<PAGE>


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 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: May 31, 2000

                                      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: 0-23996

                           SCHMITT INDUSTRIES, INC.
            (Exact name of registrant as specified in its charter)

           Oregon
(State or other jurisdiction of                        91-1151989
incorporation or organization)            (IRS Employer Identification Number)

                           2765 N.W. Nicolai Street
                            Portland, Oregon 97210
               (Address of principal executive offices) (Zip Code)

                                (503) 227-7908
               (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

    Title of each class          Name of each exchange on which registered
---------------------------   -----------------------------------------------
           None                                    None

Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock - no par value
                            (Title of each class)

         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 registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]

         As of August 1, 2000, the aggregate market value of the registrant's
Common Stock held by nonaffiliates of the registrant was $19,348,981 based on
the closing sales price of the registrant's Common Stock on the Nasdaq
National Market. On that date, there were 8,255,389 shares of Common Stock
outstanding.

         Portions of the registrant's 2000 Annual Report to Shareholders are
incorporated by reference into Parts II and IV hereof, and portions of the
registrant's definitive Proxy Statement for its 2000 Annual Meeting of
Shareholders are incorporated by reference into Part III hereof.



<PAGE>



                                    PART I

ITEM 1.  BUSINESS

INTRODUCTION

The Company (an Oregon corporation) designs, assembles and markets
computer-controlled balancing equipment for use primarily by the machine tool
industry. Through its wholly owned subsidiary, Schmitt Measurement Systems,
Inc. ("SMS"), a Montana corporation, the Company designs, manufactures and
markets precision laser measurement systems. The Company acquired its
original balancing equipment technology pursuant to a series of agreements
from 1987 through 1991. The patented technology has been substantially
enhanced and advanced by the Company in the past decade. The Company also
sells and markets its products in Europe through its wholly owned
subsidiaries, Schmitt Europe Ltd. ("SEL") located in the United Kingdom and
Schmitt Hofmann Systems GmbH ("SHS") located in Germany. The Company's
executive offices are located at 2765 N.W. Nicolai Street, Portland, Oregon
97210, and its telephone number is (503) 227-7908.

BALANCING PRODUCTS

The Company's principal product is the Schmitt Dynamic Balance System (the
"SBS System"). It consists of a computer control unit, sensor,
spindle-mounting adapter, and balance head. It is designed to be an
inexpensive, yet highly accurate, permanent installation on grinding
machines. Currently, the SBS System is beginning to be evaluated by
manufacturers for additional applications including large electric motors,
industrial fans, industrial brushing devices, turbines and similar devices.

The SBS System is fully automated and consequently the user does not have to
pre-balance such devices as grinding wheels. This reduces the setup time of
such operations and ensures a smoother and more efficient operation.
Operating on a principle of mass compensation for wheel imbalance, the
balance head contains two movable eccentric weights, each of which is driven
by electric motors through a precision gear train. These weights can be
repositioned to offset any imbalance in a grinding wheel or other
application. Imbalance or vibration is picked up by the sensor that feeds a
signal to a controller that filters the signal by revolutions per minute. The
controller then drives the two balance head weights in a direction that
reduces the amplitude of the vibration signal. When the weights are
positioned to achieve the lowest vibration level, the balance cycle is
complete.

Notable features of the SBS System include its ability to fit almost all
machines, ease of installation, compact and modular construction, ability to
balance a wheel while on a machine, elimination of wheel vibration, automatic
monitoring of balancing, display in both English and metric systems,
instrument grade calibration, short balance process, measurement of both
displacement and/or velocity, and minimal user maintenance.

Benefits to the system user include improved quality of finished parts, ease
of product adaptation, minimal downtime, complete and ready installation,
elimination of static balancing, longer life for grinding wheels, diamond
dressings and spindle bearings, the ability to balance within 0.02 microns
and its adaptability to all types of machines.

The precision grinding industry has an established worldwide presence in all
industrialized countries. In those countries there are three major market
segments: machine tool builders, rebuilders and grinding machine users.

                                       2


<PAGE>


MACHINE TOOL BUILDERS - This segment consists of companies throughout the
world who design and manufacture a variety of cylindrical, surface and
specialty application grinding machines that are sold worldwide. SBS System
products are distributed to a variety of world markets through OEM (original
equipment manufacturer) accounts, where a special pricing (20%) discount is
offered to the machine builder if that company incorporates the SBS System
into its machine.

Examples of some of well-known worldwide machine tool builders who have
offered and/or installed the SBS System include ANCA (Australia), Bryant
Grinders Corporation (U.S.), Blohm Incorporated (U.S.), Blohm GmbH (Germany),
Capco Machinery (U.S.), Cincinnati Milacron (U.S.), Ecotech/SMTW
(China/U.S.), Gold Crown Machinery (U.S.), Gleason Works (U.S.), Litton
IAS/Landis Grinding (U.S.), Micron Machinery Limited (Japan/U.S.), Normac
Incorporated (U.S.), NTC Toyama America (U.S./Japan), Okomoto (Japan), Okuma
Machine (Japan), Royal Master Grinders (U.S.), Shigiya Machine (Japan),
Sumitomo Heavy Industry (Japan), CETOS Hostivar (Czech Republic), TOS Holice
(Czech Republic), Toyoda Machine (Japan) and Weldon Machine Tool (U.S.).

One successful marketing channel to tool builders is through grinding machine
users. Those customers use the SBS System and enjoy the benefits from that
product. When purchasing new systems from OEM's, they often request that SBS
products be included with the new equipment.

MACHINE TOOL REBUILDERS - These customers, found in all industrial nations,
develop their business with users by offering to completely update and
refurbish older machine tools. These rebuilders typically tear the old
machine apart and install new bearings, electronics, and advanced features,
such as the Schmitt Dynamic Balancing System. The Company currently sells its
products directly to all major machine rebuilders in the U.S. and Western
Europe.

GRINDING MACHINE USERS - These end users become aware of the SBS System
through trade shows, trade magazine advertising, distributors, field
representatives, referrals and new machine suppliers.

Precision grinding is increasing as a worldwide method of material removal
and processing. Therefore, the Company believes there may be an increase in
market growth and an increase in the need for automatic balancing. Precision
grinding is necessary in all major manufacturing areas such as the automotive
industry (camshafts, crankshafts, valves), bearings (roller and tapered
types), ceramics (precision shaping), electric motors (shafts), pumps (shafts
and turbines), aircraft (engine parts), and general manufacturing.

The Company's business is conducted with many customers located throughout
the world. Examples of some of the more well known of these include Black &
Decker, Briggs and Stratton, Caterpillar Inc., Daewoo International Corp.,
Eaton Corporation, Ford Motor Company, General Electric Corp., General
Motors, Ingersoll Rand, Sumitomo Heavy Industries, Texas Instruments, The
Timken Company, Torrington, TRW Automotive Components and Westinghouse
Electric Corp.

The acquisition of SHS added balancer designs to the Company's worldwide
product line. The SHS internal spindle balancers and ring balancers add to
the total balancer package available from the Company. These proven designs,
along with the original fluid-based balancer, allow Schmitt to broaden its
machine applications.

In Fiscal 1998, 1999 and 2000, net sales of the Company's balancing products
totaled $7,532,112, $7,377,879, and $7,245,689 respectively. Net sales of
balancing products accounted for 71% of the Company's revenue in Fiscal 1998,
93% in Fiscal 1999 and 82% in Fiscal 2000. See Note 8 to Consolidated
Financial Statements.

                                       3


<PAGE>


COMPETITION:

Management believes the SBS System is one of few fully automatic balancing
systems marketed in the world. Most other competitive balancing products
require special setup and training or calibration to the specific machine.
The Company believes the SBS System is currently the only balancing product
on the market that fits all machines with wheel sizes from 6 to 48 inches in
diameter and a spindle rpm of 500 through 7,500.

Competitive products include European manufacturers building water balancers
and electromechanical balancers similar to the SBS System. Water balancers,
with expensive plumbing and water chambers machined into the wheel hub, are
currently priced about 1.5 times the level of the SBS System. The machines
are disassembled and parts remachined or replaced within the spindle
assembly, a process that takes from one to two days, a time far longer than
required to install the SBS system. The system is "tuned" or "calibrated" to
the machine by a factory service technician. Although water systems are
unable to balance at low rpm, they work at mid- and high-speeds when properly
monitored. Compare this to SBS systems that require little or no monitoring
by the operator. This technology is the oldest in the market and is employed
in the SHS-installed systems. The Company considers European
electromechanical balancers its major competition due to their established
base in Europe.

Several European companies located primarily in Switzerland, Germany, Spain and
Italy produce electromechanical balancers similar to the SBS System. These
European balancers have electronic deficiencies that render them less effective
in solving essential balancing requirements. They cannot achieve the consistent
low balance levels obtained by the SBS System and cannot operate effectively at
500 rpm (low speed) or at 7,500 rpm (high speed) as the SBS system can. In
addition, these balancers have inferior brush and cable assemblies that cause
down time and high maintenance. None of these companies currently can compete
effectively with the Company in providing mounting adapters for all grinding
machines.

The SBS System list price is $7,995 worldwide. Water balancers produced by
German companies other than SHS are priced at $9,000 to $11,000, and
electromechanical systems are priced at $8,000 to $10,000 worldwide.
Management market surveys indicate customers perceive the value of an
automatic balancer to be approximately $8,000; therefore, Company pricing is
geared to obtaining a dominant market position and meeting competitive
supplier prices. The market strategy is to establish the SBS System as the
foremost product with the best quality, reliability and performance and
superior economic value.

SCHMITT MEASUREMENT SYSTEMS, INC.

SMS manufactures and markets a line of laser-based, precision measurement
systems and operates a precision light scatter measurement laboratory
utilized by third-party equipment manufacturers and others.

Light scatter technology involves using lasers, optics and detectors to throw
a beam of light on a material sample and record its reflection/transmission.
Analysis of light scatter information can determine material characteristics
such as surface roughness, defects and dimensional sizing without introducing
contaminants and causing changes to the tested material.

The principal products of SMS are laser-based measurement products and
technology applicable to both industrial and military markets. The Company
has used the patents, patent applications, trademarks and other proprietary
technology to successfully refocus the marketing efforts into industrial
markets, including electronics, computer disk manufacturers and flat-panel
display manufacturers.

                                       4


<PAGE>


In Fiscal 1998, 1999 and 2000, net sales of SMS products totaled $3,093,972,
$579,844 and $1,608,567 respectively. Net sales of SMS products accounted for
29% of the Company's revenue in Fiscal 1998, 7% in Fiscal 1999 and 18% in
Fiscal 2000.

SMS operates four product lines: laser-based light-scatter measurement
products, research products, a light-scatter measurement laboratory and other
laser alignment products.

DISK MEASUREMENT PRODUCTS:

These products use proprietary laser light scatter technology to perform
non-contact surface measurement tests that quantify surface micro-roughness
in a rapid, accurate, repeatable and non-destructive manner. Products are
sold to manufacturers of disk drives and silicon wafers, both industries with
fabrication processes that require precise and reliable measurements.

Computer hard disks require exact manufacturing control and a narrow
tolerance band for acceptable roughness. The read/write head flies over the
disk drive surface on a cushion of air generated when the rough surface of
the rotating disk pulls air under the head. If the surface is too smooth, the
head may stick or bind to the disk. If it is too rough, the head will fly too
far from the disk surface, causing a reduction in data density or storage
capacity. The DUV, TMS and DTM product series meet the challenges of disk
drive manufacturers. Customers of the DTM and TMS series include Seagate
Substrates, HMT Technology Corporation, Western Digital and Komag, Inc.

The original TMS-2000 (Texture Measurement System) product, the world's
fastest and most accurate non-contact texture measurement system,
revolutionized disk-manufacturing technology. The product is currently used
worldwide by most major disk drive manufacturers and provides fast, accurate
and repeatable microroughness measurements and quadruples production
throughput when compared to other testing devices.

The DTM 2000 (Dual Texture Measurement System) is the fastest, most accurate,
non-contact automated texture measurement system in the world. This product
provides disk drive manufacturers with affordable inspection of all disks
produced. The advanced system is ideally suited for testing in both
production and quality control applications and testing speeds are compatible
with most in-line production processes.

In fiscal 2000 the Company developed the TMS-2000-DUV product for the disk
drive market. Manufacturers in that industry have always faced and continue
to face increasing demands for products with greater storage capacity and
improved performance and reliability. To meet these demands, the industry is
planning to produce a large portion of disk drives using glass substrates
rather than aluminum. Manufacturers will require the technology and products
to measure surface roughness of these substrates to the same exact levels as
those that measure aluminum substrates. The Deep Ultra-violet light (DUV)
technology and product uses the patented light scatter technology to measure
the surface roughness of glass substrates to levels less than one Angstrom
(the point of a needle is one million Angstroms in diamter). Initial sales
are expected in fiscal 2001.

The capabilities of these products were enhanced significantly in Fiscal 1999
with the development and introduction of the "RC" series. This product uses
light scatter technology to simultaneously measure roughness of the disk
surface in two directions. Radially, when the read/write head is moving to
another disk sector and circumferentially, when the read/write head is
processing information on the disk. The two separate roughness levels are
required so the head can operate correctly. This measurement method was not
possible until developed by Schmitt and is not possible through any other

                                       5


<PAGE>


cost effective measurement means. Surface roughness can now be measured to
levels below 0.5 Angstroms.

SILICON WAFER MEASUREMENT PRODUCTS:

The TMS-2000W and TMS-3000W (Texture Measurement Systems) provide fast,
accurate, repeatable measurements for manufacturers of silicon wafers,
computer chips and memory devices. This industry demands manufacturing
precision to increase performance and capacity and the TMS-2000W and
TMS-3000W help achieve these goals. Silicon wafers are carefully cut and
polished to provide the base upon which a computer or memory chip is produced
and therefore, chip manufacturing is extremely dependent on the beginning
surface roughness of the wafer. Since all silicon wafers exhibit a
microscopic level of surface roughness, stemming from chemical deposition,
grinding, polishing, etching, or any number of other production techniques,
some method of measuring these surface characteristics is required. The wafer
measurement products provide a way for SMS customers in this industry to
quantify and control their manufacturing process. The system provides
measurements to a few hundredths of an angstrom, a level unachievable by
other testing devices.

TESTING LABORATORY:

SMS provides a highly advanced, extremely precise measurement services
laboratory to a wide variety of industrial and commercial businesses that
require precise measurements achievable only with advanced laser light
scatter technology. The laboratory uses three SMS CASI Scatterometers for
measuring surface roughness. The true value of the laboratory is not only its
extremely precise measurement capability but also the test item is not
altered, touched or destroyed. Thus, the laboratory is widely used by the
semiconductor and computer hard disk industries, as well as manufacturers of
critical optical components in aerospace and defense systems. Customers of
the laboratory have included Aerojet, AT&T Bell Labs, Eastman Kodak, General
Electric, IBM, NASA and dozens of other industrial companies, universities
and government agencies.

While total revenue from the laboratory is a small percentage of SMS's
business, use of the laboratory by customers' leads to orders for SMS's
laser-based light scatter measurement products. Therefore, it represents one
of the best marketing channels of current and future products. Existing
products being developed in conjunction with the measurement services
laboratory are being marketed to a variety of industrial customers.

RESEARCH PRODUCTS:

These products are sold to companies and institutions involved in research
efforts. The CASI Scatterometers are angle-resolved BRDF measurement
instruments providing customers with precise roughness measurements of
optical surfaces, diffuse materials, semiconductor wafers, magnetic storage
media and precision-machined surfaces, as well as surfaces affecting the
cosmetic appearance of consumer products. A Scatterometer uses ultraviolet or
infrared laser light as a nondestructive probe to measure surface quality,
optical performance, smoothness, appearance, defects and contamination on a
wide variety of materials.

The sample is mounted on stages capable of moving bidirectionally and/or in
rotation. The detector sweeps around the sample in the incident plane
measuring scattered and specular light. During the scan, the computer
controls gain, filter and aperture changes through user-defined parameters.
The instrument background is measured separately and can be compared with the
sample data. Results print on the HP

                                       6


<PAGE>


PaintJet printer as viewgraphs or publication-ready figures. Customers
include Boeing, The U.S. Navy and Pratt & Whitney.

OTHER MEASUREMENT PRODUCTS:

The uScan System consists of a hand-held control unit, an interchangeable
measurement head and a separate charging unit. To perform a measurement, the
operator places the measurement head on the objective area and presses a
button. Each measurement takes less than five seconds. The results are
displayed and stored in system memory. The uScan can store 700 measurements
in 255 files and provides the capability to program pass/fail criteria.
Software is available for control, analysis and file conversion. From a
single measurement, a user can determine RMS surface roughness, reflectance
and scatter light levels (BRDF) on flat or curved surfaces under any lighting
conditions.

LASER ALIGNMENT SYSTEMS:

The Auto-Collimating Alignment Laser System - Model 2002 is an extremely
accurate laser alignment system. The incorporation of a solid-state laser
diode provides increased beam stability and eliminates warm-up time. The
unique SMS See-Thru target design completely eliminates beam displacement and
power loss. The addition of an operator selectable auto-collimating feature
provides one arc second accuracy over a large angular range. A microprocessor
automates system configuration. A new bus interconnect reduces setup time and
allows up to seven operator selectable targets, reducing time required to
perform measurements. A complete Model 2002 system consists of an
auto-collimating laser, power supply, digital display, See-Thru and end
targets, carrying case and cable assemblies.

BUSINESS AND MARKETING STRATEGY

The Company designs, assembles and markets all of its products. The Company's
operations are divided into a number of different areas. The Vice President
of Operations directs the production, and is responsible for all assembly,
purchasing and production engineering. The Product Marketing Division is
responsible for the sale of SBS System products and is managed by the
President/CEO and four Marketing Managers. Three of the Marketing Managers
are responsible for domestic sales while the fourth is responsible for sales
in Mainland China and Korea. The President/CEO is responsible for sales in
Europe and also oversees the efforts of the four Marketing Managers. The
technical services division is responsible for providing technical support to
customers and is managed by the Vice President of Operations. Finally, there
is a research and development group supervised directly by the President/CEO
and the Vice President of Operations.

The Company markets and sells the SBS System in a variety of ways. First, the
Company uses the conventional channels provided by independent manufacturer's
representatives and distributors. There are currently 25 individuals and/or
organizations in the United States acting in one of these capacities.
Independent sales agents are paid a 10% commission; distributors are sold
products at a 15% discount.

Second, trade shows represent a significant amount of marketing/sales effort.
These worldwide events have proven to be excellent sources of business.
Company representatives, usually one or more of the marketing managers and/or
the President/CEO, attend these events along with local Company
representatives. These individuals operate a display booth featuring an SBS
System demonstration stand and product and technical literature.
Representatives from all facets of the market to which the Company directs
its sales efforts attend these trade shows.

                                       7


<PAGE>


Third, original equipment manufacturers (OEMs) often include the SBS System
on the machine tools they produce. Users thus purchase the SBS System
concurrently with the machine tools. The SBS Systems are often installed by
machine builders prior to displaying their own machine tools at various trade
shows and these samples often become endorsements that prove beneficial to
the Company's sales efforts.

In the United States, most products are shipped directly to customers from
the Company's distribution center in Portland, Oregon. Where the Company has
distributors, the product is shipped to the distributor, who in turn pays the
Company directly and then delivers and installs the product for the end user.
Western European distribution to customers is handled by shipping the product
directly from the Company's Portland headquarters to the European
subsidiaries, who in turn sell and distribute the products to the end users.

Similar to the parent company, SMS uses a variety of methods to market and
sell its products. First, a Marketing Manager, under the direction of the
President/CEO, directs the overall marketing efforts. Second, the Company
uses an independent manufacturer's representative to work with and service
various customers in the United States. That agent is paid a 5% commission on
units he is responsible for selling. Third, in fiscal 2000, the Company
entered into a distribution agreement with ULVAC Japan Ltd. ULVAC was
appointed as the exclusive distributor for the promotion and sale of SMS
products in Japan and Korea. Fourth, trade shows represent a significant
amount of marketing/sales effort. The President/CEO attends these events
along with various Company representatives. These individuals operate a
display booth featuring SMS product demonstrations and product and technical
literature. Representatives from all facets of the market to which the
Company directs its sales efforts attend these trade shows. Fifth, the
Company had an Exclusive Distribution Agreement, with Sloan Technology, Inc.
(dba Veeco Process Metrology), a subsidiary of Veeco Instruments, Inc.
(NASDAQ: VECO). Under this agreement, Veeco was appointed the exclusive
distributor for the promotion and sale of SMS products. Veeco was also to
provide customers with after-sale services. This agreement was mutually
terminated in December 1998. In fiscal 2001, the Company expects to enter
into a similar agreement with another large distributor to market and sell
SMS products. In fiscal 1999, approximately 2% of the Company's total revenue
was attributable to sales made to Veeco. No customer accounted for more than
10% of the Company's total revenue in Fiscal 2000.

All SMS products are assembled in the Portland, Oregon facility and shipped
directly to customers around the world from that location.

The SBS System customer base consists of over 250 companies and the SMS
customer base consists of approximately 200 companies, many of which are also
purchasers of the Company's balancing products.

MANUFACTURING

The Company does not use any unique sources of supply or raw materials in
either SBS System balancing products or SMS measurement products. Essential
electronic components are available in large quantities from various
suppliers. These components are assembled into the SBS System and SMS
electronic control units to meet the Company's quality and assembly
standards. Company-owned software and firmware are coupled with the
electronic components to provide the basis of the Company's various
electronic control units. The Company believes several sources of supplies
exist for all electronic components and assembly work used in its electronic
control system. The Company's primary outside supplier of electronic assembly
is Laughlin-Wilt Group, Inc. ("Laughlin-Wilt") of Beaverton, Oregon, a custom
supplier of assembled electronic products for several Pacific Northwest
companies. In the event of supply problems, the Company believes that two or
three alternatives could be developed within 30 days to supplement or replace
Laughlin-Wilt.

                                       8


<PAGE>


Mechanical parts for the Company's SBS System and SMS products are produced
to the customers' drawings and specifications by local high quality CNC
machine shops. Several such CNC machine shops exist in the local area, and
the Company is not dependent on any one supplier of mechanical components.
Principal suppliers of components for the Company's products include MacKay
Manufacturing of Spokane, Washington; OEM Manufacturing of Corvallis, Oregon;
Eagle Industries of Newberg, Oregon; and Forest City Gear of Roscoe, Illinois.

The Company uses in-house skilled assemblers to construct and test
vendor-supplied components. Component inventory of finished vendor-supplied
parts is held on Company property to assure adequate flow of parts to meet
customer order requirements. Inventory is monitored by a computer control
system designed to assure timely re-ordering of components.

In-house personnel assemble various products and test all finished components
before placing them in the finished goods inventory. Finished goods inventory
is maintained via computer to assure timely shipment and service to
customers. All customer shipments are from the finished goods inventory.

In November 1996, the Company's Quality Control Program received full
ISO-9001 certification. This certification was renewed in November 1999.

PROPRIETARY TECHNOLOGY

The Company's success depends in part on its proprietary technology, which
the Company attempts to protect through patents, copyrights, trademarks,
trade secrets and other measures.

The Company has U.S. patents covering both its SBS and SMS products,
processes and methods which the Company believes provide it with a
competitive advantage. The Company has a policy of seeking patents where
appropriate on inventions concerning new products and improvements as part of
its ongoing research, development and manufacturing activities. While patents
provide certain legal rights of enforceability, there can be no assurance
that the historical legal standards surrounding questions of validity and
enforceability will continue to be applied or that current defenses as to
issued patents will, in fact, be considered substantial in the future. There
can be no assurance as to the degree and range of protection any patent will
afford and whether patents will be issued or the extent to which the Company
may inadvertently infringe upon patents granted to others.

"SBS" and "SMS" are registered trademarks and are affixed to all products and
literature created in the Company's balancer and measurement product lines,
respectively. The Company also has registered trademarks covering various SMS
systems and instruments.

The Company manufactures its SBS products under copyright protection in the
U.S. for electronic board designs. Encapsulation of the finished product
further protects the Company's technologies including software.

The Company also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or
disclose such technology or that the Company can meaningfully protect its
trade secrets.

While the Company pursues patent, trademark, trade secret and copyright
protection for products and various marks, it also relies on know-how and
continuing technology advancement, manufacturing capabilities, affordable,
high-quality products, new product introduction and direct marketing efforts
to
                                       9


<PAGE>


develop and maintain its competitive position.

PRODUCT DEVELOPMENT

Prior to Fiscal 1996, research and development activities of the Company were
focused on the enhancement of the existing product lines for balancers. Since
its acquisition of SMS, the Company has expended significant efforts
evaluating existing and potential new products for the light-scatter
precision measurement market. In Fiscal 1997, the Company began an aggressive
research and development program to expand the product lines and capabilities
with the goal to enter new market areas and enhance products in existing
market areas. The goal was to reduce reliance on historic market segments.
Since that fiscal year, the Company has continued to develop new balancing
and laser measurement products.

The SB-4500 unit controls balancing in applications with speeds ranging from
300 to 30,000 rpm compared to a range of 500 to 10,000 rpm with the prior
Schmitt product. Vibrations are measured to 0.02 microns or 0.75 millionths
of an inch, a ten-fold performance improvement over the prior control unit
and customers can balance their grinding machines faster, reducing costly
down time and increasing factory throughput. The multi-function unit now
provides the versatility to control several activities including Schmitt's
mechanical and fluid based balancers and the AEMS (Acoustical Emission
Monitoring System) product. This generation of computer control allows the
future addition of new Schmitt products through the insertion of electronic
control cards in any of the four control slots.

Schmitt developed the AEMS (Acoustical Emissions Monitoring System) product
to meet grinding customer needs. The product, added to the SB-4500 balance
control unit via insertion of an electronic control card, monitors the
dressing and grinding process of the customer by direct measurement of
machine-generated acoustic signals. By monitoring the high frequency sound
signal generated by contact between the wheel and work piece, the system
automatically determines when wheel contact is made. Users can eliminate the
"gap" time from their grinding process and also automatically detect the
beginning of a wheel "crash" and immediately signal the grinder to stop
before real damage occurs. The benefits of the AEMS product to the customer
include time savings from quick and easy setups, improved dressing and
grinding process, and elimination of expensive part and machine damage.

In Fiscal 2000, the disk drive industry presented the Company with the
challenge of developing the technology and products to measure the surface
roughness of glass substrates, the disk drive media of the future. The
industry is planning to produce a large portion of disk drives using glass
substrates rather than aluminum and, therefore, manufacturers of disk drives
required a solution that would allow them to measure the surface
microroughness of this media. The existing SMS technology required
modification to produce the required light scatter information to provide the
necessary measurements. The engineering staff developed the DUV (Deep
Ultra-violet light) technology to measure surface microroughness of glass
substrates to the same precise levels as existing products and at levels
required by the industry. The TMS-2000-DUV has matched all disk drive
industry requirements with initial sales expected in the first quarter of
fiscal 2001. The DUV technology compliments existing products and provides
the Company the ability to supply solutions for all media used by the disk
drive industry.

Companies that grind the production rolls used in such industries such as
steel, brass, copper, printing and paper face a long, slow manual process to
assure these rolls are ground to the dimensions and smoothness required
before they can be used. Problems experienced include improper roll alignment
during grinding, the time-consuming manual measurements during grinding, and
the need for expensive periodic re-grinding of used rolls and the resulting
costly factory down time.

                                      10


<PAGE>


The solution to these problems is to use the Schmitt patented laser light
scatter technology. The computer controlled system measures rolls to exact
dimensions established by the customer. Evaluated are the roll alignment in
the grinder, roll diameter compared to established requirements and surface
mircroroughness. A process that has been totally manual will now become fully
automated and much more accurate. This new laser-based technology, known as
the roll monitor, is scheduled to be introduced in Fiscal 2001.

During Fiscal 1998, 1999 and 2000, the Company's research and development
expense totaled $379,798, $462,136 and $380,601 respectively.

INTERNATIONAL SALES

The Company's sales in the last three fiscal years have been generated from
the following geographic areas:

<TABLE>
<CAPTION>
                          North                                 Asia and
                         America             Europe              Others
                     ---------------     ---------------     ---------------
<S>                  <C>                 <C>                 <C>
Fiscal 2000            $6,063,283          $2,238,085           $552,888
Fiscal 1999            $4,901,460          $2,798,471           $257,792
Fiscal 1998            $8,006,428          $2,488,344           $131,312
</TABLE>


BACKLOG

The Company does not generally track backlog. Normally, orders are shipped
within several weeks after receipt unless the customer requests otherwise.

EMPLOYEES

As of July 14, 2000, the Company employed 44 individuals worldwide on a
full-time basis. There were no regular part-time employees. None of the
Company's employees is covered by a collective bargaining agreement.

SUBSEQUENT EVENT

Effective June 1, 2000, in a business combination accounted for as a
purchase, the Company acquired Acuity Research, Incorporated. That company
designs, assembles and markets precision dimensional laser measurement
sensors. The Company issued 275,000 of its common shares (valued at
approximately $750,000) in exchange for all of the outstanding stock of
Acuity. Acuity technology will become a critical component of the SMS roll
monitor product used to measure the diameter of production rolls. In
addition, personnel at that company will be used extensively in the future
research and development efforts of Schmitt.

ITEM 2.  PROPERTIES

The Company's design and assembly facilities and executive offices are
located in a 7,500-square foot building in Portland, Oregon owned by the
Company; a 33,000-square foot facility, located across the street from the
executive offices and also owned by the Company, houses SMS's operations.
Schmitt Europe Ltd. occupies a 1,893-square foot facility in Coventry,
England pursuant to a five-year lease beginning February 1, 1997 with a basic
monthly rent of L1,708 (approximately $2,732 as of July 5, 2000). SHS
occupies a 5,194-square foot facility in Alsbach, Germany pursuant to a
five-year lease

                                      11


<PAGE>


beginning February 1, 1997 with a basic monthly rent of DM 5,442
(approximately $2,802 as of July 5, 2000). The Company believes its
facilities are adequate to meet its currently foreseeable needs.

ITEM 3.  LEGAL PROCEEDINGS

There are no material legal proceedings currently pending against the Company.

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

No matters were submitted to a vote of the security holders of the Company
during the fourth quarter ended May 31, 2000.

                                    PART II

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

The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "SMIT."

The following tables set forth the high and low sales prices of the Company's
Common Stock as reported on the Nasdaq National Market for the periods
indicated.

YEAR ENDED MAY 31, 1999                  HIGH             LOW
-------------------------------      ------------     ------------
First Quarter                           $6.38            $3.88
Second Quarter                          $5.00            $3.13
Third Quarter                           $4.38            $3.00
Fourth Quarter                          $4.00            $1.94


YEAR ENDED MAY 31, 2000                  HIGH             LOW
-------------------------------      ------------     ------------
First Quarter                           $3.56            $2.50
Second Quarter                          $3.38            $2.38
Third Quarter                           $3.75            $2.06
Fourth Quarter                          $3.69            $2.44

As of July 14, 2000, there were 8,255,389 shares of Common Stock outstanding
held by approximately 130 holders of record. The number of holders does not
include individual participants in security position listings; the Company
believes that there are more than 2,500 individual holders of shares of
Common Stock.

The Company has not paid any dividends on its Common Stock since 1994. The
Company's current policy is to retain earnings to finance the Company's
business. Future dividends will be dependent upon the Company's financial
condition, results of operations, current and anticipated cash requirements,
acquisition plans and plans for expansion and any other factors that the
Company's Board of Directors deems relevant. The Company has no present
intention of paying dividends on its Common Stock in the foreseeable future.

                                      12


<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

The information required by this Item is included in the Company's Annual
Report to Shareholders for the fiscal year ended May 31, 2000 ("Annual
Report") under the heading "Selected Financial Data" and is incorporated
herein by reference.

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

The information required by this Item is included in the Annual Report under
the heading "Management's Discussion and Analysis" and is incorporated herein
by reference.

ITEM 7A.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

The Company does not have any derivative financial instruments as of
May 31, 2000. However, the Company is exposed to interest rate risk. The
Company employs established policies and procedures to manage its exposure to
changes in the market risk of its marketable securities.

The Company's interest income and expense are most sensitive to changes in
the general level of U.S. and European interest rates. In this regard,
changes in U.S. and European interest rates affect the interest earned on the
Company's cash equivalents and marketable securities as well as interest paid
on debt.

The Company has lines of credit and other debt whose interest rates are based
on various published prime rates that may fluctuate over time based on
economic changes in the environment. The Company is subject to interest rate
risk and could be subject to increased interest payments if market interest
rates fluctuate. The Company does not expect any change in the interest rates
to have a material adverse effect on the Company's results from operations.

FOREIGN CURRENCY RISK

The Company operates subsidiaries in the United Kingdom and Germany. The
Company's business and financial condition is, therefore, sensitive to
currency exchange rates or any other restrictions imposed on their
currencies. To date, the foreign currency exchange rates have not
significantly impacted the Company's profitability.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and other information required by this Item are
included in the Annual Report and are incorporated herein by reference.

                                   PART III

Certain information required by Part III is included in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders
("Proxy Statement") and is incorporated herein by reference. The

                                      13


<PAGE>


Proxy Statement will be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 not later than 120 days after the end of the fiscal year
covered by this Report.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is included in the Proxy Statement
under the heading "Election of Directors" and is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is included in the Proxy Statement
under the heading "Executive Compensation" and is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is included in the Proxy Statement
under the heading "Principal Shareholders" and is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is included in the Proxy Statement
under the heading "Certain Transactions" and is incorporated herein by
reference.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (a)      Documents filed as part of this report:

                  1.       REPORT OF INDEPENDENT ACCOUNTANTS:

                           To the Board of Directors and Shareholders of
                           Schmitt Industries, Inc.

                           In our opinion, the accompanying consolidated balance
                           sheets and the related consolidated statements of
                           income, of cash flows and of changes in stockholders'
                           equity present fairly, in all material respects, the
                           financial position of Schmitt Industries, Inc. and
                           its subsidiaries at May 31, 2000, 1999 and 1998, and
                           the results of their operations and their cash flows
                           for each of the three years in the period ended May
                           31, 2000 in conformity with accounting principles
                           generally accepted in the United States. These
                           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 of these
                           statements in accordance with auditing standards
                           generally accepted in the United States which 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, assessing the accounting
                           principles used and significant estimates made by
                           management, and evaluating the

                                      14


<PAGE>


                           overall financial statement presentation. We believe
                           that our audits provide a reasonable basis for the
                           opinion expressed above.

                           PricewaterhouseCoopers LLP
                           Portland, Oregon
                           July 14, 2000

                  2.       FINANCIAL STATEMENTS:

                           The following financial statements required by this
                           Item are included in the Company's Annual Report to
                           Shareholders for the fiscal year ended May 31, 2000
                           and are incorporated by reference herein:

<TABLE>
<CAPTION>
                                                                                           Annual Report
                                                                                            Page Number
                                                                                          ---------------
<S>                                                                                       <C>
                           A.    Consolidated Balance Sheets as of May 31, 2000 and
                                 1999                                                            10

                           B.    Consolidated Statements of Income for the years
                                 ended May 31, 2000, 1999 and 1998                               11

                           C.    Consolidated Statements of Changes in Stockholders'
                                 Equity for the years ended May 31, 2000, 1999 and
                                 1998                                                            12

                           D.    Consolidated Statements of Cash Flows for the years
                                 ended May 31, 2000, 1999 and 1998                               13

                           E.    Notes to Consolidated Financial Statements                      14
</TABLE>

                  4.       FINANCIAL STATEMENT SCHEDULES:

                           All financial statement schedules are omitted either
                           because they are not applicable, not required, or the
                           required information is included in the financial
                           statements or notes thereto.

         (b)      Reports on Form 8-K:  None.

                                      15


<PAGE>


                                  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.

                                         SCHMITT INDUSTRIES, INC.


                                         By:    /s/ Wayne A. Case
                                                --------------------------------
                                               Wayne A. Case
                                                CHAIRMAN OF THE BOARD, PRESIDENT
                                                AND CHIEF EXECUTIVE OFFICER

                                         Date:  August 23, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on August 23, 2000.

SIGNATURE                                TITLE
---------                                -----

/s/ WAYNE A. CASE                        Chairman of the Board, President and
-------------------------------          Chief Executive Officer
Wayne A. Case                            (Principal Executive Officer)


/s/ Robert C. Thompson                   Chief Financial Officer/Treasurer
-------------------------------          (Principal Financial and Accounting
Robert C. Thompson                       Officer)

/s/ David M. Hudson                      Director
-------------------------------
David M. Hudson

/s/ Trevor Nelson                        Director
-------------------------------
Trevor Nelson

/s/ Dennis T. Pixton                     Director
-------------------------------
Dennis T. Pixton

/s/ John A. Rupp                         Director
-------------------------------
John A. Rupp

                                      16


<PAGE>


                               INDEX TO EXHIBITS

 EXHIBITS                               DESCRIPTION
----------   ------------------------------------------------------------------

     3(i)    Second Restated Articles of Incorporation of Schmitt Industries,
             Inc. (the "Company"). Incorporated by reference to Exhibit 3(i) to
             the Company's Annual Report on Form 10-K for the fiscal year ended
             May 31, 1998......................................................

    3(ii)    Second Restated Bylaws of the Company Incorporated by reference to
             Exhibit 3(ii) to the Company's Annual Report on Form 10-K for the
             fiscal year ended May 31, 1998....................................

     10.1    Schmitt Industries, Inc. Amended & Restated Stock Option Plan.
             Incorporated by reference to Exhibit 10.1 to the Company's Annual
             Report on Form 10-K for the fiscal year ended May 31, 1998........

    *13.1    Annual Report to Shareholders of Schmitt Industries, Inc. for
             fiscal year ended May 31, 2000....................................

    *21.1    Subsidiaries of Schmitt Industries, Inc...........................

    *23.1    Consent of PricewaterhouseCoopers LLP.............................

    *27.1    Financial Data Schedule...........................................

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

* Filed herewith

                                      17