UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 28, 2008

OR

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

For the transition period from              to             

Commission File Number 000-17297

BTU INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

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

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

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

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

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

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

Indicate the number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of the latest practicable date: As of November 6, 2008: 9,391,727 shares.

BTU INTERNATIONAL, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Unaudited Condensed Consolidated Balance Sheets	1
Unaudited Condensed Consolidated Statements of Operations	2
Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income	3
Unaudited Condensed Consolidated Statements of Cash Flows	4-5
Notes to Unaudited Condensed Consolidated Financial Statements	6-11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	15
Item 4. Controls and Procedures	15-16
PART II. OTHER INFORMATION
Item 1A. Risk Factors	16
Item 4. Submission of Matters to a Vote of Security Holders	16
Item 6. Exhibits	17
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.

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

	September 28, 2008			December 31, 2007
Assets
Current assets
Cash and cash equivalents	$	29,009		$	25,065
Accounts receivable, net		20,405			18,832
Inventories, net		18,258			16,891
Other current assets		823			787
Total current assets		68,495			61,575
Property, plant and equipment, net		6,808			5,536
Other assets, net		2,084			2,401
Total assets	$	77,387		$	69,512
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt	$	287		$	277
Accounts payable		6,069			5,645
Other current liabilities		9,843			5,088
Total current liabilities		16,199			11,010
Long-term debt, less current portion		9,058			9,267
Other long-term liabilities		—			300
Total liabilities		25,257			20,577
Commitments and contingencies
Stockholders’ equity
Preferred stock, $1.00 par value - 5,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.01 par value - 25,000,000 shares authorized; 10,540,737 shares issued and 9,391,727 shares outstanding at September 28, 2008 and 10,502,311 shares issued and 9,353,301 shares outstanding at December 31, 2007		105			105
Additional paid in capital		45,048			44,046
Retained earnings		8,878			7,814
Treasury stock, at cost, 1,149,010 shares at September 28, 2008 and December 31, 2007		(4,177	)		(4,177	)
Accumulated other comprehensive income		2,276			1,147
Total stockholders’ equity		52,130			48,935
Total liabilities and stockholders’ equity	$	77,387		$	69,512

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

1

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 28, 2008			September 30, 2007			September 28, 2008			September 30, 2007
Net sales	$	20,578		$	16,522		$	57,581		$	45,456
Costs of goods sold		11,373			9,347			32,433			25,781
Gross profit		9,205			7,175			25,148			19,675
Operating expenses:
Selling, general and administrative		6,372			5,127			17,685			13,792
Research, development and engineering		1,748			1,284			5,138			4,179
Operating income		1,085			764			2,325			1,704
Interest income		121			221			299			732
Interest expense		(182	)		(163	)		(536	)		(450	)
Foreign exchange loss		(151	)		(204	)		(422	)		(520	)
Other income (loss), net		1			(3	)		1			110
Income before provision for income taxes		874			615			1,667			1,576
Provision for income taxes		197			92			603			188
Net income	$	677		$	523		$	1,064		$	1,388
Income per share:
Basic	$	0.07		$	0.06		$	0.11		$	0.15
Diluted	$	0.07		$	0.06		$	0.11		$	0.15
Weighted average number of shares outstanding:
Basic shares		9,389,456			9,275,349			9,373,294			9,283,618
Effect of dilutive options		141,738			175,102			154,602			185,999
Diluted shares		9,531,194			9,450,451			9,527,896			9,469,617

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

2

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2008

(in thousands)

(unaudited)

	Common Stock			Additional Paid-in		Retained Earnings		Treasury Stock				Accumulated Other Comprehensive		Total
	# of shares	$		Capital				# of shares	$			Income
Balance at December 31, 2007	10,502	$	105	$	44,046	$	7,814	1,149	$	(4,177	)	$	1,147	$	48,935
Net income	—		—		—		1,064	—		—			—		1,064
Exercise of stock options	34		—		104		—	—		—			—		104
Issuance of stock under ESPP	5		—		46		—	—		—			—		46
Stock-based compensation	—		—		852		—	—		—			—		852
Translation adjustment	—		—		—		—	—		—			1,129		1,129
Balance at September 28, 2008	10,541	$	105	$	45,048	$	8,878	1,149	$	(4,177	)	$	2,276	$	52,130

	Three Months Ended			Nine Months Ended
	September 28, 2008
Comprehensive income is calculated as follows:
Net income	$	677		$	1,064
Other comprehensive gain (loss):
Foreign currency translation adjustment		(44	)		1,129
Comprehensive income	$	633		$	2,193

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

3

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2008 AND SEPTEMBER 30, 2007

(in thousands)

(unaudited)

	September 28, 2008			September 30, 2007
Cash flows from operating activities:
Net income	$	1,064		$	1,388
Adjustments to reconcile net cash provided by (used in) operating activities:
Depreciation		902			670
Amortization		391			386
Provision (recovery) for bad debt		53			(10	)
Provision (recovery) for inventory obsolescense		13			(113	)
Stock-based compensation		852			486
Loss on foreign currency contracts		64			—
Net change in operating assets and liabilities:
Accounts receivable		(1,324	)		(290	)
Inventories		(1,058	)		665
Other current assets		(219	)		(131	)
Customer deposits		—			(132	)
Other assets		(11	)		(52	)
Accounts payable		412			947
Accrued expenses		4,701			(1,670	)
Net cash provided by operating activities		5,840			2,144
Cash flows from (used in) investing activities:
Purchases of property, plant and equipment		(2,134	)		(1,520	)
Settlement of forward currency contract		60			—
Net cash used in investing activities		(2,074	)		(1,520	)
Cash flows from (used in) financing activities:
Principal payments under loan and capital lease agreements		(499	)		(210	)
Issuance of common stock for ESPP		46			38
Proceeds from the exercise of stock options		104			290
Net cash provided by (used in) financing activities		(349	)		118
Effects of exchange rates on cash		527			227
Net increase in cash and cash equivalents		3,944			969
Cash and cash equivalents, beginning of period		25,065			25,100
Cash and cash equivalents, end of period	$	29,009		$	26,069

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

4

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2008 AND SEPTEMBER 30, 2007

(in thousands)

(unaudited)

	September 28, 2008		September 30, 2007
Supplemental disclosures of cash flow information:
Cash paid (received) during the periods for:
Interest	$	261	$	(214	)
Income taxes		162		57

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

5

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Basis for Presentation

The condensed consolidated balance sheet, financial information and related disclosures as of and for the year ended December 31, 2007 have been derived from our consolidated financial statements, which have been audited as of that date. The condensed consolidated balance sheet as of September 28, 2008 and the related condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 28, 2008 are unaudited. The condensed consolidated statements of cash flows and statement of stockholders’ equity and comprehensive income for the nine months ended September 28, 2008 are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for any other period or for the full year. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the footnotes contained in the Company’s consolidated financial statements as of and for the year ended December 31, 2007, together with the auditors’ report, included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

(2) Summary of Significant Accounting Policies

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

(3) Inventories

	September 28, 2008		December 31, 2007
	(in thousands)
Raw materials and manufactured components	$	9,171	$	11,439
Work-in-process		6,161		3,718
Finished goods		2,926		1,734
	$	18,258	$	16,891

(4) Debt

Long-Term Debt at September 28, 2008 and December 31, 2007 consisted of (in thousands):

	September 28, 2008		December 31, 2007
Mortgage note payable, interest rate of 6.84%	$	9,343	$	9,538
Capital lease obligations, interest rate of 6.75%		2		6
		9,345		9,544
Less - current maturities		287		277
	$	9,058	$	9,267

On March 30, 2006, we entered into a 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.

6

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

On March 1, 2007, the Company entered into an amended revolving loan agreement with a bank that allows for unsecured aggregate borrowings, including letters of credit, up to a maximum of $15 million against a borrowing base of accounts receivable, inventory and fixed assets. The Company may elect to borrow at interest rates related to the bank’s prime rate or LIBOR. This loan agreement extends to December 31, 2010. As of September 28, 2008, the borrowing base would support the maximum borrowings of $15 million, and there were no borrowings outstanding under the loan agreement.

(5) Earnings Per Share (EPS)

Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive potential common shares outstanding during the period, using the treasury stock method. The number of common shares underlying options that were not included in the determination of diluted EPS, because their effect would be anti-dilutive, was 454,276 and 374,762 for the three and nine months ended September 28, 2008 and 481,920 and 486,500 for the three and nine months ended September 30, 2007, respectively.

(6) Accounting for Stock-Based Compensation

The Company’s stock option compensation expense was $305,172 and $831,587 respectively, for the three and nine months ended September 28, 2008 and $202,128 and $486,410 for the three and nine months ended September 30, 2007. These amounts do not include expense related to restricted stock awards.

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

	Nine months ended
Calculation of Fair Values - Assumptions Used:	28-Sep-08		30-Sep-07
Expected Volatility	65.57	%	65.00	%
Expected Life	4.68		5.00
Risk-Free Interest Rate	2.61	%	4.79	%
Expected Dividend Yield	None		None

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

7

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table summarizes the stock option activity during the nine months ended September 28, 2008:

	Shares		Weighted- Average Exercise Price		Average Remaining Contractual Term	Aggregate Intrinsic Value
Options
Outstanding at December 31, 2007	756,466		$	9.63
Granted	449,495		$	10.06
Exercised	(33,431	)	$	3.38
Forfeited	(151,822	)	$	11.57
Outstanding at September 28, 2008	1,020,708		$	9.73	4.93	$	1,186,612
Exercisable at September 28, 2008	179,860		$	6.19	4.98	$	503,046

The weighted-average grant-date fair value of options granted during the nine month period ended September 28, 2008 and September 30, 2007 was $5.54 and $6.87, respectively. The fair value of options exercised during the nine-month periods ended September 28, 2008 and September 30, 2007 were $65,871 and $1,214,196, respectively.

As of September 28, 2008, there was $3,505,435 of total unrecognized compensation cost related to non-vested options granted under all of the Company’s option plans. That cost is expected to be recognized over a weighted average period of 2.3 years. The total fair value of shares vested during the nine-month period ended September 28, 2008 was $946,345.

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

As of September 28, 2008, there was $7,500 of unrecognized compensation cost related to restricted stock grants which were issued in a prior year. These grants have a vesting period of less than one year.

8

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(7) Revenue Recognition

For the three and nine months ended September 28, 2008, there was $1,174,490 and $3,725,715, respectively, of revenue recognized using the percentage of completion method. 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.

(8) Fair Value Disclosures

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

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

As of September 28, 2008 the Company held a non-deliverable forward foreign currency contract. At December 31, 2007, the Company held a forward currency contract which had been marked-to-market and carried in other current assets at $34 thousand, and an unrealized gain of $34 thousand was recorded to other income in 2007. That contract expired in January 2008, during which time the decline of the US dollar against the Chinese RMB generated a further gain in 2008 of $29 thousand. A new contract was entered into in January 2008 which generated an additional gain of $334 thousand in the first quarter of 2008. During the second and third quarters of 2008, the forward value on this currency contract of the Chinese RMB declined relative to the US dollar as compared to the forward value at the end of the first quarter, generating a cumulative loss of $93 thousand on this contract as of September 28, 2008. The $64 thousand loss from foreign currency contracts as of September 28, 2008 represents the $29 thousand realized gain in 2008 on the contract which expired in January 2008 offset by $93 thousand on unrealized loss in the new January 2008 contract.

(9) Product Warranty Costs

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

The following table reflects changes in the Company’s accrued warranty account during the nine months ended September 28, 2008 (in thousands):

	Nine Months Ended September 28, 2008
Beginning balance, December 31, 2007	$	638
Plus: accruals related to new sales		705
Less: warranty claims incurred		(660	)
Ending balance, September 28, 2008	$	683

9

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(10) Recent Accounting Pronouncements

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

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

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

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

In April 2008, the FASB issued Staff Position No. FAS 142-3, or FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. FSP FAS 142-3 allows an entity to use its own historical experience in renewing or extending similar arrangements, adjusted for specified entity-specific factors, in developing assumptions about renewal or extension used to determine the useful life of a recognized intangible asset and will be effective for fiscal years and interim periods beginning after December 15, 2008. Additional disclosures are required to enable financial statement users to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. The guidance for determining the useful life of a recognized intangible asset is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements are to be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date.

(11) Segment Reporting

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

The thermal processing capital equipment segment consists of the designing, manufacturing, selling and servicing of thermal processing equipment and related process controls for use in the electronics, energy generation and other industries. This business

10

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

	September 28, 2008		December 31, 2007
North America	$	5,985	$	5,002
Asia Pacific		823		534
	$	6,808	$	5,536

(12.) Subsequent Events

At their October 31, 2008 meeting, the Compensation Committee of the Board of Directors approved the issuance of 140,500 share options to certain of the Company’s employees. The options were granted with an exercise price equal to the closing price of the Company’s common stock at the close of business October 30, 2008, which was $5.01. These options vest ratably over four years and have a seven year contract life.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

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

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

11

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 28, 2008				September 30, 2007
	( $ in thousands)
			% of net sales				% of net sales		Percent change
Net sales	$	20,578	100.0	%	$	16,522	100.0	%	24.5	%
Cost of goods sold		11,373	55.3	%		9,347	56.6	%	21.7	%
Gross profit		9,205	44.7	%		7,175	43.4	%	28.3	%
Selling, general and administrative expenses		6,372	31.0	%		5,127	31.0	%	24.3	%
Research, development and engineering expenses		1,748	8.5	%		1,284	7.8	%	36.1	%
Operating income		1,085	5.3	%		764	4.6	%	42.0	%
Income before provision for income taxes		874	4.2	%		615	3.7	%	42.1	%
Net income	$	677	3.3	%	$	523	3.2	%	29.4	%
	Nine Months Ended
	September 28, 2008				September 30, 2007
	( $ in thousands)
			% of net sales				% of net sales		Percent change
Net sales	$	57,581	100.0	%	$	45,456	100.0	%	26.7	%
Cost of goods sold		32,433	56.3	%		25,781	56.7	%	25.8	%
Gross profit		25,148	43.7	%		19,675	43.3	%	27.8	%
Selling, general and administrative expenses		17,685	30.7	%		13,792	30.3	%	28.2	%
Research, development and engineering expenses		5,138	8.9	%		4,179	9.2	%	22.9	%
Operating income		2,325	4.0	%		1,704	3.7	%	36.4	%
Income before provision for income taxes		1,667	2.9	%		1,576	3.5	%	5.8	%
Net income	$	1,064	1.8	%	$	1,388	3.1	%	(23.3	)%

Net Sales The primary factor for the 2008 improved net sales, for both the third quarter and year-to-date, was increased demand for our products designed for the alternative energy markets. During these same periods, sales to the Company’s electronic markets decreased as compared to 2007.

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

	Three Months Ended								Nine Months Ended
	September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
	$		% of revenues		$		% of revenues		$		% of revenues		$		% of revenues
United States	$	3,406	16.6	%	$	1,856	11.2	%	$	11,533	20.0	%	$	7,722	17.0	%
Europe, Near East		2,763	13.4	%		3,535	21.4	%		8,874	15.4	%		9,438	20.8	%
Asia Pacific		12,927	62.8	%		9,644	58.4	%		34,293	59.6	%		24,564	54.0	%
Other Americas		1,482	7.2	%		1,487	9.0	%		2,881	5.0	%		3,732	8.2	%
Total Revenue	$	20,578			$	16,522			$	57,581			$	45,456

In the first nine months of 2008 as compared to the same period in 2007, total revenue has increased in the United States and in Asia Pacific, and has declined in the European/Near Eastern and Other Americas markets. The largest geographical increase is in our Asia Pacific region where the increase was primarily from the Company’s alternative energy products.

Gross Profit. For the three and nine months ended September 28, 2008, as compared to the same periods in 2007, gross margin has improved primarily due to the increase in net sales. The gross margin as a percentage of net sales for the first nine months of 2008 compared to 2007 is relatively unchanged.

Selling, General and Administrative (SG&A). In the third quarter of 2008 as compared to the same period in 2007, SG&A costs as a percentage of net sales remained steady at 31.0%. The increased spending for SG&A was in support of the third quarter year over year increase in revenue, along with the announced intention to increase service, sales, marketing and administrative support for our continued expansion into the alternative energy markets. The increase in the nine month year to date SG&A expense for 2008 as compared to the same period in 2007 is for the same reasons as stated above for the third quarter.

Research, Development and Engineering.(RD&E) In the third quarter and first nine months of 2008 the Company has increased its spending on RD&E as compared to the same periods in 2007 primarily due to development efforts towards new products for our alternative energy markets.

Operating Income. Despite the increase in operating costs, operating income, for the third quarter and first nine months of 2008, as compared with the same periods of 2007, increased principally as a result of the increased revenue.

Foreign Exchange (loss). The $0.2 million foreign exchange loss for the third quarter of 2008 was primarily related to a foreign currency forward contract. The $0.4 million foreign exchange loss for the nine months ended September 28, 2008 is primarily the result of losses recorded at the Company’s China operations on U.S. dollar denominated balance sheet accounts.

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

The effective income tax rate was 23% for the three months ended September 28, 2008, compared to 15% for the three months ended September 30, 2007. The effective income tax rates for the nine months ended September 28, 2008 and September 30, 2007 were 36% and 12%, respectively.

The significant fluctuations in the Company’s quarterly tax rate, as a percent of consolidated pre-tax income, are the result of the varying ratio of the consolidated pre-tax profit or loss by corporate tax entity to the consolidated tax provision. The majority of the third quarter and year-to-date consolidated tax provisions are China withholding taxes, which are not related to pre-tax income. The China withholding taxes primarily result from corporate royalty charges based on our China subsidiary net sales.

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The Company has federal and state net operating loss carry forwards of approximately $6 million against which it has recorded a full valuation allowance because of uncertainty surrounding realization. Our statutory federal income tax rate is 34.0%.

LIQUIDITY AND CAPITAL RESOURCES

As of September 28, 2008, the Company had $29.0 million in cash and cash equivalents.

Cash Generated by Operations:

During the nine months ended September 28, 2008, the Company generated net cash resources of approximately $5.8 million from operating activities. This source of cash was primarily the result of an increase in accounts payable and accrued expenses of $5.1 million, net profit of $1.1 million, non-cash stock-based compensation of $0.9 million, depreciation and amortization of $1.3 million, and was offset by increases in inventories of $1.1 million, accounts receivable of $1.3 million, and other current assets of $0.2 million.

Cash Used in Investing Activities:

For the nine months ended September 28, 2008, the Company used $2.1 million in investing activities. Approximately $2.1 million was related to capital expenditures, compared to $1.5 million in the same period in 2007. Offsetting the capital expenditures in the first half of 2008 was $60 thousand received in settlement of a foreign currency forward contract in the first quarter of 2008.

Cash Provided by (used in) Financing Activities:

The Company used approximately $300 thousand in financing activities in the first nine months of 2008, compared to generating $100 thousand in the first nine months of the prior year. In the first nine months of 2008, approximately $500 thousand was related to principal payments on loans and capital leases, compared to approximately $200 thousand in 2007. In 2008, approximately $104 thousand was generated through the exercise of stock options by employees, compared to $290 thousand in the comparable period of 2007.

On March 30, 2006, the Company entered into a 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 28, 2008 of approximately $9.3 million.

On March 1, 2007, the Company entered into an amended revolving loan agreement with a bank that allows for unsecured aggregate borrowings, including letters of credit, up to a maximum of $15 million against a borrowing base of accounts receivable, inventory and fixed assets. The Company may elect to borrow at interest rates related to the bank’s prime rate or LIBOR. This loan agreement extends to December 31, 2010 and is subject to maintaining certain financial covenants, with which the Company is in full compliance. At September 28, 2008, the borrowing base would support the maximum borrowings of $15 million, and there were no borrowings outstanding under the loan agreement.

As of September 28, 2008, the Company has no material commitments relating to capital expenditures.

The Company’s business forecasts project that our cash position, cash flow and our working capital line of credit will be sufficient to meet our corporate, operating and capital requirements through 2009.

OTHER MATTERS

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

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In the first three quarters of 2008, inflation had no material impact on our business.

FORWARD LOOKING STATEMENTS

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates primarily through our revolving loan agreement. As of September 28, 2008, we had no debt outstanding under our revolving loan agreement.

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

Item 4. CONTROLS AND PROCEDURES

1. Disclosure Controls and Procedures

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

The Company’s management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Accounting Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of September 28, 2008, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Securities Exchange Act of 1934.

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Based upon that evaluation, management concluded that as of September 28, 2008 our disclosure controls and procedures were effective.

2. Changes in Internal Control over Financial Reporting

Effective January 1, 2008, the Company, at its Billerica, Massachusetts headquarters, moved many of its accounting processes to a new enterprise reporting programming environment. Some of the financial processes and procedures related to producing financial statements and disclosures prior to that date have changed as a result. For these items, Management is engaged in re-documenting processes and developing testing procedures to be able to demonstrate the effectiveness of the new controls as required by the Sarbanes-Oxley Act of 2002.

Historically, the Company’s Management relies on many controls that are not affected by the change to the new system.

PART II. OTHER INFORMATION

Item 1A. RISK FACTORS

Risk factors are disclosed in the Company’s 2007 Annual Report on Form 10-K. During the quarter ended September 28, 2008, there were no material changes to the risk factors for the business.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

At the Annual Meeting of Stockholders held on May 16, 2008, the Company’s stockholders voted as follows:

To elect the following nominees to the Board of Directors:

All received a plurality of the votes cast by stockholders entitled to vote thereon. These individuals will serve as directors until the 2009 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified.

Nominee	Total vote “For”	Total vote “Withheld”
Paul J. van der Wansem	8,361,970	97,463
G. Mead Wyman	7,918,815	540,618
J. Chuan Chu	8,121,021	338,412
John E. Beard	8,181,091	278,342
Joseph F. Wrinn	8,123,771	335,662
J. Samuel Parkhill	8,121,311	338,122

To amend the Company’s 1998 Stock Option Plan for Non-Employee Directors to increase the number of shares authorized for issuance:

For	5,193,304
Against	1,492,795
Abstain	34,126
Non-Votes	1,739,208

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To amend the Company’s 2003 Equity Incentive Plan to increase the number of shares authorized for issuance:

For	6,303,290
Against	381,610
Abstain	35,325
Non-Votes	1,739,208

Item 6. 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

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SIGNATURES

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

	BTU INTERNATIONAL, INC.
DATE: November 7, 2008	BY:	/s/    Paul J. van der Wansem
		Paul J. van der Wansem
		President, Chief Executive Officer (principal executive officer) and Chairman of the Board of Directors
DATE: November 7, 2008	BY:	/s/    Thomas P. Kealy
		Thomas P. Kealy
		Vice President, Corporate Controller and Chief Accounting Officer (principal financial and accounting officer)

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