. As a result of applying the provisions of FIN 48, there was no cumulative effect on retained earnings.

For the nine months ended
September 30, 2007, there were no material changes to the total amount of unrecognized tax benefits. The Company does not expect any significant increases or decreases for uncertain tax positions during the next 12 months.

The Company files income tax returns in the U.S. and various states as well as several foreign jurisdictions. The tax years 2003 through 2006 remain open to examination
by the tax jurisdictions to which we are subject.

The Companys policy is to recognize interest and penalties accrued on any unrecognized tax
benefits as a component of income tax expense. There is no interest or penalties accrued at September 30, 2007. As a result of this review, the Company concluded that at this time there are no uncertain tax positions.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of SFAS
No. 115. The new statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a Company elects
the fair value option for an eligible item, changes in that items fair value in subsequent reporting periods must be recognized in current earnings. SFAS No. 159 will be effective for fiscal years beginning after November 15, 2007.
The Company does not believe the adoption of SFAS No. 159 will have a material impact on its financial condition or results of operations.

In June
2006, the FASB reached consensus on Emerging Issues Task Force (EITF) No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement.The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added,
and excise taxes. The EITF affirmed its conclusion that entities should present these taxes in the income statement on either a gross or a net basis, based on their accounting policy, which should be disclosed pursuant to Accounting Principles
Board Opinion (APB) No. 22, Disclosure of Accounting Policies.If those taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. EITF No. 06-3 is effective
for interim and annual reporting periods beginning after December 15, 2006. The adoption of EITF No. 06-3 did not have a material impact on the Companys financial condition or results of operations.



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##### Table of Contents

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)



(10) Acquisitions

On March 17, 2006, the Company acquired the product lines, trademarks and other related assets of Radiant Technology Corporation (RTC). The purchase price for this acquisition was as follows: 1) $500,000 in cash and 100,000 shares of
the Companys common stock, of which 30,000 shares were contingent upon RTCs successful achievement of certain non-financial performance criteria; and 2) Royalty payments on any products using the RTC technology manufactured by the
Company for a period of 4 years. In addition, the parties entered into a supply agreement under which RTC will continue to manufacture its products for distribution by the Company after the closing.

In the second quarter of 2007, it was determined that, of the additional 30,000 shares of stock that were contingent upon RTCs successful achievement of certain
non-financial performance criteria, 21,000 shares had been earned. On May 3, 2007, 18,000 shares were issued and the additional 3,000 shares were issued on July 16, 2007.

On May 31, 2006, the Company acquired the assets and intellectual property of AtmoPlas, a division of Dana Corporation. The purchase price is as follows: 1) $474,564 in cash; 2) Royalty payments on any products
using AtmoPlas technology manufactured by the Company and sold during the third through seventh years after the acquisition with minimum royalties in years three and four of not less than $300,000 per year; and 3) Royalty payments on licensing
revenues received from third parties for a period of seven years after the closing date calculated on a percentage basis.



|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.



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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 |        |                |                 |  
|                                             |  | September 30, 2007 |        |                | October 1, 2006 |   |             |   |               
|                                             |  | $ thousands        |        | % of net sales |                 |   | $ thousands |   | % of net sales |  |       | $ Percent change | 
|Net sales                                    |  | $                  | 16,522 |                | 100.0           | % |             | $ | 18,254         |  | 100.0 | %                |  | (9.5  | )%
|Cost of goods sold                           |  |                    | 9,347  |                | 56.6            | % |             |   | 10,627         |  | 58.2  | %                |  | (12.0 | )%
|                                             |  |                    |        |                |                 |   |             |   |                |  |       |                  |  |       |   
|Gross profit                                 |  |                    | 7,175  |                | 43.4            | % |             |   | 7,627          |  | 41.8  | %                |  | (5.9  | )%
|Selling, general and administrative expenses |  |                    | 5,127  |                | 31.0            | % |             |   | 3,871          |  | 21.2  | %                |  | 32.4  | % 
|Research, development and engineering        |  |                    | 1,284  |                | 7.8             | % |             |   | 1,377          |  | 7.5   | %                |  | (6.8  | )%
|                                             |  |                    |        |                |                 |   |             |   |                |  |       |                  |  |       |   
|Operating income                             |  |                    | 764    |                | 4.6             | % |             |   | 2,379          |  | 13.1  | %                |  | (67.9 | )%
|Income before provision for income taxes     |  |                    | 615    |                | 3.7             | % |             |   | 2,397          |  | 13.1  | %                |  | (74.3 | )%
|                                             |  |                    |        |                |                 |   |             |   |                |  |       |                  |  |       |   
|Net income                                   |  | $                  | 523    |                | 3.2             | % |             | $ | 2,349          |  | 12.9  | %                |  | (77.7 | )%
|                                             |  |                    |        |                |                 |   |             |   |                |  |       |                  |  |       |   



|                                             |  |                    |        |                |                 |   |             |   |                |  |       |                  |  |       |   
|-------------------------------------------- |  | ------------------ | ------ | -------------- | --------------- | - | ----------- | - | -------------- |  | ----- | ---------------- |  | ----- | --
|                                             |  | Nine Months Ended  |        |                |                 |  
|                                             |  | September 30, 2007 |        |                | October 1, 2006 |   |             |   |               
|                                             |  | $ thousands        |        | % of net sales |                 |   | $ thousands |   | % of net sales |  |       | $ Percent change | 
|Net sales                                    |  | $                  | 45,456 |                | 100.0           | % |             | $ | 61,726         |  | 100.0 | %                |  | (26.4 | )%
|Cost of goods sold                           |  |                    | 25,781 |                | 56.7            | % |             |   | 37,047         |  | 60.0  | %                |  | (30.4 | )%
|                                             |  |                    |        |                |                 |   |             |   |                |  |       |                  |  |       |   
|Gross profit                                 |  |                    | 19,675 |                | 43.3            | % |             |   | 24,679         |  | 40.0  | %                |  | (20.3 | )%
|Selling, general and administrative expenses |  |                    | 13,792 |                | 30.3            | % |             |   | 12,733         |  | 20.6  | %                |  | 8.3   | % 
|Research, development and engineering        |  |                    | 4,179  |                | 9.2             | % |             |   | 3,559          |  | 5.8   | %                |  | 17.4  | % 
|                                             |  |                    |        |                |                 |   |             |   |                |  |       |                  |  |       |   
|Operating income                             |  |                    | 1,704  |                | 3.7             | % |             |   | 8,387          |  | 13.6  | %                |  | (79.7 | )%
|Income before provision for income taxes     |  |                    | 1,576  |                | 3.5             | % |             |   | 8,373          |  | 13.6  | %                |  | (81.2 | )%
|                                             |  |                    |        |                |                 |   |             |   |                |  |       |                  |  |       |   
|Net income                                   |  | $                  | 1,388  |                | 3.1             | % |             | $ | 8,205          |  | 13.3  | %                |  | (83.1 | )%
|                                             |  |                    |        |                |                 |   |             |   |                |  |       |                  |  |       |   

Net Sales. The decline in net sales of 26.4% in the first nine months of 2007 versus the same period in
2006 was due to the slowdown in demand for our electronics market products. The decrease in the percentage decline in net sales from the mid thirties in the first half of 2007 versus the first half of 2006 to 9.5% in the third quarter of 2007 verses
the third quarter of 2006 was due primarily to an increased demand for our electronics assembly equipment, as well as solar equipment.



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##### Table of Contents

The following table sets forth, for the periods indicated, select geographical data (in thousands) expressed in dollars
of net sales.



|                  |  |                    |        |                   |   |                    |  |                 |        |  |   |       
|----------------- |  | ------------------ | ------ | ----------------- | - | ------------------ |  | --------------- | ------ |  | - | ------
|                  |  | Three Months Ended |        | Nine Months Ended
|                  |  | September 30 2007  |        | October 1, 2006   |   | September 30, 2007 |  | October 1, 2006
|United States     |  | $                  | 1,856  |                   | $ | 4,428              |  | $               | 7,722  |  | $ | 9,490 
|Europe, Near East |  |                    | 3,535  |                   |   | 3,583              |  |                 | 9,438  |  |   | 14,377
|Asia Pacific      |  |                    | 9,644  |                   |   | 8,733              |  |                 | 24,564 |  |   | 31,107
|Other Americas    |  |                    | 1,487  |                   |   | 1,510              |  |                 | 3,732  |  |   | 6,752 
|                  |  |                    |        |                   |   |                    |  |                 |        |  |   |       
|                  |  | $                  | 16,522 |                   | $ | 18,254             |  | $               | 45,456 |  | $ | 61,726
|                  |  |                    |        |                   |   |                    |  |                 |        |  |   |       

The comparative nine-month percentage of geographical sales distribution is relatively the same year to year.
However with the recovery of our electronic products in Q3 2007, the distribution of sales has shifted to Asia with a proportional revenue decline in U.S. sales.

Gross Profit. The increase in the gross profit percentage for the first nine months and the third quarter of 2007 versus the same periods in 2006 was principally the result of a favorable product mix, lower material costs in our
U.S. operations and improvements in our China assembly and China material sourcing for global operations.

Selling, General and Administrative.The
increase in selling, general and administrative expenses in the first nine months of 2007 versus the same period in 2006 is reflective of the Companys expansion in the alternative energy markets and the continuing increased costs associated
with government regulations on United States public companies with global operations. The increased selling, general and administrative costs in the third quarter of 2007 versus the third quarter of 2006 are due to the product and geographical mix
which resulted in higher commission costs, added sales and marketing expenses primarily associated with trade shows for our alternative energy products and added administrative costs associated with the expensing of stock options, Sarbanes-Oxley
compliance, tax consulting and legal costs. Also, during the third quarter of 2006 selling, general and administrative expenses of $3.9 million were reduced from $4.5 million in the second quarter of 2006 partially by a proportionate adjustment in
reserves to reflect the reduced revenue in the third quarter of 2006 versus the higher revenues in the previous quarters.

Research, Development and
Engineering.In the first nine months of 2007 the Company has increased its spending on RD&E versus the same period in 2006 primarily for its development efforts towards advanced technological products at our AtmoPlas laboratory, new
products for our alternative energy markets and enhancements to our electronics market products.

Operating Income.The decrease in operating income
was primarily the result of decreased revenues.

Foreign Exchange (loss).The $0.2 million foreign exchange loss for the quarter ending
September 30, 2007 is primarily due to the reduction in the valuation of the US dollar accounts against the Chinese RMB at the Companys Shanghai operations.

Income Taxes.The Company has federal and state net operating loss carry forwards of approximately $7 million. We estimated our annual tax rate and recorded the resulting provision. 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%.



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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2007, the Company had $26.1 million in cash and cash equivalents.

During the nine months ended September 30,
2007, the Company generated net cash resources of approximately $2.1 million from operating activities. This source of cash was primarily the result of an increase in accounts payable of $0.9 million, a decrease in inventory of
$0.7 million, net profit of $1.4 million, stock based compensation of $0.5 million, depreciation and amortization of $1.1 million, and was offset by a decrease in accrued expenses of $1.7 million, an increase in other assets and reserves
of $0.4 million, and an increase in accounts receivable of $0.3 million.

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 September 30, 2007 of approximately $9.6 million. Net proceeds on the refinancing were
$4.7 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, in which the Company is in full compliance. At September 30, 2007, the borrowing base would support the maximum borrowings of $15
million, and there were no borrowings outstanding under the loan agreement.

As of September 30, 2007, 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 net sales in U.S. dollars and that the Company has a substantial manufacturing presence in China, with sales into
the PRC primarily in U.S. dollars, should the US dollar continue to decline in relation to the Chinese RMB the Companys financial results will continue to be adversely affected.

The impact of inflation during 2007 had no material impact on our business and financial results.

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 compliance with financial covenants in our bank agreement 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,



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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.

See the risks described in Risk Factors in
Part II, Item 1A of this Report.



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

As of
September 30, 2007, we do not believe that we have any material market risk exposure with respect to derivative or other financial instruments.



|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
Securities Exchange Act of 1934 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 principal executive officer and principal financial 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 principal executive officer and principal financial 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 September 30, 2007, 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 completed under the specific rules stated above, as of September 30, 2007, management concluded that our disclosure controls and procedures
were not effective. This conclusion was based on continuing material weaknesses in our internal control over financial reporting as described below.

2.
Internal Control over Financial Reporting

The Companys management is responsible for establishing and maintaining adequate internal control over
its financial reporting. The Companys internal control over financial reporting is a process designed under the supervision of the Companys principal executive officer and principal financial officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the Companys financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



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The Companys Management assessed the effectiveness of the Companys internal control over financial reporting
as of December 31, 2006 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework.

Managements assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2006, had identified control
deficiencies, which when aggregated, constituted two material weaknesses in the Companys internal control over financial reporting. A material weakness is a significant deficiency, or a combination of significant deficiencies which when
aggregated, results in there being more than a remote likelihood that a material misstatement of the annual or interim financials statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned
functions. As a result, Management concluded due to two material weaknesses that existed in our internal control over financial reporting, that the Companys internal control over financial reporting was not effective and required improvement
as of December 31, 2006. Notwithstanding the material weaknesses below, which did not result in an adjustment to the financial statements, management believes that the consolidated financial statements included in this Quarterly Report on Form
10-Q fairly present, in all material respects, the Companys financial position, results of operations and cash flows for the periods presented.



| | 1) | The first material weakness identified resulted from the aggregation of significant deficiencies arising out of the insufficient segregation of incompatible duties. Due to limited
staff, certain individuals processed transactions, reconciled balances, performed key monitoring controls and maintained control of assets all within certain cycles. The Company has taken or is in the process of taking the following remediation
measures:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The accounting department has been reorganized to enhance segregation of duties. (Implemented)
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Additional staff will be added to allow transactional processing and account balance review to be separated. (Implemented)
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Additional cross-training will occur for roles to be backfilled. (Implemented)
| | - |  | ------------------------------------------------------------------------------



| |  |  | Effective utilization of the new ERP system. (In process)
| | - |  | ---------------------------------------------------------



| | 2) | The second material weakness identified resulted from the aggregation of significant deficiencies arising out of lack of evidence and inadequate financial key controls over
financial reporting. Examples include ineffective controls over formal account reconciliation preparation, period-end account reconciliation review and analysis and review and approval of journal entries. The following remediation measures have been
or are in the process of being put in place to ensure these activities can be evidenced:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Formal account reconciliation preparation and review by appropriate personnel. (Implemented)
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Additional staff will be added to allow managers to focus on the review and approval function. (Implemented)
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | Training will continue to be provided to identify and evidence key control activities. (In process)
| | - |  | ---------------------------------------------------------------------------------------------------

Management has discussed these corrective actions with the Audit Committee and Vitale, Caturano & Company, Ltd. (VCC), our independent registered public
accounting firm, but it is uncertain that the Company will be fully successful in remediating its control weaknesses. VCC has audited managements assessment of the Companys internal controls over financial reporting and the effectiveness
of our internal control over financial reporting as of December 31, 2006, and has issued their report which is included in the Companys 2006 Form 10K.



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3. Changes in Internal Control over Financial Reporting

The changes in the Companys internal control over financial reporting that occurred during the quarter ended September 30, 2007 have not materially affected,
nor are reasonably likely to materially affect, the Companys internal control over financial reporting. Since December 31, 2006, the Company has begun the implementation of actions for the remediation of the identified material weakness,
as described above.

PART II. OTHER INFORMATION



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

Risk factors are disclosed in the Companys 2006 Annual
Report on Form 10-K and its April 1, 2007 and July 1, 2007 Forms 10-Q.

During the quarter ended September 30, 2007, there were no material changes to
the risk factors for the business.



|Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|------- | ------------------------------------------------------------

On
July 16, 2007, the Company issued 3,000 shares of its common stock to Radiant Technology Corporation (RTC). The 3,000 shares were the final installment of a total of 21,000 shares the Company issued to RTC as an earnout relating to its
acquisition of assets from RTC on March 17, 2006. In total, the Company issued 91,000 shares as part of the purchase price for this acquisition. Because these issuances did not involve a public offering, the issuances were exempt from
registration under Section 4(2) of the Securities Act of 1933.



|Item 5. | EXHIBITS
|------- | --------

(a) Exhibits

Exhibit 31.1 - Section 302 Certification

Exhibit 31.2 - Section 302 Certification

Exhibit 32.1 - Section 906 Certification

Exhibit 32.2 - Section 906 Certification

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: November 9, 2007 |  | 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: November 9, 2007 |  | 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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