<PAGE>

To Our Shareholders

                  GROWING -- GROWING -- GROWING!

During fiscal year 2000 ending May 31, 2000, Schmitt Industries, Inc.
advanced our product lines and technologies for our worldwide measurement and
balancing markets to very exacting micron and angstrom standards.

Our core technologies advanced during fiscal year 2000 and will be the
foundation for a series of new products that the Company will introduce in
the future. Any new series of products must be solid, repeatable and user
friendly to be successful in today's manufacturing market place.

We have exceeded our goals in fiscal year 2000 and we will reap the benefits
of the advanced products and the Company technologies. Schmitt has returned
to profitability through new products and extended markets, and we are
pleased with our renewed growth and the employees who have worked
relentlessly to advance the Company.

The acquisition of Acuity Research Inc. in June of 2000 started our fiscal
year 2001 with additional new laser products that will add to greater sales
and profits. Management believes the Acuity Laser dimensional measurement
technology to be superior to competitive products, and Schmitt plans to
utilize this technology into a line of advanced measurement tools for
industry. We are pleased to report that our balance sheet remains strong with
assets of $11 million and no debt. Management believes that fiscal year 2001
will show a major increase in sales and profit growth.

Wayne A. Case
President and Chairman of the Board

Introduction

At Schmitt we have historically demonstrated the capability of listening to
our customers needs and then working with those companies in fulfilling their
requirements with products of the highest quality. This characteristic has
been one of the critical components in building our strong product line in
each of our industry segments--automatic balancing products and laser
measurement devices. Fiscal 2000 was no exception as we responded to market
challenges in several areas. Among the most significant challenges we met
were in products for our core customer base in the grinding machine industry,
the disk drive markets, and through the acquisition of Acuity Research
Incorporated, a company whose technology will significantly enhance our
measurement product lines.



<PAGE>


EXPANSION OF EXISTING MARKETS

Manufacturers of computer disk drives have always faced and continue to face
increasing demands for products with greater storage capacity and improved
performance and reliability. This is coupled with competitive pressures and
market demands that have placed downward pressure on disk drive sales prices.
Therefore, disk drive manufacturers are seeking manufacturing measurement
tools that lower rework, scrap, service and warranty costs while at the same
time offer solutions for advanced disk drive technology. We have consistently
met or exceeded the requirements of this industry by designing, assembling
and selling measurement products that help our customers minimize production
costs.

In fiscal 2000, this industry presented us 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. Our customers required a solution that would allow them to measure
surface microroughness of this media and sought us out to provide them with
that solution. Our existing technology required modification to produce the
required light-scatter information for the necessary measurements. Our
engineering staff responded to this challenge and developed the DUV (Deep
Ultra-violet light) technology that measures surface microroughness of glass
substrates to the same precise levels as our existing products and at levels
the industry expected. The TMS-2000-DUV has matched all disk drive industry
requirements with initial sales expected in the second quarter of fiscal 2001.

Over the past fourteen years, we have focused on providing automatic
balancing solutions to the grinding machine industry. That focus has produced
a strong market position in the North American grinding machine industry,
with a current market share in excess of 60%. The challenges for this
industry in the next few years will be to manufacture products that are even
more efficient and cost-effective. To accomplish this, the industry requires
products with greater precision that work in a multitude of environments. We
have worked closely with our customers to develop products that provide these
capabilities. The control unit for the Schmitt Dynamic Balancing System (SBS)
monitors and controls functions in the grinding process. Our customer's
sought a multi-function replacement for the older SB-2500 control unit--a
single purpose component that monitored and adjusted the grinding spindle
unbalance to match customer specified vibration levels. The SB-4500 was
introduced in fiscal 1999 to meet our customers' requirements. The
flexibility of our system is now unmatched in the industry and we are capable
of focusing our efforts on solutions that meet our customers' requirements
for a system that can perform multiple tasks. Our customers now have a
control unit that has the capability of controlling a wider range of customer
applications such as; the new AEMS (Acoustic Emissions Monitoring System)
product, environments with spindle speeds as low as 300 rpm (compared to 500
before) or high spindle speeds of up to 30,000 rpm (compared to 10,000
before) and all of our balance heads (external, internal, noncontact and
hydro-based). The sensitivity improved ten-fold as vibrations can now be
measured as low as .02 microns compared to the .20 microns with prior
technology. The market responded positively to our new products as sales in
North America increased five percent from the prior fiscal year.


<PAGE>


DEVELOPING NEW MARKETS

Since the inception of the Company, the North American markets have been the
primary focus for our balancing products. With that primary focus, we have
achieved a market share and name recognition our competition cannot match.
With those strategic goals now attained and expected to be maintained, we
intend to capitalize on those strengths in other markets. Among the most
significant of our strategic goals will be to increase our marketing efforts
toward an increase in our market share in the European and Asian markets,
both of which are similar in size to North America.

In 1996, we opened our sales office in the United Kingdom and purchased the
assets of a competitor, Hofmann Maschinenbau, GmbH. These were our first
steps towards a physical presence in Europe. In less than four years, we
developed the name familiarly and recognition in Europe and Asia that is the
critical first step in developing a market share that could approach what we
see in North America. These initial efforts have made us one of the growing
suppliers of automatic balancing solutions to the end-user market in Europe.
Our next goal is to become the number one supplier to the OEM segment of the
European markets as well. In discussions with the various OEMs throughout
Europe, our staff found that segment was impressed with Schmitt, but they
required additional technology to fit their requirements. We addressed those
needs with the AEMS (Acoustic Emissions Monitoring System) and noncontact
balancing head products that we introduced in the past fiscal year.

Our current and targeted customers were seeking solutions that would prevent
both the costly crash of the grinding wheel into the part during the grinding
phase and the monitoring of the dressing process on the grinding wheel. Both
events can increase costs and downtime and damage the competitive position of
our clientele. Therefore, our customers were requiring solutions to prevent
and/or control these events. Our engineers developed a solution that not only
exceeds marketplace expectations, it surpasses the capabilities of our
competitor's technology, offering grinding machine manufacturers and end
users the best product available today. The product monitors the noise or
acoustic signals emitted by the grinding wheel. When a certain signal level
is achieved, it either slows the advance of the grinding wheel so it does not
crash into the part being ground or monitors the dressing process to make
sure the sharpening tool is dressing the grinding wheel correctly.

Another feature the European market sought was a balance device that was not
attached to the grinding machine via cables. The traditional SBS product,
when mounted on the spindle, has cables that run from the balance head to the
control unit. European companies sought a system where the cables were not
attached to the balance head and therefore the grinding machine. During
fiscal 2000, we introduced a "noncontact balance head" that met these
requirements. While the balance head is still connected to the spindle, the
power source required to move the weights in the balance head is not
attached. The weights are moved via an electromagnetic power signal sent from
the transmission unit (which is connected to the SB-4500 control unit) to the
balance head.



<PAGE>


The AEMS and non-contact products have captured the attention of the
worldwide OEM market. Our intent is to achieve greater portions of the
balancing markets in Europe and Asia. These products will help but we will
also be working on a revised internal balancer product to be introduced in
fiscal 2001 as well as a cost-effective solution for the Asian markets that
will match their needs for lower end products.

CREATING NEW PRODUCTS

One of our strategic goals is developing new products outside of our historic
market segments. While many products are under consideration, one that is the
most developed is the roll monitor, a post process gauging system.

Many millions of dollars are spent annually to measure the dimensional
characteristics and surface microroughness of industrial rolls used in a
variety of industries, such as paper and steel mills. Our research has
disclosed present processes to establish the roll characteristics (defined as
the surface microroughness as well as the crown, taper and diameter of the
roll) are extremely time consuming and use manual rather than automated
measurement methods. The results of this time consuming and inexact process
are imprecise results and little or no information or documentation regarding
the characteristics of those rolls. The industry is searching for solutions
that improve the end result and provide the required measurements in an
efficient, timely, and cost effective manner.

Much of our research and development focus over the past several years has
been devoted to development of the dynamic roll monitor products. Subsequent
to May 31, 2000 we purchased Acuity Research, Inc. located in Menlo Park,
California. Acuity is a designer and manufacturer of precision dimensional
laser measurement sensors. The capabilities of their dimensional sizing
products exceed any other such products on the market today and are a perfect
complement to our roll monitor products. The match of our laser light-scatter
technology to measure surface microroughness with the Acuity laser technology
to measure dimensional sizes creates a product that offers the market the
solutions they are seeking.

Our product philosophy has always been to provide customers with quality
products that increase the excellence of their products while, at the same
time, reducing their costs via increased productivity and product yields and
reduced costs. The gauging product line is a natural extension of that
philosophy. It also matches our laser light-scatter technology with our core
business, the grinding machine industry, as many of these rolls are ground on
machines which use our Dynamic Balancing System. Our product uses the
patented laser light-scatter technology of Schmitt and the dimensional
measurement technology of Acuity to automatically establish the surface
characteristics in a manner of minutes rather than hours. Also, these
measurements are far more accurate, allowing our customers to perform far
more precise roll grinding as their costs go down and productivity increases.


<PAGE>



EMPHASIS ON PRODUCING QUALITY

Our quality statement, "Schmitt Industries is committed to superior quality
in design, manufacturing and services, to supply process tools to improve our
customers ability to compete in today's markets" is one that all of our
employees are committed to achieving. We are and always will be committed to
providing products that achieve the goals of this statement. Our financial
and operating results prove we are attaining this goal. Our market share in
North America, the increasing name familiarity in Europe and Asia and low
product returns and warranty costs demonstrate not only that we are committed
to this mission statement but that we are achieving it. To guide us in
achieving this goal we have two quality programs in place.

The results achieved under our ISO9001 and CE Quality systems demonstrate
that quality is at the center of all design, development, assembly and
shipment of our products. The goal is to equip all of our customers with
products of the highest quality that match their requirements. The first step
toward achieving this goal is obvious; we must first understand the needs of
our customer. How do we do this? The concept is simple--we listen to them!
All of the new products discussed throughout this report were developed using
this simple and straightforward process. First, we strive to understand our
customers' business plus the requirements and uses of their products. Second,
we turn our attention to the customers manufacturing and other business
processes to determine where our technology and subsequently our products can
enhance their efficiency, reduce costs and place the highest quality product
in the customers hands. Third, based upon the information gathered in this
phase, we are in a position to understand and recommend a product that will
be suited to the customers needs. At this point, the focus then moves from
understanding the customer and their requirements to using our innovative
technology to design and assemble products, under our quality processes,
which will help our customers solve their problems.

CONCLUSION

We are looking forward to an exciting future. Our customers have presented us
with several marketing challenges in the past fiscal year, and we have
responded to those challenges by offering products that provide our customers
solutions to their manufacturing needs. As they continue to seek our
technology and products to provide new solutions, we will respond to those
requests with our typical high-quality products. We also will continue to
evaluate the technology of other companies, such as Acuity Research, that
offer technology that will complement ours and therefore be a strategic fit
to our company. Our marketing and sales goals are to increase our name
familiarity in our existing markets as well as several new ones over the
course of the next fiscal year.



<PAGE>

Customers fully recognize our commitment to providing tools that aid them in
meeting current and future industry challenges. Over the next five years,
this commitment will carry us into new markets where our technology will
provide new customers with valuable production tools.

2000 - The SB-4500 has awarded us the precision grinding market advantage.

1999 - High-speed grinding markets demanded control and precision.

Our European customers are finding the AEMS product improves the dressing
process and virtually eliminates part damage during grinding. We are
experiencing true excitement and acceptance of this and other Schmitt
products. Product innovations, such as the AEMS are contributing to our goal
of securing a larger portion of the European grinding machine market.

DEAN WHITE

General Manager
Schmitt Europe, Ltd.

The disk drive industry continues to rely on us to develop new technologies
to answer industry challenges. We were sought out to develop the technology
that measures the surface characteristics of glass substrates, the disk drive
media of the future. We responded with the new TMS-2000DUV product that
provides the ability to measure surface characteristics of glass and ceramic
substrates.

JOHN FERLAND

Product Sales and Service

One of our medium term strategic goals is expansion in our share of the
European and Asian grinding machine markets where our name familiarity and
the reputation of our products has helped position us to realize significant
growth over the next few years.

2000 - Our AEMS product line provides precise control to boost productivity.

1999 - Grinding machine operators sought methods to increase output.

We acquired Acuity Research Incorporated in June 2000. The personnel at
Acuity add a significant amount of engineering strength and depth and
significantly enhance the capability of our laser measurement research and
development efforts.

2000 - We developed and introduced a noncontact balance head.


<PAGE>

1999 - European grinding machine manufacturers required a noncontact balance
head.

Companies using industrial rolls in their manufacturing processes must grind
those rolls to exacting standards. They are seeking tools that, in a
cost-effective manner, will provide increased precision regarding the
dimensions and micro- roughness of the roll. The Precision Roll Monitor our
engineering staff is developing will provide those companies with a product
that surpasses their expectations.

STEVE TABOR

Engineering Manager

Our ISO9001 quality system provides the discipline and processes to assure
our customers the products they receive match their expectations and provide
them with tools to enhance or improve the quality of their products. The
large volume of repeat business and the low warranty costs incurred by our
company each year show we are on the right track.

LINDA PERRY

Electronic Quality Control

Our business practices follow methods that assure our customers they will
receive products that consistently meet or exceed their requirements. We are
ISO-9001 certified for our design, manufacturing and service operations in
the United States and balancer products are in conformity with CE standards
for products sold in Europe.

2000 - Our TMS-RC technology was developed and initial product sales realized.

1999 - Disk drive manufacturers needed to measure surface roughness below one
angstrom.

<PAGE>


                                                                   Exhibit 13.1

CONSOLIDATED BALANCE SHEETS

For the years ended
May 31, 2000 and 1999

<TABLE>
<CAPTION>

                                                                 2000            1999
<S>                                                    <C>              <C>
ASSETS
CURRENT ASSETS
Cash                                                      $ 1,264,475     $   268,888
Accounts receivable                                         1,377,422       1,423,611
Inventories                                                 4,635,792       4,444,012
Prepaid expenses                                               65,022          75,454
Income tax receivable                                          24,918         295,964
-------------------------------------------------------------------------------------
                                                            7,367,629       6,507,929
-------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Land                                                          299,000         299,000
Buildings and improvements                                  1,213,553       1,194,664
Furniture, fixtures, and equipment                            826,235         942,776
Vehicles                                                      107,606         144,064
-------------------------------------------------------------------------------------
                                                            2,446,394       2,580,504
Less accumulated depreciation and amortization                896,844         926,314
-------------------------------------------------------------------------------------
                                                            1,549,550       1,654,190
-------------------------------------------------------------------------------------
OTHER ASSETS
Long-term investments                                         812,000       2,135,000
Long-term deferred tax asset                                1,156,871         898,628
Other assets                                                   66,667          86,667
-------------------------------------------------------------------------------------
                                                            2,035,538       3,120,295
-------------------------------------------------------------------------------------
TOTAL ASSETS                                              $10,952,717     $11,282,414
=====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable                                          $   471,596     $   392,287
Accrued royalties                                              45,014          10,535
Accrued commissions                                           140,506         105,080
Other accrued liabilities                                     167,530         175,133
Income taxes payable                                               --          12,819
-------------------------------------------------------------------------------------
                                                              824,646         695,854
-------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (NOTE 7)

STOCKHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares authorized,
  7,980,389 and 8,184,889 shares issued and outstanding
at May 31, 2000 and 1999, respectively                      7,259,399       7,284,445
Accumulated other comprehensive loss                       (1,196,683)       (201,781)
Retained earnings                                           4,065,355       3,503,896
-------------------------------------------------------------------------------------
                                                           10,128,071      10,586,560
-------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $10,952,717     $11,282,414
=====================================================================================

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS

                                      10

<PAGE>

CONSOLIDATED STATEMENTS OF INCOME

For the years ended
May 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>

                                                                  2000            1999            1998
<S>                                                         <C>             <C>            <C>
Net Sales                                                   $8,854,256      $7,957,723     $10,626,084
Cost of Sales                                                3,895,345       4,145,280       4,632,485
------------------------------------------------------------------------------------------------------
    Gross profit                                             4,958,911       3,812,443       5,993,599
------------------------------------------------------------------------------------------------------
Operating expenses:
General, administrative, and sales                           3,809,976       3,841,155       4,275,059
Research and development                                       380,601         462,136         379,798
------------------------------------------------------------------------------------------------------
    Total operating expenses                                 4,190,577       4,303,291       4,654,857
------------------------------------------------------------------------------------------------------
Operating income (loss)                                        768,334        (490,848)      1,338,742
------------------------------------------------------------------------------------------------------

Other income and expense:
  Interest expense                                                (628)        (22,736)        (42,231)
  Interest income                                               30,462          24,364          44,581
  Miscellaneous (expense) income                               (34,505)         93,946         259,924
------------------------------------------------------------------------------------------------------
    Other income and expense                                    (4,671)         95,574         262,274
------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes                763,663        (395,274)      1,601,016
Provision (benefit) for income taxes                           202,204        (135,967)        350,901
------------------------------------------------------------------------------------------------------
Net income (loss)                                           $  561,459      $ (259,307)    $ 1,250,115
------------------------------------------------------------------------------------------------------
Net income (loss) per common share, basic                   $     0.07      $    (0.03)    $      0.18
------------------------------------------------------------------------------------------------------
Weighted average number of common shares, basic              8,103,563       7,591,699       7,091,269
------------------------------------------------------------------------------------------------------
Net income (loss) per common share, diluted                 $     0.07      $    (0.03)    $      0.17
------------------------------------------------------------------------------------------------------
Weighted average number of common shares, diluted            8,606,835       7,591,699       7,456,172
------------------------------------------------------------------------------------------------------

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS

                                      11

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended
May 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>


                                                               2000            1999            1998

<S>                                                    <C>              <C>             <C>
CASH FLOWS RELATING TO OPERATING ACTIVITIES
Net income (loss)                                        $  561,459      $ (259,307)     $1,250,115
Adjustments to reconcile net income (loss) to net
   cash provided by (used in) operating activities
  Depreciation                                              247,580         294,513         347,228
  Amortization                                               20,000          13,333              --
  Deferred taxes                                            139,757         (26,445)        (57,183)
(Increase) decrease in:
  Trading securities                                             --              --         168,000
  Accounts receivable                                        46,189        (225,660)      1,527,561
  Inventories                                              (191,780)       (277,257)     (1,686,935)
  Prepaid expenses                                           10,432          45,012         (89,798)
  Income taxes receivable                                   271,046          18,914        (190,806)
  Other assets                                                   --              --          (9,585)
Increase (decrease) in:
  Accounts payable                                           79,309        (289,237)        150,857
  Accrued liabilities, royalties, and commissions            62,302          41,183         (57,246)
  Income taxes payable                                      (12,819)         12,819         (44,809)
---------------------------------------------------------------------------------------------------
    Net cash provided by (used in) operating
 activities                                               1,233,475        (652,132)      1,307,399
---------------------------------------------------------------------------------------------------
CASH FLOWS RELATING TO INVESTING ACTIVITIES
Purchase of property and equipment                         (190,086)       (119,380)       (514,283)
Disposal of property and equipment                           47,145          14,658          24,250
---------------------------------------------------------------------------------------------------
    Net cash (used in) investing activities                (142,941)       (104,722)       (490,033)
---------------------------------------------------------------------------------------------------
CASH FLOWS RELATING TO FINANCING ACTIVITIES
Repayment of long-term debt                                      --              --        (179,983)
Common stock repurchased                                    (55,049)        (47,261)             --
Exercise of stock options                                    30,000              --          96,469
---------------------------------------------------------------------------------------------------
    Net cash (used in) financing activities                 (25,049)        (47,261)        (83,514)
---------------------------------------------------------------------------------------------------
Effect of foreign exchange translation on cash              (69,898)        (54,073)       (111,438)
---------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH                                 995,587        (858,188)        622,414
Cash, beginning of year                                     268,888       1,127,076         504,662
---------------------------------------------------------------------------------------------------
Cash, end of year                                        $1,264,475      $  268,888      $1,127,076
===================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest                 $      628      $   22,736      $    2,231
Cash paid during the period for income taxes             $   16,110      $    6,800      $  405,800
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
 AND FINANCING ACTIVITIES
Acquisition of long-term investment                      $       --      $2,135,000      $       --
Reduction of goodwill                                    $       --      $       --      $ (155,438)
Income tax benefit of stock options exercised            $       --      $  124,072      $  (23,754)
===================================================================================================

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS

                                      12

<PAGE>

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the years ended
May 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                     Accumulated
                                                                                       Other                          Total
                                                                      Retained      Comprehensive                  Comprehensive
                                        Shares          Amount        Earnings          Loss            Total      Income (Loss)
---------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>             <C>            <C>               <C>            <C>

BALANCE, MAY 31, 1997                 7,081,889       4,952,411       2,513,088       (36,270)        7,429,229
Stock options exercised                  17,250          96,469              --            --            96,469
Income tax benefit from
  exercise of stock options                  --          23,754              --            --            23,754
Net income                                                           1,250,115                        1,250,115       $ 1,250,115
Other comprehensive loss                     --              --              --      (111,438)         (111,438)         (111,438)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE, MAY 31, 1998                 7,099,139       5,072,634       3,763,203      (147,708)        8,688,129
COMPREHENSIVE INCOME, YEAR
  ENDED MAY 31, 1998                                                                                                    1,138,677
                                                                                                                       ----------
Stock options exercised                 485,750         869,475              --            --           869,475
Income tax benefit from
  exercise of stock options                  --         124,072              --            --           124,072
Notes received for stock options             --        (869,475)             --            --          (869,475)
Stock issued for long-term
  investment                            610,000       2,135,000              --            --         2,135,000
Common shares repurchased               (10,000)        (47,261)             --            --           (47,261)
Net loss                                                               (259,307)                       (259,307)         (259,307)
Other comprehensive loss                     --              --              --       (54,073)          (54,073)         (54,073)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE, MAY 31, 1999                 8,184,889       7,284,445       3,503,896      (201,781)       10,586,560
COMPREHENSIVE LOSS, YEAR
  ENDED MAY 31, 1999                                                                                                    (313,380)
                                                                                                                       ----------
Stock options exercised                  10,000          30,000              --            --            30,000
Common shares retired                  (192,500)       (282,975)             --            --          (282,975)
Note cancelled in return
  for stock                                             282,975                                         282,975
Common shares repurchased               (22,000)        (55,046)                                        (55,046)
Net income                                                              561,459                         561,459           561,459
Other comprehensive loss                                                             (994,902)         (994,902)         (994,902)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE, MAY 31, 2000                 7,980,389      $7,259,399      $4,065,355   $(1,196,683)      $10,128,071
===============================================================================================================
COMPREHENSIVE LOSS, YEAR
  ENDED MAY 31, 2000                                                                                                  $ (433,443)
                                                                                                                      ===========

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS

                                      13

<PAGE>

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1

ORGANIZATION AND NATURE OF OPERATIONS

Schmitt Industries, Inc. (the Company) is engaged in the design, assembly,
marketing, and distribution of electronic and mechanical components for
machine tool products and laser measurement systems worldwide.

NOTE 2

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include those of the Company and its
wholly owned subsidiaries: Schmitt Measurement Systems, Inc. (SMS), Schmitt
Europe, Ltd. (SEL) and Schmitt Hofmann Systems, GmbH (SHS). All significant
intercompany accounts and transactions have been eliminated in the
preparation of the consolidated financial statements.

REVENUE RECOGNITION

Revenue from product sales is recognized upon shipment. Sales are reported
net of applicable cash discounts and allowances for returns. Revenue from
long-term contracts is recognized based on the effort incurred relative to
the total effort expected over the course of the contract. Revenue in excess
of billings was approximately $97,000 and $0 at May 31, 2000 and 1999,
respectively and is reflected in accounts receivable on the balance sheet.

INVENTORY

Inventory is valued at the lower of cost or market. Cost is determined on the
average cost basis. As of May 31, 2000 and 1999, inventories consisted of raw
materials ($2,456,522 and $2,292,389 respectively), work-in-process ($12,232
and $222,888 respectively), and finished goods ($2,167,038 and $1,928,735,
respectively).

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of three to seven years for
furniture, fixtures, and equipment; three years for vehicles; and twenty-five
years for buildings and improvements.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially expose the Company to concentration of
credit risk are trade accounts receivable. Credit terms generally include a
discount of 1-1/2% if the invoice is paid within ten days, with the net
amount payable in 30 days. No allowance for doubtful accounts is considered
necessary. During the year ended May 31, 1999, the Company canceled a
strategic partnership with an entity to distribute systems manufactured by
Schmitt Measurement Systems, Inc. For the years ended May 31, 1999 and 1998,
approximately 2% and 24% of consolidated sales respectively were made to this
customer.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax
consequences of differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to expense when incurred.

TRADING SECURITIES

Trading securities consist of common stock and are stated at fair value,
which is estimated based on quoted market prices. Unrealized gains or losses
are included in other income and expense. Total realized gain on trading
securities during fiscal 1998 was approximately $186,000 and is included in
other income. No trading securities were held at May 31, 2000 or 1999.

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers short-term investments that are highly liquid, readily
convertible into cash and have original maturities of less than three months
to be cash equivalents.

                                       14
<PAGE>

NOTES TO THE FINANCIAL STATEMENTS


STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (FAS 123) encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB 25). Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to
acquire the stock.

FOREIGN CURRENCY TRANSLATION

Financial statements for the Company's subsidiaries outside the United States
are translated into U.S. dollars at year-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are recorded as a separate component of
stockholders' equity titled "Accumulated Other Comprehensive Loss."

FINANCIAL INSTRUMENTS

The carrying amounts of financial instruments approximate their fair values
at May 31, 2000.

EARNINGS PER SHARE

Basic earnings per share are computed using the weighted average number of
shares outstanding. Diluted earnings per share are computed using the
weighted average number of shares outstanding, adjusted for the incremental
shares attributed to outstanding options to purchase common stock.
Incremental shares of 503,272 and 364,903 in 2000 and 1998, respectively,
were used in the calculation of diluted earnings per share. In fiscal 1999,
130,245 incremental shares were excluded from the diluted loss per share
calculation, as their effect was anti-dilutive.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivatives Instruments and Hedging Activities." SFAS
133 establishes new accounting treatment for derivatives and hedging
activities and supersedes and amends a number of existing accounting
standards. For the Company, this pronouncement will be effective in fiscal
2001, and is not anticipated to have a material effect on the consolidated
financial statements.

        On April 3, 2000, the FASB issued FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of Accounting Principles Board Opinion No. 25" (FIN44). FIN 44
clarifies the application of Opinion 25 for certain issues including the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award. In May 1999, the Company decreased the exercise
prices of 426,750 outstanding incentive stock options to $3.00 per share (the
"repriced options"); 379,250 of the repriced options were outstanding at May
31, 2000. In accordance with FIN 44, effective July 1, 2000, any of these
options which are not exercised or cancelled, will be accounted for pursuant
to a variable stock option plan. Accordingly, compensation expense will be
recorded to the extent that the quoted market price of the Company's common
stock exceeds the revised exercise price of the repriced options. In the
first quarter of fiscal 2001, management will initiate some steps to
repurchase the effected options from the employees, thereby eliminating the
need to account for those options under variable stock plan accounting rules.

NOTE 3

LONG-TERM INVESTMENTS

In December 1998, the Company issued 610,000 shares of its common stock to
acquire 1,375,716 shares or approximately 19.5% of the outstanding shares of
Air Packaging Technologies, Inc. That company is engaged in the design,
manufacture, marketing and sales of "Air Box" patented packaging systems used
in the semiconductor, electronic, medical and dental markets worldwide. This
investment is classified as "Available- for-sale securities" under Statement
of Financial Accounting Standards No. 115. As required under that statement,
all unrealized gains and losses are included in Accumulated Other
Comprehensive Loss and reported as a separate component in Other
Comprehensive Loss in Stockholders' Equity until realized. At May 31, 2000
the difference between market value and acquisition cost was $1,323,000.
Management does not consider this decline from acquisition cost to be
permanent.

                                      15

<PAGE>

NOTES TO THE FINANCIAL STATEMENTS

NOTE 4

LINE OF CREDIT

The Company has a $1.5 million unsecured short-term line of credit agreement
with a commercial bank. The line is guaranteed by the Company's wholly owned
subsidiary, Schmitt Measurement Systems, Inc. Interest is payable at the
bank's prime rate minus 0.25%, or LIBOR +2.00%. The line of credit is
renewable annually. No balance was outstanding as of May 31, 2000 or May 31,
1999.

NOTE 5

INCOME TAXES

The provision (benefit) for income taxes was as follows

<TABLE>
<CAPTION>

Years ended May 31,                          2000           1999           1998
-------------------------------------------------------------------------------
<S>                                      <C>           <C>             <C>
Current                                  $ 62,447      $(109,523)      $243,264
Deferred                                  249,757        (26,444)       383,887
Decrease in valuation
  allowance                              (110,000)            --       (276,250)
-------------------------------------------------------------------------------
Total provision (benefit)
  for income taxes                      $ 202,204      $(135,967)      $350,901
===============================================================================
</TABLE>

Deferred tax assets (liabilities) are comprised of the following components:

<TABLE>
<CAPTION>

Years ended May 31,                                         2000           1999
-------------------------------------------------------------------------------
<S>                                                   <C>            <C>
Depreciation                                          $    7,027     $   31,112
Net operating loss carryforwards                         818,298      1,038,559
Deferred taxes related to decline in
  fair market value of long-term
  investment                                             398,000            --
Other asset capitalization                                11,654         12,820
Other deferred assets                                     46,123         50,368
-------------------------------------------------------------------------------
Gross deferred tax assets                              1,281,102      1,101,747
Deferred tax asset valuation
  allowance                                             (124,231)      (234,231)
-------------------------------------------------------------------------------
Net deferred tax asset                                $1,156,871     $  898,628
===============================================================================

</TABLE>

Through the acquisition of Schmitt Measurement Systems, Inc., the Company
acquired approximately $5.5 million of U.S. federal net operating loss
carryforwards. As of May 31, 2000, approximately $2,400,000 million of these
net-operating losses remain and will expire in the years 2007 through 2009.
The deferred tax asset valuation allowance in fiscal years 2000 and 1999 is
attributed to these net-operating losses.

        The provision for income taxes differs from the amount of income
taxes determined by applying the U.S. statutory federal tax rate to pre-tax
income (loss) due to the following:

<TABLE>
<CAPTION>

Years Ended May 31,                          2000           1999           1998
-------------------------------------------------------------------------------
<S>                                         <C>           <C>             <C>
Statutory federal tax rate                   34.0%         (34.0%)         34.0%
State taxes, net of federal
  benefit                                     4.4           (4.3)           3.2
Change in deferred tax
  valuation allowance                       (13.2)            --          (17.2)
Other permanent differences                   1.3            3.9            1.9
-------------------------------------------------------------------------------
Effective tax rate                           26.5%         (34.4%)         21.9%
===============================================================================

</TABLE>

NOTE 6

EMPLOYEE BENEFIT PLANS

The Company adopted the Schmitt Industries, Inc. 401(k) Profit Sharing Plan &
Trust effective June 1, 1996. Employees must meet certain age and service
requirements to be eligible. Participants may contribute up to 15% of their
eligible compensation that is partially matched by the Company. The Company
may further make either a profit sharing contribution or a discretionary
contribution. Contributions made by the Company to this Plan during the year
ended May 31, 2000 and May 31, 1999 were $88,759 and $86,899, respectively.

NOTE 7

COMMITMENTS AND CONTINGENCIES

In a transaction related to the acquisition of Schmitt Measurement Systems,
Inc. (formerly TMA Technologies, Inc.), the Company established a royalty
pool and vested each shareholder and debt holder of the acquired company an
interest in the royalty pool equal to the amount invested or loaned including
interest payable through March 1995. The royalty pool will be funded at 5% of
net sales (defined as gross sales less returns, allowances, and sales
commissions) of Schmitt Measurement Systems, Inc.'s, products and future
derivative products developed by Schmitt Industries, Inc., which utilize
these technologies. As part of the royalty pool agreement, each former
shareholder and debt holder released TMA Technologies, Inc., from any claims
with regard to the acquisition except their rights to future royalties.
Long-term debt of $179,983 was fully paid to certain TMA Technologies, Inc.,
debt holders in fiscal year 1998. Royalty payments applicable to the years
ended May 31, 2000, 1999 and 1998 amounted to $78,977, $28,992 and $155,438,
respectively.

                                      16

<PAGE>

NOTES TO THE FINANCIAL STATEMENTS

NOTE 8

SEGMENTS OF BUSINESS

The Company operates principally in two segments of business: the
manufacturing of mechanical components for the machine tool industry, and the
manufacturing of laser measurement systems. The Company also operates in two
principal geographic markets, U.S. and foreign.

        The segment, which manufactures mechanical components, reported gross
sales of $8,173,275 for the year ended May 31, 2000, including inter-company
sales of $928,306. This segment reported gross sales of $8,223,308 for the
year ended May 31, 1999, including inter-company sales of $845,429 and gross
sales of $8,286,243 for the year ended May 31, 1998 including intercompany
sales of $754,131. The segment, which manufactures laser measurement systems,
reported gross sales of $1,625,717 for the year ended May 31, 2000 including
intercompany sales of $16,430. This segment reported gross sales of $579,844
for the year ended May 31, 1999, with no inter-company sales, and gross sales
of $3,108,769 including inter-company sales of $14,797 for the fiscal year
ended May 31, 1998. Geographically, U.S. sales were $5,822,941, $4,756,079
and $7,873,148 for fiscal years ended May 31, 2000, 1999 and 1998
respectively. Foreign sales were $3,976,051, $4,047,073 and $3,521,864 for
the same years, respectively. This includes inter-company sales of $944,736
for the year ended May 31, 2000, $845,429 for the year ended May 31, 1999 and
$768,928 for the year ended May 31, 1998. For the years ended May 31, 2000,
1999 and 1998, respectively, export sales by the U.S. segment totaled
$878,303, $615,212 and $344,100.

        Income (loss) from operations for the years ended May 31, 2000, 1999
and 1998 for the mechanical components segment was $119,015, $(263,965), and
$363,656, respectively. Income (loss) from operations for the years ended May
31, 2000, 1999 and 1998 of the laser measurement segment was $649,319,
$(226,883), and $975,086, respectively. Consolidated income (loss) from
operations includes an adjustment of $30,000 for the elimination of
inter-company rent for the years ended May 31, 2000, 1999 and 1998. Income
(loss) from operations for the U.S. segment was $823,904, $(305,390) and
$1,423,502, respectively, for the years ended May 31, 2000, 1999 and 1998 and
for the foreign segment, losses of $(55,570), $(185,458) and $(84,760)
respectively, for the same years.

        Long-term assets at May 31, 2000 and 1999 were $3,107,721 and
$4,097,803 for the mechanical components segment and $477,367 and $676,682
for the laser measurement segment. Long-term assets at May 31, 2000 and 1999,
were $3,489,686 and $4,654,796 for the U.S. segment and $95,402 and $119,689
for the foreign segment. Depreciation expense incurred during the years ended
May 31, 2000, 1999 and 1998, by the mechanical components segment was
$176,367, $194,541 and $206,335 respectively. The laser measurement segment
incurred depreciation expense of $71,213, $99,972 and $140,893, for the years
ended May 31, 2000, 1999 and 1998, respectively. Amortization expense
incurred during the years ended May 31, 2000, 1999 and 1998 by the mechanical
components segment was $20,000, $13,333 and $0 respectively. The laser
measurement segment did not incur amortization expense for years 2000, 1999
and 1998. The U.S. segment incurred depreciation expense of $194,204 $221,295
and $276,102 during the years ended May 31, 2000, 1999 and 1998,
respectively. The foreign segment incurred depreciation expense of $53,376,
$73,218 and $71,126 respectively, for these same years. The U.S. segment
incurred amortization expense of $20,000, $13,333 and $0 for the fiscal years
ended May 31, 2000, 1999 and 1998. The foreign segment has not incurred
amortization expense. Capital expenditures for the years ended May 31, 2000
and 1999, were $173,071 and $117,884 by the mechanical components segment and
$17,015 and $1,496 by the laser measurement segment, respectively. Capital
expenditures for the years ended May 31, 2000 and 1999, were $137,443 and
$60,079 by the U.S. segment and $52,643 and $59,301 by the foreign segment,
respectively.

        Income from operations represents sales less costs and operating
expenses. In computing income from operations, all overhead expenses have
been allocated to both industry segments, as they are an integral part of
profit recognition for each segment. Identifiable assets by segment of
business are those assets used in the Company's operations in each segment.
There are no unallocated Company assets.

                                      17
<PAGE>

NOTES TO THE FINANCIAL STATEMENTS

NOTE 9

STOCK OPTIONS

Prior to 1995, the Company granted stock options to officers and employees of
the Company. Stock options for up to 10% of the outstanding shares were
eligible for grant provided the stock options for any one individual did not
exceed 5% of the issued and outstanding shares of common stock. The purchase
price of the optioned shares was equal to not less than the average closing
price of the Company's common stock for the ten trading days immediately
preceding the grant date of the stock options. The maximum term of each stock
option did not exceed five years and all options were vested and exercisable
upon grant. The outstanding options exercised in the fiscal year ended May
31, 1999 were held by officers/ employees who issued notes to the Company for
the exercise price. During the year ended May 31, 2000, the Company and one
of the officers/employees mutually agreed to terminate one of the notes. The
note was secured by outstanding common stock of the Company that had been
issued upon exercise of the stock options. In return for cancellation of the
note, the officer/employee surrendered the shares that secured the note, with
those shares subsequently cancelled. The remaining note matures on or before
December 2000 ($586,500) and carries interest at the rate of 6% per annum.
This note is reported as a reduction of stockholders equity.

        The Board of Directors adopted a 1995 Stock Option Plan on December
19, 1995 which plan was amended in August 1996 and restated in August 1998.
An option granted under the Amended and Restated Stock Option Plan might be
either an incentive stock option (ISO), or a nonstatutory stock option (NSO).
ISOs may be granted only to employees of the Company and are subject to
certain limitations, in addition to restrictions applicable to all stock
options under the Plan. Options not meeting these limitations will be treated
as NSOs. The purchase of ISOs is fair market value on the date of grant; the
purchase price of NSOs may vary from fair market value. Vesting is at the
discretion of the option committee of the Board of Directors but generally is
on a cumulative basis over four years at 25% per year or 50% at grant date
and 12.5% on each anniversary thereafter. The Company has 800,000 shares
reserved for issuance under the stock option plan. The options expire in
years 2006 through 2010.

        The following summarizes the options outstanding as of May 31, 2000:

<TABLE>
<CAPTION>

                                  Options Prior to 1995    1995 Stock Option Plan
                              ---------------------------- -----------------------
                                                  Weighted               Weighted
                                                   Average              Average
                                                   Exercise             Exercise    Combined
                                        Shares      Price      Shares     Price      Shares
-------------------------------------------------------------------------------------------
<S>                                     <C>       <C>          <C>      <C>         <C>
Options outstanding, May 31, 1997       485,750     $1.79      282,250    $5.83     768,000
Options granted                              --        --      174,000    $6.62     174,000
Options exercised                            --        --      (15,750)   $5.71     (15,750)
Options forfeited/cancelled                  --        --     (151,250)   $7.93    (151,250)
-------------------------------------------------------------------------------------------
Options outstanding, May 31, 1998       485,750     $1.79      289,250    $5.22     775,000
Options granted                              --        --      589,250    $3.24     589,250
Options exercised                      (485,750)    $1.79           --       --    (485,750)
Options forfeited/cancelled                  --        --     (426,750)   $4.41    (426,750)
-------------------------------------------------------------------------------------------
Options outstanding, May 31, 1999            --        --      451,750    $3.02     451,750
Options granted                              --        --      179,000    $2.77     179,000
Options exercised                            --        --      (10,000)   $3.00     (10,000)
Options forfeited/cancelled                  --        --      (37,500)   $3.00     (37,500)
-------------------------------------------------------------------------------------------
Options outstanding May 31, 2000             --        --      583,250    $2.94     583,250
===========================================================================================
Options vested at May 31, 2000               --        --      278,625    $2.95     278,625
===========================================================================================

</TABLE>

                                      18

<PAGE>

NOTES TO THE FINANCIAL STATEMENTS

        The Company has adopted the disclosure only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Adjustments are made for options forfeited prior to vesting. For the
years ended May 31, 2000, 1999 and 1998, total value of options granted was
computed to be $473,460 $1,275,098 and $877,963, respectively, which would be
amortized on a straight-line basis over the vesting period of the options.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for the awards in 2000, 1999 and
1998, consistent with the provisions of SFAS 123, the Company's pro forma net
income (loss) for the years ended May 31, 2000, 1999 and 1998, would be
$261,255, ($467,573) and $889,944, respectively. Pro forma basic (loss)
earnings per share for the years ended May 31, 2000, 1999 and 1998 would be
$03, ($.06) and $.13 respectively. Pro forma diluted (loss) earnings per
share for the years ended May 31, 2000, 1999 and 1998 would be $03, ($.06)
and $.12, respectively.

        Pursuant to SFAS 123, the fair value of each option granted is
estimated on the date of the grant using the Black-Scholes option and pricing
model. The weighted average assumptions used for fiscal 2000, 1999 and 1998
was a risk-free interest rate of 7.5% for 2000, 5.5% for 1999 and 7.5% for
1998, an expected dividend yield of 0% for all years, an expected life of 8
years for all periods, and a volatility of 132%, 65% and 52%, respectively.

        The effects of applying SFAS No. 123 in the proforma disclosure are
not indicative of future amounts.

NOTE 10

COMPREHENSIVE OTHER LOSS

<TABLE>
<CAPTION>

Years ended May 31,                          2000           1999
----------------------------------------------------------------
<S>                                     <C>            <C>
Net income (loss)                       $ 561,459      $(259,307)
Other comprehensive income (loss):
(Decrease) in fair market value of
  long-term investment, net of taxes     (925,000)            --
Foreign currency translation
  adjustment                              (69,902)       (54,073)
----------------------------------------------------------------
Total comprehensive loss                $(433,443)     $(313,380)
================================================================

</TABLE>

The long-term investment is considered an "Available-for-sale security." As
required under Statement of Financial Accounting Standards No. 115, all
unrealized gains and losses, net of tax benefits, are included in Accumulated
Other Comprehensive Income (Loss) and reported as a separate component of Other
Comprehensive Income (Loss) in Stockholders' Equity until realized. The
cumulative translation adjustment consists of unrealized gains/losses from
translation adjustments on intercompany foreign currency transactions that are
of a long-term investment nature.

NOTE 11

SUBSEQUENT EVENTS

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.

                                      19

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following information contains certain forward-looking statements that
anticipate future trends or events. These statements are based on certain
assumptions that may prove to be erroneous and are subject to certain risks
including but not limited to the uncertainties of the Company's new product
introductions, the risks of increased competition and technological change in
the Company's industries and other factors detailed in the Company's SEC
filings. Accordingly, actual results may differ, possibly materially, from
the predictions contained herein.

        During fiscal 2000, the Company began to experience sales and profits
from the new technology developed in fiscal 1999 while sales of existing
products continued to grow. Sales of Balancing systems in the United States
(exclusive of intercompany sales) approached record levels and were 7% above
year ago levels while those in the Measurement markets increased 173% over
those realized in fiscal 1999. Results in Europe were down as sales decreased
11% from prior fiscal year. This result is misleading, however, as sales in
the last six months of fiscal 2000 exceed those in the same period of fiscal
1999. The overall result of these positive factors was net income of $561,459
($0.07 per fully diluted share) or an increase of $820,766 ($0.10 per fully
diluted share) over the net loss of $259,307 ($0.03 per fully diluted share)
in fiscal 1999. The reasons for this significant change are summarized herein.

        In prior fiscal years, Management initiated an increase in its
research and development efforts so the Company could introduce new products
for both the laser measurement and mechanical balancer markets. The goal was
expansion of established markets and achieving sales in new markets. Products
developed and/or introduced in fiscal 2000 and 1999 were:

FOR BALANCING SYSTEMS SEGMENT
        1. The new SB-4500 controller
        2. The Acoustic Emissions Monitoring System (AEMS)
        3. The non-contact balance head
        4. Ring balancer for fan markets

FOR MEASUREMENT SYSTEMS SEGMENT
        1. Radial and Circumferential (RC) measurement systems
        2. Deep-Ultraviolet light (DUV) measurement systems

        Sales of these products helped achieve the expected improvement in
sales in fiscal 2000, a level which approached Management's' expectations.
These products, along with others currently under development, are expected
to provide increasing sales for the company in the future.

        Sales outside the United States accounted for approximately 24% of
the Company's revenues in fiscal 2000, 48% in fiscal 1999 and 29% in fiscal
1998. Some foreign customers purchase in their own country's currencies,
thereby imposing on the Company a currency risk. All U.S. sales (76% of total
sales in fiscal 2000) were in U.S. dollars and the remaining fiscal 2000
sales were in currencies other than U.S. dollars. To date, currency
fluctuations have had little impact on revenue realization. However,
significant variations in the value of the U.S. dollar, relative to
currencies of countries in which the Company has significant competitors, can
impact future sales. The Company does not engage in currency hedging. In
addition, the longer payment cycles of international sales can have a
negative impact on liquidity. The Company believes international sales will
continue to grow in future periods.

        A substantial portion of the Company's revenues is derived from sales
to end users through selling agents and directly to builders of machine
tools. The Company is dependent on the sales activities of its selling
agents, and there can be no assurance these agents will continue to be
successful in their efforts to market the Company's products. The Company
enjoys substantial repeat business from a broad base of customers, but there
is no assurance these customers will continue to buy the Company's products.

        For fiscal years 2000 and 1999, sales to a single customer did not
exceed 10% of total revenues while in fiscal 1998, 24% of consolidated sales
were with one customer. In fiscal 1997 the Company entered into a strategic
partnership with Veeco Instruments Inc. (NASDAQ:VECO) to act as the exclusive
sales and marketing agent for SMS's laser light scatter products. In fiscal
1999, Schmitt and Veeco reached a mutual decision to terminate the
relationship, as sales by that entity had dropped dramatically.

        The decrease in revenues in fiscal 1999 occurred exclusively in the
laser Measurement products segment where the volume of product shipments
declined as a result of the drop in business in the technology industry,
primarily disk drive manufacturers. Increased revenues during fiscal 2000
principally resulted from increased volume of product shipments as that
industry begins to recover. Product improvements and available features have
resulted in modestly increased average product prices.

[Graph]

                                      20

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

The Company operates in highly competitive industries characterized by
increasingly rapid technological changes. The Company's competitive advantage
and future success are therefore dependent on its ability to develop new
products, to qualify these new products with its customers, to successfully
introduce these products to the marketplace on a timely basis, to commence
production to meet customer demands and to develop new markets in the
industries for its products and services. The successful introduction of new
technology and products is increasingly complex. If the Company is unable,
for whatever reason, to develop and introduce new products in a timely manner
in response to changing market conditions or customer requirements, its
results of operations could be adversely impacted.

RESULTS OF OPERATIONS

Sales in fiscal 2000 increased to $8,854,256 from $7,957,723, but were lower
than sales of $10,626,084 in fiscal 1998. Worldwide sales of Schmitt
Balancing products in fiscal 2000 remained about the same at $7,245,689 from
$7,377,879 in fiscal 1999 and $7,532,112 in fiscal 1998. Schmitt Measurement
System (SMS) sales increased to $1,608,567 from $579,844 in fiscal 1999, but
were down from sales of $3,093,972 in fiscal 1998. The net income for fiscal
2000 of $561,459 compares to a net loss for fiscal 1999 of $259,307 and net
income for fiscal 1998 of $1,250,115. The improvement in fiscal 2000 was
attributable to increased sales in the measurement segment and a reduction in
operating expenses as a percentage of sales.

[Graph]

        Historically the Company has enjoyed a high gross profit margin in
excess of 50% on its SBS Dynamic Balancing products and 60% on its SMS
Measurement products. Fiscal year 2000 gross profits totaled 56%. Cost of
sales as a percentage of sales for fiscal 2000, 1999 and 1998 was 44%, 52%
and 44% respectively. Margins in fiscal 1999 had declined slightly for
balancer products from increased competitive pressures in all markets.
However, with improvements to existing products and new technology, these
results improved in fiscal 2000 and should improve even further beyond that
date. This is demonstrated by the fact that margins of Balancing products
increased to 53% from 48% in 1999 and approached the margin of 56% realized
in fiscal 1998. Margins of Measurement products increased to 70% from 45% and
57% in fiscal 1999 and 1998 respectively. The increase occurred as the higher
sales provided for increased absorption of manufacturing labor costs.
Management expects the trends in sales and profits of both the balancer and
Measurement products to increase slightly during fiscal 2001. No assurances
can be made that the Company will be profitable or will generate increased
sales in future time periods.

        General, administrative and sales expenses as a percentage of net
sales were 43% in fiscal 2000 compared to 48% in fiscal 1999 and 40% in
fiscal 1998. In terms of dollars, these expenses were $3,809,976, $3,841,155
and $4,275,059 in fiscal 2000, 1999 and 1998 respectively. The reduction in
expenses in fiscal 2000, despite increasing sales, resulted from a concerted
effort by Management to decrease expenses. In future fiscal periods,
Management believes the Company's costs will not increase at the same rate
that sales are anticipated to increase, although there can be no such
assurance.

        Research and development expenses as a percentage of net sales were
4.3% in fiscal 2000 compared to 5.8% in fiscal 1999 and 3.6% in fiscal 1998.
In terms of dollars, these expenses were $380,601, $462,136 and $379,798 in
fiscal 2000, 1999 and 1998 respectively. The Company began a major research
and development program in fiscal 1998 to develop products that will expand
its market base and reduce reliance on historic market segments. This
development program will continue in future fiscal periods, with expenditures
as a percentage of sales expected to approximate those levels expended in
fiscal 2000. The Company's future operating results depend, to a considerable
extent, on its ability to maintain a competitive advantage in both the
products and services it provides. For this reason, Management believes
future investments in research and development are critical to ensure the
flow of innovative, productive, high-quality products and support services.
Accordingly, Management expects to place a high priority on research and
development projects in the future.

        The company realized net income of $561,459 in fiscal 2000 compared
to a net loss of $259,307 in fiscal 1999 and net income for fiscal 1998 of
$1,250,511. Diluted net income per share was $0.07 compared to a net loss per
basic share of $(0.03) in fiscal 1999 and diluted net income per share of
$0.17 in fiscal 1998.

LIQUIDITY AND CAPITAL RESOURCES

The Company's financial condition remains very strong, with a ratio of
current assets to current liabilities of 8.9 to 1 at May 31, 2000 compared to
9.4 to 1 at May 31, 1999 and 7.3 to 1 at May 31, 1998. As of May 31, the
Company had $1,264,475 in cash compared to $268,888 at May 31, 1999.

        The accounts receivable balance at May 31, 2000 was $1,377,422
compared to $1,423,611 at May 31, 1999. This

                                      21

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

change from prior years is not significant as accounts receivable in fiscal
2000 turned at 6.3 times per year compared to 6.1 times in fiscal 1999. At
May 31, 2000, none of the Company's accounts receivable were considered a
doubtful collection. The Company generally experiences a payment cycle of
30-80 days on invoices. Management believes its credit and collection
policies are effective and appropriate for the marketplace and the Company
has had no significant bad debt write-offs since its inception in 1986. There
can be no assurance that the Company's collection procedures will continue to
be successful.

        Working capital increased slightly to $6,542,983 at May 31, 2000 from
$5,812,075 at May 31, 1999. During fiscal 2000 and 1999, the Company spent
$190,086 and $119,380 respectively to acquire certain worldwide corporate
assets of property and equipment to assist in production and product
development. Although the Company has no current material commitments for
capital expenditures, product development to extend SBS and SMS products to
new markets is expected to result in increased capital expenditures for
equipment in fiscal 2001.

[Graph]

        The Company maintains levels of inventory sufficient to satisfy
normal customer demands, plus an increasing short-term delivery requirement
for a majority of its products. Management believes its ability to provide
prompt delivery gives it a competitive advantage for certain sales.
Additionally, inventories are periodically adjusted according to Management's
forecast for future business activity. It is expected that current inventory
levels will decrease as market conditions improve in the technology industry
(disk drive and silicon wafer segments) and new products are introduced.
Despite the introduction of new products, this new technology will utilize
existing raw materials, thereby mitigating the level of additional inventory
purchases in fiscal 2001 and beyond. The average finished goods inventory
turnover ratio for fiscal 2000 and 1999 was 0.9 and 1.0 times, respectively.

        In fiscal 1999, officers/employees exercised stock options for
485,750 shares at an average exercise price of $1.79 per share. The
officers/employees issued notes to the Company for the exercise price. During
the year ended May 31, 2000, the Company and one of the officers/employees
mutually agreed to terminate one of the notes. The note was secured by
192,500 shares of outstanding common stock of the Company that had been
issued upon exercise of the stock options. In return for cancellation of the
note, the officer/employee surrendered the shares that secured the note, with
those shares subsequently cancelled. The remaining note matures on or before
December 2000 and carries interest at the rate of 6% per annum. The notes are
reported as a reduction of stockholders' equity.

        Also in fiscal 1999, the Company issued 610,000 shares of its common
stock to acquire 1,375,716 shares or approximately 19.5% of the then
outstanding shares of Air Packaging Technologies, Inc. (APTI). That company
is engaged in the design, manufacture, marketing and sales of "Air Box"
patented packaging systems used in the semiconductor, electronic, medical and
dental markets worldwide. The Company made this investment as the philosophy
of APTI is similar to its own--to provide products that make its customers
more profitable either through increased productivity or reduced operating
costs. At May 31, 2000, the fair market value of this investment had declined
to an amount below the acquisition value. Management does not believe this
decline is permanent in nature.

        The acquisition of SMS in fiscal 1995 resulted in a tax loss
carryforward in excess $5 million, which is available to offset earnings from
SMS through the year 2009. As of May 31, 2000, approximately $2.4 million of
these losses remain.

        During the year ended May 31, 2000, the Company completed its planned
Year 2000 compliance activities with respect to products, internal systems,
software, equipment and facilities. To date, the Company has not encountered
any material Year 2000 problems with respect to any products, internal
systems, software, equipment and facilities nor has it encountered any vendor
supply disruptions related to Year 2000 problems.

        Management believes its cash flows from operations, available credit
resources and its cash position will provide adequate funds on both a
short-term and long-term basis to cover currently foreseeable debt payments,
lease commitments and payments under existing and anticipated supplier
agreements. Management believes that such cash flow (without the raising of
external funds) is sufficient to finance current operations, projected
capital expenditures, anticipated long-term sales agreements and other
expansion-related contingencies during fiscal 2001.

[Graph]

                                      22

<PAGE>

SUMMARIZED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>

In thousands, except per share information (unaudited)

2000 QUARTER ENDED              August 31     November 30    February 29          May 31
----------------------------------------------------------------------------------------
<S>                             <C>           <C>            <C>                  <C>
Sales                              $2,013          $2,343         $2,543          $1,955
Gross profit                       $1,056          $1,286         $1,483          $1,134
Net income (loss)                     $85            $148           $261             $67
Net income per share, basic         $0.01           $0.02          $0.03           $0.01
Net income per share, diluted       $0.01           $0.02          $0.03           $0.01
Market price of common stock
  Low                               $2.50           $2.38          $2.06           $2.44
  High                              $3.56           $3.38          $3.75           $3.69
========================================================================================
1999 Quarter Ended              August 31     November 30    February 28          May 31
----------------------------------------------------------------------------------------
Sales                              $1,985          $2,162         $1,767          $2,044
Gross profit                         $962            $986           $998            $868
Net income (loss)                    $(51)          $(116)           $17           $(109)
Net income per share, basic        $(0.01)         $(0.02)         $0.00          $(0.01)
Net income per share, diluted      $(0.01)         $(0.02)         $0.00          $(0.01)
Market price of common stock
  Low                               $3.88           $3.13          $3.00           $1.94
  High                              $6.38           $5.00          $4.38           $4.00
========================================================================================

</TABLE>

COMMON STOCK INFORMATION AND DIVIDEND POLICY

As of July 15, 2000, there were 7,963,889 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. Management
estimates that there are over 2,500 shareholders who own the Company's stock.

        The Company has not paid any dividends on its Common Stock since
1994. The Company's present policy is to retain earnings to finance the
Company's business. Any future dividends will be dependent upon the Company's
financial condition, results of operations, current 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.

        The sum of quarterly earnings per share does not equal annual
earnings per share as a result of the computation of quarterly versus annual
average shares outstanding.

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

In thousands, except per share information

Year Ended May 31                                    2000            1999            1998            1997            1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>             <C>              <C>
Sales                                             $ 8,854         $ 7,958         $10,626         $10,542          $7,080
Net income (loss)                                 $   561         $  (259)        $ 1,250         $ 1,725          $1,217
Net income (loss)per share, basic                 $  0.07         $ (0.03)        $  0.18         $  0.25          $ 0.18
Weighted average number shares, basic               8,104           7,592           7,091           7,031           6,888
Net income (loss) per share, diluted              $  0.07         $ (0.03)        $  0.17         $  0.23          $ 0.16
Weighted average number shares, diluted             8,607           7,592           7,456           7,562           7,417
Stockholders' equity                              $10,128         $10,587         $ 8,688         $ 7,429          $4,887
Total Assets                                      $10,953         $11,282         $ 9,619         $ 8,515          $5,986
=========================================================================================================================

</TABLE>

                                      23

<PAGE>

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 operations, of changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial
position of Schmitt Industries, Inc. and its subsidiaries at May 31, 2000 and
May 31, 1999, and the results of their operations and their cash flows for
the years then ended 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 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

SCHMITT INDUSTRIES

CORPORATE OFFICES
Schmitt Industries, Inc.
2765 NW Nicolai St.
Portland, OR 97210
Phone: (503) 227-7908
Fax: (503) 223-1258
www.schmitt-ind.com



ANNUAL MEETING

The annual meeting of shareholders will be held Friday, September 29, 2000 at
3:00 p.m. at the Corporate Offices.

TRANSFER AGENT & REGISTRAR

Interwest Transfer Company
Salt Lake City, Utah U.S.A.

BANKING REFERENCE

Wells Fargo Bank
Portland, Oregon U.S.A.

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

PricewaterhouseCoopers, LLP
Portland, Oregon U.S.A.

STOCK LISTING

NASDAQ National Market
Symbol: SMIT

OFFICERS

Wayne A. Case
PRESIDENT AND CHIEF EXECUTIVE OFFICER

David W. Case
VICE PRESIDENT OF OPERATIONS

Robert C. Thompson
CHIEF FINANCIAL OFFICER

Linda M. Case
CORPORATE SECRETARY

DIRECTORS

Wayne A. Case
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SCHMITT INDUSTRIES

Maynard Brown
PARTNER, BROWN MCCUE, ATTORNEYS

David M. Hudson
PRESIDENT, COLDSTREAM HOLDINGS, INC.

Trevor Nelson
FINANCIAL CONSULTANT
THE STEWART THOMAS GROUP

Dennis T. Pixton
PRESIDENT, CHIEF OPERATING OFFICER
MICHAELS OF OREGON CO.

John A. Rupp
BUSINESS EXECUTIVE - SELF EMPLOYED

FORM 10-K AVAILABLE

A copy of the Company's Form 10-K as filed with the Securities and Exchange
Commission is available to shareholders free of charge upon request addressed
to the Secretary at the Company's Corporate Offices.

FORWARD-LOOKING STATEMENTS

This summary annual report, other than the historical financial information,
contains statements regarding future sales and earnings growth and projects
or processes currently under development which are forward-looking statements
that involve risks and uncertainties that could cause actual results to
differ materially from those set forth in the forward-looking statements,
including delays in technology or product developments, shipment or
cancellation of orders, timing of future orders, customer reorganizations,
fluctuations in demand and the other risks detailed from time-to-time in the
Company's reports which are filed with the Securities and Exchange Commission.

                                      24