##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 2, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 
 Commission File Number 000-17297
 BTU INTERNATIONAL, INC.
  DELAWARE
    
    04-2781248(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)23 Esquire Road, North Billerica, Massachusetts
    
    01862-2596(Address of principal executive offices)
    
    (Zip Code)
  þ o
  o o þ
 o þ




---



##### 



PART I. FINANCIAL INFORMATIONItem 1.Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    2Condensed Consolidated Statement of Stockholders Equity
and Comprehensive Income
    
    
    3Condensed Consolidated Statements of Cash Flows
    
    
    4-5Notes to Condensed Consolidated Financial Statements
    
    
    6-12Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12-15Item 3. Quantitative and Qualitative Disclosures
About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15-17PART II. OTHER INFORMATIONItem 1A. Risk Factors
    
    
    17-21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 6. Exhibits
    
    
    21Signatures
    
    
    22EX-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.




---



##### Table of Contents



July 2,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assetsCash and cash equivalents
    
    $
    17,206
    
    
    $
    15,460Accounts receivable, net
    
    
    22,414
    
    
    
    16,519Inventories
    
    
    16,600
    
    
    
    13,933Other current assets
    
    
    763
    
    
    
    489Total current assets
    
    
    56,983
    
    
    
    46,401Property, plant and equipment, net
    
    
    3,486
    
    
    
    2,343Other assets, net
    
    
    2,369
    
    
    
    161Total assets
    
    $
    62,838
    
    
    $
    48,905Liabilities and stockholders equityCurrent liabilitiesCurrent portion of long-term debt
    
    $
    267
    
    
    $
    183Accounts payable
    
    
    5,675
    
    
    
    6,069Other current liabilities
    
    
    5,428
    
    
    
    4,781Total current liabilities
    
    
    11,370
    
    
    
    11,033Long-term debt, less current portion
    
    
    9,695
    
    
    
    5,106Long-term deferred compensation
    
    
    283
    
    
    
    Long-term liabilities
    
    
    600
    
    
    
    283Total liabilities
    
    
    21,948
    
    
    
    16,422Commitments and contingenciesStockholders equityPreferred stock, $1.00 par value - 5,000,000 shares
authorized; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value - 25,000,000 shares
authorized; 10,288,246 shares issued and 9,139,236
shares outstanding at July 2, 2006 and 10,039,759
shares issued and 8,890,749 shares
outstanding at December 31, 2005
    
    
    103
    
    
    
    100Additional paid in capital
    
    
    42,181
    
    
    
    39,746Deferred compensation
    
    
    
    
    
    
    (49
    )Accumulated earnings (deficit)
    
    
    2,499
    
    
    
    (3,356
    )Treasury stock, at cost
    
    
    (4,177
    )
    
    
    (4,177
    )Accumulated other comprehensive income
    
    
    284
    
    
    
    219Total stockholders equity
    
    
    40,890
    
    
    
    32,483Total liabilities and stockholders equity
    
    $
    62,838
    
    
    $
    48,905
  1




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJuly 2, 2006
    
    
    July 3, 2005
    
    
    July 2, 2006
    
    
    July 3, 2005Net sales
    
    $
    22,538
    
    
    $
    15,806
    
    
    $
    43,473
    
    
    $
    28,598Costs of goods sold
    
    
    13,518
    
    
    
    10,218
    
    
    
    26,420
    
    
    
    18,495Gross profit
    
    
    9,020
    
    
    
    5,588
    
    
    
    17,053
    
    
    
    10,103Operating expenses:Selling, general and
administrative
    
    
    4,457
    
    
    
    3,813
    
    
    
    8,861
    
    
    
    7,257Research, development and
engineering
    
    
    1,254
    
    
    
    867
    
    
    
    2,183
    
    
    
    1,639Operating income
    
    
    3,309
    
    
    
    908
    
    
    
    6,009
    
    
    
    1,207Interest income
    
    
    138
    
    
    
    1
    
    
    
    230
    
    
    
    2Interest expense
    
    
    (162
    )
    
    
    (139
    )
    
    
    (232
    )
    
    
    (272
    )Other income (loss), net
    
    
    16
    
    
    
    
    
    
    
    (32
    )
    
    
    Income before provision for
income taxes
    
    
    3,301
    
    
    
    770
    
    
    
    5,975
    
    
    
    937Provision for income taxes
    
    
    (66
    )
    
    
    
    
    
    
    (120
    )
    
    
    Net income
    
    $
    3,235
    
    
    $
    770
    
    
    $
    5,855
    
    
    $
    937Income per share:Basic
    
    $
    0.35
    
    
    $
    0.11
    
    
    $
    0.65
    
    
    $
    0.13Diluted
    
    $
    0.34
    
    
    $
    0.11
    
    
    $
    0.62
    
    
    $
    0.13Weighted average number of
shares outstanding:Basic shares
    
    
    9,133,371
    
    
    
    7,246,924
    
    
    
    9,070,845
    
    
    
    7,232,620Effect of dilutive options
    
    
    308,518
    
    
    
    119,805
    
    
    
    312,719
    
    
    
    100,545Diluted shares
    
    
    9,441,889
    
    
    
    7,366,729
    
    
    
    9,383,564
    
    
    
    7,333,165
  2




---



##### Table of Contents



BTU INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 FOR THE SIX MONTHS ENDED JULY 2, 2006
 (unaudited)
 (in thousands)
 Retained
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    Earnings
    
    
    
    
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Deferred
    
    
    (Accum.
    
    
    Treasury Stock
    
    
    Comprehensive# of shares
    
    
    $
    
    
    Capital
    
    
    Comp.
    
    
    Deficit)
    
    
    # of shares
    
    
    $
    
    
    Income
    
    
    TotalSix months ended
July 2, 2006Balance at
December 31, 2005
    
    
    10,040
    
    
    $
    100
    
    
    $
    39,746
    
    
    $
    (49
    )
    
    $
    (3,356
    )
    
    
    1,149
    
    
    $
    (4,177
    )
    
    $
    219
    
    
    $
    32,483Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,855
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,855Exercise of stock
options
    
    
    90
    
    
    
    1
    
    
    
    293
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    294Issuance of
common stock, net
of
issuance costs of
$63
    
    
    158
    
    
    
    2
    
    
    
    2,069
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,071Reclass of
deferred
compensation and
compensation
expense related to
SFAS 123R
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122Translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    65Balance at July
2, 2006
    
    
    10,288
    
    
    $
    103
    
    
    $
    42,181
    
    
    $
    
    
    
    $
    2,499
    
    
    
    1,149
    
    
    $
    (4,177
    )
    
    $
    284
    
    
    $
    40,890
 SixMonthsEndedJuly 2, 2006Comprehensive income is calculated as follows:Net income
    
    $
    5,855Other comprehensive gainForeign currency translation adjustment
    
    
    65Comprehensive income
    
    $
    5,920
  3




---



##### Table of Contents



July 2,
    
    
    July 3,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    5,855
    
    
    $
    937Adjustments to reconcile net cash used in operating activities:Depreciation and amortization
    
    
    529
    
    
    
    515Provision for bad debt
    
    
    111
    
    
    
    55Provision for inventory
    
    
    436
    
    
    
    Stock based compensation
    
    
    122
    
    
    
    (60
    )Net change in operating assets and liabilities:Accounts receivable
    
    
    (5,930
    )
    
    
    (3,907
    )Inventories
    
    
    (3,026
    )
    
    
    1,059Other current assets
    
    
    (204
    )
    
    
    (257
    )Other assets
    
    
    (129
    )
    
    
    697Customer deposits
    
    
    (238
    )
    
    
    Accounts payable
    
    
    (960
    )
    
    
    40Accrued expenses
    
    
    457
    
    
    
    520Deferred compensation
    
    
    
    
    
    
    (229
    )Net cash used in operating activities
    
    
    (2,977
    )
    
    
    (630
    )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
    
    
    (313
    )
    
    
    (110
    )Net cash used in investing activities
    
    
    (1,288
    )
    
    
    (110
    )Cash flows from financing activities:Principal payments under loan and capital lease agreements
    
    
    (84
    )
    
    
    (85
    )Proceeds from bank loan
    
    
    4,686
    
    
    
    Net borrowings under revolving credit agreement
    
    
    
    
    
    
    627Issuance of common stock
    
    
    1,070
    
    
    
    Proceeds from the exercise of stock options
    
    
    294
    
    
    
    386Net cash provided by financing activities
    
    
    5,966
    
    
    
    928Effects of exchange rates on cash
    
    
    45
    
    
    
    (92
    )Net increase in cash and cash equivalents
    
    
    1,746
    
    
    
    96Cash and cash equivalents, beginning of period
    
    
    15,460
    
    
    
    372Cash and cash equivalents, end of period
    
    $
    17,206
    
    
    $
    468
  4




---



##### Table of Contents



July 2,
    
    
    July 3,2006
    
    
    2005Supplemental disclosures of cash flow information:Cash paid (received) during the periods for:Interest
    
    $
    8
    
    
    $
    272Income taxes
    
    
    25
    
    
    
    24Non-cash disclosure:Acquisition of Radiant Technology CorporationFair value of assets acquired
    
    
    1,591
    
    
    
    Fair value of common stock issued
    
    
    (1,001
    )
    
    
    Less fair value of liabilities assumed
    
    
    (90
    )
    
    
    Cash paid
    
    $
    500
    
    
    $
    Acquisition of Atmoplas Technology and ResearchFair value of assets acquired
    
    
    1,390
    
    
    
    Less fair value of liabilities assumed
    
    
    (915
    )
    
    
    Cash paid
    
    $
    475
    
    
    $
    
  5




---



##### Table of Contents



July 2,
    
    
    December 31,2006
    
    
    2005Raw materials and manufactured components
    
    $
    10,440
    
    
    $
    8,491Work-in-process
    
    
    4,021
    
    
    
    3,571Finished goods
    
    
    2,139
    
    
    
    1,871$
    16,600
    
    
    $
    13,933
   July 2,
    
    
    December 31,2006
    
    
    2005Mortgage note payable
    
    $
    9,947
    
    
    $
    5,272Capital lease obligations, interest rate of 6.75%
    
    
    15
    
    
    
    179,962
    
    
    
    5,289Less  current maturities
    
    
    267
    
    
    
    183$
    9,695
    
    
    $
    5,106
  6




---



##### Table of Contents



Share-Based Payment
    Three months ended July 2, 2006
    
    Six months ended July 2, 2006Previous
    
    123R Adj
    
    As Reported
    
    Previous
    
    123R Adj
    
    As ReportedOperating income
    
    
    3,367,302
    
    
    
    58,329
    
    
    
    3,308,973
    
    
    
    6,122,328
    
    
    
    114,329
    
    
    
    6,007,999Earnings before income taxes
    
    
    3,358,812
    
    
    
    58,329
    
    
    
    3,300,483
    
    
    
    6,089,058
    
    
    
    114,329
    
    
    
    5,974,729Net income
    
    
    3,291,636
    
    
    
    57,010
    
    
    
    3,234,626
    
    
    
    5,967,277
    
    
    
    112,070
    
    
    
    5,855,207Basic earnings per share
    
    $
    0.36
    
    
    $
    0.01
    
    
    $
    0.35
    
    
    $
    0.66
    
    
    $
    0.01
    
    
    $
    0.65Diluted earnings per share
    
    $
    0.35
    
    
    $
    0.01
    
    
    $
    0.34
    
    
    $
    0.63
    
    
    $
    0.01
    
    
    $
    0.62
 7




---



##### Table of Contents



Three months ended
    
    Six months endedJuly 3, 2005
    
    July 3, 2005Net Income, as Reported
    
    
    770
    
    
    
    937Value of Stock-Based Compensation Expense
Under Fair Value-Based
Method
    
    
    (113
    )
    
    
    (226
    )Pro Forma Net Income
    
    
    657
    
    
    
    711Basic EPS  as Reported
    
    $
    0.11
    
    
    $
    0.13Basic EPS  Pro Forma
    
    $
    0.09
    
    
    $
    0.10Diluted EPS  as Reported
    
    $
    0.11
    
    
    $
    0.13Diluted EPS  Pro Forma
    
    $
    0.09
    
    
    $
    0.10
  Six months endedJuly 2,
    
    July 3,2006
    
    2005Expected Volatility
    
    
    60
    %
    
    
    60
    %Expected Life
    
    
    5
    
    
    
    7Risk-Free Interest Rate
    
    
    4.96
    %
    
    
    4.13
    %Expected Dividend Yield
    
    None
    
    None
  8




---



##### Table of Contents



Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOptionsOutstanding at December 31, 2005
    
    
    525,378
    
    
    $
    2.99Granted
    
    
    207,920
    
    
    
    13.35Exercised
    
    
    (90,987
    )
    
    
    2.82Forfeited
    
    
    (14,612
    )
    
    
    2.88Outstanding at July 2, 2006
    
    
    627,699
    
    
    $
    6.45
    
    
    
    6.56
    
    
    $
    4,739,369Exercisable at July 2, 2006
    
    
    187,835
    
    
    $
    2.98
    
    
    
    5.78
    
    
    $
    2,070,816
   Weighted-AverageGrant-DateShares
    
    
    Fair ValueNonvested optionsNonvested at December 31, 2005
    
    
    299,826
    
    
    $
    1.89Granted
    
    
    207,920
    
    
    
    7.26Vested
    
    
    (53,271
    )
    
    
    1.89Forfeited
    
    
    (14,612
    )
    
    
    1.77Nonvested at July 2, 2006
    
    
    439,863
    
    
    $
    4.43
     9




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJuly 2,
    
    
    July 3,
    
    
    July 2,
    
    
    July 3,2006
    
    
    2005
    
    
    2006
    
    
    2005United States
    
    $
    2,685
    
    
    $
    2,852
    
    
    $
    5,062
    
    
    $
    6,471Europe, Near East
    
    
    5,546
    
    
    
    3,290
    
    
    
    10,794
    
    
    
    7,489Asia Pacific
    
    
    11,924
    
    
    
    9,140
    
    
    
    22,375
    
    
    
    13,823Other Americas
    
    
    2,383
    
    
    
    524
    
    
    
    5,242
    
    
    
    815$
    22,538
    
    
    $
    15,806
    
    
    $
    43,473
    
    
    $
    28,598
  July 2,
    
    
    December 31,2006
    
    
    2005North America
    
    $
    5,360
    
    
    $
    2,156Asia Pacific
    
    
    495
    
    
    
    348$
    5,855
    
    
    $
    2,504
    10




---



##### Table of Contents



Six Months EndedJuly 2, 2006Beginning balance, December 31, 2005
    
    $
    1,036Plus: accruals related to new sales
    
    
    583Less: warranty claims incurred
    
    
    (307
    )Less: reversal of excess requirements
    
    
    (166
    )Balance, end of period
    
    $
    1,146
 11




---



##### Table of Contents



Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3 . ,
Accounting Changes Reporting Accounting Changes in Interim Financial Statements
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB No. 109
    
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    12




---



##### Table of Contents



Three Months EndedJuly 2, 2006
    
    
    July 3, 2005% of
    
    
    
    
    
    
    % of
    
    
    Percent$ thousands
    
    
    revenues
    
    
    $ thousands
    
    
    revenues
    
    
    changeTotal revenues
    
    $
    22,538
    
    
    
    100.0
    %
    
    $
    15,806
    
    
    
    100.0
    %
    
    
    42.6
    %Cost of goods sold
    
    
    13,518
    
    
    
    60.0
    %
    
    
    10,218
    
    
    
    64.6
    %
    
    
    32.3
    %Gross profit
    
    
    9,020
    
    
    
    40.0
    %
    
    
    5,588
    
    
    
    35.4
    %
    
    
    61.4
    %Selling, general and administrative expenses
    
    
    4,457
    
    
    
    19.8
    %
    
    
    3,813
    
    
    
    24.1
    %
    
    
    16.9
    %Research, development and engineering
    
    
    1,254
    
    
    
    5.6
    %
    
    
    867
    
    
    
    5.5
    %
    
    
    44.7
    %Operating income
    
    
    3,309
    
    
    
    14.6
    %
    
    
    908
    
    
    
    5.8
    %
    
    
    264.4
    %Income before provision for income taxes
    
    
    3,301
    
    
    
    14.6
    %
    
    
    770
    
    
    
    4.9
    %
    
    
    328.8
    %Net income
    
    $
    3,235
    
    
    
    14.3
    %
    
    $
    770
    
    
    
    4.9
    %
    
    
    320.2
    %
 Six Months EndedJuly 2, 2006
    
    
    July 3, 2005% of
    
    
    
    
    
    
    % of
    
    
    Percent$ thousands
    
    
    revenues
    
    
    $ thousands
    
    
    revenues
    
    
    changeTotal revenues
    
    $
    43,473
    
    
    
    100.0
    %
    
    $
    28,598
    
    
    
    100.0
    %
    
    
    52.0
    %Cost of goods sold
    
    
    26,420
    
    
    
    60.8
    %
    
    
    18,495
    
    
    
    64.7
    %
    
    
    42.9
    %Gross profit
    
    
    17,053
    
    
    
    39.2
    %
    
    
    10,103
    
    
    
    35.3
    %
    
    
    68.8
    %Selling, general and administrative expenses
    
    
    8,861
    
    
    
    20.4
    %
    
    
    7,257
    
    
    
    25.4
    %
    
    
    22.1
    %Research, development and engineering
    
    
    2,183
    
    
    
    5.0
    %
    
    
    1,639
    
    
    
    5.7
    %
    
    
    33.2
    %Operating income
    
    
    6,009
    
    
    
    13.8
    %
    
    
    1,207
    
    
    
    4.2
    %
    
    
    397.8
    %Income before provision for income taxes
    
    
    5,975
    
    
    
    13.7
    %
    
    
    937
    
    
    
    3.3
    %
    
    
    537.7
    %Net income
    
    $
    5,855
    
    
    
    13.5
    %
    
    $
    937
    
    
    
    3.3
    %
    
    
    524.8
    %
 Net Sales
  13




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJuly 2, 2006
    
    
    July 3, 2005
    
    
    July 2, 2006
    
    
    July 3, 2005% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of$
    
    
    revenues
    
    
    $
    
    
    revenues
    
    
    $
    
    
    revenues
    
    
    $
    
    
    revenuesUnited States
    
    $
    2,685
    
    
    
    11.9
    %
    
    $
    2,852
    
    
    
    18.0
    %
    
    $
    5,062
    
    
    
    11.6
    %
    
    $
    6,471
    
    
    
    22.6
    %Europe, Near East
    
    
    5,546
    
    
    
    24.6
    %
    
    
    3,290
    
    
    
    20.8
    %
    
    
    10,794
    
    
    
    24.8
    %
    
    
    7,489
    
    
    
    26.2
    %Asia Pacific
    
    
    11,924
    
    
    
    52.9
    %
    
    
    9,140
    
    
    
    57.9
    %
    
    
    22,375
    
    
    
    51.5
    %
    
    
    13,823
    
    
    
    48.4
    %Other Americas
    
    
    2,383
    
    
    
    10.6
    %
    
    
    524
    
    
    
    3.3
    %
    
    
    5,242
    
    
    
    12.1
    %
    
    
    815
    
    
    
    2.8
    %$
    22,538
    
    
    
    
    
    
    $
    15,806
    
    
    
    
    
    
    $
    43,473
    
    
    
    
    
    
    $
    28,598
  Gross Profit
 Selling, General and Administrative.
 Research, Development and Engineering.
 Operating Income.
 Income Taxes.
       14




---



##### Table of Contents



Evaluation of Disclosure Controls and Procedures
   15




---



##### Table of Contents



Changes in Internal Control Over Financial Reporting
  
    
    With respect to the first significant deficiency, we have selected an ERP
solution. Our project plan has the new ERP system being implemented in our Chinese
subsidiary by late 2006 and in the United States in 2007. Additionally, we have engaged
consultants to help us determine if additional controls can be placed around the current
business system to minimize the current systems inherent risks. We are taking the
following actions related to out current system:
 1.
    
    We have secured both hardware and software support currently and for
the foreseeable future.2.
    
    We have contracted with a third party to provide a warm-site
meaning a complete duplicate of our current system resides in a secure remote
location.3.
    
    In 2006, we have installed a complete (hardware and software)
redundant version of our current system on-site. This redundant system will
utilize the last nightly data backup to restore the system in the event of a major
hardware or software failure on the current system.
 
    
    With respect to the second significant deficiency, we have begun to implement
and formally document a disaster recovery plan as it relates to information technology.
We have secured consultants to assist us in developing the disaster recovery plan as a
component of a larger business continuity plan. We anticipate this initiative to be
completed in 2006.
    
    With respect to the third significant deficiency, we have increased the
accounting staff to provide additional expertise in GAAP, taxation and SEC reporting
requirements. Additionally, we have engaged several consultants to assist us with complex
accounting and taxation related matters. We are continuing training of our current staff
and evaluating the need for additional financial resources.
    
    With respect to the fourth significant deficiency, we are aggressively securing
resources and technologies to comply with Sarbanes  Oxley and Regulation 404. Actions we
are taking include the following:
 1.
    
    We have secured and evaluated our dedicated internal resources and
have identified and secured various consultants to eliminate areas of weakness.
 16




---



##### Table of Contents



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




---



##### Table of Contents



Sales of our products to the energy generation markets are subject to substantial risks.
 Fuel Cells.
 Solar Energy.
 Nuclear Energy.
 If we are unable to increase sales and reduce costs, our profitability may be affected negatively.
  Our future success will depend on our ability to effectively develop and market our products
against those of our competitors.
  Our international sales and operations are subject to the economic, political, legal and business
environments of the countries in which we do business, and our failure to operate successfully or
adapt to changes in these environments could cause our international sales and operations to be
limited or disrupted.
  18




---



##### Table of Contents




    
    fluctuations in currency exchange rates;
    
    the imposition of governmental controls;
    
    import and export license requirements;
    
    political instability;
    
    difficulties enforcing contractual and intellectual property rights;
    
    terrorist activities and armed conflict;
    
    restrictions on direct investments by foreign entities and trade restrictions;
    
    changes in tax laws and tariffs;
    
    costs and difficulties in staffing and managing international operations; and
    
    longer payment cycles.
   A majority of our revenue is generated from sales in the Asia Pacific region. Our operations are
particularly vulnerable to instability in this region and competition from organizations based in
this region.
  Our business systems to manage our Chinese operations are still being developed. If they are not
fully developed and implemented, it could have a material adverse effect on our business.
    Some of the requirements of Sarbanes-Oxley affect us as a small company disproportionately, and we
may not be able to comply despite substantial effort and expense.
 19




---



##### Table of Contents



If we fail to maintain positive relationships with key personnel, we may be unable to successfully
grow our business.
  Failure of critical suppliers to deliver sufficient quantities of parts in a timely and
cost-effective manner would adversely impact our operations.
  The occurrence of natural disasters in the Asia Pacific region may adversely impact our operations
and sales.
  Provisions in our organizational documents could prevent or frustrate attempts by stockholders to
replace our current management and could make acquisitions more difficult.
  20




---



##### Table of Contents



(a)
    
    We held our 2006 Annual Meeting of Shareholders on May 19, 2006.(b)
    
    The following matters were voted upon at the 2006 Annual Meeting of Shareholders:
 a.
    
    The election of the nominees for the Board of Directors who will
serve a term to expire at the 2007 Annual Meeting of Shareholders. The nominees,
all of whom were elected, were Paul J. van der Wansem, J. Chuan Chu, Joseph F.
Wrinn, John E. Beard, G. Mead Wyman and J. Samuel Parkhill. The vote tabulations
were as follows:
 Votes For
    
    Votes WithheldPaul J. van der Wansem
    
    
    6,595,812
    
    
    
    558,735J. Chuan Chu
    
    
    6,895,589
    
    
    
    258,958Joseph F. Wrinn
    
    
    6,896,289
    
    
    
    258,258John E. Beard
    
    
    6,965,231
    
    
    
    189,316G. Mead Wyman
    
    
    6,647,923
    
    
    
    506,624J. Samuel Parkhill
    
    
    6,896,279
    
    
    
    258,268
 
   Exhibit 31.1
    
    - Section 302 CertificationExhibit 31.2
    
    - Section 302 CertificationExhibit 32.1
    
    - Section 906 CertificationExhibit 32.2
    
    - Section 906 Certification
 21




---



##### Table of Contents



BTU INTERNATIONAL, INC.DATE: August 16, 2006
    
    BY:
    
    /s/ Paul J. van der Wansem

Paul J. van der WansemPresident, Chief Executive Officer
(principal executive officer) and Chairman of the
Board of DirectorsDATE: August 16, 2006
    
    BY:
    
    /s/ Thomas P. KealyThomas P. KealyVice President, Corporate Controller and
Chief Accounting Officer (principal
financial and accounting officer)
 22