BTU INTERNATIONAL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

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 0-17297

BTU INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 04-2781248
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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

---------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None Registered

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Title of Each Class
-------------------
Common Stock, $.01 Par Value

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate market value of the shares of Common Stock, $.01 par value,
of the Company held by non-affiliates of the Company was $11,156,960 on June 30,
2003.

Indicate number of shares outstanding of the Registrant's Common Stock, par
value $.01 per share, as of the latest practicable date: As of March 26, 2004:
7,177,652 shares.

DOCUMENTS INCORPORATED HEREIN BY REFERENCE

The following documents are incorporated herein by reference: Part III -
Portions of the Proxy Statement for the 2004 Annual Meeting of Stockholders,
both of which are to be filed with the Securities and Exchange Commission.

- --------------------------------------------------------------------------------

BTU INTERNATIONAL, INC.
2003 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS
-----------------

PART I
------

Item 1 Business

Item 2 Properties

Item 3 Legal Proceedings

Item 4 Submission of Matters to a Vote of Security Holders

Item 4A Executive Officers of the Registrant

PART II
-------

Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters

Item 6 Selected Financial Data

Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations

Item 8 Financial Statements and Supplementary Data

Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

Item 9A Controls and Procedures

PART III
--------

Item 10 Directors and Executive Officers of the Registrant

Item 11 Executive Compensation

Item 12 Security Ownership of Certain Beneficial Owners and Management

Item 13 Certain Relationships and Related Transactions

Item 14 Principal Accounting Fees and Services

PART IV
-------

Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K

PART I

ITEM 1. BUSINESS

BTU International designs, manufactures, sells and supports advanced
thermal processing systems used primarily for semiconductor packaging, printed
circuit boards (PCB) assembly and advanced materials processing. In addition, we
produce custom thermal systems for a variety of specialty applications for a
wide range of temperatures. We believe we are one of the leading suppliers of
thermal systems used by electronics and materials manufacturers.

Our electronics customers serve the advanced segments of the industry in
which the integrated circuits of a semiconductor device are connected and sealed
into a package, and where these semiconductor packages together with other
components are assembled on printed circuit boards (PCB's). Our materials
customers serve multiple markets in which advanced ceramics and metal alloys are
used in end use applications for the automotive, fuel cell, communications and
other industries. Our customers typically require high throughput, high yield
and highly reliable advanced thermal processing systems with tightly controlled
temperature and atmosphere parameters.

Our products are sold worldwide through a direct technical sales force and
through independent sales representatives. Among our top revenue generating
customers in 2003 were such industry leaders as IBM, Dana Corporation, Intel
Corporation, Advanced Semiconductor Engineering (ASE), Compal, Nokia, Motorola,
Inc., Celestica Incorporated, Delphi and Samsung Corporation.

Our principal offices and main manufacturing facility are located at 23
Esquire Road, North Billerica, Massachusetts 01862 USA. Our telephone number is
(978) 667-4111. Our new China Manufacturing plant is located at 25 Jia Tai Road,
Waigaoqiao Free Trade Zone, Shanghai, 200131, PRC. We also have sales and
service facilities throughout North America, Europe and Asia. Our corporate
website is www.btu.com.

INDUSTRY BACKGROUND

ELECTRONICS MARKETS. The electronic markets are showing clear signs of a
robust recovery and the outlook for the industry is one of long-term growth. The
need for increasingly sophisticated electronic devices continues and new
technology such as wireless networks, next generation cellular phones and
personal digital assistants (PDAs) will continue to drive future demand. Other
types of electronic equipment are becoming more complex, including data
communications equipment such as switches, routers and servers, broadband access
products such as cable modems, Ethernet wireless accessories and consumer
products such as automobile electronics and digital cameras. Integral to the
growth in electronics are the advances in technology, which result in producing
smaller, lighter and less expensive end products by increasing the performance
and reducing the cost, size, weight and power requirements of electronic
assemblies, PCBs and semiconductors. In response to these developments,
manufacturers are increasingly employing more sophisticated production and
assembly techniques requiring more advanced manufacturing equipment.

MATERIALS MARKETS. Advanced materials are very important for sealing,
connecting and package brazing for electronics manufacturing. Emerging markets
including fuel cell and synthetic gas production as well as automotive markets
require high performance ceramic and metal components. A significant trend is
the use of multi-layer configurations that must be designed with very tight
dimensional tolerances requiring very sophisticated process control and
uniformity. Low Temperature Co-fired Ceramics (LTCC), high temperature ceramics
and aluminum powdered metals all figure prominently in leading-edge products for
these markets.

MANUFACTURING PROCESSES. Electronics manufacturing processes include
integrated circuit (IC) manufacturing, IC packaging and the assembly of PCBs.
Several precision thermal process steps are required in each application. In
advanced semiconductor packaging, processing takes place at both the wafer level
and die level. At the wafer level, deposited solder must be thermally treated to
form perfectly spherical "bumps". At the die level, these bumps allow the ICs to
be bonded to the semiconductor package using precise thermal process. In the PCB
assembly process, packaged circuits and other components are attached to PCBs.
The attachment process, which creates a permanent physical and electrical bond,
is called solder reflow, or surface mount reflow.

Materials processing involves many different types of thermal applications.
In electronics, thick film firing is used to construct metalized electrical
circuits onto ceramic or metal substrates for automotive electronics,
microelectronics packaging, resistive heaters, and passive circuit applications.
Electrical termination of chip capacitors is achieved by sintering a conductive
material to a capacitor to create an electrical connection. Hybrid or microwave
RF circuits require electrical shielding in a metal container. This is done
using a Glass to Metal Sealing process, in which the glass is bonded to a metal
surface to insure a strong, hermetic and electrically insulating joint.

1

In addition, the manufacture of many ceramic products or components, from
fuel cell anodes and cathodes to substrates for wireless networking products
requires a multi-step thermal process. A binder burnout step in which organics
are removed from ceramic laminate materials is followed by a high temperature
sintering step that solidifies the ceramic at desired dimensions. Similar
sintering processes are used for metal components across a wide variety of
applications and for gadolinium and uranium fuel pellet sintering, which take
place at temperatures up to 2000(degree)C.

Across all markets, the need for more versatile, more reliable and more
advanced capital equipment persists. In addition, the continued globalization of
manufacturing and shift to low cost regions such as China, particularly by
electronics producers, has driven the demand for greater value from equipment -
a balance of price and performance.

TECHNOLOGICAL CHALLENGES

Advanced thermal processing systems present significant engineering
challenges related to temperature control, atmosphere control, product handling,
flux containment and disposal, and high system up time.

Advanced thermal processing systems maintain accurate and uniform
temperatures within their process chambers. The temperature within the process
chamber is influenced by the rate at which components are moved through the
system and the weight and density of the product. In addition, the thermal
processing system's heat convection rate must be varied and controlled as
components and materials are processed. The chamber must also dispense heat
uniformly across the product at precise temperatures to ensure maximum process
uniformity. Also, products must be heated and cooled at closely preset rates in
order to avoid damage caused by thermal stress. With the increasing use of lead
free solder processes, the control window for temperature uniformity has gotten
significantly more critical.

Another technological challenge for advanced thermal processing systems is
achieving precisely controlled atmospheric conditions within the process
chamber. In order to facilitate thermal processing without contamination of or
damage to product, many advanced thermal processing systems use a substantially
oxygen-free atmosphere of nitrogen or hydrogen in their process chambers. If
such gases are used, the entry of contaminating air must be minimized, even
though the product enters and exits the system continuously from the ambient
atmosphere. Maintaining a pure, safe and controlled atmosphere in the process
chamber, while minimizing the consumption of nitrogen or hydrogen gases in order
to reduce operating costs, presents significant engineering challenges.

Handling products in advanced thermal processing systems requires highly
reliable conveyance systems that can easily be converted to process a wide
variety of products having different specifications, sometimes on side-by-side
tracks through the process chamber. The product handling system must also fully
support a wide variety of product sizes.

The mechanical components in advanced thermal processing systems must
operate almost continuously in a demanding, elevated temperature environment
with frequent thermal cycles. The use of materials that are resistant to high
temperature and thermal stress is important to achieving high reliability.

In applications using flux, the volatile compounds that are vaporized
during the thermal processing cycle, must be contained and collected so that
they do not condense in the system or damage the environment. The efficient
containment, collection and disposal of the flux are important factors in
achieving high system up time, high throughput and reliability.

OUR SOLUTION

We deliver a broad range of advanced thermal processing systems to serve
the needs of manufacturers that require high throughput, process yields and
reliability with tightly controlled process parameters. Our systems enable our
customers to increase throughput and yield for advanced semiconductor packaging,
PCB assembly and advance materials by providing precise atmosphere and
temperature control. In addition to the high performance of our products, we
believe the quality standards of our organization and our worldwide service and
support are important to our success with industry leading global manufacturers.

ATMOSPHERE UNIFORMITY AND CONTROL. Our advanced thermal processing systems
provide precision control over atmospheric conditions within their process
chambers by integrating our gas and physical curtain technologies. Our systems
are capable of

2

excluding virtually all oxygen from the critical process steps to maintain the
safety and integrity of the process chamber atmosphere. In addition, our systems
minimize the consumption of nitrogen or hydrogen, thereby reducing the operating
cost of maintaining the atmosphere.

ACCURATE AND UNIFORM TEMPERATURE. Our high rate convection and fully
enclosed coil (FEC) heating modules provide controlled heating capacities across
many different applications, thereby enabling our customers to maximize process
uniformity and throughput. In addition, our systems apply heat uniformly across
the product load, which is critical to ensure optimum processing. Heat up and
cool down profiles are also closely controlled for process consistency and the
protection of product.

REPEATABILITY FROM SYSTEM TO SYSTEM. We provide a high degree of
repeatability from system to system through our atmosphere and temperature
controls and the reliability of our systems. This is a critical attribute
because our customers must achieve uniform manufacturing performance in plants
located throughout the world.

PROCESSING FLEXIBILITY. Major electronics manufacturers process many sizes
of PCBs and often need rapid product changeover capabilities. Our systems can
process PCBs of different sizes with minimal or no reconfiguration. Rapid
changeover reduces down time and increases manufacturing volume. In addition,
our high temperature products can be configured for multiple process
applications allowing for versatility in materials manufacturing.

RELIABILITY. Our customers place a high premium on reliability. Reliability
is a major contributor to low cost of ownership because high up time can
increase the productivity of an entire production line. We believe our systems
are the most reliable advanced thermal processing systems in the world.

WORLDWIDE CUSTOMER SUPPORT. We provide our customers with global technical
service support, in depth process engineering support and rapid delivery of our
systems and parts. We provide our customer support through our on-site direct
service organization and our independent sales and service representatives,
supplemented with twenty-four hours a day, seven days a week telephonic support
and extensive customer training programs

PRODUCTS

We supply a broad range of advanced thermal processing systems for
electronics and materials manufacturing industries. Our products are used for
such applications as semiconductor packaging, PCB assembly, ceramic and metals
sintering, thick film firing, fuel pellet sintering and metal brazing. In
addition, we have custom product engineering capabilities that allow us to
design specific products for unique applications, typically involving high
temperatures.

ADVANCED SEMICONDUCTOR PACKAGING. We sell several systems for the thermal
processes used in advanced semiconductor packaging.

Wafer Bump Reflow. Our TCAS series of continuous belt advanced thermal
processing system is rated up to 800(degree)C and is designed for wafer
bump reflow. It can operate in a variety of controlled atmospheres
including hydrogen using patented gas barrier technology to achieve a safe
and high purity hydrogen atmosphere. Our TCAS systems range in price from
$100,000 to $400,000 and are available in various belt widths and heated
lengths.

We also provide advanced solutions for wafer bump reflow by integrating
automated handling systems with thermal equipment for processing both 200mm
and 300mm wafers. As a result of our acquisition of the Sagarus robotics,
we now offer a complete integrated system based on BTU product modules
including handling flux coating and furnace. The 300mm systems are
available fully compliant with I300i protocol and with SEMI S2 and S8
standards. These integrated systems range in price from $300,000 to $1.5
million.

Flip Chip Reflow in Package. Flip Chip Reflow provides the physical and
electronic bond of the semiconductor device to its package. The PARAGON and
PYRAMAX families of advanced convection reflow systems, using specialized
fan drives, are rated up to 400(degree)C and operate in air or nitrogen
atmospheres. The product utilizes impingement technology to transfer heat
to the substrate. Using thermal power arrays of five-kilowatt heaters, it
can process substrates in dual track configurations, thereby enabling our
customers to double production without increasing the machine's footprint.
The family of products is available in three models based on the heated
lengths of thermal processing chambers. Heated length is based on the
required production rate and loading requirements. The products range in
price from $70,000 to $160,000.

3

SURFACE MOUNT TECHNOLOGY (SMT). We currently sell two families (VIP
and PYRAMAX) of advanced thermal processing systems used in the solder
reflow and cure stages of PCB (printed circuit board) assembly.

The new PYRAMAX family of advanced convection reflow systems is
designed on a single platform to be rapidly configurable, which reduces the
product build cycle, allowing us to meet customer demands for shorter
delivery lead times. Pyramax products offer our customers reduced capital
cost, lower nitrogen consumption and reduced scheduled maintenance cycles.

Pyramax provides increased process flexibility due to its ability to
process PCBs up to 24 inches wide. Rated up to 350(degrees)C, these
products are capable of operating in air or nitrogen atmospheres and have
increased convection flow for greater performance and lead free processes.
Pyramax utilizes impingement technology to transfer heat to the substrate.
These systems are offered in 7-zone and 10-zone heated lengths and are
capable of processing lead-free solder. They range in price from $40,000 to
$150,000.

The market need for lead free solder reflow presents a unique problem
by raising the process temperature critically close to the destruct
temperature of the components that are being attached. PYRAMAX's unique
closed loop convection control provides significantly tighter temperature
window than those available from any other manufacturer

The solder reflow process requires the thermal processing system to
manage flux residues that are eliminated during the processing of the PCBs.
Pyramax advanced thermal processing systems are equipped with a patented
flux management system that isolates the flux outside the main process
chamber, thereby helping to maintain the integrity of the atmosphere and
facilitate easy disposal.

ADVANCED MATERIALS PROCESSING. We sell several systems for the thermal
processes used in advanced materials processing.

Thick Film Resistors and Conductors. FAST FIRE continuous belt
advanced thermal processing systems are rated up to 1050(degree)C in air.
These systems are used for firing thick film pastes in the production of
hybrid circuits and can achieve an across belt temperature uniformity of
+/- 1(degree)C. Such thermal uniformity is critical in the production of
resistor circuits. These systems are available in various belt widths and
heated lengths and range in price from $50,000 to $180,000.

Our TCA continuous belt advanced thermal processing systems, rated up
to 1150(degree)C in multiple atmospheres such as nitrogen, hydrogen,
forming gas and dissociated ammonia, are used for ceramic sintering, copper
termination, glass to metal sealing, metal brazing and many other processes
requiring tight atmosphere and temperature control. The TCA utilizes an
advanced gas scrubbing system to control the binder remover phase in the
termination firing process. Unique features like venturi exhaust and
patented eductor technology make TCA essential for advanced materials
processing. The TCA is available in various belt widths and heated lengths
and ranges in price from $70,000 to $500,000.

Our Walking Beam system is designed for high volume production
applications with very heavy loads. It uses a walking beam transport system
to eliminate friction associated with advanced thermal processing systems
that use pusher technology. Walking Beam systems are used to sinter
gadolinium and uranium pellets used for nuclear fuel generation at
temperatures up to 2000(degree)C. This system ranges in price from $500,000
to $2.0 million.

CUSTOM APPLICATIONS

We design and manufacture custom high temperature systems used in such
applications as metals brazing, ceramic sintering and thin film coatings.

Ceramic Sintering. BTU's walking beam thermal processing system is rated up
to 2000(degree)C and operates in hydrogen reducing atmospheres primarily used
for sintering of multilayer ceramics. In addition, we offer a batch furnace with
elevator hearth loading to accomplish precise high temperature ceramic sintering
processes such as fuel cell and synthetic gas components requiring tight
temperature uniformity to maintain close dimensional tolerances and minimize
deformation of the product. The elevator batch system achieves temperature
uniformity of +/- 5(degree)C across the load at high throughput rates.

4

Convection Batch System. BTU has introduced a new convection batch furnace
leveraging our patented eductor technology. The systems are used for processing
ceramic and advanced materials such as Ceramics/LTCC/MLCC, Fuel Cells and glass
separation membranes. We can now uniquely offer customers convection technology
at elevated temperatures, providing the customer with dramatic improvements in
process uniformity as well as optimum heavy load/high throughput capability. The
systems range in price from $ 250,000 to $ 750,000.

We also offer a pusher thermal processing system, which is rated up to 1800
degrees C in a hydrogen reducing atmosphere. The Pusher is used in lower volume
applications for the sintering of ceramics and nuclear fuels. These systems
range in price from $500,000 to $1.2 million.

CUSTOMERS

Many of our principal customers are large-volume global manufacturers that
use our products in multiple facilities worldwide. Our customers include
industry leaders such as Intel, IBM, Advanced Semiconductor Engineering (ASE),
Compal, Nokia, Samsung, Celestica, Dana, Delphi and Foxconn.

Our largest customers have historically accounted for a significant
percentage of our net sales. Aggregate net sales to our ten largest customers
accounted for approximately 28% of our net sales in 2003. In 2003, no customer
accounted for more than 10% of net sales.

SALES AND MARKETING

We market and sell our products through our direct sales force and
independent sales representatives throughout the world. Our Sales and Marketing
force is responsible for educating the marketplace, generating leads and
creating sales programs and literature. Our on-site direct service organization
and our independent sales representatives provide ongoing services to customers
using our products. These services include implementing continuous improvement
tools related both to the cost of our products and to their technical
performance. These service functions allow us to market future sales within our
current customer base. In addition, our management and sales teams participate
in periodic trade conventions, through which we aggressively market our products
to potential customers.

We market our systems and services globally. In 2003, approximately 76% of
our net sales originated outside the United States, with Asia Pacific and Europe
representing 53% and 19% of net sales, respectively, and 4% to Other Americas.

RESEARCH, DEVELOPMENT AND ENGINEERING

Our research, development and engineering efforts are directed toward
enhancing existing products and developing our next generation of products. Our
expenses for research, development and engineering were: $5.0 million in 2001,
$3.6 million in 2002 and $3.4 million in 2003. A large percentage of our
research, development and engineering expense in 2003 was spent on the
development of integrated solutions for wafer bump reflow, development of our
convection batch furnace for ceramics and fuel cells, the expansion of our
Pyramax solder reflow platform and in support of custom design solutions.

Close working relationships between our key customers and our product
engineering teams enable us to incorporate our customers' feedback and needs
into our product development efforts.

We have integrated our product design, manufacturing, engineering and after
sales support documentation in support of the new product introduction process
and lowered research, development and engineering costs.

MANUFACTURING AND SUPPLIERS

Our principal manufacturing operations consist of final assembly, systems
integration and testing at our facility in North Billerica, Massachusetts. We
outsource the manufacture of many of our subsystems to a number of key suppliers
and maintain close relationships with them while also maintaining qualified
alternative suppliers in the event we exceed the capacity of our key suppliers
and to maintain a cost down focus. This year we are completing a new
manufacturing plant in Shanghai, China for manufacture of our SMT products as
well as local sourcing of materials.

5

We continue to invest in software and capital equipment related to our
information technology infrastructure and customer support. We have outsourced
the manufacture of most of our significant component systems thereby reducing
cycle time and increasing our inventory turnover. We adhere closely to the
principles of total quality management and have been ISO 9001 certified since
1998 and updated to ISO 9000:2000 in October 2003. Our customers, suppliers and
employees are encouraged to provide feedback and suggestions for improvements in
products and services.

INTELLECTUAL PROPERTY

We seek to protect our intellectual property by filing patents on
proprietary features of our advanced thermal processing systems and by
challenging third parties that we believe infringe on our patents. We also
protect our intellectual property rights with nondisclosure and confidentiality
agreements with employees, consultants and key customers and with our
trademarks, trade secrets and copyrights. As a global supplier of equipment, we
recognize that the laws of certain foreign countries may not protect our
intellectual property to the same extent as the laws of the United States.

We license some software programs from third party developers and
incorporate them into our products. Generally, these agreements grant us
non-exclusive licenses to use the software and terminate only upon a material
breach by us. We believe that such licenses are generally available on
commercial terms from a number of licensors.

BACKLOG

Backlog as of December 31, 2003 was $5.8 million, compared to $5.2 million
as of December 31, 2002. As of December 31, 2003, we expected to ship our
year-end backlog within 40 weeks. Most of our backlog for solder reflow systems
is expected to be shipped within 3 to 8 weeks. The backlog of our custom systems
is expected to be shipped within 12 to 40 weeks. We include in backlog only
those orders for which the customer has issued a purchase order. Due to possible
changes in delivery schedules and order cancellations, our backlog at any
particular date is not necessarily representative of sales for any subsequent
period.

COMPETITION

Several companies compete with us in selling advanced thermal processing
systems. Although price is a factor in buying decisions, we believe that
technological leadership, process capability, throughput, environmental
safeguards, uptime, mean time-to-repair, cost of ownership and after-sale
support have become increasingly important factors. We compete primarily on the
basis of these criteria, rather than on the basis of price.

Our principal competitors for advanced semiconductor packaging and PCB
assembly equipment vary by product application. Our principal competitors for
advanced semiconductor packaging are Sikama, RTC, and Heller Industries. Our
principal competitors for solder reflow systems are Vitronics-Soltec, Inc. (a
Dover Technologies Company), Electrovert-Speedline Technologies and Heller
Industries. Our high temperature systems for thick film, hybrid circuits,
ceramics and other applications compete primarily against systems sold by
Lindberg (a Unit of SPX Corp.), SierraTherm Production Furnaces, Inc.,
Centrotherm and Harper International Corp.

EMPLOYEES

As of February 29, 2004, we had 214 employees, of whom 54 are engaged in
sales, marketing and service, 23 in research, development and engineering, 18 in
finance and administration and 119 in operations. None of our employees are
represented by a collective bargaining agreement, and we believe that we have
satisfactory relations with our employees.

ENVIRONMENTAL

One of BTU's core values is protecting the environment in which we operate
and the environment in which our equipment operate. Compliance with laws and
regulations regarding the discharge of materials into the environment, or
otherwise relating to the protection of the environment, has not had any
material effects on the capital expenditures, earnings or competitive position
of the Company. The Company does not anticipate any material capital
expenditures for environmental control facilities in 2004.

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ITEM 2. PROPERTIES

FACILITIES

We maintain our headquarters in North Billerica, Massachusetts, where we
own a 150,000 square foot manufacturing facility. We currently operate our
manufacturing facility on a multi shift basis. In England, we lease a facility
for our European sale and service operations. We also rent office space in
Paris, France. In Asia, we lease sales and service offices in Shanghai and
Beijing, China; Singapore; Penang, Malaysia; and Cavite, Philippines. We
recently completed construction of a leased facility in Shanghai, China. We
believe that our plants in the USA and China provide sufficient manufacturing
capacity into the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

There were no material legal proceedings pending as of the time of this
filing.

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

There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of 2003.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

NAME AGE POSITIONS
---- --- ---------

Paul J. van der Wansem 64 Chairman of the Board of Directors
Mark R. Rosenzweig 57 President and Chief Executive Officer
Thomas P. Kealy 61 Vice President, Corporate Controller and
Chief Accounting Officer
James M. Griffin 46 Vice President of Sales-Americas

Paul J. van der Wansem is Chairman of our Board of Directors. He was also
President and Chief Executive Officer from 1979 until July 2002. From 1977 to
1981, he was Vice-President and advisor to the Management Board of Holec, N.V.,
(a Dutch-Multinational electronics company), and in 1978 started Holec (USA),
Inc. and became its President. From 1973 to 1977, he was Management Consultant
for The Boston Consulting Group, Inc. (BCG) in Boston, MA. Prior to this he was
an Adjunct Director at Citicorp starting in 1970 in Amsterdam, The Netherlands
and later at the New York headquarters through April of 1973. Mr. van der Wansem
received an undergraduate degree in automotive engineering in England and holds
an M.B.A. from IMD, Lausanne, Switzerland.

Mark R. Rosenzweig joined BTU in July 2002 as President and Chief Executive
Officer. From 1992 to 2002, Mr. Rosenzweig held various positions with The BOC
Group, a UK based, FT 100 Company, with his last position as the Chief Executive
of the BOC Edwards US operations, which was a major supplier of industrial gases
and process equipment to the semiconductor industry. From 1991 to 1992, Mr.
Rosenzweig was President and CEO of Datamarine, International., a Nasdaq listed,
marine navigation and communications company. From 1979 to 1991, Mr. Rosenzweig
held various management positions with Adams-Russell Company, which became part
of Ma/Com in 1989 at which time he became a Corporate VP at Ma/Com running the
Signal Processing Group. Mr. Rosenzweig holds a BSEE from Stevens Institute of
Technology, Hoboken, NJ.

Thomas P. Kealy has been Vice President, Corporate Controller and Chief
Accounting Officer of our company since February 1991. He has been the Corporate
Controller since joining our company in July 1985. Prior to 1985, Mr. Kealy
served for 14 years in various financial management positions, including
Division Controller for Polaroid Corporation. Earlier he was the Corporate
Controller for Coro, Inc. and Lebanon, Inc. Mr. Kealy holds a B.S. in Finance
and Accounting from Bentley College and an M.B.A. from Clark University.

James M. Griffin has been Vice President Sales-Americas of our company
since February 2000. Previously, Mr. Griffin was our Director of Sales-North
America, and has held a number of positions within our company's sales
organization. He has been with our company for 19 years. Mr. Griffin attended
Worcester Polytechnic Institute in the mechanical engineering program.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Our common stock has been listed on the Nasdaq National Market System under
the symbol "BTUI" since February 7, 1989. The following table sets forth, for
the periods indicated, the high and low sale prices of our common stock as
reported on the Nasdaq National Market System.

HIGH LOW
---- ---
Fiscal Year Ended December 31, 2002:
First Quarter.................................................... 6.48 4.05
Second Quarter................................................... 6.00 3.66
Third Quarter.................................................... 4.25 1.93
Fourth Quarter................................................... 2.70 1.63

Fiscal Year Ended December 31, 2003:
First Quarter.................................................... 2.19 1.62
Second Quarter................................................... 2.34 1.65
Third Quarter.................................................... 3.50 1.82
Fourth Quarter................................................... 5.38 2.41

As of March 25, 2004 there were approximately 494 stockholders of record.

DIVIDEND POLICY

Our policy is to retain earnings to provide funds for the operation and
expansion of our business. We have not paid cash dividends on our common stock
and do not anticipate that we will do so in the foreseeable future. The payment
of dividends in the future will depend on our growth, profitability, financial
condition and other factors that our board of directors may deem relevant.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated statement of operations data for each of the
fiscal years ended December 31, 2001, December 31, 2002 and December 31, 2003
and the selected consolidated balance sheet data as of December 31, 2002 and
December 31, 2003 have been derived from our consolidated financial statements
audited by independent public accountants, which are included elsewhere in this
Form 10-K. The selected consolidated statement of operations data for the fiscal
years ended December 31, 1999 and December 31, 2000 and the selected
consolidated balance sheet data as of December 31, 1999, December 31, 2000 and
December 31, 2001 have been derived from audited financial statements not
included in this Form 10-K. This data should be read together with our
consolidated financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Form 10-K.

8

FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales ........................................ $ 71,260 $ 99,494 $ 47,057 $ 30,631 $ 28,490
Cost of goods sold ............................... 42,449 59,112 31,625 21,030 22,098
-------- -------- -------- -------- --------
Gross profit ................................... 28,811 40,382 15,432 9,601 6,392
Selling, general and administrative .............. 20,284 25,310 16,328 13,413 9,419
Research, development and engineering ............ 4,786 6,231 5,001 3,587 3,382
Restructuring charge and executive retirement .... -- -- -- 1,350 190
-------- -------- -------- -------- --------
Operating income (loss) ........................ 3,741 8,841 (5,897) (8,749) (6,599)
Interest income (expense), net ................... 8 (54) (53) (150) (304)
Other income (expense) ........................... 24 (440) 2 12 (148)
-------- -------- -------- -------- --------
Income (loss) before provision for income taxes .. 3,773 8,347 (5,948) (8,887) (7,051)

Net income (loss) .............................. $ 2,838 $ 5,422 $ (3,747) $ (7,072) $ (6,829)
======== ======== ======== ======== ========

Earnings per share, diluted (1) .................. $ 0.41 $ 0.74 $ (0.54) $ (1.03) $ (0.97)
======== ======== ======== ======== ========

Weighted average shares outstanding, diluted ..... 6,968 7,278 6,928 6,886 7,042

DECEMBER 31,
-----------------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
(IN THOUSANDS)

CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $12,431 $ 8,886 $15,716 $13,847 $ 6,659
Working capital.................................... 26,693 30,709 26,571 21,411 16,060
Total liabilities.................................. 17,346 19,363 10,185 10,413 10,834
Total assets....................................... 43,149 51,160 37,836 31,514 25,654
Stockholders' equity............................... 25,803 31,797 27,651 21,101 14,820

- -------------------
(1) Common share equivalents are anti dilutive when in a loss position.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

We design, manufacture, sell and support advanced thermal processing
systems used primarily for semiconductor packaging, printed circuit boards (PCB)
assembly and advanced materials processing. In addition, we produce custom
thermal systems for a variety of specialty applications for a wide range of
temperatures.

We derive our net sales from customers around the world. Our customers
include large multinational OEM (original equipment manufacturers) and EMS
(electronic manufacturing service) providers requiring advanced thermal
processing equipment solutions. In 2003, net sales to our five largest customers
accounted for 18.8% of our total net sales. Our net sales in 2003 were dispersed
worldwide, with approximately 24% to customers in the United States, 53% to Asia
Pacific customers, 19% to European customers and 4% to Other Americas. Over the
past three years, the percentage of our net sales to international customers was
59% in 2001, 61% in 2002 and 76% in 2003.

9

CRITICAL ACCOUNTING POLICIES

The following is a discussion of those accounting policies that the Company
deems to be "critical" - that is, they are important to the portrayal of the
Company's financial condition and results, and they reflect management's
reliance on estimates regarding matters that are inherently uncertain.

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,
delivery 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 cannot be demonstrated until customer use, revenues are recognized
upon acceptance. Furthermore, revenues for products that require installation
for which the installation is essential to functionality or 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.

Applying the requirements of SAB No. 101 to future sales arrangements used
in the Company's thermal processing equipment sales may result in the deferral
of the revenue for some equipment sales. The Company continues to evaluate the
impact that SAB No. 101 might have on its sales transactions. However, there
will be no impact on the Company's cash flows from operations as a result of any
change.

The Company also has certain sales transactions for products, which are not
completed within the normal operating cycle of the business. It is the Company's
policy to account for these transactions using the percentage of completion
method for revenue recognition purposes when all of the following criteria
exist. (1) The Company has received the Customer's purchase order or entered
into a legally binding contract. (2) The Customer is credit worthy and
collection is probable or Customer prepayments are required at product
completion milestones or specific dates. (3) The sales value of the product to
be delivered is significant in amount when compared to the Company's other
products. (4) Product costs can be reasonably estimated; there is no major
technological uncertainty and the total engineering, material procurement,
product assembly and test cycle time extend over a period of six months or
longer.

Under the percentage completion method, revenues and gross margins to date
are recognized based upon the ratio of costs incurred to date compared to the
latest estimate of total costs to complete the product as a percentage of the
total contract revenue for the product. Revisions in costs and gross margin
percentage estimates are reflected in the period in which the facts causing the
revision become known. Provisions for total estimated losses on uncompleted
contracts, if any, are made in the period in which such losses are determined.

INVENTORY VALUATION - The Company's inventories consist of material, labor
and manufacturing overhead costs. The Company determines the cost of inventory
based on the first-in, first-out method (FIFO). The Company regularly reviews
the quantity of inventories on hand and compares these quantities to the
expected usage of each applicable product or product line. The Company's
inventories are adjusted in value to the lower of costs and/or net realizable
value. Since the value of the Company's inventories depends in part on the
Company's estimates of each product's net realizable value, adjustments may be
needed to reflect changes in valuation. Any adjustments the Company is required
to make to lower the value of the inventories are recorded as a charge to cost
of revenue.

For more information on the Company's inventory valuation, please see Note
1 to the financial statements included in this report.

10

RESULTS OF OPERATIONS

The following table sets forth the percentage of net sales of certain items
in our consolidated statements of operations for the periods indicated.

FISCAL YEAR ENDED
DECEMBER 31,
-----------------------------
2001 2002 2003
------ ------ ------

Net sales............................................ 100.0% 100.0% 100.0%
Cost of goods sold................................... 67.2% 68.7% 77.6%
----- ----- -----
Gross profit....................................... 32.8% 31.3% 22.4%

Operating expenses:
Selling, general and administrative................ 34.7% 43.8% 33.0%
Research, development and engineering.............. 10.6% 11.7% 11.9%
Restructuring and executive retirement 0.0% 4.4% 0.7%
----- ----- -----
Operating loss..................................... (12.5)% (28.6)% (23.2)%
Interest income...................................... 0.8% 0.7% 0.2%
Interest expense..................................... (0.9)% (1.2)% (1.3)%
Other income (expense), net.......................... 0.0% 0.0% (0.5)%
----- ----- -----
Loss before benefit from income taxes................ (12.6)% (29.1)% (24.8)%
Benefit from income taxes............................ (4.7)% (5.9)% (0.8)%
----- ----- -----
Net Loss............................................. (7.9)% (23.2)% (24.0)%
===== ===== =====

FISCAL YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 2002

Net Sales. Net sales decreased 7.0% from $30.6 million in 2002 to $28.5
million in 2003. Although total net sales for 2003 were slightly lower than in
2002, quarter on quarter net sales improved from a low of $5.7 million in Q4
2002 to $7.8 million in Q4 2003. The improving quarterly net sales are due to
the beginnings of a recovery and increase in demand for the Company's solder
reflow systems. This increase was partially offset by decreases in product
shipments of the Company's advanced materials systems, whose markets have not
rebounded.

The percentage of net sales attributable to our customers in the United
States decreased in 2003 by 14.9%, net sales attributable to our customers in
Europe increased by 1.6%, net sales attributable to our Asia Pacific customers
increased by 16.7% and net sales attributable to our customers in the other
Americas decreased by 3.4% as compared to 2002. The decrease in the percentage
of net sales to United States and other Americas customers reflects the shift in
the electronics business to Asia Pacific. The effect of price discounting
primarily for SMT products has materially impacted the change in net sales for
the periods presented.

Gross Profit. Gross profit decreased 33.4% from $9.6 million in 2002 to
$6.4 million in 2003 and, as a percentage of net sales, decreased from 31.3% in
2002 to 22.4% in 2003. The decrease in gross profit and gross profit percentage
for 2003 was primarily the result of a change in product mix and selling price
pressures. In 2003, the Company experienced a decrease in demand for its
products in the advanced materials market. The decreased demand resulted in an
under absorption of costs in 2003. Even with the increase in demand for solder
reflow systems, significant price pressure has continued to depress the margins
for solder reflow systems through 2003.

Selling, General and Administrative. Selling, general and administrative
costs decreased 29.8% from $13.4 million in 2002 to $9.4 million in 2003, and as
a percentage of net sales, decreased from 43.8% to 33.0%. The decreases in
selling, general, and administrative costs for 2003 versus 2002 for both
spending and as a percentage of net sales were the result of lower expenditures
for sales, service, marketing and administrative functions, as the Company
reduced its workforce to reflect the existing sales levels.

Research, Development and Engineering. Research, development and
engineering costs decreased 5.6% from $3.6 million in 2002 to $3.4 million in
2003, and as a percentage of net sales, increased from 11.7% in 2002 to 11.9% in
2003. In 2003, the Company continued it's spending, at 2002 levels on new
product development as it prepares for the future product needs of its
customers.

Restructuring. In the second quarter of 2003, the Company reduced its
overhead personnel to better align its spending with the current economic market
for its products. The $190,000 restructuring charge represents severance costs
for these employees.

Operating Loss. Operating loss decreased 24.1% from $(8.7) million in 2002
to $(6.6) million in 2003, and as a percentage of net sales, operating loss
decreased from (28.6)% in 2002 to (23.2)% 2003. The decrease in operating loss
for 2003 is primarily the result of reduced selling, general and administrative
spending.

11

Other income (expense), net. The Company recorded a $154,000 expense in the
fourth quarter of 2003 in conjunction with entering into a new mortgage note.
The expense represents the prepayment penalty required to terminate the old
mortgage note.

Income Taxes. Due to the uncertainty surrounding realization, the Company
has recorded at December 31, 2003 a full valuation allowance to offset its
deferred tax asset arising as a result of its available tax net operating loss
carryforward. The income tax benefit of $222,000 reflected in the statement of
operations for the year 2003 represents an additional carryback allowance
calculated in the Company's 2002 federal tax return. This carryback claim is a
refund of taxes paid in prior periods, which the Company received in the third
quarter 2003. The Company's statutory federal income tax rate is 34%.

FISCAL YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 2001

Net Sales. Net sales decreased 34.9%, from $47.1 million in 2001 to $30.6
million in 2002. The decrease in 2002 net sales was primarily due to decreases
in product shipments of the Company's solder reflow systems, due to the lower
demand in orders from our key electronics board assembly customers.

The percentage of net sales attributable to our customers in the United
States decreased in 2002 by 2.0%, net sales attributable to our customers in
Europe decreased by 7.4%, net sales attributable to our Asia Pacific customers
increased by 7.9% and net sales attributable to our customers in the other
Americas increased by 1.5% as compared to 2001. The decrease in the percentage
of net sales to United States and European customers reflects the shift in the
electronics business to Asia Pacific. The effect of price discounting for
specific products has materially impacted the change in net sales for the
periods presented.

Gross Profit. Gross profit decreased 37.8% from $15.4 million in 2001 to
$9.6 million in 2002 and, as a percentage of net sales, decreased from 32.8% in
2001 to 31.3% in 2002. The decrease in gross profit and gross profit percentage
for 2002 was the direct result of decrease demand for products in the
electronics industry. The decrease demand resulted in significant price pressure
and under-absorption of costs.

Selling, General and Administrative. Selling, general and administrative
costs decreased 17.9% from $16.3 million in 2001 to $13.4 million in 2002, and
as a percentage of net sales, increased from 34.7% to 43.8%. The decreases in
costs were primarily the result of reductions in personnel and related overhead
expenses. The primary reason for the increase in S, G & A as a percentage of
sales is the 35% decrease in sales.

Research, Development and Engineering. Research, development and
engineering costs decreased 28.3% from $5.0 million in 2001 to $3.6 million in
2002, and as a percentage of net sales, increased from 10.6% in 2001 to 11.7% in
2002. The Company continued its support in new product development, but at
reduced levels given the current economic climate.

Restructuring & Executive Retirement. In the third quarter of 2002, the
Company reduced its personnel to better align its spending with the current
economic market for its products. The Company recorded a $360,000 restructuring
charge representing severance costs for terminated employees mainly related to
wages and related benefits. In the fourth quarter of 2002, the Company recorded
a $990,000 charge associated with benefits under an executive retirement
agreement for its former President and CEO.

Operating Loss. Operating loss increased 48.4% from $(5.9) million in 2001
to $(8.7) million in 2002, and as a percentage of net sales, operating loss
increased from (12.5)% in 2001 to (28.6)% 2002. The decline in operating income
is the result of the sales decline, lower gross margins and higher operating
costs as a percentage of sales.

Income Taxes. Income tax benefit decreased from a $2.2 million benefit in
2001 to a $1.8 million benefit in 2002. The 20.4% tax benefit in 2002 is due to
recording of a valuation allowance due to uncertainty about realization of
deferred tax assets in the future. The Company's statutory federal income tax
rate is 34%.

12

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2003, the Company had $6.7 million in cash and cash
equivalents, a decrease of $7.1 million compared to December 31, 2002. The
decrease was primarily the result of net losses of $6.8 million.

The Company has a secured revolving line of credit with a bank that allows
for aggregate borrowings, including letters of credit, up to a maximum of $14.0
million against a borrowing base of secured accounts receivable and inventory.
The Company may elect to borrow at interest rates pegged to either the bank's
base rate or the LIBOR rate in effect from time to time. This loan agreement
extends to May 31, 2007 and is subject to maintaining certain financial
covenants with which the Company is in compliance at December 31, 2003. No
borrowings were outstanding under this agreement at December 31, 2003; at which
time the available funds on the borrowing base formula was approximately $6.9
million.

The Company entered into a mortgage note in December 2003 that is secured
by our real property in Billerica, MA. The mortgage note had an outstanding
balance at December 31, 2003 of approximately $5.6 million. The mortgage
requires monthly payments of $38,269, which includes interest calculated at the
rate of 5.42% per annum. A final balloon payment of approximately $5.1 million
is due on December 26, 2006 upon maturity of the mortgage note.

The Company conducts its UK operations in a facility that is under a
long-term operating lease expiring in March 2010. Rent expense under this lease
was approximately $196,000 in 2003, $170,000 in 2002 and $260,000 in 2001. The
Company has a lease of approximately $200,000 in rent expense per year through
March 2010. As of December 31, 2003, the future minimum lease commitment for
this facility is $1,250,000, payable as follows: $200,000 for each of the years
2004 through 2009, $50,000 for 2010.

We expect that our cash position and our working capital line of credit
will be sufficient to meet our corporate, operating and capital requirements
throughout 2004.

CONTRACTUAL OBLIGATIONS

The Company's contractual obligations at December 31, 2003 were:

CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
LESS THAN 1 1 - 3 3 - 5 MORE THAN
TOTAL YEAR YEARS YEARS 5 YEARS
------- ----------- ----- ----- ---------

Long-term debt....................... $ 6,300 $ 360 $5,840 $100 $ 0
Capital leases....................... 0 0 0 0 0
Operating leases..................... 1,466 272 544 400 250
Open purchase orders................. 3,011 3,011 0 0 0
Other long-term liabilities.......... 0 0 0 0 0
------- ------ ------ ---- ----
Total................................ $10,777 $3,643 $6,384 $500 $250

MARKET RISK DISCLOSURE

Our primary market risk exposure is in the area of foreign currency
exchange rate risk as we are exposed to currency exchange rate fluctuations as
they pertain to invoices for parts and labor in our foreign service locations.

As of December 31, 2003, all of our long-term debt and capital lease
obligations are fixed rate financial instruments. Therefore we are not exposed
to interest rate risk resulting from variable interest rate of our debts.

OTHER MATTERS

The impact of inflation and the effect of foreign exchange rate changes
during 2003 have not had a material impact on our business and financial
results.

13

RECENT ACCOUNTING DEVELOPMENTS

In May 2003, the Financial Accounting Standard Board (FASB) issued SFAS No.
150, Accounting for Certain Instruments with Characteristics of both Liabilities
and Equity, which established standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company's adoption of
the initial recognition and initial measurement provisions of SFAS No. 150,
effective June 1, 2003, did not have a material impact on the Company's results
of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, Derivatives and Hedging, an
Amendment of SFAS No. 133. This statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The changes in this Statement
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this Statement
clarified under what circumstances a contract with an initial net investment
meets the characteristic of a derivative of SFAS No. 133, clarifies when a
derivative contains a financing component, amends the definition of an
"underlying" to conform it to language used in FASB Interpretation (FIN) No. 45,
Guarantor's Accounting and Disclosure Requirement for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and amends certain other existing
pronouncements. Those changes will result in more consistent reporting of
contracts as either derivatives or hybrid instruments. This Statement is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The Company adopted SFAS
No. 149 effective July 1, 2003, which did not have any impact on the Company's
results of operations or financial position.

In January 2003, the Emerging Issues Task Force (EITF), published EITF
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, which requires
companies to determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting. In applying EITF No. 00-21, revenue
arrangements with multiple deliverables should be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values. This issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF No. 00-21 did not have any impact on the Company's
results of operations or financial position.

In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. Along with new disclosure requirements,
FIN 45 requires guarantors to recognize, at the inception of certain guarantees,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. This differs from the current practice to record a liability only
when a loss is probable and reasonably estimable. The recognition and
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
did not have a material effect on the Company's results of operations or
financial position.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, which addressed accounting for special-purpose and
variable interest entities. This interpretation was effective for financial
statements issued after December 31, 2002. In September 2003, the FASB issued a
Staff Position to allow a deferment of the effective date to the end of the
first interim or annual period ending after December 15, 2003 if certain
conditions were met. In December 2003, the FASB issued Interpretation No. 46R,
Consolidation of Variable Interest Entities, which addresses accounting for
special-purpose and variable interest entities and which superseded
Interpretation 46. The effective date of this interpretation is the end of the
first reporting period that ends after March 15, 2004, unless the entity is
considered to be a special-purpose entity in which case, the effective date is
the end of the first reporting period that ends after December 15, 2003.
Companies that have adopted Interpretation No. 46 prior to the effective date of
Interpretation No. 46R will either continue to apply Interpretation No. 46 until
the effective date of Interpretation No. 46R or apply the provisions of
Interpretation No. 46R at an earlier date. The Company believes that the
adoption of Interpretation No. 46 and No. 46R will not have a material impact on
the Company's consolidated financial position or results of operations.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -Transition and
Disclosure" (SFAS 148). This statement amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for years beginning after December 15, 2002. The
Company does not expect the adoption of SFAS 148 to have a material impact on
its operating results or financial position.

14

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by item 8 of Form 10-K is presented here in the
following order:

Unaudited Quarterly Financial Information

Consolidated Balance Sheet as of December 31, 2003 and 2002

Consolidated Statement of Operations for the years ended December 31, 2003, 2002
and 2001

Consolidated Statement of Stockholders' Equity for the years ended December 31,
2003, 2002 and 2001

Consolidated Statement of Comprehensive Income for the years ended December 31,
2003, 2002 and 2001

Consolidated Statement of Cash Flows for the years ended December 31, 2003, 2002
and 2001

Notes to Consolidated Financial Statements

Reports of Independent Public Accountants

15

UNAUDITED QUARTERLY RESULTS OF OPERATIONS

The following table presents unaudited statement of operations data for
each of the eight quarters in the period ended December 31, 2003 with such data
expressed as a percentage of net sales for the period indicated. We believe that
all necessary adjustments have been included to present fairly the quarterly
information when read in conjunction with our consolidated financial statements.
The operating results for any quarter are not necessarily indicative of the
results for any subsequent period.

SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

QUARTER ENDED
------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 29, DEC. 31, MAR. 31, JUNE 30, SEPT. 29, DEC. 31,
2002 2002 2002 2002 2003 2003 2003 2003
------- ------- ------- ------- ------- ------- ------- -------

Net sales ................................... $ 8,507 $ 9,360 $ 7,100 $ 5,663 $ 6,836 $ 7,125 $ 6,738 $ 7,792
Cost of goods sold .......................... 5,940 6,239 4,601 4,250 4,983 5,579 5,370 6,166
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ................................ 2,567 3,121 2,499 1,413 1,853 1,546 1,368 1,626
Selling, general and administrative ...... 3,583 3,835 3,409 2,585 2,750 2,554 2,165 1,951
Research, development and engineering ....... 946 911 903 826 822 826 745 989
Restructuring and executive retirement ...... -- -- 360 990 -- 190 -- --
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations ........................ (1,962) (1,625) (2,173) (2,988) (1,719) (2,024) (1,542) (1,314)
Interest income (expense), net .............. (38) (39) (38) (35) (55) (65) (77) (107)
Other income (expense), net ................. -- 2 11 (1) 1 4 2 (155)
------- ------- ------- ------- ------- ------- ------- -------
Loss before taxes ........................... (2,000) (1,662) (2,200) (3,024) (1,773) (2,085) (1,617) (1,576)
Income tax benefit .......................... (700) (197) (539) (379) -- (222) -- --
------- ------- ------- ------- ------- ------- ------- -------
Net loss .................................. $(1,300) $(1,465) $(1,661) $(2,645) $(1,773) $(1,863) $(1,617) $(1,576)
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share, basic and diluted ....... $ (0.19) $ (0.21) $ (0.24) $ (0.38) $ (0.25) $ (0.27) $ (0.23) $ (0.22)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares, basic and diluted... 6,841 6,870 6,910 6,923 7,003 7,003 7,030 7,128

QUARTER ENDED
------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 29, DEC. 31, MAR. 31, JUNE 30, SEPT. 29, DEC. 31,
2002 2002 2002 2002 2003 2003 2003 2003
------- ------- ------- ------- ------- ------- ------- -------

PERCENTAGE OF NET SALES:
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................... 69.8 66.7 64.8 75.0 72.9 78.3 79.7 79.1
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ................................ 30.2 33.3 35.2 25.0 27.1 21.7 20.3 20.9
Selling, general and administrative.......... 42.1 41.0 48.0 45.6 40.2 35.8 32.1 25.0
Research, development and engineering........ 11.0 9.7 12.7 14.6 12.0 11.6 11.1 12.7
Restructuring & Executive Retirement ........ 0.0 0.0 5.1 17.5 0.0 2.7 0.0 0.0
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations......................... (23.1) (17.4) (30.6) (52.7) (25.1) (28.4) (22.9) (16.8)
Interest income (expense), net............... (0.4) (0.4) (0.5) (0.6) (0.8) (0.9) (1.1) (1.4)
Other income (expense), net.................. 0.0 0.0 0.1 (0.1) 0.0 0.0 0.0 (2.0)
------- ------- ------- ------- ------- ------- ------- -------
Loss before taxes............................ (23.5) (17.8) (31.0) (53.4) (25.9) (29.3) (24.0) (20.2)
Income tax benefit........................... (8.2) (2.1) (7.6) (6.7) 0.0 (3.2) 0.0 0.0
------- ------- ------- ------- ------- ------- ------- -------
Net loss................................... (15.3)% (15.7)% (23.4)% (46.7)% (25.9)% (26.1)% (24.0)% (20.2)%
======= ======= ======= ======= ======= ======= ======= =======

During the eight quarters in 2002 and 2003, net sales ranged from a high of
$9.4 million to a low of $5.7 million. The range of quarterly net sales for 2003
increased against the fourth quarter of 2002, yet at continued low levels.

Gross profits as a percentage of net sales during the last eight quarters
began at 30.2% and ended at 20.9%. The decline in gross profit and gross profit
as a percent of net sales during 2003 was due to the change in product mix,
price pressure and the under absorption of overhead.

Selling, general and administrative costs during the last eight quarters in
2002 and 2003 decreased from a high of $3.8 million to a low of $2.0 million.
Lower costs were incurred in every area of selling, general and administrative
for 2003 including sales, service and commission costs as the Company continued
to reduce its workforce to reflect the economic reality. This decrease in S, G&A
spending was reflected in the S, G & A as a percentage of sales, which decreased
from 45.6% in Q4 2002 to 25.0% in Q4 2003.

Research, development and engineering costs for all 2002 and 2003 quarters
remained relatively flat both in dollars of spending and percentage of net
sales.

Loss from operations decreased during the quarters of 2003 vs. 2002. The
decrease in the loss from operations for the year 2003 was primarily the result
of the decrease in S, G & A expenses versus 2002.

16

BTU INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

AS OF DECEMBER 31,
----------------------
2003 2002
-------- --------

ASSETS
Current Assets:
Cash and cash equivalents (Notes 1 and 11) .................................................. $ 6,659 $ 13,847
Trade accounts receivable, less reserves of $172 at December 31, 2003 and 2002 (Note 1) ..... 6,073 4,532
Inventories, net (Note 1) ................................................................... 7,795 6,668
Refundable income taxes ..................................................................... -- 1,700
Other current assets ........................................................................ 469 417
-------- --------
Total current assets ................................................................ 20,996 27,164
-------- --------
Property, Plant and Equipment, at cost (Notes 1)
Land ........................................................................................ 210 210
Buildings and improvements .................................................................. 7,983 7,894
Machinery and equipment ..................................................................... 7,597 7,645
Furniture and fixtures ...................................................................... 866 856
-------- --------
16,656 16,605
Less-accumulated depreciation ............................................................ (13,366) (12,568)
-------- --------
Net property, plant and equipment ........................................................... 3,290 4,037
-------- --------
Other assets, net of accumulated amortization of $414 in 2003 and $362 in 2002 (Note 1) ....... 1,368 313
-------- --------
Total Assets ........................................................................ $ 25,654 $ 31,514
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt and capital lease obligations (Notes 3 and 11) ......... $ 160 $ 329
Current portion of long-term deferred compensation (Note 13) ................................ 200 200
Trade accounts payable (Note 9) ............................................................. 2,560 2,601
Customer deposits ........................................................................... 336 213
Accrued expenses (Note 2) ................................................................... 1,680 2,410
-------- --------
Total current liabilities ........................................................... 4,936 5,753
Long-term debt and capital lease obligations less current maturities (Notes 3 and 11) ......... 5,440 4,010
Long-term deferred compensation (Note 13) ..................................................... 458 650
-------- --------
Total Liabilities ................................................................... $ 10,834 $ 10,413
-------- --------
Commitments and contingencies (Note 3)
Stockholders' Equity:
Series preferred stock, $1.00 par value --
Authorized -- 5,000,000 shares; Issued and outstanding - none ............................ -- --
Common Stock, $.01 par value --
Authorized -- 25,000,000 shares: Issued - 8,293,958, outstanding - 7,144,948 in 2003;
and Issued - 8,151,588, outstanding - 7,002,578 in 2002 ............................... 83 81
Additional paid-in capital .................................................................. 22,349 21,976
Deferred compensation ....................................................................... (18) (71)
Retained earnings (accumulated deficit) ..................................................... (3,794) 3,035
Less: treasury stock at cost, 1,149,010 shares at December 31, 2003 and December 31, 2002 ... (4,177) (4,177)
Accumulated other comprehensive income ...................................................... 377 257
-------- --------
Total stockholders' equity .......................................................... 14,820 21,101
-------- --------
Total Liabilities and Stockholders' Equity .......................................... $ 25,654 $ 31,514
======== ========

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

17

BTU INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
-------- -------- --------

Net sales (Notes 1, 4 and 5) ..................... $ 28,490 $ 30,631 $ 47,057
Cost of goods sold ............................... 22,098 21,030 31,625
-------- -------- --------
Gross profit ..................................... 6,392 9,601 15,432
-------- -------- --------
Selling, general and administrative ............ 9,419 13,413 16,328
Research, development and engineering (Note 1) . 3,382 3,587 5,001
Restructuring and executive retirement (Note 13) 190 1,350 --
-------- -------- --------
Operating loss ................................... (6,599) (8,749) (5,897)
-------- -------- --------
Interest income ................................ 67 217 360
Interest expense (Note 3) ...................... (371) (367) (413)
Other income (expense) ......................... (148) 12 2
-------- -------- --------
Loss before benefit for income taxes ............. (7,051) (8,887) (5,948)
Benefit for income taxes (Notes 1 and 6) ......... (222) (1,815) (2,201)
-------- -------- --------
Net loss ......................................... $ (6,829) $ (7,072) $ (3,747)
======== ======== ========
Loss per share:
Basic .......................................... $ (0.97) $ (1.03) $ (0.54)
======== ======== ========
Diluted ........................................ $ (0.97) $ (1.03) $ (0.54)
======== ======== ========
Weighted average number of shares outstanding:
Basic shares ................................... 7,042 6,886 6,928
Effect of dilutive options ..................... -- -- --
-------- -------- --------
Diluted shares ................................. 7,042 6,886 6,928
======== ======== ========

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

18

BTU INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)

RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER TOTAL
COMMON PAID-IN DEFERRED (ACCUMULATED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL COMP. DEFICIT) STOCK INCOME EQUITY
------ ---------- -------- ------------ -------- ------------- ------------

BALANCE AT DECEMBER 31, 2000 ........ $ 79 $21,223 $ -- $13,854 $(3,538) $ 179 $31,797
Net loss .......................... -- -- -- (3,747) -- -- (3,747)
Translation adjustment ............ -- -- -- -- -- (23) (23)
Sale of common stock and
exercise of stock options ....... 1 189 -- -- -- -- 190
Purchase of treasury stock ........ -- -- -- -- (612) -- (612)
Stock based compensation .......... -- 122 (122) -- -- -- --
Deferred compensation ............. -- -- 46 -- -- -- 46
----- ------- ------ ------- ------- ----- -------
BALANCE AT DECEMBER 31, 2001 ........ 80 21,534 (76) 10,107 (4,150) 156 27,651
Net loss .......................... -- -- -- (7,072) -- -- (7,072)
Translation adjustment ............ -- -- -- -- -- 101 101
Sales of common stock and
exercise of stock options ....... 1 228 -- -- -- -- 229
Purchase of treasury stock ........ -- -- -- -- (27) -- (27)
Stock based compensation .......... -- 214 (74) -- -- -- 140
Deferred compensation ............. -- -- 79 -- -- -- 79
----- ------- ------ ------- ------- ----- -------
BALANCE AT DECEMBER 31, 2002 ........ 81 21,976 (71) 3,035 (4,177) 257 21,101
Net loss .......................... -- -- -- (6,829) -- -- (6,829)
Translation adjustment ............ -- -- -- -- -- 120 120
Sales of common stock and
exercise of stock options ....... 2 373 -- -- -- -- 375
Deferred compensation ............. -- -- 53 -- -- -- 53
----- ------- ------ ------- ------- ----- -------
BALANCE AT DECEMBER 31, 2003 ........ $ 83 $22,349 $ (18) $(3,794) $(4,177) $ 377 $14,820
===== ======= ====== ======= ======= ===== =======

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)

YEARS ENDED DECEMBER 31,
------------------------------
2003 2002 2001
------- ------- -------

Net loss ................................................................................... $(6,829) $(7,072) $(3,747)
Other comprehensive income:
Foreign currency translation adjustment .................................................. 120 101 (23)
------- ------- -------
Comprehensive loss ......................................................................... $(6,709) $(6,971) $(3,770)
======= ======= =======

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

19

BTU INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
-------- -------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................... $ (6,829) $ (7,072) $ (3,747)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization ................................ 1,114 1,299 1,262
Deferred income taxes ........................................ -- 34 (671)
Stock based compensation ..................................... 53 219 46
Deferred compensation expense ................................ -- 850 --
Loss on sale of cash surrender value of officers
life insurance ............................................ 115 -- --
Net changes in operating assets and liabilities
(excluding business acquisition):
Accounts receivable .......................................... (1,541) 1,094 16,090
Inventories .................................................. (1,107) 2,383 4,568
Other current assets ......................................... (52) 140 (79)
Refundable income taxes ...................................... 1,700 (275) (1,425)
Other assets ................................................. (141) 30 (17)
Accounts payable ............................................. (41) (245) (4,076)
Customer deposits ............................................ 123 (64) (36)
Accrued expenses ............................................. (890) (8) (4,085)
Deferred compensation ........................................ (192) -- --
-------- -------- --------
Net cash provided by (used in) operating activities........ (7,688) (1,615) 7,830
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net ................ (305) (193) (245)
Proceeds from sale of cash surrender value of officers
life insurance .............................................. 117 -- --
Cash paid for acquisition ...................................... (380) -- --
-------- -------- --------
Net cash used in investing activities ..................... (568) (193) (245)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from refinance of mortgage note ....................... 5,600 -- --
Principal payments under long-term debt and capital
lease obligations ........................................... (4,339) (305) (310)
Payments for debt refinancing .................................. -- (59) 0
Restricted cash ................................................ (688) -- --
Proceeds from issuance of common stock and exercise
of stock options ............................................ 375 229 190
Purchase of treasury stock ..................................... -- (27) (612)
-------- -------- --------
Net cash provided by (used in) financing activities........ 948 (162) (732)
-------- -------- --------
EFFECT OF EXCHANGE RATES ON CASH ............................... 120 101 (23)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........... (7,188) (1,869) 6,830
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................. 13,847 15,716 8,886
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ....................... $ 6,659 $ 13,847 $ 15,716
======== ======== ========

Supplemental disclosures of cash flow information are included in Note 10.

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

20

BTU INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

BTU International, Inc. and its wholly owned subsidiaries (the Company) are
primarily engaged in the design, manufacture, sale, and service of thermal
processing systems, which are used as capital equipment in various manufacturing
processes, primarily in the electronics industry.

PRINCIPLES OF CONSOLIDATION AND THE USE OF ESTIMATES

The accompanying consolidated financial statements include the accounts of
the Company. All material intercompany balances and transactions have been
eliminated in consolidation. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. The primary estimates used in the consolidated financial
statements include percent complete revenue and inventory reserves.

CASH AND CASH EQUIVALENTS

The Company has classified certain liquid financial instruments, with
original maturities of less than three months, as cash equivalents. These
financial instruments are carried at cost, which approximates fair value.

ACCOUNTS RECEIVABLE

Accounts receivable are stated at the amount management expects to collect
from outstanding balances. An allowance for doubtful accounts is provided for
those accounts receivable considered to be uncollectible based upon historical
experience and management's evaluation of outstanding accounts receivable at the
end of the year. Bad debts are written off against the allowance when
identified. Bad debt expense was $0, $90,000 and $24,000 for 2003, 2002 and
2001, respectively.

INVENTORIES

Inventories consist of material, labor and manufacturing overhead and are
valued at the lower of cost or net realizable value. Cost is determined by the
first-in, first-out (FIFO) method for all inventories.

Inventories consist of the following (in thousands):

YEARS ENDED
DECEMBER 31,
-------------------
2003 2002
------- -------

Raw materials and manufactured components................ $ 3,881 $ 3,786
Work-in-progress......................................... 2,358 2,066
Finished goods........................................... 1,556 816
------- -------
$ 7,795 $ 6,668
======= =======

The Company periodically reviews quantities of inventory on hand and
compares these amounts to expected usage of each particular product or product
line. In 2003, 2002 and 2001, respectively, $200,000, $411,000 and $533,000 were
recorded as a charge to cost of goods sold to provide for excess and obsolete
inventories. The Company records, as a charge to cost of goods sold, any amounts
required to reduce the carrying value of the inventory to net realizable value.
In 2003, 2002, and 2001, respectively, $389,000, $756,000 and $665,000 were
recorded as a charge to cost of goods sold to reduce the carrying value of
inventory to net realizable value.

21

PROPERTY, PLANT AND EQUIPMENT

The Company provides for depreciation using the straight-line method over
the assets' useful lives. The estimated useful lives for depreciation purposes
are as follows:

Buildings and improvements.......................................... 8-25 years
Machinery and equipment............................................. 2-8 years
Furniture and fixtures.............................................. 5-8 years

Depreciation expense was $1,062,000, $1,274,000 and $1,255,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.

Maintenance and repairs are charged to operations as incurred. When
equipment and improvements are sold or otherwise disposed of, the asset cost and
accumulated depreciation are removed from the accounts, and the resulting gain
or loss, if any, is included in the results of operations.

The Company evaluates long-lived assets such as intangible assets and
property, plant and equipment under Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets " (SFAS
144). This statement requires that long-lived asset and certain identifiable
intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. SFAS 144 requires (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale.
Management has assessed the implementation and determined that there is no
significant impact on the consolidated financial statements of the Company.

OTHER ASSETS

Other assets consist of the following:

000's 2003 2002
---- ----

Restricted cash $ 688 --
Deferred financing costs 553 416
Cash surrender value of life insurance 0 233
Goodwill 250 0
Intellectual property 260 0
Other 31 26
Accumulated Amortization (414) (362)
------ -----
Total 1,368 313
====== =====

The Company's restricted cash represents an interest bearing cash deposit
in an escrow account with our mortgage note holder that becomes available upon
the Company achieving two consecutive quarters of profitability.

Long-lived assets include property, plant and equipment, deferred financing
costs, goodwill and intellectual property. Deferred financing costs capitalized
in 2003, are being amortized over three years, the term of the note.
Amortization on deferred financing costs was $13,000, $25,000 and $7,000 in
2003, 2002 and 2001, respectively. Amortization on intellectual property
acquired in 2003 was $39,000. The intellectual property will be amortized over
five years.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in the consolidated financial
statements or tax returns. The amounts of deferred tax assets or liabilities are
based on the difference between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.

22

TRANSLATION OF FOREIGN CURRENCIES

Assets and liabilities of the Company's foreign operations are translated
from their functional currency into United States dollars at year end exchange
rates. Revenue and expense items are translated at weighted average rates of
exchange prevailing during the year. Gains and losses arising from translation
are accumulated as a separate component of stockholders' equity, as the
functional currency of the subsidiaries is their local currency, and the
reporting currency of the Company is the US dollar. Exchange gains and losses
(if any) arising from transactions denominated in foreign currencies are
included in income as incurred. Such exchange gains or losses were not material
during the periods presented.

PATENTS

The Company has patents in the United States and certain foreign countries
for some of its products and processes. No value has been assigned to these
patents in the accompanying consolidated financial statements.

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, delivery 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 cannot be
demonstrated until customer use, revenues are recognized upon acceptance.
Furthermore, revenues for products that require installation for which the
installation is essential to functionality or 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.

Applying the requirements of SAB No. 101 to future sales arrangements used
in the Company's thermal processing equipment sales may result in the deferral
of the revenue for some equipment sales. The Company continues to evaluate the
impact that SAB No. 101 might have on its sales transactions. However, there
will be no impact on the Company's cash flows from operations as a result of any
change.

The Company also has certain sales transactions for products, which are not
completed within the normal operating cycle of the business. It is the Company's
policy to account for these transactions using the percentage of completion
method for revenue recognition purposes when all of the following criteria
exist. (1) The Company has received the Customer's purchase order or entered
into a legally binding contract. (2) The Customer is credit worthy and
collection is probable or Customer prepayments are required at product
completion milestones or specific dates. (3) The sales value of the product to
be delivered is significant in amount when compared to the Company's other
products. (4) Product costs can be reasonably estimated; there is no major
technological uncertainty and the total engineering, material procurement,
product assembly and test cycle time extend over a period of six months or
longer.

Under the percentage completion method, revenues and gross margins to date
are recognized based upon the ratio of costs incurred to date compared to the
latest estimate of total costs to complete the product as a percentage of the
total contract revenue for the product. Revisions in costs and gross margin
percentage estimates are reflected in the period in which the facts causing the
revision 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 year ended December 31, 2003, $639,545 of revenue was recognized using
the percentage of completion method. For the year ended December 31, 2002,
$432,266 of revenue was recognized and for year ended December 31, 2001, $3.4
million of revenue was 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. In 2003, $263,107 was recorded as cost of goods
sold. In 2002 and 2001, $159,966 and $377,834, respectively, were recorded as a
charge to selling, general, and administrative expense.

23

RESEARCH, DEVELOPMENT AND ENGINEERING

Research, development and engineering costs are charged to expense as
incurred.

EARNINGS PER SHARE INFORMATION

Basic Earnings Per Share (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
outstanding that were not included in the determination of diluted EPS, because
their effect would be antidilutive, was 1,186,395 in 2003, 1,258,398 in 2002 and
1,050,812 in 2001.

RECENT ACCOUNTING DEVELOPMENTS

In May 2003, the Financial Accounting Standard Board (FASB) issued SFAS No.
150, Accounting for Certain Instruments with Characteristics of both Liabilities
and Equity, which established standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company's adoption of
the initial recognition and initial measurement provisions of SFAS No. 150,
effective June 1, 2003, did not have a material impact on the Company's results
of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, Derivatives and Hedging, an
Amendment of SFAS No. 133. This statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The changes in this Statement
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this Statement
clarified under what circumstances a contract with an initial net investment
meets the characteristic of a derivative of SFAS No. 133, clarifies when a
derivative contains a financing component, amends the definition of an
"underlying" to conform it to language used in FASB Interpretation (FIN) No. 45,
Guarantor's Accounting and Disclosure Requirement for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and amends certain other existing
pronouncements. Those changes will result in more consistent reporting of
contracts as either derivatives or hybrid instruments. This Statement is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The Company adopted SFAS
No. 149 effective July 1, 2003, which did not have any impact on the Company's
results of operations or financial position.

In January 2003, the Emerging Issues Task Force (EITF), published EITF
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, which requires
companies to determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting. In applying EITF No. 00-21, revenue
arrangements with multiple deliverables should be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values. This issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF No. 00-21 did not have any impact on the Company's
results of operations or financial position.

In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. Along with new disclosure requirements,
FIN 45 requires guarantors to recognize, at the inception of certain guarantees,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. This differs from the current practice to record a liability only
when a loss is probable and reasonably estimable. The recognition and
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
did not have a material effect on the Company's results of operations or
financial position.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, which addressed accounting for special-purpose and
variable interest entities. This interpretation was effective for financial
statements issued after December 31, 2002. In September 2003, the FASB issued a
Staff Position to allow a deferment of the effective date to the end of the
first interim or annual period ending after December 15, 2003 if certain
conditions were met. In December 2003, the FASB issued Interpretation No. 46R,
Consolidation of Variable Interest Entities, which addresses accounting for
special-purpose and variable interest entities and which superseded
Interpretation 46. The effective date of this interpretation is the end of the
first reporting period that ends after March 15, 2004, unless the entity is
considered to be a special-purpose entity in which case, the effective date is
the end of the first reporting period that ends after December 15, 2003.
Companies that have adopted Interpretation No. 46 prior to the effective date of
Interpretation No. 46R will either continue to apply Interpretation No. 46 until
the effective date of Interpretation No. 46R or apply the provisions of
Interpretation No. 46R at an earlier date. The Company believes that the
adoption of Interpretation No. 46 and No. 46R will not have a material impact on
the Company's consolidated financial position or results of operations.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -Transition and
Disclosure" (SFAS 148). This statement amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for years beginning after December 15, 2002. The
Company does not expect the adoption of SFAS 148 to have a material impact on
its operating results or financial position.

RECLASSIFICATION

Certain prior year financial statement information has been reclassified to
conform with the current year presentation.

24

(2) ACCRUED EXPENSES

Accrued expenses at December 31, 2003 and 2002 consisted of the following
(in thousands):

2003 2002
------ ------

Accrued commissions............................................ $ 454 $ 638
Accrued warranty............................................... 635 1,038
Accrued income taxes........................................... 125 92
Payroll and payroll taxes...................................... 309 631
Other.......................................................... 157 11
------ ------
$1,680 $2,410
====== ======

WARRANTIES

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, charged to cost of sales, based on anticipated
warranty claims at the time product revenue is recognized. The reserve for
warranty covers the estimated costs of material, labor and travel. Actual
warranty claims incurred are charged against 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 fiscal year ended December 31, 2003:

2003
-------

(in thousands)
Beginning Balance, December 31, 2002 .............................. $ 1,038
Plus accruals related to new sales ................................ 519
Less: warrant claims incurred ..................................... (525)
Less amortization of prior period accruals ........................ (397)
-------
Ending Balance, December 31, 2003 ................................. $ 635
=======

(3) DEBT, CAPITAL LEASES, COMMITMENTS AND CONTINGENCIES

Debt at December 31, 2003 and 2002 consisted of the following (in
thousands):

2003 2002
------ ------

Mortgage note payable........................................ $5,600 $4,298
Capital lease obligations, interest rates ranging
from 10.2% to 10.3%, net of interest of $4 in 2002........ -- 41
------ ------
5,600 4,339
Less current maturities...................................... 160 329
------ ------
$5,440 $4,010
====== ======

The Company entered into a new mortgage note payable in December 2003,
which is secured by the Company's land and building in Billerica, MA and
requires monthly payments of $38,269, including interest at 5.42%. This mortgage
note payable has a balloon payment of approximately $5,100,000 due at maturity
on December 26, 2006. The new mortgage note replaces a mortgage, which required
monthly payments of $53,922 including interest at 8.125% and required a balloon
payment of approximately $3,825,000 on July 1, 2004.

The capital lease obligations relate to various equipment leases used in
the operation of the business. The obligations under capital leases were settled
in 2003. Under the terms of the debt, the minimum repayments of long-term debt
by year are as follows (in thousands):

5.420%
MORTGAGE
--------

2004................................................................ $ 160
2005................................................................ 168
2006................................................................ 178
2007................................................................ 5,094
-------
$ 5,600
=======

25

The Company has a secured revolving line of credit with a bank that allows
for aggregate borrowings, including letters of credit, up to a maximum of $14.0
million against a borrowing base of secured accounts receivable and inventory.
The Company may elect to borrow at interest rates pegged to either the bank's
base rate or the LIBOR rate in effect from time to time. This loan agreement was
extended one year to May 31, 2007 in February 2004 and is subject to maintaining
certain financial covenants with which the Company is in compliance at December
31, 2003. No borrowings were outstanding under this agreement at December 31,
2003; at which time the available funds on the borrowing base formula was
approximately $6.9 million.

The Company conducts its UK operations in a facility that is under a
long-term operating lease expiring in March 2010. Rent expense under this lease
was approximately $196,000 in 2003, $170,000 in 2002 and $260,000 in 2001. The
Company has a lease of approximately $200,000 in rent expense each year through
March 2010. As of December 31, 2003, the future minimum lease commitment for
this facility is $1,250,000, payable as follows: $200,000 for each of the years
2004 through 2009 and $50,000 for 2010.

The Company is a party to various claims arising in the normal course of
business. Management believes the resolution of these matters will not have a
material impact on the Company's results of operations or financial condition.

(4) FOREIGN OPERATIONS

The following table shows the amounts (in thousands) and percentages of the
Company's revenues by geographic region, for the last three years:

2003 2002 2001
------------ ------------ ------------

United States...................... $ 6,838 24% $11,946 39% $19,294 41%
Europe............................. 5,413 19 5,207 17 11,764 25
Asia Pacific....................... 15,100 53 11,027 36 13,176 28
Other Americas..................... 1,139 4 2,451 8 2,823 6

(5) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

Statement of Financial Accounting Standards No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," requires disclosure
of any significant off-balance-sheet and credit risk concentrations. The Company
has no significant off-balance-sheet concentrations such as foreign exchange
contracts, option contracts or other foreign hedging arrangements. The Company
maintains the majority of its cash and cash equivalent balances with one
financial institution.

The principal financial instrument that potentially subjects the Company to
concentrations of credit risk is accounts receivable. The majority of the
Company's revenues are derived from customers in the electronics manufacturing
industry who are not required to provide collateral for amounts owed to the
Company. The Company's customers are dispersed over a wide-geographic area and
are subject to periodic review under the Company's credit policies. The Company
does not believe that it is subject to any unusual credit risks, other than the
normal level of risk attendant to operating its business.

Concentration of credit risk with respect to accounts receivable is limited
to certain customers to whom the Company makes substantial sales. To reduce its
credit risk, the Company routinely assesses the financial strength of its
customers. The Company maintains an allowance for potential credit losses, but
historically has not experienced any losses in excess of the loss allowance
related to individual customers or groups of customers in any particular
industry or geographic area.

One customer represented 6% of revenue in 2003, 16% of revenue in 2002 and
15% of revenue in 2001. As of December 31, 2003, there were no customers that
accounted for more than 10% of accounts receivable. As of December 31, 2002,
there were two customers that individually accounted for 10% and 13% accounts
receivable.

26

(6) INCOME TAXES

The components of (loss) income before (benefit) provision for income taxes
are as follows (in thousands):

YEARS ENDED DECEMBER 31,
-----------------------------
2003 2002 2001
------- ------- -------

Domestic......................................................................... $(7,288) $(8,804) $(5,912)
Foreign.......................................................................... 237 (83) (36)
------- ------- -------
Total............................................................................ $(7,051) $(8,887) $(5,948)
======= ======= =======

For the years ended December 31, 2003, 2002 and 2001, the Company's benefit
for income taxes were as shown below (in thousands):

FEDERAL STATE FOREIGN TOTAL
------- ------- ------- -------

December 31, 2003
Current ........................................................... $ (222) $ -- $ -- $ (222)
Deferred .......................................................... -- -- -- --
------- ------- ------- -------
$ (222) $ -- $ -- $ (222)
======= ======= ======= =======
December 31, 2002
Current ........................................................... $(1,949) $ 45 $ 55 $(1,849)
Deferred .......................................................... 34 -- -- 34
------- ------- ------- -------
$(1,915) $ 45 $ 55 $(1,815)
======= ======= ======= =======
December 31, 2001
Current ........................................................... $ (148) $ 38 $ 39 $ (71)
Deferred .......................................................... (2,013) (117) -- (2,130)
------- ------- ------- -------
$(2,161) $ (79) $ 39 $(2,201)
======= ======= ======= =======

The differences between the statutory United States federal income tax rate
of 34% and the Company's effective tax rate are as follows (in thousands):

YEARS ENDED DECEMBER 31,
-----------------------------
2003 2002 2001
------- ------- -------

Tax benefit at United States statutory rate .................................... $(2,397) $(3,022) $(2,009)
State and foreign income taxes, net of federal benefit.......................... (218) (310) (234)
Valuation Allowance ............................................................ 2,374 1,569 --
Non-deductible and other ....................................................... 19 (52) 42
------- ------- -------
Total benefit .................................................................. $ (222) $(1,815) $(2,201)
======= ======= =======

The components of the deferred tax assets (liabilities) at December 31,
2003 and 2002 (in thousands) are as follows:

2003 2002
-------- -------

Accelerated tax depreciation.............................................................. (132) 51
Inventory reserves........................................................................ 260 292
Deferred compensation..................................................................... 273 309
Accruals and other........................................................................ 359 534
Federal net operating loss carry forwards................................................. 2,578 --
State net operating loss carry forwards................................................... 487 265
Federal tax credit carry forwards......................................................... 118 118
-------- -------
Total deferred tax assets....................................................... 3,943 1,569
Valuation allowance............................................................. (3,943) (1,569)
-------- -------
Net deferred tax asset ................................................................... $ -- $ --
======== =======

The Company has state net operating loss carryforwards of approximately
$7,000,000 that expire between 2006 and 2021. The Company's federal net
operating loss carryforward of approximately $7,100,000 will expire in 2023.

The ability of the Company to fully realize deferred tax assets in future years
is contingent upon its success in generating sufficient levels of taxable income
to use the deductions underlying the assets. After an assessment of all
available evidence, including historical and projected operating trends, the
company recorded a full valuation allowance to offset the Company's deferred tax
assets due to the uncertainty surrounding their realization.

27

(7) EMPLOYEE BENEFITS

The Company has management incentive and profit sharing plans for its
executives and all of its employees. These plans provide for bonuses upon the
attainment of certain financial targets. Under these plans, $0, $0 and $15,000
were expensed in 2003, 2002 and 2001, respectively.

The Company has a deferred 401(k) contribution plan that is available to
cover all domestic employees of the Company. Subject to non-discriminatory
restrictions on highly compensated employees, participants can voluntarily
contribute a percentage of their compensation up to the plan limits, and the
Company, at its discretion, may match this contribution up to a stipulated
percentage. The Company's expense under the plan was $154,200, $64,500, and
$243,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

(8) STOCK OPTION AND PURCHASE PLANS

The Company has two stock option plans for employees, the 1993 Equity
Incentive Plan (1993 Plan), which expired in 2003 with 254,791 un-issued shares
and the 2003 Equity Incentive Plan (2003 Plan). These plans allow stock options
for employees. Under the terms of the plans, other stock awards can also be
granted at the discretion of the Company's Board of Directors. The Company also
has two stock option plans for non-employee directors, the 1989 Stock Plan for
Directors (1989 Plan) and the 1998 Stock Option Plan for Non-Employee Directors
(1998 Plan). Under each plan, the exercise price of the options is not less than
the fair market value at the date of the grant. Options expire from a minimum of
two years to a maximum of ten years from the date of the grant.

In May 2003, the shareholders approved the 2003 Equity Incentive Plan,
which allows up to 700,000 shares to be awarded (plus the addition of up to
300,000 options that could be forfeited under the expired 1993 Plan). Also in
May 2003, the shareholders approved an amendment to add 70,000 shares to the
1998 Stock Option Plan for Non-Employee Directors.

Shares available for future stock option grants, pursuant to these plans,
were 761,965 at December 31, 2003, 288,898 at December 31, 2002, and 548,179 at
December 31, 2001.

A summary of all stock option activity for the years ended December 31,
2003, 2002 and 2001 is as follows:

2003 2002 2001
---------------------- ---------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF PRICE PER OF PRICE PER OF PRICE PER
SHARES SHARE SHARES SHARE SHARES SHARE
--------- --------- --------- --------- --------- ---------

Outstanding at beginning of year . 1,258,398 $ 4.21 1,050,812 $ 4.83 944,460 $ 5.58
Granted .......................... 240,782 3.23 398,403 2.63 330,809 3.23
Exercised ........................ (114,145) 2.87 (51,695) 3.05 (22,172) 3.41
Forfeited ........................ (198,640) 3.59 (139,122) 5.12 (202,285) 5.87
--------- -------- --------- -------- --------- --------
Outstanding at end of year ....... 1,186,395 $ 4.24 1,258,398 $ 4.21 1,050,812 $ 4.83
========= ======== ========= ======== ========= ========
Options exercisable at end of year 499,237 $ 5.37 532,089 $ 4.73 377,103 $ 4.48
========= ======== ========= ======== ========= ========

At December 31, 2003 the outstanding options have exercise prices ranging
from $1.86 to $13.63 and a weighted average remaining contractual life of 4.0
years.

The following table summarizes information for options outstanding and
exercisable at December 31, 2003:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
PRICES NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- -------------- --------- -------------- -------------- -------- - ------------

$ 1.86 - 2.00 253,253 6.1 yrs $ 1.88 53,956 $ 1.87
2.53 - 2.88 12,404 5.0 yrs 2.61 4,500 2.75
3.10 - 4.00 575,409 4.5 yrs 3.40 154,355 3.27
4.14 - 5.55 157,828 1.4 yrs 5.02 146,551 5.02
6.01 - 9.38 138,400 2.0 yrs 9.16 103,050 9.19
10.13 - 13.63 49,101 2.1 yrs 10.38 36,826 10.38
--------- ------- ------ ------- ------
1,186,395 4.0 yrs $ 4.24 499,237 $ 5.37
--------- ------- ------ ------- ------

28

The Company has an Employee Stock Purchase Plan. Under the terms of the
plan, employees are entitled to purchase shares of common stock at the lower of
85% of fair market value at either the beginning or the end of each six-month
option period. A total of 500,000 shares have been reserved for issuance under
this plan, of which 127,715 remain available at December 31, 2003. During 2003,
a total of 28,225 shares were purchased at prices ranging from $1.58 to $1.67
per share.

The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option and purchase plans.
Accordingly, no compensation cost has been recognized related to the plans. Had
compensation cost for the plans been determined based on the fair value at the
grant dates for the awards under these plans consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income (loss) and
net income (loss) per share would have been reduced (increased) to the pro forma
amounts indicated below:

YEARS ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)

Net loss:
As reported................................. $(6,829) $(7,072) $(3,747)
Pro forma................................... (7,133) (7,394) (4,429)
Loss per basic share:
As reported................................. $ (0.97) $ (1.03) $ (0.54)
Pro forma................................... (1.01) (1.07) (0.64)
Loss per diluted share:
As reported................................. $ (0.97) $ (1.03) $ (0.54)
Pro forma................................... (1.01) (1.07) (0.64)

Pro forma compensation costs were estimated using the Black-Scholes option
pricing model using the following weighted average assumptions for grants in
2003, 2002 and 2001, respectively; a dividend yield rate of 0 for each year;
expected lives of 5.0 for each year; expected volatility of 67.13%, 72.3% and
68.2%; and risk free interest rates of 2.59%, 3.5% and 3.9%. The weighted
average fair value of options granted during 2003, 2002 and 2001 was $1.96,
$1.63 and $1.93, respectively.

As the SFAS No. 123 presentation has not been applied to options granted
prior to January 1, 1995, the resulting pro forma reduction in net earnings and
earnings per share may not be representative of what could be expected in future
years. The Company has adopted the disclosure provisions of SFAS 148.

(9) RELATED PARTY TRANSACTIONS

During 2003 and 2002, transactions were made between the Company and
certain related parties. These transactions included payments to one of the
Company's directors for consulting services of $5,000 and $15,000 in 2003 and
2002, respectively. The Company also had related party transactions with respect
to the purchase of certain software development and components from a company,
which is partially owned by one of the Company's key employees. The amount of
contract software and hardware purchased from this party was $649,000 and
$356,000 in 2003 and 2002, respectively.

(10) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
------- ------- -------
(IN THOUSANDS)

Cash paid (received) during the year for:
Interest .................................... $ 371 $ 367 $ 413
Income Taxes ................................ (1,922) 59 279

Non-cash disclosure:
Acquisition of Sagarus Robotics Corporation
Fair value of assets acquired ............... 540 -- --
Less fair value of liabilities assumed ...... (160) -- --
------- ------- -------
Cash paid ................................ 380 -- --

29

(11) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
that value.

a. Cash and Cash Equivalents - The carrying amount of these assets on the
Company's Consolidated Balance Sheets approximates their fair value because of
the short maturities of these instruments.

b. Receivables, Payables and Accruals - The recorded amounts of financial
instruments, including accounts receivable, accounts payable, and accrued
liabilities, approximate their fair value because of the short maturity of these
instruments.

c. Long-term Debt and Capital Lease Obligations - The fair value of
long-term indebtedness as of December 31, 2003 and 2002 was approximately
$5,606,000 and $4,580,000, respectively, based on a discounted cash flow
analysis, using the prevailing cost of capital for the Company as of each date.
The interest rates used in the calculation were 5.4% and 3.9% for 2003 and 2002,
respectively.

(12) 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, power generation, automotive and
other industries. This business segment includes the supply of solder reflow
systems used for surface mount applications in printed circuit board assembly.
Thermal processing equipment is used in: low temperature curing/encapsulation;
hybrid integrated circuit manufacturing; integrated circuit packaging and
sealing; and processing multi-chip modules. In addition, the thermal process
equipment is used for sintering nuclear fuel for commercial power generation, as
well as brazing and the sintering of ceramics and powdered metals, and the
deposition of precise thin film coatings. The business segment's customers are
multinational original equipment manufacturers and contract manufacturing
companies.

The accounting policies of segment reporting are the same as those
described in Note 1 "Summary of Significant Accounting Policies." The Company
evaluates the performance of operating results taken as a whole.

(13) RESTRUCTURING, EXECUTIVE RETIREMENT AGREEMENT

The Company recorded a $360,000 restructuring charge in the third quarter
2002. This charge is solely related to severance costs associated with the
reduction of 44 employees across all lines of the Company. All payments were
made in 2002

The Company recorded a $190,000 restructuring charge in the second quarter
2003. This charge was solely related to severance costs associated with the
reduction of 15 non-production employees. All payments were made in 2003.

In 2002, the Company entered into an executive retirement agreement with
its former President and Chief Executive Officer. Under the terms of the
agreement, the former President and CEO will provide, at the Company's request
and subject to certain limitations, consulting services over a four-year period
ending June 2007, for $200,000 per year. The Company or the former President and
CEO may terminate the consulting agreement at any time. If terminated by the
Company, the former President and CEO is entitled to a lump sum payment for the
remaining amounts due through June 2007; if terminated by the former President
and CEO, he is entitled to the same lump sum payment discounted as specified in
the agreement. The agreement also provided for an initial bonus payment of
$100,000 and the grant of 75,000 shares of unrestricted common stock.

30

In the fourth quarter of 2002, the Company recorded a $990,000 charge in
connection with the above-described portions of the agreement.

As part of the agreement, the Company granted the former President and CEO
the option to buy out the Company interest in the cash value of the split dollar
life insurance executed by the Company by paying an amount equal to the sum of
the Company's interest, discounted by a rate of 3% over a period equal to the
number of remaining years in his life expectancy at the time of the buy out as
established in trade publications for the life insurance industry. In December
2003, the former President and CEO exercised his option to buy out the split
dollar policy and paid approximately $117,000. The Company recorded a loss of
approximately $115,000 as a selling, general and administrative expense in the
accompanying consolidated statement of operations related to the sale of the
cash surrender value of life insurance.

Also as part of the agreement, the Company will compensate the former
President and CEO $100,000 per year in connection with his responsibilities as
Chairman of the Board for the period July 2003 through June 2007. The Company
will recognize these amounts as the services are performed. The agreement also
provides for certain settlement amounts if the former President and CEO's
responsibilities as Chairman of the Board are terminated.

(14) STOCK COMPENSATION

During 2001, the Company granted 20,000 shares of restricted stock to an
employee. The fair value of the shares at the date of the grant was $122,000.
This stock vests over a two year term. The Company has recorded a compensation
charge of $15,000, $61,000 and $46,000 in 2003, 2002 and 2001 respectively,
related to this grant.

During 2002, the Company granted 20,000 shares of restricted stock to the new
President and CEO. The fair value of the shares at the date of the grant was
$74,000. This stock vests over a two year term. The Company has recorded a
compensation charge of $38,000 and $18,000 in 2003 and 2002 respectively,
related to this grant. At December 31, 2003, the unvested portion of this award
was $18,000.

(15) ACQUISITION

On April 2, 2003, the Company purchased the assets of Sagarus Robotics
Corporation (Sagarus) in order to expand the Company's product offerings. The
business combination has been accounted for under the purchase method. The
purchase price, including cash payments and liabilities assumed of $160,000,
totaled $540,000. The financial statements reflect the operations of Sagarus
from the date of acquisition. The excess of the purchase price over the fair
value of the net assets was allocated to goodwill.

The purchase price has been allocated based upon an estimate of the fair
value of assets acquired and liabilities assumed as follows:

2003
--------

Inventory............................................................ $ 20,000
Property, plant and equipment........................................ 10,000
Intellectual property................................................ 260,000
Goodwill............................................................. 250,000
--------
$540,000
========

Goodwill is tested for impairment annually. Based on management's
estimates, no impairment charges have been recorded as of December 31, 2003.

The pro-forma presentation, to disclose the effects on the Company's
results of operations for the years ended December 31, 2002 and December 31,
2003 as if the acquisition had been completed as of January 1, 2002, has not
been presented as the effect is immaterial.

31

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors
of BTU International, Inc.

We have audited the accompanying consolidated balance sheets of BTU
International, Inc. (a Delaware corporation) and subsidiaries (the Company) as
of December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity, comprehensive income, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2003 and 2002, and the consolidated results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.

VITALE, CATURANO & COMPANY, P.C.

February 20, 2004
Boston, Massachusetts

32

The following Report of Independent Public Accountants is a copy of the
previously issued Arthur Andersen LLP report. Arthur Andersen has not reissued
this report or consented to the inclusion of this report in this filing. The
financial statements as of December 31, 2000 and year ended 1999 are not
presented herein.

To the Shareholders and Board of Directors of BTU International, Inc.:

We have audited the accompanying consolidated balance sheets of BTU
International, Inc. (a Delaware corporation) and subsidiaries (the Company) as
of December 31, 2001 and 2000, and the related consolidated statements of
operations, comprehensive income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BTU International,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 1, 2002

33

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

On June 10, 2002, the Audit Committee of BTU International, Inc. ("BTU")
recommended, and the Board of Directors of BTU decided to no longer engage
Arthur Andersen LLP ("Andersen") as BTU's independent public accountants.

Andersen's reports on BTU's consolidated financial statements for each of
the years ended December 31, 2001 and December 31, 2000 did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles. During the years ended
December 31, 2001 and December 31, 2000 and through the date hereof, there were
no disagreements between BTU and Andersen concerning any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to Andersen's satisfaction, would have caused
Andersen to make reference to the subject matter in connection with its report
on BTU's consolidated financial statements for such years. There were no
reportable events as defined in Item 304 (a)(l)(v) of Regulation S-K.

On June 27, 2002, the Audit Committee of BTU International, Inc. ("BTU")
recommended, and the Board of Directors of BTU agreed to engage Vitale, Caturano
& Company PC to serve as BTU's new independent public accountants for the fiscal
year 2002 and 2003.

During the years ended December 31, 2001 and December 31, 2000 and through
the date hereof, BTU did not consult Vitale, Caturano & Company PC with respect
to the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
BTU's consolidated financial statements, or any other matter that was either the
subject of disagreement (as defined in Item 304 (a)(l)(iv) of Regulation S-K) or
a reportable event (as described in Item 304 (a)(l)(v) of Regulation S-K).

ITEM 9A. CONTROLS AND PROCEDURES

Our disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports that we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. The Chief Executive Officer and the Chief
Accounting Officer have reviewed the effectiveness of our disclosure controls
and procedures as of December 31, 2003 and have concluded that the disclosure
controls and procedures are effective. There was no change in our internal
control over financial reporting that occurred during the fourth fiscal quarter
that has materially affected or is reasonably likely to materially affect our
internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to the executive officers of the Company is included
in Item 4A of Part I.

Information relating to the directors of the Company is included under the
caption "Election of Directors" in the 2004 Proxy Statement for BTU
International, Inc. and is incorporated herein by reference.

Information related to compliance with Section 16(a) of the Exchange Act is
included under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the 2004 Proxy Statement for BTU International, Inc. and is
incorporated here by reference.

We have adopted a code of ethics that applies to all employees, as well as
our principal executives, that is available on our website @ www.BTU.com.

ITEM 11. EXECUTIVE COMPENSATION

Information relating to executive compensation is included under the
caption "Executive Compensation" in the 2004 Proxy Statement for BTU
International, Inc. and is incorporated herein by reference.

34

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information relating to the security ownership of certain beneficial owners
and management is included under the caption "Beneficial Ownership of Shares"
and information relating to equity compensation plan information is included
under the caption "Equity Plan Compensation Information" in the 2004 Proxy
Statement for BTU International, Inc. and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information relating to the principal accounting fees and services is
included under the caption "Principal Accounting Fees and Services" in the 2004
Proxy Statement for BTU International, Inc. and is incorporated herein by
reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. Financial Statements. The financial statements listed in Item 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, above are filed as part
of this Annual Report on Form 10-K.

2. Financial Statement Schedule. The financial statement schedule II -
VALUATION AND QUALIFYING ACCOUNTS is filed as part of this Annual
Report on Form 10-K.

3. Exhibits. The exhibits listed in the accompanying Exhibit Index are
filed as part of this Annual Report on Form 10-K.

(b) Reports on Form 8-K

On October 17, 2003, the Company furnished a Current Report on Form 8-K to
notify shareholders of the Company's release of its financial results for
quarter ended September 28, 2003.

35

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To BTU International, Inc.:

We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements included in BTU
International, Inc.'s and subsidiaries (the Company's) annual report to
stockholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 20, 2004. Our audit was made for the purpose of
forming an opinion on those consolidated financial statements taken as a whole.
The schedule listed in the preceding index is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements and, in our opinion, based on our audit, fairly states, in
all material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole for the years ended
December 31, 2003 and 2002.

Vitale, Caturano & Co., P.C.

March 30, 2004
Boston, Massachusetts

36

Schedule II

BTU INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)

For the Year Ended December 31, 2003
------------------------------------

ADDITIONS
---------------------
BALANCE CHARGED
AT TO COSTS CHARGED BALANCE
BEGINNING AND TO OTHER DEDUCTIONS- AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (A) OF PERIOD
- ----------- --------- -------- -------- ----------- ---------

Allowance for doubtful
Accounts $ 172 $-- $-- $-- $ 172

For the Year Ended December 31, 2002
------------------------------------

ADDITIONS
---------------------
BALANCE CHARGED
AT TO COSTS CHARGED BALANCE
BEGINNING AND TO OTHER DEDUCTIONS- AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (A) OF PERIOD
- ----------- --------- -------- -------- ----------- ---------

Allowance for doubtful
Accounts $ 230 $ 90 $ -- $ 148 $ 172

For the Year Ended December 31, 2001
------------------------------------

ADDITIONS
---------------------
BALANCE CHARGED
AT TO COSTS CHARGED BALANCE
BEGINNING AND TO OTHER DEDUCTIONS- AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (A) OF PERIOD
- ----------- --------- -------- -------- ----------- ---------

Allowance for doubtful
Accounts $ 206 $ 24 $ -- $ -- $ 230

(A) Amounts indicated as deductions are for amounts charged against these
reserves in the ordinary course of business.

37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 2004 By: /s/ MARK R. ROSENZWEIG
Mark R. Rosenzweig, President, Chief Executive
Officer (principal executive officer) and
Director

Date: March 30, 2004 By: /s/ THOMAS P. KEALY
Thomas P. Kealy, Vice President Corporate
Controller and Chief Accounting Officer
(principal financial and accounting officer)

Date: March 30, 2004 By: /s/ PAUL J. VAN DER WANSEM
Paul J. van der Wansem President, Director
and Chairman of the Board of Directors

Date: March 30, 2004 By: /s/ DR. JEFFREY CHUAN CHU
Dr. Jeffrey Chuan Chu, Director

Date: March 30, 2004 By: /s/ JOSEPH F. WRINN
Joseph F. Wrinn, Director:

Date: March 30, 2004 By: /s/ JOHN E. BEARD
John E. Beard, Director

38

EXHIBIT INDEX

The following designated exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission under the Securities Act of 1933 and the Securities Exchange Act of
1934 and are referred to and incorporated herein by reference to the following
SEC Filings: Registration Statement Filing on Form S-1 ("33-24882"), the annual
report as reported on the 1989 Form 10-K ("1989 10-K"), the annual report as
reported on the 1991 Form 10-K ("1991 10-K"), the annual report as reported on
the 1992 Form 10-K ("1992 10-K"), the annual report as reported on the 1993 Form
10K ("1993 10-K"), the annual report as reported on the 1994 Form 10K ("1994
10-K"), the annual report as reported on the 1999 Form 10K ("1999 10-K"),Or the
quarterly report as reported on 9-28-97 Form 10Q ("9-28-97 10-Q") or the
quarterly report as reported on 6-28-98 Form 10Q(6-28-98 10-Q). All exhibits
incorporated by reference from the Company's annual or quarterly reports are
from file no. 0-17297.

SEC
EXHIBIT DOCKET
------- -----------

EXHIBIT 3. ARTICLES OF INCORPORATION AND BY-LAWS

Incorporated herein by reference:

3.1 Amended and Restated Certificate of Incorporation. 3.1 7-1-01 10-Q

3.2 By-Laws. 3.2 33-24882

EXHIBIT 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING DEBENTURES

Incorporated herein by reference:

4.0 Specimen Common Stock Certificate. 4.0 33-24882

EXHIBIT 10. MATERIAL CONTRACTS

*10.13 1988 Employee Stock Purchase Plan. 10.13 1999 10-K

*10.15 1989 Stock Option Plan for Directors. 10.15 1999 10-K

*10.37 BTU International, Inc. 1993 Equity Incentive Plan 10.37 1999 10-K

10.39 BTU (UK) Limited and RD International (UK) Limited underlease, 10.39 1994 10-K
relating to Unit B15 Southwood Summit Centre

10.42 Mortgage note between BTU International, Inc. and John Hancock
Mutual Life Insurance Company, dated June 30, 1997 10.42 9-28-97 10-Q

*10.44 Amendment to the 1993 Equity Incentive Plan 10.44

*10.45 1998 Stock Option Plan for Non-Employee Directors 10.45 1999 10-K

*10.47 Amendment No. 1 to 1988 Employee Stock Purchase Plan
dated June 15, 1989 10.47 1999 10-K

*10.48 Amendment No. 2 to 1988 Employee Stock Purchase Plan
dated February 20, 1991. 10.48 1999 10-K

*10.49 Amendment No. 2 to 1993 Equity Incentive Plan 10.49 1999 10-K

10.50 Loan Agreement dated June 26, 2002 with Sovereign Bank 10.50 6-30-02 10-Q

*10.51 Employment Contract between the Company and Mark Rosenzweig 10.51 9-29-02 10-Q

*10.52 Executive Retirement Agreement 10.52 2002 10-K

*10.53 2003 Equity Incentive Plan 2003 Proxy Statement

Filed herewith:

10.54 Mortgage note with Salem Five dated December 23, 2003

10.55 Amendment No. 1 dated January 28, 2004 to Loan Agreement
dated June 26, 2002 with Sovereign Bank

EXHIBIT 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS

Filed herewith:
11.0 Calculation of net income per common share

EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT

Filed herewith:
21.0 Subsidiaries of the Registrant.

EXHIBIT 23. CONSENTS OF EXPERTS AND COUNSEL

Filed herewith:
23.1 Consent of Vitale, Caturano & Company P.C.
23.2 Explanation Concerning Absence of Current Written Consent of
Arthur Andersen LLP
31.1 Certification
31.2 Certification
32.1 Section 906 Certification
32.2 Section 906 Certification

* designates management contracts or compensatory Plans or agreements.

39