SCHMITT INDUSTRIES INC (Form: 10-Q, Received: 01/12/2010 16:34:48)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: November 30, 2009

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

For the transition period from: To:

Commission File Number: 000-23996

SCHMITT INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Oregon

93-1151989

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification Number)

2765 NW Nicolai Street, Portland, Oregon 97210-1818

(Address of principal executive offices) (Zip Code)

(503) 227-7908

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

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

The number of shares of each class of common stock outstanding as of January 4, 2010


Common stock, no par value		2,894,802

SCHMITT INDUSTRIES, INC.

INDEX TO FORM 10-Q


		Page
Part I - FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets: – November 30, 2009 and May 31, 2009 (unaudited)	3

	Consolidated Statements of Operations: – For the Three and Six Months Ended November 30, 2009 and 2008 (unaudited)	4

	Consolidated Statements of Cash Flows: – For the Six Months Ended November 30, 2009 and 2008 (unaudited)	5

	Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income: – For the Six Months Ended November 30, 2009 (unaudited)	6

	Notes to Consolidated Interim Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4.	Controls and Procedures	22

Part II - OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders	23

Item 6.	Exhibits	23

Signatures		23

Certifications

Page 2

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

SCHMITT INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	November 30, 2009			May 31, 2009
ASSETS
Current assets
Cash and cash equivalents	$	3,245,024		$	4,174,335
Short-term investments		500,000			—
Accounts receivable, net of allowance of $59,309 and $38,233 at November 30, 2009 and May 31, 2009, respectively		1,186,814			1,110,850
Inventories		3,714,140			3,866,971
Prepaid expenses		117,349			171,178
Income taxes receivable		237,881			330,134

		9,001,208			9,653,468

Property and equipment
Land		299,000			299,000
Buildings and improvements		1,564,880			1,564,880
Furniture, fixtures and equipment		1,047,291			1,037,346
Vehicles		90,452			90,452

		3,001,623			2,991,678
Less accumulated depreciation and amortization		(1,621,584	)		(1,563,840	)

		1,380,039			1,427,838

Other assets
Intangible assets		1,591,617			1,542,694

TOTAL ASSETS	$	11,972,864		$	12,624,000

LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	418,324		$	335,609
Accrued commissions		171,337			172,755
Accrued payroll liabilities		145,249			228,887
Other accrued liabilities		173,863			168,325

Total current liabilities		908,773			905,576

Long-term liabilities		3,472			—
Stockholders’ equity
Common stock, no par value, 20,000,000 shares authorized, 2,894,802 and 2,870,160 shares issued and outstanding at November 30, 2009 and May 31, 2009, respectively		9,694,125			9,545,678
Accumulated other comprehensive loss		(191,238	)		(183,629	)
Retained earnings		1,557,732			2,356,375

Total stockholders’ equity		11,060,619			11,718,424

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	11,972,864		$	12,624,000

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

Page 3

SCHMITT INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2009 AND 2008

(UNAUDITED)


	Three Months Ended November 30,						Six Months Ended November 30,
	2009			2008			2009			2008
Net sales	$	1,921,861		$	2,989,281		$	3,145,095		$	6,182,666
Cost of sales		978,914			1,586,602			1,653,059			3,122,607

Gross profit		942,947			1,402,679			1,492,036			3,060,059

Operating expenses:
General, administration and sales		1,032,282			1,420,351			1,992,989			2,743,269
Research and development		127,495			250,894			300,539			498,113

Total operating expenses		1,159,777			1,671,245			2,293,528			3,241,382

Operating loss		(216,830	)		(268,566	)		(801,492	)		(181,323	)
Other income (expense)		5,468			(2,214	)		15,133			18,017

Loss before income taxes		(211,362	)		(270,780	)		(786,359	)		(163,306	)
Provision (benefit) for income taxes		12,284			(157,113	)		12,284			(83,186	)

Net loss	$	(223,646	)	$	(113,667	)	$	(798,643	)	$	(80,120	)

Net loss per common share:
Basic	$	(0.08	)	$	(0.04	)	$	(0.28	)	$	(0.03	)

Weighted average number of common shares, basic		2,886,949			2,870,160			2,878,509			2,870,160

Diluted	$	(0.08	)	$	(0.04	)	$	(0.28	)	$	(0.03	)

Weighted average number of common shares, diluted		2,886,949			2,870,160			2,878,509			2,870,160

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

Page 4

SCHMITT INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED NOVEMBER 30, 2009 AND 2008

(UNAUDITED)


	Six Months Ended November 30,
	2009			2008
Cash flows relating to operating activities
Net loss	$	(798,643	)	$	(80,120	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		179,339			201,597
Gain on disposal of property and equipment		(1,200	)		—
Stock based compensation		48,154			109,870
(Increase) decrease in:
Accounts receivable		(38,640	)		(360,791	)
Inventories		194,530			(119,942	)
Prepaid expenses		56,908			(23,700	)
Income taxes receivable		91,917			—
Increase (decrease) in:
Accounts payable		72,499			64,004
Accrued liabilities and customer deposits		(83,505	)		(72,277	)
Income taxes payable		—			(248,108	)

Net cash used in operating activities		(278,641	)		(529,467	)


Cash flows relating to investing activities
Purchase of short-term investments		(1,000,000	)		(1,019,199	)
Maturities of short-term investments		500,000			3,519,062
Purchase of property and equipment		(40,363	)		(117,455	)
Payments on asset acquisition		(100,000	)		—
Proceeds from sale of property and equipment		1,200			—

Net cash provided by (used in) investing activities		(639,163	)		2,382,408

Effect of foreign exchange translation on cash		(11,507	)		11,286

Increase (decrease) in cash and cash equivalents		(929,311	)		1,864,227

Cash and cash equivalents, beginning of period		4,174,335			3,020,131

Cash and cash equivalents, end of period	$	3,245,024		$	4,884,358

Supplemental Disclosure of Cash Flow Information
Cash paid (received) during the period for income taxes	$	(79,633	)	$	145,009

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

Page 5

SCHMITT INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED NOVEMBER 30, 2009

(UNAUDITED)


	Shares	Amount		Accumulated other comprehensive loss			Retained earnings			Total			Total comprehensive loss
Balance, May 31, 2009	2,870,160	$	9,545,678	$	(183,629	)	$	2,356,375		$	11,718,424
Stock based compensation	—		48,154		—			—			48,154
Common stock issued in connection with asset acquisition	24,642		100,293		—			—			100,293
Net loss	—		—		—			(798,643	)		(798,643	)	$	(798,643	)
Other comprehensive loss	—		—		(7,609	)		—			(7,609	)		(7,609	)

Balance, November 30, 2009	2,894,802	$	9,694,125	$	(191,238	)	$	1,557,732		$	11,060,619

Comprehensive loss, six months ended November 30, 2009													$	(806,252	)

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

Page 6

SCHMITT INDUSTRIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Note 1:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial information included herein has been prepared by Schmitt Industries, Inc. (the Company or Schmitt) and its wholly owned subsidiaries. In the opinion of management, the accompanying unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly its financial position as of November 30, 2009 and its results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 2009 has been derived from the Annual Report on Form 10-K for the fiscal year ended May 31, 2009. The accompanying unaudited financial statements and related notes should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2009. Operating results for the interim periods presented are not necessarily indicative of the results that may be experienced for the fiscal year ending May 31, 2010.

The Company has performed a review for subsequent events through the date of the filing of these financial statements with the Securities and Exchange Commission on January 12, 2010.

Revenue Recognition and Accounts Receivable

The Company recognizes revenue for sales and billing for freight charges upon delivery of the product to the customer at a fixed and determinable price with a reasonable assurance of collection, passage of title to the customer as indicated by shipping terms and fulfilment of all significant obligations, pursuant to the guidance provided by Accounting Standards Codification Topic 605. For sales to all customers, including manufacturer representatives, distributors or their third-party customers, these criteria are met at the time product is shipped. When other significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled. In addition, judgments are required in evaluating the credit worthiness of our customers. Credit is not extended to customers and revenue is not recognized until we have determined that collectability is reasonably assured.

Financial Instruments

The carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash and cash equivalents, short term investments, accounts receivable and accounts payable) also approximates fair value because of their short-term maturities.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles – a Replacement of FASB Statement No. 162,” which establishes the FASB Accounting Standards Codification™ (the “Codification” or “ASC”) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this guidance, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the codification will become non-authoritative. The Company adopted ASC Topic 105 in the second quarter of Fiscal 2010. The adoption of ASC Topic 105 did not have a material impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which were incorporated into the Codification within ASC Topic 805 “Business Combinations”. This guidance establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This guidance is to be applied prospectively to business combinations for which the acquisition date is after May 31, 2009.

Page 7

In May 2009, the FASB issued SFAS No 165, “Subsequent Events” (SFAS 165”). The provisions of this standard were incorporated into the Codification within ASC Topic 855, “Subsequent Events”. This guidance is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This guidance is effective for interim or annual financial periods ending after June 15, 2009. The Company has adopted this guidance.

Note 2:

INVENTORY

Inventory is valued at the lower of cost or market with cost determined on the average cost basis. Costs included in inventories consist of materials, labor and manufacturing overhead, which are related to the purchase or production of inventories. Write-downs, when required, are made to reduce excess inventories to their net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual conditions become less favorable than the assumptions used, an additional inventory write-down may be required. As of November 30, 2009 and May 31, 2009, inventories consisted of:


	Nov. 30, 2009		May 31, 2009
Raw materials	$	1,396,142	$	1,525,618
Work-in-process		744,875		730,609
Finished goods		1,573,123		1,610,744

	$	3,714,140	$	3,866,971

Note 3:

LINE OF CREDIT

In February 2009, the Company renewed its $1.0 million bank line of credit secured by U.S. accounts receivable, inventories and general intangibles that expires on March 1, 2011. Interest is payable at the bank’s prime rate (3.25% as of November 30, 2009) or LIBOR plus 2.0% (2.24% as of November 30, 2009). There were no outstanding balances on the line of credit at November 30, 2009 and May 31, 2009.

Note 4:

STOCK OPTIONS AND STOCK-BASED COMPENSATION

Stock-based compensation includes expense charges for all stock-based awards to employees and directors granted under the Company’s stock option plan. Stock-based compensation recognized during the period is based on the value of the portion of the stock-based award that will vest during the period, adjusted for expected forfeitures. Compensation cost for all stock-based awards is recognized using the straight-line method. Stock-based compensation recognized in the Company’s Consolidated Financial Statements for the three and six months ended November 30, 2009 has been recognized in accordance with ASC Topic 718. The Company uses the Black-Scholes option pricing model as its method of valuation for stock-based awards. The Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results. These variables include, but are not limited to:

•

Risk-Free Interest Rate. The Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award.

•

Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and pre-vesting and post-vesting forfeitures.

•

Expected Volatility. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock. The volatility factor the Company uses is based on its historical stock prices over the most recent period commensurate with the estimated expected life of the award. These historical periods may exclude portions of time when unusual transactions occurred.

Page 8

•

Expected Dividend Yield. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero.

•

Expected Forfeitures. The Company uses relevant historical data to estimate pre-vesting option forfeitures. The Company records stock-based compensation only for those awards that are expected to vest.

The Company has computed, to determine stock-based compensation expense recognized for those options granted during the six months ended November 30, 2009 and 2008, the value of all stock options granted using the Black-Scholes option pricing model using the following assumptions:


	Six Months Ended November 30,
	2009	2008
Risk-free interest rate	—	4.0%
Expected life	—	4.8 years
Expected volatility	—	54.4%

At November 30, 2009, the Company had a total of 218,609 outstanding stock options (181,109 vested and exercisable and 37,500 non-vested) with a weighted average exercise price of $3.32. The Company estimates that a total of approximately $45,000 will be recorded as additional stock-based compensation expense during the remainder of the year ending May 31, 2010 for all options that were outstanding as of November 30, 2009, but which were not yet vested.


Outstanding Options				Exercisable Options
Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (yrs)	Number of Shares	Weighted Average Exercise Price
76,110	$	1.20	2.3	76,110	$	1.20
62,499		2.30	4.5	62,499		2.30
5,000		5.80	5.9	5,000		5.80
75,000		6.16	8.5	37,500		6.16

218,609	$	3.32	5.1	181,109	$	2.73

Options granted, exercised, and forfeited or canceled under the Company’s stock option plan during the three and six months ended November 30, 2009 are summarized as follows:


	Three Months Ended November 30, 2009			Six Months Ended November 30, 2009
	Number of Shares	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
Options outstanding - beginning of period	218,609	$	3.32	218,609	$	3.32
Options granted	—		—	—		—
Options exercised	—		—	—		—
Options forfeited/canceled	—		—	—		—

Options outstanding - November 30, 2009	218,609	$	3.32	218,609	$	3.32

Page 9

Note 5:

EPS RECONCILIATION


	Three Months Ended November 30,		Six Months Ended November 30,
	2009	2008	2009	2008
Weighted average shares (basic)	2,886,949	2,870,160	2,878,509	2,870,160
Effect of dilutive stock options	—	—	—	—

Weighted average shares (diluted)	2,886,949	2,870,160	2,878,509	2,870,160

Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed using the weighted average number of common shares outstanding, adjusted for dilutive incremental shares attributed to outstanding options to purchase common stock. Common stock equivalents for stock options are computed using the treasury stock method. In periods in which a net loss is incurred, no common stock equivalents are included since they are antidilutive and as such all stock options outstanding are excluded from the computation of diluted net loss in those periods. 79,051 and 96,162 potentially dilutive common shares from outstanding stock options have been excluded from diluted earnings (loss) per share for the three months ended November 30, 2009 and 2008, respectively. 82,284 and 96,205 potentially dilutive common shares from outstanding stock options have been excluded from diluted earnings (loss) per share for the six months ended November 30, 2009 and 2008, respectively.

Note 6:

INCOME TAXES

The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Each year the Company files income tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the taxing authorities. Positions challenged by the taxing authorities may be settled or appealed by the Company. As a result, there is an uncertainty in income taxes recognized in the Company’s financial statements in accordance with ASC Topic 740. The Company applies this guidance by defining criteria that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement, de-recognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure, and transition.

On June 1, 2007, the Company adopted the provisions of ASC Topic 740. At June 1, 2007, the gross amount of unrecognized tax benefits was approximately $586,000, which included approximately $150,000 of net unrecognized tax benefits that, if recognized, would reduce the Company’s effective income tax rate. During the third quarter of Fiscal 2009, the Company completed an examination of its federal tax returns for the years ended May 31, 2005 through 2007. The Company recognized tax benefits of approximately $150,000 during the three and nine months ended February 28, 2009. Other long-term liabilities related to tax contingencies were $0 as of November 30, 2009 and May 31, 2009.

Interest and penalties associated with uncertain tax positions are recognized as components of the “Provision for income taxes.” The Company’s accrual for interest and penalties was $96,500 upon adoption of ASC Topic 740. The liability for payment of interest and penalties was $0 as of November 30, 2009 and May 31, 2009. The liability for payment of interest and penalties decreased to $0 during the three and nine months ended February 28, 2009 due to the completion of the federal examination.

Page 10

Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax years for Fiscal 2007 and after are subject to examination. In the United Kingdom, tax years for Fiscal 2006 and after are subject to examination. In Canada, tax years for 2005 and after are subject to examination. In the United States, returns related to an acquired subsidiary for the year ended October 31, 1994 and final return for the period ended May 19, 1995 are also subject to examination.

Effective Tax Rate

Our effective tax rate on consolidated net loss was (1.6)% for the six months ended November 30, 2009. Our effective tax rate on consolidated net loss differs from the federal statutory tax rate primarily due to the amount of income from foreign jurisdictions, changes in the deferred tax valuation allowance and certain expenses not being deductible for income tax reporting purposes offset by tax credits related to research and experimentation expenses. One of the items not deductible for income tax reporting is stock based compensation Management believes the effective tax rate for Fiscal 2010 will be approximately (2.6)% due to the items noted above.

Note 7:

SEGMENTS OF BUSINESS

The Company has two reportable business segments: the design and assembly of dynamic balancing systems for the machine tool industry (Balancer), and the design and assembly of laser-based test and measurement systems (Measurement). The Company operates in three principal geographic markets: North America, Europe and Asia.

Segment Information


	Three Months Ended November 30,
	2009						2008
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	1,481,442		$	561,857		$	2,540,083		$	725,671
Intercompany sales		(100,749	)		(20,689	)		(265,102	)		(11,371	)

Net sales	$	1,380,693		$	541,168		$	2,274,981		$	714,300

Operating income (loss)	$	(69,794	)	$	(147,036	)	$	(143,500	)	$	(125,066	)

Depreciation expense	$	38,353		$	14,657		$	36,280		$	12,651

Amortization expense	$	—		$	38,636		$	—		$	53,744

Capital expenditures	$	33,046		$	6,137		$	11,889		$	12,892


	Six Months Ended November 30,
	2009						2008
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	2,499,703		$	905,654		$	5,035,104		$	1,629,866
Intercompany sales		(236,888	)		(23,374	)		(458,201	)		(24,103	)

Net sales	$	2,262,815		$	882,280		$	4,576,903		$	1,605,763

Operating income (loss)	$	(415,002	)	$	(386,490	)	$	37,453		$	(218,776	)

Depreciation expense	$	77,443		$	28,475		$	69,325		$	24,783

Amortization expense	$	—		$	73,421		$	—		$	107,489

Capital expenditures	$	33,046		$	7,317		$	90,143		$	27,312

Page 11

Geographic Information-Net Sales by Geographic Area


	Three Months Ended November 30,				Six Months Ended November 30,
Geographic Sales	2009		2008		2009		2008
North American	$	972,175	$	1,681,162	$	1,565,767	$	3,348,020
European		279,856		403,742		551,140		889,271
Asia		612,965		763,180		954,898		1,703,095
Other markets		56,865		141,197		73,290		242,280

Total Net Sales	$	1,921,861	$	2,989,281	$	3,145,095	$	6,182,666


	Three Months Ended November 30,
	2009					2008
	United States			Europe		United States			Europe
Operating income (loss)	$	(233,147	)	$	16,317	$	(355,250	)	$	86,684

Depreciation expense	$	53,010		$	—	$	48,931		$	—

Amortization expense	$	38,636		$	—	$	53,744		$	—

Capital expenditures	$	39,183		$	—	$	24,781		$	—


	Six Months Ended November 30,
	2009					2008
	United States			Europe		United States			Europe
Operating income (loss)	$	(823,470	)	$	21,978	$	(374,157	)	$	192,834

Depreciation expense	$	105,918		$	—	$	93,951		$	157

Amortization expense	$	73,421		$	—	$	107,489		$	—

Capital expenditures	$	40,363		$	—	$	117,455		$	—

Note — Europe is defined as the European subsidiary, Schmitt Europe, Ltd.

Segment and Geographic Assets


	November 30, 2009		May 31, 2009
Segment assets to total assets
Balancer	$	4,440,843	$	4,674,279
Measurement		3,549,116		3,445,253
Corporate assets		3,982,905		4,504,468

Total assets	$	11,972,864	$	12,624,000


Geographic assets to long-lived assets
United States	$	1,380,039	$	1,427,838
Europe		—		—

Total assets	$	1,380,039	$	1,427,838


Geographic assets to total assets
United States	$	11,400,368	$	12,042,035
Europe		572,496		581,965

Total assets	$	11,972,864	$	12,624,000

Page 12

Note 8:

ACQUISITION

On September 30, 2009, the Company completed an Asset Purchase Agreement (the “Agreement”) with Optical Dimensions, a sole proprietorship (“Optical”), pursuant to which the Company acquired all of the assets and assumed certain liabilities of Optical. The Company will own and operate Optical’s business, including its patented laser light scatter roughness measurement technology. The total purchase price for the acquisition was $200,293 which includes the value of the shares issued and the cash paid. The Agreement provided that the Company pay cash of $100,000 and issue 24,642 shares of common stock of the Company. The number of shares issued was equal to $100,000 in value based on the average closing price of the Company’s common stock, as reported on the NASDAQ National Market, over the five-day period immediately prior to closing. Based upon the closing price on September 30, 2009, as reported on the NASDAQ Capital Market, the aggregate value of the Company’s 24,642 shares issued was $100,293.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition:


Tangible assets and liabilities assumed:
Receivables	$	33,434
Inventory		40,000
Property and equipment		17,757
Prepaid expenses		2,955
Accounts payable		(9,374	)
Intangible assets
Purchased technology		115,521

Total	$	200,293

The allocation process requires an analysis and valuation of acquired assets including technologies, customer contracts and relationships, trade names and liabilities assumed, including contractual commitments and legal contingencies. The value assigned to certain acquired assets and liabilities are preliminary, are based upon information available as November 30, 2009, and may be adjusted as further information becomes available. Additional information that may become available subsequently and may result in changes in the values allocated to various assets and liabilities includes, but is not limited to, unidentified claims from suppliers or other contingent obligations and the amounts required to settle them. Any changes in the values allocated to tangible and specifically identified intangible assets acquired and liabilities assumed during the allocation period may result in adjustment to intangible assets.

Purchased technology relates to Optical’s patented laser light scatter roughness measurement technology that has reached technological feasibility. The fair value of the purchased technology is being amortized over the expected remaining useful life of 5 years.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report filed with the SEC on Form 10-Q (the “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of Schmitt Industries, Inc. and its consolidated subsidiaries (the “Company”) that are based on management’s current expectations, estimates, projections and assumptions about the Company’s business. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed in the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report as well as those discussed from time to time in the Company’s other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

RESULTS OF OPERATIONS

Overview

Schmitt Industries, Inc. designs, manufactures and markets computer controlled vibration detection and balancing equipment (the Balancer segment) primarily to the machine tool industry, and, through its wholly owned subsidiary, Schmitt Measurement Systems, Inc. (SMS), precision laser-based surface measurement products, laser-based distance measurement products and ultrasonic measurement systems (the Measurement segment) for a variety of industrial applications worldwide. The Company also sells and markets its products in Europe through its wholly owned subsidiary, Schmitt Europe Ltd. (SEL), located in the United Kingdom. The Company is organized into two operating segments: the Balancer segment and the Measurement segment. The accompanying unaudited financial information should be read in conjunction with our Annual Report filed with the Securities and Exchange Commission (SEC) on Form 10-K for the fiscal year ended May 31, 2009.

For the three months ended November 30, 2009, total sales decreased $1.1 million, or 35.7%, to $1.9 million from $3.0 million in the three months ended November 30, 2008. For the six months ended November 30, 2009, total sales decreased $3.0 million, or 49.1%, to $3.1 million from $6.2 million in the six months ended November 30, 2008. Balancer segment sales primarily come from end-users, rebuilders and original equipment manufacturers of grinding machines within the target geographic markets of North America, Asia and Europe. Balancer segment sales decreased $894,000, or 39.3%, to $1.4 million for the three months ended November 30, 2009 compared to $2.4 million for the three months ended November 30, 2008. Balancer segment sales decreased $2.3 million, or 50.6%, to $2.3 million for the six months ended November 30, 2009 compared to $4.6 million for the six months ended November 30, 2008. The Measurement segment product line consists of both laser-based light-scatter and distance measurement and dimensional sizing products. Total Measurement segment sales decreased $173,000, or 24.2%, to $541,000 for the three months ended November 30, 2009 compared to $714,000 for the three months ended November 30, 2008. Total Measurement segment sales decreased $723,000, or 45.1%, to $882,000 for the six months ended November 30, 2009 compared to $1.6 million for the six months ended November 30, 2008.

In response to the significant decreases in revenues during the past year, the Company has been reducing its expenses across the entire Company. Operating expenses have decreased $511,000, or 30.6%, to $1.2 million for the three months ended November 30, 2009 from $1.7 million for the three months ended November 30, 2008. Operating expenses have decreased $948,000, or 29.2%, to $2.3 million for the six months ended November 30, 2009 from $3.2 million for the six months ended November 30, 2008. General, administration and sales expenses have decreased $388,000, or 27.3%, to $1.0 million for the three months ended November 30, 2009 from $1.4 million for the same period in the prior year. Research and development expenses have decreased $123,000, or 49.2%, to $127,000 for the

Page 14

three months ended November 30, 2009 from $251,000 for the three months ended November 30, 2008. Research and development expenses have decreased $198,000, or 39.7%, to $301,000 for the six months ended November 30, 2009 from $498,000 for the six months ended November 30, 2008. Net loss was $224,000, or $0.08 per fully diluted share, for the three months ended November 30, 2009 as compared to net loss of $114,000, or $0.04 per fully diluted share, for the three months ended November 30, 2008. Net loss was $799,000, or $0.28 per fully diluted share, for the six months ended November 30, 2009 as compared to net loss of $80,000, or $0.03 per fully diluted share, for the six months ended November 30, 2008.

Acquisition

On September 30, 2009, the Company completed an Asset Purchase Agreement (the “Agreement”) with Optical Dimensions, a sole proprietorship (“Optical”), pursuant to which the Company acquired all of the assets and assumed certain liabilities of Optical. The Company will own and operate Optical’s business, including its patented laser light scatter roughness measurement technology. The total purchase for the acquisition was $200,293 which includes the value of the shares issued and the cash paid. The Agreement provided that the Company pay cash of $100,000 and issue 24,642 shares of common stock of the Company. The number of shares issued was equal to $100,000 in value based on the average closing price of the Company’s common stock, as reported on the NASDAQ National Market, over the five-day period immediately prior to closing. Based upon the closing price on September 30, 2009, as reported on the NASDAQ Capital Market, the aggregate value of the Company’s 24,642 shares issued was $100,293.

Critical Accounting Policies

There were no material changes in our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended May 31, 2009.

Recently Issued Accounting Pronouncements:

Refer to Note 1 of the Notes to Consolidated Interim Financial Statements for discussion of recently issued accounting pronouncements.

Page 15

Discussion of Operating Results


	Three Months Ended November 30,
	2009					2008
Balancer sales	$	1,380,693		71.8	%	$	2,274,981		76.1	%
Measurement sales		541,168		28.2	%		714,300		23.9	%

Total sales		1,921,861		100.0	%		2,989,281		100.0	%
Cost of sales		978,914		50.9	%		1,586,602		53.1	%

Gross profit		942,947		49.1	%		1,402,679		46.9	%


Operating expenses:
General, administration and sales		1,032,282		53.7	%		1,420,351		47.5	%
Research and development		127,495		6.6	%		250,894		8.4	%

Total operating expenses		1,159,777		60.3	%		1,671,245		55.9	%


Operating loss		(216,830	)	-11.3	%		(268,566	)	-9.0	%
Other income (expense)		5,468		0.3	%		(2,214	)	-0.1	%

Loss before income taxes		(211,362	)	-11.0	%		(270,780	)	-9.1	%
Provision (benefit) for income taxes		12,284		0.6	%		(157,113	)	-5.3	%


Net loss	$	(223,646	)	-11.6	%	$	(113,667	)	-3.8	%


	Six Months Ended November 30,
	2009					2008
Balancer sales	$	2,262,815		71.9	%	$	4,576,903		74.0	%
Measurement sales		882,280		28.1	%		1,605,763		26.0	%

Total sales		3,145,095		100.0	%		6,182,666		100.0	%
Cost of sales		1,653,059		52.6	%		3,122,607		50.5	%

Gross profit		1,492,036		47.4	%		3,060,059		49.5	%


Operating expenses:
General, administration and sales		1,992,989		63.4	%		2,743,269		44.4	%
Research and development		300,539		9.6	%		498,113		8.1	%

Total operating expenses		2,293,528		72.9	%		3,241,382		52.4	%


Operating loss		(801,492	)	-25.5	%		(181,323	)	-2.9	%
Other income		15,133		0.5	%		18,017		0.3	%

Loss before income taxes		(786,359	)	-25.0	%		(163,306	)	-2.6	%
Provision (benefit) for income taxes		12,284		0.4	%		(83,186	)	-1.3	%


Net loss	$	(798,643	)	-25.4	%	$	(80,120	)	-1.3	%

Page 16

Sales – Sales in the Balancer segment decreased $894,000, or 39.3%, to $1.4 million for the three months ended November 30, 2009 compared to $2.3 million for the three months ended November 30, 2008. This decrease is primarily due to lower unit sales volumes in Asia, North America and Europe during the second quarter of Fiscal 2010. North American sales decreased $536,000, or 48.6%, in the three months ended November 30, 2009 compared to the same period in the prior year. Sales in Asia decreased $146,000, or 19.9%, for the three months ended November 30, 2009 compared to the three months ended November 30, 2008. European sales decreased $137,000, or 41.1%, in the second quarter of Fiscal 2010 compared to the second quarter of Fiscal 2009. Sales in other regions of the world decreased $76,000 in the second quarter of Fiscal 2010 as compared to the same period in Fiscal 2009. As with the North American market, the duration of the strength or weakness in demand in Asia and Europe cannot be forecasted with any certainty given the weaknesses in the global economy.

Sales in the Balancer segment decreased $2.3 million, or 50.6%, to $2.3 million for the six months ended November 30, 2009 compared to $4.6 million for the six months ended November 30, 2008. This decrease is primarily due to lower unit sales volumes in Asia, North America and Europe during the first half of Fiscal 2010. North American sales decreased $1.1 million, or 55.3%, in the six months ended November 30, 2009 compared to the same period in the prior year. Sales in Asia decreased $731,000, or 45.0%, for the six months ended November 30, 2009 as compared to the six months ended November 30, 2008. European sales decreased $335,000, or 44.1%, in the first half of Fiscal 2010 compared to the first half of Fiscal 2009. Sales in other regions of the world decreased $128,000 in the first half of Fiscal 2010 compared to the same period in Fiscal 2009.

Sales in the Measurement segment decreased $173,000, or 24.2%, to $541,000 in the three months ended November 30, 2009 compared to $714,000 in the three months ended November 30, 2008. Sales of laser-based dimensional sizing products decreased $218,000, or 35.2%, in the three months ended November 30, 2009 compared to the same period in the prior year primarily due to the lower volume of shipments in the current fiscal year. Sales of laser-based surface measurement products in the three months ended November 30, 2009 compared to the same period in the prior year increased $18,000, or 19.0%, as sales to disk drive and silicon wafer manufacturers increased slightly. These industries have undergone significant technological change and consolidation as manufacturers merged or exited the markets resulting in a redeployment of equipment rather than the making of additional investments in capital equipment, and future sales of laser-based surface measurement products cannot be forecasted with any certainty. Sales of laser light scatter roughness measurement technology products were $18,000 since the date of the Optical Dimensions acquisition on September 30, 2009.

Sales in the Measurement segment decreased $723,000, or 45.1%, to $882,000 in the six months ended November 30, 2009 compared to $1.6 million in the six months ended November 30, 2008. Sales of laser-based dimensional sizing products decreased $685,000, or 50.4%, in the six months ended November 30, 2009 compared to the same period in the prior year primarily due to the lower volume of shipments in the current fiscal year. Sales of laser-based surface measurement products in the six months ended November 30, 2009 as compared to the same period in the prior year decreased $66,000, or 26.7%, as sales to disk drive and silicon wafer manufacturers decreased.

Gross margin – Gross margin for the three months ended November 30, 2009 increased to 49.1% compared to 46.9% for the three months ended November 30, 2008. These increases were due to changes in the product sales mix shifting toward higher margin products. Gross margin for the six months ended November 30, 2009 decreased to 47.4% compared to 49.5% for the six months ended November 30, 2008. These decreases were due to changes in the product sales mix shifting toward lower margin products. Balancer margins were also negatively impacted by higher sales in foreign markets as a large portion of those sales are made through distributors who receive favorable pricing.

Operating expenses – Operating expenses decreased $511,000, or 30.6%, to $1.2 million for the three months ended November 30, 2009 as compared to $1.7 million for the three months ended November 30, 2008. General, administrative and selling expenses decreased $388,000, or 27.3%, for the three months ended November 30, 2009 as compared to the same period in the prior year primarily due to lower commissions related to the decrease in sales, lower personnel costs resulting from both salary reductions and mandatory furloughs, lower stock-based compensation and lower trade show costs, offset by higher bad debt expenses. Research and development expenses decreased $123,000, or 49.2%, compared to the same period in the prior year primarily due to lower material costs associated with new product development related to technologies acquired from Xtero and to existing product lines and lower personnel costs associated with salary reductions.

Operating expenses decreased $948,000, or 29.2%, to $2.3 million for the six months ended November 30, 2009 compared to $3.2 million for the six months ended November 30, 2008. General, administrative and selling expenses decreased $750,000, or 27.3%, for the six months ended November 30, 2009 compared to the same period in the prior year. Research and development expenses decreased $198,000, or 39.7%, compared to the same period in the prior year. These decreases are primarily due to the same reasons as noted above.

Page 17

Other income – Other income consists of interest income, foreign currency exchange gain (loss) and other income (expense). Interest income was $3,000 and $27,000 for the three months ended November 30, 2009 and 2008, respectively. Interest income was $8,000 and $57,000 for the six months ended November 30, 2009 and 2008, respectively. Interest income decreased due to lower interest rates and decreased cash and investment balances. Foreign currency exchange gains (losses) were $3,000 and $(29,000) for the three months ended November 30, 2009 and 2008, respectively. Foreign currency exchange gains (losses) were $6,000 and $(39,000) for the six months ended November 30, 2009 and 2008, respectively. The increase in the gains is primarily due to the strengthening of foreign currencies against the US dollar during the current period.

Income tax provision – The Company’s effective tax rate on consolidated net loss was (1.6)% for the six months ended November 30, 2009. The Company’s effective tax rate on consolidated net loss differs from the federal statutory tax rate primarily due to the amount of income from foreign jurisdictions, changes in the deferred tax valuation allowance and certain expenses not being deductible for income tax reporting purposes offset by tax credits related to research and experimentation expenses. One of the items not deductible for income tax reporting is stock based compensation. Management believes the effective tax rate for Fiscal 2010 will be (2.6)% due to the items noted above.

Net income – Net loss increased $110,000 to a net loss of $224,000, or $0.08 per diluted share, for the three months ended November 30, 2009 as compared to a net loss of $114,000, or $0.04 per diluted share, for the three months ended November 30, 2008. Net loss increased $719,000 to a net loss of $799,000, or $0.28 per diluted share, for the six months ended November 30, 2009 as compared to a net loss of $80,000, or $0.03 per diluted share, for the six months ended November 30, 2008. Net income decreased due primarily to lower sales and related gross profit offset by lower general, administrative and selling expenses, lower research and development expenses and a lower effective tax rate during the three and six months ended November 30, 2009 and 2008.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s working capital decreased $655,000 to $8.1 million as of November 30, 2009 compared to $8.7 million as of May 31, 2009. Cash, cash equivalents and short-term investments totaled $3.7 million and $4.2 million as of November 30, 2009 and May 31, 2009, respectively. As of November 30, 2009, the Company had $3.2 million in cash and cash equivalents on hand compared to $4.2 million at May 31, 2009. The Company had $500,000 and $0 in short-term investments as of November 30, 2009 and May 31, 2009, respectively. The Company invested in $500,000 of certificates of deposit during the first quarter of Fiscal 2010.

Cash used in operating activities totaled $279,000 for the six months ended November 30, 2009 as compared to cash used in operating activities of $529,000 for the six months ended November 30, 2008. The cash used in operating activities was primarily due to the net loss, decreases in other accrued liabilities and an increase in accounts receivable, offset by decreases in inventories, income taxes receivable and prepaid expenses, increases in accounts payable, depreciation and amortization and stock based compensation.

At November 30, 2009, the Company had accounts receivable of $1.2 million as compared to $1.1 million at May 31, 2009. The increase in accounts receivable of $76,000 was due to the increase in sales in the second quarter of Fiscal 2010. At November 30, 2009, inventories decreased $153,000 to $3.7 million at November 30, 2009 as compared to $3.9 million at May 31, 2009. This decrease was due to the timing of purchases and inventory receipts.

During the six months ended November 30, 2009, net cash used in investing activities was $639,000, which consisted of net purchases of short-term investments of $500,000, $100,000 used for the acquisition of Optical Dimensions during the second quarter and $40,000 used to purchase new manufacturing and office equipment.

The Company has a $1.0 million bank line of credit agreement secured by U.S. accounts receivable, inventories and general intangibles. Interest is payable at the bank’s prime rate (3.25% as of November 30, 2009), or LIBOR plus 2.0% (2.24% as of November 30, 2009), and the agreement expires on March 1, 2011. There were no outstanding balances on the line of credit at November 30, 2009 and May 31, 2009.

We believe that our existing cash, cash equivalents and investments combined with the cash we anticipate to generate from operating activities and our available line of credit and financing available from other sources will be sufficient to meet our cash requirements for the foreseeable future. We do not have any significant commitments nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity or capital resources.

Page 18

Business Risks

The following are important factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company (see the forward-looking statements disclaimer at the beginning of Item 2 in this Report). In addition, the risks and uncertainties described below are not the only ones that the Company faces. Unforeseen risks could arise and problems or issues that the Company now views as minor could become more significant. If the Company were unable to adequately respond to known or unknown risks, the Company’s business, financial condition or results of operations could be materially adversely affected. In addition, the Company cannot be certain that any actions taken to reduce known or unknown risks and uncertainties will be effective.

The general economic conditions and the global financial crisis may adversely affect the Company’s business, operating results and financial condition

The Company’s operations and performance depend significantly on worldwide economic conditions, particularly in the manufacturing sector, and their impact on levels of capital investment, which have deteriorated significantly over the past two years and may remain depressed, or be subject to further deterioration. Economic factors that could adversely influence demand for the Company’s products include uncertainty about global economic conditions leading to reduced levels of investment, customers’ and suppliers’ access to credit, unemployment and other macroeconomic factors affecting commercial and industrial spending behavior.

The past distress in the financial markets and global economy has resulted in reduced liquidity and a tightening of credit markets. As a result of these conditions, the Company could experience several potential adverse effects, including the inability of customers to obtain credit to finance purchases of the Company’s products, the insolvency of customers resulting in reduced sales and bad debts, and the insolvency of key suppliers resulting in product development and production delays.

The Company’s primary markets are volatile and unpredictable

The Company’s business depends on the demand for our various products in a variety of commercial and industrial markets. In the past, demand for our products in these markets has fluctuated due to a variety of factors, some of which are beyond our control, including: general economic conditions, both domestically and internationally, the timing, number and size of orders from, and shipments to, our customers as well as the relative mix of those orders and variations in the volume of orders for a particular product line in a particular quarter.

The introduction of the Xact™ tank monitoring system may not become commercially viable and satisfy expected demand

On May 13, 2009, the Company announced the introduction of the Xact™ tank monitoring system for measuring fill levels of industrial liquefied propane tanks and communicating that data via satellite to a secure web site. Although the initial acquisition and further development of the Xact™ product has negatively impacted current operating results, the product should allow the Company to enter new measurement markets and is expected to add sales and profits to the Company in future years. However, the introduction of the Xact™ product may not be successful, anticipated market demand for the product may not materialize and additional product or market opportunities may not be identified and developed and brought to market in a timely and cost-effective manner, each of which could continue to negatively impact future operating results and result in large and immediate write-offs of recorded intangible asset balances.

New products may not be developed to satisfy changes in consumer demands

The failure to develop new technologies, or react to changes in existing technologies, could materially delay development of new products, which could result in decreased revenues and a loss of market share to competitors. Financial performance depends on the ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. New product opportunities may not be identified and developed and brought to market in a timely and cost-effective manner. Products or technologies developed by other companies may render products or technologies obsolete or noncompetitive, or a fundamental shift in technologies in the product markets could have a material adverse effect on the Company’s competitive position within historic industries.

Page 19

Failure to protect intellectual property rights could adversely affect future performance and growth

Failure to protect existing intellectual property rights may result in the loss of valuable technologies or paying other companies for infringing on their intellectual property rights. The Company relies on patent, trade secret, trademark and copyright law to protect such technologies. There is no assurance any of the Company’s U.S. patents will not be invalidated, circumvented, challenged or licensed to other companies.

Competition is intense and the Company’s failure to compete effectively would adversely affect its business

Competition in the markets for the Company’s products is intense. The speed with which companies can identify new applications for the Company’s various technologies, develop products to meet those needs and supply commercial quantities at low prices to those new markets are important competitive factors. The principal competitive factors in the Company’s markets are product features, performance, reliability and price. Many of the Company’s competitors have greater financial, technical, research and development and marketing resources. No assurance can be given that the Company will be able to compete effectively in the future, and the failure to do so would have a material adverse effect on the Company’s business, financial condition and results of operations.

Production time and the overall cost of products could increase if any of the primary suppliers are lost or if a primary supplier increased the prices of raw materials

Manufacturing operations depend upon obtaining adequate supplies of raw materials on a timely basis. The results of operations could be adversely affected if adequate supplies of raw materials cannot be obtained in a timely manner or if the costs of raw materials increased significantly.

Fluctuations in quarterly and annual operating results make it difficult to predict future performance

Quarterly and annual operating results are likely to fluctuate in the future due to a variety of factors, some of which are beyond management’s control. As a result of quarterly operating fluctuations, it is important to realize quarter-to-quarter comparisons of operating results are not necessarily meaningful and should not be relied upon as indicators of future performance.

The Company may not be able to reduce operating costs quickly enough if sales decline

Operating expenses are generally fixed in nature and largely based on anticipated sales. However, should future sales decline significantly and rapidly, there is no guarantee management could take actions that would further reduce operating expenses in either a timely manner or without seriously impacting the operations of the Company.

The Company maintains a significant investment in inventories in anticipation of future sales

The Company believes it maintains a competitive advantage by shipping product to its customers more rapidly than its competitors. As a result, the Company has a significant investment in inventories. These inventories are recorded using the lower-of-cost or market method, which requires management to make certain estimates. Management evaluates the recorded inventory values based on customer demand, market trends and expected future sales and changes these estimates accordingly. A significant shortfall of sales may result in carrying higher levels of inventories of finished goods and raw materials thereby increasing the risk of inventory obsolescence and corresponding inventory write-downs. As a result, the Company may not carry adequate reserves to offset such write-downs.

Future success depends in part on attracting and retaining key management and qualified technical and sales personnel

Future success depends on the efforts and continued services of key management, technical and sales personnel. Significant competition exists for such personnel, and there is no assurance that key technical and sales personnel can be retained or that other highly qualified technical and sales personnel as required can be attracted, assimilated and retained. There is also no guarantee that key employees will not leave and subsequently compete against the Company. The inability to attract and retain key personnel could adversely impact the business, financial condition and results of operations.

Page 20

Changes in the effective tax rate may have an adverse effect on the Company’s results of operations

The Company’s future effective tax rate may be adversely affected by a number of factors including: the jurisdictions in which profits are determined to be earned and taxed; the resolution of issues arising from tax audits with various tax authorities; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes; changes in available tax credits; changes in stock-based compensation expense; changes in tax laws or the interpretations of such tax laws and changes in generally accepted accounting principles.

Changes in securities laws and regulations have increased and will continue to increase Company expenses

Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules promulgated by the Securities and Exchange Commission, have increased and could continue to increase Company expenses as the Company devotes resources to ensure compliance with all applicable laws and regulations. In particular, the Company could incur significant additional administrative expense and a diversion of management’s time in Fiscal 2011 to implement Section 404 of the Sarbanes-Oxley Act which requires management to report on, and the Company’s independent registered public accounting firm to ultimately attest to, our internal control over financial reporting. The Company may also incur additional fees necessary for them to provide their attestation. In addition, the NASDAQ Capital Market, on which the Company’s common stock is listed, has also adopted comprehensive rules and regulations relating to corporate governance. These laws, rules and regulations have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. The Company may be required to hire additional personnel and use outside legal, accounting and advisory services to address these laws, rules and regulations. The Company also expects these developments to make it more difficult and more expensive for the Company to obtain director and officer liability insurance in the future, and the Company may be required to accept reduce coverage or incur substantially higher costs to obtain coverage. Further, the Company’s board members, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which would adversely affect the Company.

The Company faces risks from international sales and currency fluctuations

The Company markets and sells its products worldwide and international sales have accounted for and are expected to continue to account for a significant portion of future revenue. International sales are subject to a number of risks, including: the imposition of governmental controls; trade restrictions; difficulty in collecting receivables; changes in tariffs and taxes; difficulties in staffing and managing international operations; political and economic instability; general economic conditions; and fluctuations in foreign currencies. No assurances can be given that these factors will not have a material adverse effect on future international sales and operations and, consequently, on business, financial condition and results of operations.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The Company did not have any derivative financial instruments as of November 30, 2009. However, the Company could be exposed to interest rate risk at any time in the future and, therefore, 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 interest bearing cash equivalents and short term investments. The Company has a variable rate line of credit facility with a bank but there was no outstanding balance as of November 30, 2009. Also, there is no other long-term obligation whose interest rates are based on variable rates that may fluctuate over time based on economic changes in the environment. Therefore, at this time, the Company is not subject to interest rate risk on outstanding interest bearing obligations if market interest rates fluctuate and does not expect any change in the interest rates to have a material effect on the Company’s results from operations.

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Foreign Currency Risk

The Company markets and sells its products worldwide and international sales have accounted for and are expected to continue to account for a significant portion of future revenue. The Company operates a subsidiary in the United Kingdom and acquires certain materials and services from vendors transacted in foreign currencies. Therefore, the Company’s business and financial condition is sensitive to currency exchange rates or any other restrictions imposed on their currencies. For the three months ended November 30, 2009 and 2008, results of operations included gains (losses) on foreign currency translation of $3,000 and $(29,000), respectively. For the six months ended November 30, 2009 and 2008, results of operations included gains (losses) on foreign currency translation of $6,000 and $(39,000), respectively.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of November 30, 2009, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e). Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Remediation of Material Weakness

As of August 31, 2009, we did not maintain effective controls around the preparation and review of income tax accounts. This control deficiency resulted in a material audit adjustment that was properly reflected in the financial statements for the year ended May 31, 2009. As of November 30, 2009, we implemented additional control procedures necessary to remediate this material weakness. Specifically, we are using an independent, qualified third party to review the Company’s tax provision calculation on a quarterly basis.

Changes in Internal Control Over Financial Reporting

Other than as noted above, there has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended November 30, 2009 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 4.

Submission of Matters to a Vote of Security Holders.

At an annual meeting of the Company’s shareholders on October 2, 2009, the shareholders re-elected Wayne A. Case and Maynard E. Brown to serve as directors until the 2012 Annual Meeting of Shareholders and until their successors have been elected and qualified. The shareholders also elected James A. Fitzhenry as a director to serve until the 2010 Annual Meeting of Shareholders and until his successor has been elected and qualified. The voting results were as follows:


Director	Class	Term	For	Withheld
Wayne A. Case	3	2009-2012	2,288,367	133,251
Maynard E. Brown	3	2009-2012	2,387,312	34,306
James A. Fitzhenry	1	2009-2010	2,300,207	121,411

Item 6.

Exhibits


Exhibit		Description
2.1		Asset Purchase Agreement between Schmitt Industries, Inc., and Glenn Valliant, an individual doing business as Optical Dimensions, dated September 30, 2009.

3.1		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.

3.2		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.

4.1		See exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws defining the rights of security holders.

31.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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


		SCHMITT INDUSTRIES, INC.
		(Registrant)

Date: January 12, 2010		/ S / W AYNE A. C ASE
		Wayne A. Case, Chairman of the Board and Chief Executive Officer

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Exhibit 2.1

ASSET PURCHASE AGREEMENT

This ASSET PURCHASE AGREEMENT (this “ Agreement ”), dated as of September 30, 2009, is between Glenn Valliant (the “ Seller ”), an individual doing business as Optical Dimensions, and Schmitt Industries, Inc., an Oregon corporation (the “ Buyer ”).

RECITALS

A. The Seller operates a business primarily engaged in the business of developing, manufacturing, and selling the Lasercheck® line of roughness gauges (the “ Business ”). The Seller’s principal place of business is 27472 Portola Parkway, Suite 205-208, Foothill Ranch, CA 92610. The Seller owns equipment, inventory, contract rights, leasehold interests, intellectual property, and miscellaneous assets used in connection with the operation of the Business.

B. The Buyer desires to acquire substantially all the assets used or useful, or intended to be used, in the operation of the Business, and the Seller desires to sell these assets to the Buyer.

The parties agree as follows:

SECTION 1. ASSETS PURCHASED; LIABILITIES ASSUMED

1.1 Assets Purchased. The Seller agrees to sell to the Buyer and the Buyer agrees to purchase from the Seller, on the terms and conditions set forth in this Agreement, the following assets (the “ Assets ”):

(a) All equipment, tools, furniture, and fixtures listed on attached Schedule 1.1(a), together with any replacements or additions to the equipment made before the Closing;

(b) All inventories of supplies, raw materials, parts, and finished goods inventory owned by the Seller, together with any replacements or additions to the inventories made before the Closing, but excluding inventory disposed of in the ordinary course of the Business;

(d) All the Seller’s rights under purchase orders, including those entered into in the ordinary course of business before the Closing;

(e) The Seller’s name and goodwill;

(f) All patents, trademarks, trade names, copyrights, service marks, and domain names of the Seller as listed on Schedule 7.12, all registrations for them, all applications pending for them, and all other proprietary rights and intangible property of the Seller, including trade secrets, inventions, technology, software, operating systems, customer lists, customer relationships, customer agreements, customer understandings, drawings, blueprints, know-how, formulae, slogans, processes, and operating rights and all other similar items and all such items acquired by the Seller or coming into existence on or before the Closing Date;

(g) To the extent transferable, all approvals, authorizations, consents, licenses, permits, franchises, tariffs, orders, and other registrations of any federal, state, or local court or other governmental department, commission, board, bureau, agency, or instrumentality held by the Seller and required or appropriate for the conduct of the Business, including without limitation all such items listed on Schedule 1.1(g) and all such items granted or received on or before the Closing Date;

(h) All accounts receivable and other receivables of the Seller, including without limitation all receivables listed on Schedule 1.1(h) and all receivables arising on or before the Closing Date, other than to the extent that those receivables have been collected by the Seller in the ordinary course of business before the Closing Date;

(i) All choses in action, causes of action, rights of recovery and setoff, warranty rights, and other similar rights of the Seller, including without limitation all such items listed on Schedule 1.1(i) and all such items arising or acquired on or before the Closing Date;

(j) All prepaid and deferred items of the Seller, other than prepaid insurance and taxes, but including without limitation prepaid rent and unbilled charges and deposits relating to the Business and all other such items reflected on the Financial Statements described in Section 7.3;

(k) All correspondence, engineering, and plant records, and other similar documents and records; and

(l) All assignable rights, if any, to all telephone lines and numbers used in the conduct of the Business, including without limitation those listed on Schedule 1.1(l).

1.2 Liabilities Assumed.

1.2.1 The Buyer will accept the assignment and assume responsibility for all unfilled orders from customers of the Seller assigned to the Buyer pursuant to Section 1.1(d) and will assume responsibility of payment for purchase orders for inventory items that have been placed by the Seller before the Closing but that will not be delivered until after the Closing. The Buyer will assume and perform the Seller’s obligations under the Contracts listed on Schedule 8.6 arising on or after the Closing Date.

1.2.2 Except for the liabilities and obligations to be assumed by the Buyer under Section 1.2, and as listed on Schedule 1.2, the Buyer will not assume and will not be liable for any liabilities of the Seller, known or unknown, contingent or absolute, accrued or other, and the Assets will be free of all liabilities, obligations, liens, and encumbrances. Without limiting the generality of the foregoing and except as otherwise provided above, the Buyer will not be responsible for any of the following:

(a) Liabilities, obligations, or debts of the Seller, whether fixed, contingent, or mixed and whether based on events occurring before or after the Closing, including without limitation those based on tort, contract, statutory, or other claims or involving fines or penalties payable to any governmental authority;

(b) Liabilities, obligations, or debts of the Seller for any federal, state, or local tax, including without limitation federal income taxes, state income and excise taxes, state and local real and personal property taxes, and federal, state, and local withholding and payroll taxes;

(c) Liabilities or obligations of the Seller to employees for salaries, bonuses, or health and welfare benefits or with respect to any profit-sharing, stock bonus, pension, retirement, stock purchase, option, bonus, or deferred compensation plan or for any other benefits or compensation (including without limitation accrued vacation);

(d) Liabilities or obligations of the Seller for employee severance payments or arrangements resulting from termination of the Seller’s employees;

(e) Liabilities or obligations of the Seller incurred in connection with distributions to shareholders or any corporate dissolution; and

(g) Liabilities or obligations of the Seller under any environmental law.

SECTION 2. ALLOCATION OF PURCHASE PRICE

The Purchase Price will be allocated among the Assets in accordance with Schedule 2, and the Buyer and the Seller will be bound by that allocation in reporting the transactions contemplated by this Agreement to any governmental authority (including without limitation the Internal Revenue Service).

SECTION 3. PURCHASE PRICE

The purchase price for the Assets (the “ Purchase Price ”) will consist of:

(a) $100,000 in cash;

(b) The issuance of the number of restricted shares of Schmitt common stock (the “ Shares ”) equal to $100,000 in value, based on the average closing price, as determined by the Nasdaq National Market, over the five-day period immediately preceding the Closing;

(d) A royalty of 5% of the invoiced sales price (net of any sales commissions) of any product incorporating Seller’s intellectual property.

SECTION 4. PAYMENT OF PURCHASE PRICE

The price for the Assets will be paid as follows:

4.1 At the Closing, the Buyer will pay, by cashier’s check, certified check, or wire transfer to the account specified by the Seller two business days before the Closing, the sum of $100,000.

4.2 At the Closing, the Buyer will issue the Shares.

4.3 At the Closing, the Seller and the Buyer will enter into a royalty agreement (the “ Royalty Agreement ”), substantially in the form attached as Exhibit A.

SECTION 5. ADJUSTMENTS

The operation of the Business and related income and expenses up to the close of business on the day before the Closing will be for the account of the Seller and thereafter for the account of the Buyer. Expenses, including but not limited to utilities, personal property taxes, rents, real property taxes, wages, vacation pay, payroll taxes, and fringe benefits of employees of the Seller, will be prorated between the Seller and the Buyer as of the close of business on the Closing, the proration to be made and paid, insofar as reasonably possible, on the Closing, with settlement of any remaining items to be made within 30 days after the Closing.

SECTION 6. OTHER AGREEMENTS

At the Closing, the parties will execute the following additional agreements (the “ Related Agreements ”):

(a) The Royalty Agreement between the Buyer and the Seller, substantially in the form attached as Exhibit A;

(b) The Assignment and Assumption Agreement, substantially in the form attached as Exhibit B;

(d) The Change of Control Agreement between the Buyer and the Seller, substantially in the form of Exhibit D.

(e) The Stock Subscription Agreement, substantially in the form attached as Exhibit E.

SECTION 7. SELLER’S REPRESENTATIONS AND WARRANTIES

As used in this Agreement, “ Material Adverse Effect ” means a material adverse effect on the business, results of operations, financial position, assets, or prospects of the Seller; and “ Material Adverse Change ” means any change that has resulted, will result, or is likely to result, in a Material Adverse Effect.

Subject to, and except as disclosed by the Seller in the Schedule of Exceptions in a numbered paragraph that corresponds to the section for which disclosure is made, the Seller and represents and warrants to the Buyer as follows:

7.1 Corporate Existence. The Seller is qualified to do business in every jurisdiction in which the failure to so qualify could reasonably be expected to have a Material Adverse Effect on the Seller. The Seller has all material licenses, permits, and authorizations necessary to own and operate the Assets and to carry on the Business as now conducted.

7.2 Authorization. This Agreement and the Related Agreements, when executed and delivered by the parties thereto, will constitute the legal, valid, and binding obligation of the Seller enforceable against the Seller, in accordance with their respective terms except as the enforceability thereof may be limited by the application of bankruptcy, insolvency, moratorium, or similar laws affecting the rights of creditors generally or judicial limits on the right of specific performance. The execution and delivery by the Seller of this Agreement and the Related Agreements to which the Seller is a party, and the fulfillment of and compliance with the respective terms hereof and thereof by the Seller, do not and will not (a) conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any Contract, (b) result in the creation of any lien, security interest, charge, or encumbrance on the Assets, (c) result in a violation of any law, statute, rule, or regulation to which the Seller is subject, or any order, judgment, or decree to which the Seller is subject, or (d) require any authorization, consent, approval, exemption, or other action by or notice to any court or administrative or governmental body.

7.3 Financial Statements. The balance sheets of the Seller at December 31, 2008 and August 31, 2009, as attached to this Agreement as Schedule 7.3 (the “ Balance Sheets ”), fairly present the financial position of the Seller at such dates, and the income statements of the Seller for the years ended December 31, 2007 and December 31, 2008, and for the eight months ended August 31, 2009, as attached to this Agreement as Schedule 7.3 (the “ Income Statements ”), fairly present the results of operations of the Seller for such periods, and have been prepared in accordance with generally accepted accounting principles (GAAP), consistently applied, and in a manner substantially consistent with prior financial statements of the Seller. The Balance Sheets and the Income Statements are referred to collectively in this Agreement as the “ Financial Statements .”

7.4 Brokers and Finders. The Seller has not employed any broker or finder in connection with the transactions contemplated by this Agreement, or taken action that would give rise to a valid claim against any party for a brokerage commission, finder’s fee, or other like payment.

7.5 Transfer Not Subject to Encumbrances or Third-Party Approval. The execution and delivery of this Agreement and the Related Agreements by the Seller, and the consummation of the contemplated transactions, will not result in the creation or imposition of any valid lien, charge, or encumbrance on any of the Assets, and will not require the authorization, consent, or approval of any third party, including any governmental subdivision or regulatory agency.

7.6 Contracts. Schedule 7.6 contains a complete and accurate list of each contract, agreement, instrument, lease, and commitment (including license agreements) to which the Seller is a party that provides for payments in excess of $5,000 per year or whose term is in excess of one year and is not cancelable on 30 or fewer days’ notice without any liability, penalty, or premium, other than a nominal cancellation fee or charge (the “ Contracts ”). The Seller has delivered a copy of each Contract to the Buyer. Except as otherwise set forth on Schedule 7.6:

(a) The Seller is not in default under any Contract, nor, to the Seller’s best knowledge, does there exist any event that, with notice or the passage of time or both, would constitute a default or event of default by the Seller under any Contract.

(b) No power of attorney or similar authorization given by the Seller is currently in effect or outstanding. No Contract limits the freedom of the Seller to compete in any line of business or with any person.

(c) Each of the Contracts is valid, binding, and enforceable by the Seller in accordance with its terms and is in full force and effect. There is no pending or threatened proceeding that would interfere with the quiet enjoyment of any leasehold of which the Seller is the lessee or sublessee. All other parties to the Contracts have consented or, before the Closing, will have consented (when such consent is necessary) to the consummation of the transaction contemplated by this Agreement without requiring modification of the Seller’s rights or obligations under any Contract.

(d) The Seller is not aware of any default by any other party to any Contract or of any event that (whether with or without notice, lapse of time, or both) would constitute a default by any other party with respect to obligations of that party under any Contract, and, to the knowledge of the Seller, there are no facts that exist indicating that any of the Contracts may be totally or partially terminated or suspended by the other parties.

(e) To the Seller’s best knowledge, no Contract will result in any loss to the Seller on the performance thereof (including any liability for penalties or damages, whether liquidated, direct, indirect, incidental, or consequential).

7.7 Compliance with Codes and Regulations. The Seller has no knowledge, after reasonable investigation, that leasehold improvements violate any provisions of any applicable building codes, fire regulations, building restrictions, or other ordinances, orders, or regulations.

7.8 Litigation. There are no actions, suits, proceedings, orders, investigations, or claims pending or, to the best of the Seller’s knowledge, threatened against the Seller or its property, at law or in equity, or before or by any governmental department, commission, board, bureau, agency, or instrumentality; the Seller is not subject to any arbitration proceedings under collective bargaining agreements or otherwise or, to the best of the Seller’s knowledge, any governmental investigations or inquiries; and, to the best knowledge of the Seller, there is no basis for any of the foregoing.

7.9 Compliance with Laws. To the best of the Seller’s knowledge, (a) the Seller has at all relevant times conducted the Business in compliance with all applicable laws and regulations, and (b) the Seller is not in violation of any applicable laws or regulations, other than violations that singly or in the aggregate do not and, with the passage of time, will not have a Material Adverse Effect. The Seller is not subject to any outstanding order, writ, injunction, or decree, and the Seller has not been charged with, or threatened with a charge of, a violation of any provision of federal, state, or local law or regulation.

7.10 Employment Matters.

7.10.1 Labor Matters.

(a) The Seller is not a party or otherwise subject to any collective bargaining or other agreement governing the wages, hours, or terms of employment of its employees.

(b) There is no (i) unfair labor practice complaint against the Seller pending before the National Labor Relations Board or any other governmental authority, (ii) labor strike, slowdown, or work stoppage actually occurring or, to the best knowledge of the Seller, threatened against the Seller, (iii) representation petition regarding the Seller’s employees pending before the National Labor Relations Board, or (iv) grievance or any arbitration proceeding pending arising out of or under collective bargaining agreements applicable to the Seller.

(c) The Seller has not experienced any primary work stoppage or other organized work stoppage involving its employees in the past two years.

7.10.2 Employment Claims. There are no pending claims and, to the Seller’s knowledge, no threatened claims by or on behalf of any of its employees under any federal, state, or local labor or employment laws or regulations.

7.10.3 Employee Benefits. Schedule 7.10(3) lists all pension, retirement, profit-sharing, deferred compensation, bonus, commission, incentive, life insurance, health and disability insurance, hospitalization, and all other employee benefit plans or arrangements (including, without limitation, any contracts or agreements with trustees, insurance companies, or others relating to any such employee benefit plans or arrangements) established or maintained by the Seller (the “ Plans ”), and complete and accurate copies of all of the Plans have been provided to the Buyer. None of the Plans is a defined benefit pension plan under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA), as amended.

7.10.4 Employment Agreements. Each of Seller’s employees is an “at-will” employee, and there are no written employment, commission, or compensation agreements of any kind between the Seller and any of its employees. Schedule 7.10(4) lists all the Seller’s employment or supervisory manuals, employment or supervisory policies, and written

information generally provided to employees (such as applications or notices), and true and complete copies of those manuals, policies, and written information have been provided to the Buyer. The Seller does not have any agreements or understandings with its employees except as reflected in the items listed on Schedules 7.10(3) and 7.10(4).

7.10.5 Compensation. Schedule 7.10(5) contains a complete and accurate list of all officers, employees, and consultants of the Seller, specifying their names and job designations, the total amount paid or payable as compensation to each of them, and the basis of such compensation, whether fixed or commission or a combination thereof, and accrued benefits for them as of the date of this Agreement.

7.11 Tangible Assets.

7.11.1 Real Property. The Seller neither owns nor leases any real property used in the Business.

7.11.2 Personal Property. Schedule 7.11(2) contains a complete and accurate list of all the tangible personal property owned by the Seller and used in the Business (the “ Tangible Personal Property ”). The Assets include all the assets and rights owned or used by the Seller in the Business.

7.12 Intellectual Property. Schedule 7.12 contains a complete and accurate list of the Seller’s patents, trademarks, trade names, copyrights, technology, domain names, know-how, processes, related applications, and other intellectual property used in the Business (the “ Intellectual Property ”). The Seller owns all its Intellectual Property free and clear of all liens, claims, and encumbrances. To the Seller’s knowledge, the Seller’s use of its Intellectual Property does not create any conflict with or infringe on any rights of any other person and no claims of conflict or infringement have been asserted against the Seller. Schedule 7.12 also describes all agreements, licenses, permits, and other instruments under which the Seller has acquired or been granted or sold or granted a right to use any Intellectual Property, together with a brief description of such Intellectual Property.

7.13 Title to and Condition of Assets.

7.13.1 The Seller owns (and at the Closing the Buyer will acquire) all the Assets free and clear of all mortgages, pledges, security interests, options, claims, charges, or other encumbrances or restrictions of any kind, except for (a) liens disclosed on the Balance Sheet, and (b) liens for taxes not yet due or being contested in good faith and for which adequate accruals or reserves have been established on the Balance Sheet.

7.13.2 The Seller has (and at the Closing the Buyer will acquire) good and marketable title to the Assets.

7.13.3 All Tangible Personal Property has been maintained and operated in accordance with manufacturers’ specifications and prudent industry practices, is in a good state of maintenance and repair, ordinary wear and tear excepted, and is adequate for the conduct of the Business.

7.13.4 There are no defects or liabilities affecting any of the Tangible Personal Property that might detract from the value of the property or assets, interfere with any present or intended use of any of the property or assets, or affect the marketability of the property or assets, in each case, other than those that will not have a Material Adverse Effect.

7.13.5 The plants, buildings, and structures included in the Real Property currently have access to (a) public roads or valid easements over private streets or private property for ingress to and egress from the Real Property, and (b) water supply, storm and sanitary sewer facilities, telephone, gas and electrical connections, fire protection, drainage, and other public utilities, in each case as is necessary for the conduct of the Business.

7.14 Undisclosed Liabilities. The Seller does not have any liability or obligation (whether absolute, accrued, contingent, or other, and whether due or to become due) that is not accrued, reserved against, or disclosed on the Balance Sheet, other than liabilities incurred in the ordinary course of business consistent with past practice since the date of the Current Balance Sheet or that individually or in the aggregate will not have a Material Adverse Effect.

7.15 Absence of Certain Changes or Events. Since August 31, 2009, there has not been:

(a) Any Material Adverse Change or any event, occurrence, development, or state of circumstances or facts that could reasonably be expected to result in a Material Adverse Change;

(b) Any damage, destruction, or casualty loss, whether insured against or not, to any of the Assets;

(c) Any entry into any agreement, commitment, or transaction (including, without limitation, any borrowing, capital expenditure, or capital financing or any amendment, modification, or termination of any existing agreement, commitment, or transaction) by the Seller, except agreements, commitments, or transactions in the ordinary course of business and consistent with past practices or as expressly contemplated in this Agreement;

(d) Any conduct of business that is outside the ordinary course of business or not substantially in the manner that the Seller previously conducted the Business;

(e) Any purchase or other acquisition of property or any sale, lease, or other disposition of property, or any expenditure, except in the ordinary course of business;

(f) Any incurrence of any noncontract liability known to the Seller that, either singly or in the aggregate, is material to the Business, results of operations, financial condition, or prospects of the Seller;

(g) Any encumbrance or consent to encumbrance of any property or assets except in the ordinary course of business; or

(h) Any change in the assets, liabilities, licenses, permits, or franchises of the Seller, or in any agreement to which the Seller is a party or is bound, which has had or reasonably could be expected to have a Material Adverse Effect.

7.16 Receivables. Each of the Seller’s receivables (including accounts receivable, loans receivable, and advances) that is reflected on the Balance Sheet, and each of the receivables that has arisen since that date, has arisen only from bona fide transactions in the ordinary course of business and will be fully collected when due, without resort to litigation and without offset or counterclaim.

7.17 Product Warranties.

7.17.1 Schedule 7.17(1) contains the Seller’s standard form of product warranty. The Seller has not undertaken any performance obligations or made any warranties or guarantees with respect to its products other than those disclosed on Schedule 7.17(1), and the aggregate cost to the Seller to comply with its product warranties is not expected to exceed $2,000 in the 12 months following the Closing.

7.17.2 Each of the products produced or sold by the Seller is, and at all times has been, (a) in compliance in all material respects with all applicable federal, state, and local laws and regulations and (b) in conformance with the Buyer’s specifications and with any promises or affirmations of fact made in the warranty or on the container or label for such product or in connection with its sale, whether through advertising or otherwise.

7.18 Inventories. The Seller’s inventories, whether finished goods, work in process, or raw materials, shown on the Balance Sheet or thereafter acquired are all items of a quality usable or saleable in the ordinary and usual course of the Business, except for inventory items that are obsolete or not usable or saleable in the ordinary course of business and that have been written down to an amount not in excess of realizable market value or for which adequate reserves or allowances have been provided. The values at which inventories are carried reflect an inventory valuation policy consistent with the Seller’s past practice and in accordance with generally accepted accounting principles consistently applied.

7.19 Accuracy of Representations and Warranties. None of the representations or warranties of the Seller contains or will contain any untrue statement of a material fact or omit or will omit or misstate a material fact necessary in order to make statements in this Agreement not misleading.

SECTION 8. REPRESENTATIONS OF BUYER

The Buyer represents and warrants to the Seller as follows:

8.1 Corporate Existence. The Buyer is a corporation duly organized and legally existing under the laws of the state of Oregon. The Buyer has all requisite corporate or individual power and authority to enter into this Agreement and the Related Agreements and to perform its obligations under them.

8.2 Authorization. The execution, delivery, and performance of this Agreement and the related agreements have been duly authorized and approved by the board of directors. This Agreement and the Related Agreements constitute valid and binding agreements of the Buyer, enforceable in accordance with their terms, except as enforceability may be limited by bankruptcy, reorganization, insolvency, or similar laws affecting the enforcement of creditors’ rights or by the application of general principles of equity.

8.3 Brokers and Finders. The Buyer has not employed any broker or finder in connection with the transactions contemplated by this Agreement and has taken no action that would give rise to a valid claim against any party for a brokerage commission, finder’s fee, or other like payment.

8.4 No Conflict with Other Instruments or Agreements. The execution, delivery, and performance by the Buyer of this Agreement and the Related Agreements will not result in a breach or violation of, or constitute a default under, the Buyer’s Articles of Incorporation or Bylaws or any material agreement to which the Buyer is a party or by which the Buyer is bound.

8.5 Governmental Authorities. The Buyer is not required to submit any notice, report, or other filing with any governmental or regulatory authority in connection with the execution and delivery by the Buyer of this Agreement and the Related Agreements and the consummation of the purchase and no consent, approval, or authorization of any governmental or regulatory authority is required to be obtained by the Buyer in connection with the Buyer’s execution, delivery, and performance of this Agreement and the Related Agreements and the consummation of the purchase of the Assets.

8.6 Accuracy of Representations and Warranties. None of the representations or warranties of the Buyer contains or will contain any untrue statement of a material fact or omit or will omit or misstate a material fact necessary in order to make the statements contained herein not misleading.

SECTION 9. COVENANTS OF SELLER

9.1 Seller’s Operation of Business Before Closing. The Seller agrees that between the date of this Agreement and the Closing, the Seller will:

(a) Continue to operate the Business that is the subject of this in the usual and ordinary course and in substantial conformity with all applicable laws, ordinances, regulations, rules, or orders, and will use its best efforts to preserve its business organization and to preserve the continued operation of its business with its customers, suppliers, and others having business relations with the Seller;

(b) Not assign, sell, lease, or otherwise transfer or dispose of any of the Assets used in the performance of the Business, whether now owned or hereafter acquired, except in the normal and ordinary course of business and in connection with its normal operation;

(c) Maintain all the Assets in their present condition, reasonable wear and tear and ordinary usage excepted, and maintain the inventory at levels normally maintained; and

(d) Notify the Buyer promptly in the event of any material change in the Assets or the Business before the Closing.

9.2 Access to Assets and Information. At reasonable times before the Closing, the Seller will provide the Buyer and its representatives with reasonable access during business hours to the assets, titles, contracts, and records of the Seller and furnish such additional information concerning the Business as the Buyer from time to time may reasonably request.

9.3 Employee Matters.

9.3.1 Before the Closing, the Seller will deliver to the Buyer a list of the names of all persons on the Seller’s payroll, together with a statement of amounts paid to each during the Seller’s most recent fiscal year and amounts paid for services from the beginning of the current fiscal year to the Closing. Before the Closing, the Seller will also provide the Buyer with a schedule of all employee bonus arrangements and a schedule of other material compensation or personnel benefits or policies in effect.

9.3.2 Before the Closing, the Seller will not, without the Buyer’s prior written consent, enter into any material agreement with its employees, increase the rate of compensation or bonus payable to or to become payable to any employee, or effect any changes in the management, personnel policies, or employee benefits, except in accordance with existing employment practices.

9.4 Change of Name. At the Closing, the Seller will take all action necessary or appropriate to permit the Buyer to legally commence using the name Optical Dimension as of the day after the Closing.

9.5 Conditions and Best Efforts. The Seller will use its best efforts to effectuate the transactions contemplated by this Agreement and the Related Agreements and to fulfill all the conditions of their obligations under this Agreement and the Related Agreements, and will do all acts and things as may be required to carry out its obligations under this Agreement and the Related Agreements.

9.6 No Negotiations with Others. Except as otherwise permitted by this Agreement, or with the Buyer’s prior written consent, the Seller will refrain, and will cause the Seller’s officers, directors, and employees and any investment banker, lawyer, accountant, or other agent retained by the Seller to refrain, from initiating or soliciting any inquiries or making any proposals with respect to, or engaging in negotiations concerning, or providing any confidential information or data to, or having any discussions with any person relating to, any acquisition,

business combination or purchase of all or any significant portion of the assets of, or any equity interest in, the Seller. The Seller will immediately cease and cause to be terminated any existing activities, discussions, or negotiations with any parties conducted heretofore with respect to any of the foregoing.

9.7 Press Releases. No press releases, other public announcements, or notices to customers concerning the transactions contemplated by this Agreement will be made by the Seller without the Buyer’s prior written consent, which consent will not be unreasonably withheld; however, nothing in this section will prevent a party from supplying such information or making statements as required by governmental authority or in order for a party to satisfy its legal obligations (prompt notice of which must in any such case be given to the other party).

SECTION 10. COVENANTS OF BUYER

10.1 Conditions and Best Efforts. The Buyer will use its best efforts to effectuate the transactions contemplated by this Agreement and the Related Agreements and to fulfill all the conditions of the Buyer’s obligations under this Agreement and the Related Agreements, and will do all acts and things as may be required to carry out the Buyer’s obligations and to consummate this Agreement and the Related Agreements.

10.2 Confidential Information. If for any reason the sale of Assets contemplated by this Agreement is not consummated, the Buyer will promptly return to the Seller and will not disclose to third parties any confidential information received from the Seller in the course of investigating, negotiating, and performing the transactions contemplated by this Agreement.

10.3 Press Releases. No press releases, other public announcements, or notices to customers concerning the transactions contemplated by this Agreement will be made by the Buyer without the prior written consent of the Seller, which consent will not be unreasonably withheld; however, nothing in this section will prevent a party from supplying such information or making statements as required by governmental authority or in order for a party to satisfy its legal obligations (prompt notice of which must in any such case be given to the other party or parties).

SECTION 11. CONDITIONS PRECEDENT TO BUYER’S OBLIGATIONS

The obligation of the Buyer to purchase the Assets is subject to the fulfillment, before or at the Closing, of each of the following conditions, any one or portion of which may be waived in writing by the Buyer:

11.1 Representations, Warranties, and Covenants of Seller. All representations and warranties made in this Agreement by the Seller will be true in all material respects as of the Closing, and the Seller will not have violated or will not have failed to perform in accordance with any covenant contained in this Agreement or the Related Agreements.

11.2 Licenses and Permits. The Buyer will have obtained all licenses and permits from public authorities necessary to authorize the ownership and operation of a business using the Assets.

11.3 Consents. The Seller will have obtained the third-party consents required under the terms of the Contracts to be assigned by it under this Agreement, and such consents will not have required any change to the terms and conditions of the Contracts other than changes consented to in writing by the Buyer.

11.4 No Suits or Actions. No action, suit, or proceeding before any court or any governmental or regulatory authority will have been commenced and be continuing, and no investigation by any governmental or regulatory authority will have been commenced and be continuing, and no action, investigation, suit, or proceeding will be threatened at the time of the Closing, against the Seller or the Buyer or any of their affiliates, associates, officers, or directors, seeking to restrain or prevent or questioning the validity of the transactions contemplated by this Agreement or the Related Agreements.

11.5 Material Adverse Change. From the date of this Agreement to the Closing, the Seller will not have suffered any Material Adverse Change (whether or not such change is referred to or described in any supplement to any Schedule to this Agreement) in the Business prospects, financial condition, working capital, assets, liabilities (absolute, accrued, contingent, or otherwise), or operations.

SECTION 12. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER

The obligations of the Seller to consummate the transactions contemplated by this Agreement and the Related Agreements are subject to the fulfillment, before or at the Closing, of each of the following conditions, any one or a portion of which may be waived in writing by the Seller:

12.1 Representation, Warranties, and Covenants of Buyer. All representations and warranties made in this Agreement by the Buyer will be true in all material respects as of the Closing, and the Buyer will have neither violated nor failed to perform in accordance with any covenant contained in this Agreement or the Related Agreements.

12.2 No Proceeding or Litigation. No action, suit, or proceeding before any court or any governmental or regulatory authority will have been commenced and be continuing, and no investigation by any governmental or regulatory authority will have been commenced and be continuing, and no action, investigation, suit, or proceeding will be threatened at the time of the Closing, against the Seller or the Buyer or any of their affiliates, associates, officers, or directors, seeking to restrain or prevent questioning the validity of the transactions contemplated by this Agreement or the Related Agreements.

SECTION 13. RISK OF LOSS

The risk of loss, damage, or destruction to any of the Assets will be the Seller’s responsibility before the Closing. In the event of such loss, damage, or destruction, the Seller, to the extent reasonable, will replace the lost property or will repair or cause to repair the damaged property to its condition before the damage. If replacement, repairs, or restorations are not completed before the Closing, then the purchase price will be adjusted by an amount agreed on by the Buyer and the Seller that will be required to complete the replacement, repair, or restoration after the Closing. If the Buyer and the Seller are unable to agree, then the Buyer, at its sole option and notwithstanding any other provision of this Agreement, and on notice to the Seller, may rescind this Agreement and declare it to be of no further force and effect, in which event there will be no closing of this Agreement and all the terms and provisions of this Agreement will be deemed null and void. If, before the Closing, any Real Property that is the subject of a lease is damaged or destroyed, then the Buyer may rescind this Agreement in the manner provided above unless arrangements for repair satisfactory to all parties involved are made before the Closing.

SECTION 14. INDEMNIFICATION AND SURVIVAL

14.1 Survival of Representations and Warranties. All representations and warranties made in this Agreement will survive the Closing of this Agreement, except that any party to whom a representation or warranty has been made in this Agreement will be deemed to have waived any misrepresentation or breach of the representation or warranty if the party had knowledge of such breach before the Closing. The representations and warranties in this Agreement will terminate one year after the Closing Date, and such representations or warranties will thereafter be without force or effect, except for any claim with respect to which notice has been given to the potentially indemnifying party before such expiration date.

14.2 Seller’s Indemnification.

14.2.1 The Seller hereby agrees to indemnify, defend, and hold the Buyer, its successors, and assigns harmless from and against any and all claims, liabilities, obligations, costs, and expenses, including reasonable attorney fees, (collectively, “ Damages ”) arising out of or related to:

(a) Any breach or inaccuracy of any representation or warranty of the Seller made in this Agreement or any Related Agreement;

(b) Any failure by the Seller to perform any covenant required to be performed by it pursuant to this Agreement or any Related Agreement; and

(c) Any liability or obligation of the Seller or arising out of or in connection with the ownership, use, condition, maintenance, or operation of the Business or the Assets by the Seller on or before the Closing, in either case not expressly assumed by the Buyer in accordance with the terms of this Agreement.

14.2.2 If any claim is asserted against the Buyer that would give rise to a claim by the Buyer against the Seller for indemnification under Section 14.2, then the Buyer will promptly give written notice to the Seller concerning such claim and the Seller will, at no expense to the Buyer, defend the claim.

14.3 Buyer’s Indemnification. The Buyer agrees to defend, indemnify, and hold harmless the Seller from and against all Damages arising out of or related to:

(a) Any breach or inaccuracy of any representation or warranty of the Buyer made in this Agreement or any Related Agreement;

(b) Any failure by the Buyer to perform any covenant required to be performed by it pursuant to this Agreement or any Related Agreement; and

(c) Any liability or obligation of the Seller to any third party expressly assumed by the Buyer in accordance with the terms of this Agreement.

14.4 Indemnification Procedure.

14.4.1 Third-Party Claims.

(a) Each indemnified party will, with reasonable promptness after obtaining knowledge thereof, provide the indemnifying party with written notice of all third-party actions, suits, proceedings, claims, demands, or assessments that may be subject to the indemnification provisions of this Section 14.4 (collectively, “ Third-Party Claims ”), including, in reasonable detail, the basis for the claim, the nature of Damages, and a good-faith estimate of the amount of Damages.

(b) The indemnifying party will have 15 days after its receipt of the claim notice to notify the indemnified party in writing whether the indemnifying party agrees that the claim is subject to Section 14.4 and, if so, whether the indemnifying party elects to undertake, conduct, and control, through counsel of its choosing and at its sole risk and expense, the good-faith settlement or defense of the Third-Party Claim.

(c) If within 15 days after its receipt of the claim notice, the indemnifying party notifies the indemnified party that it elects to undertake the good-faith settlement or defense of the Third-Party Claim, the indemnified party will reasonably cooperate with the indemnifying party in connection therewith, including, without limitation, by making available to the indemnifying party all relevant information material to the defense of the Third-Party Claim. The indemnified party will be entitled to participate in the settlement or defense of the Third-Party Claim through counsel chosen by the indemnified party, at its expense. If the proposed settlement would impose an obligation or duty on the indemnified party, the indemnified party will have the right to approve the settlement and, in that case, the settlement may not be undertaken without such approval. As long as the indemnifying party is contesting the Third-Party Claim in good faith and with reasonable diligence, the indemnified party will not pay or settle the Third-Party Claim. Notwithstanding the foregoing, the indemnified party will have the right to pay or settle any Third-Party Claim at any time, but in such event it waives any right to indemnification therefor by the indemnifying party.

(d) If the indemnifying party does not provide notice that it elects to undertake the good-faith settlement or defense of the Third-Party Claim, or if the indemnifying party fails to contest the Third-Party Claim or fails to undertake or approve settlement, in good faith and with reasonable diligence, the indemnified party will thereafter have the right to contest, settle, or compromise the Third-Party Claim at its exclusive discretion, at the risk and expense of the indemnifying party, and the indemnifying party will thereby waive any claim, defense, or argument that the indemnified party’s defense or settlement of such Third-Party Claim is in any respect inadequate or unreasonable.

(e) A party’s failure to give timely notice will not constitute a defense (in part or in whole) to any claim for indemnification by such party, except if, and only to the extent that, such failure results in any material prejudice to the indemnifying party.

14.4.2 Claims Other than Third-Party Claims.

(a) Each indemnified party will, with reasonable promptness, deliver to the indemnifying party written notice of all claims for indemnification under Section 14.4, other than Third-Party Claims, including, in reasonable detail, the basis for the claim, the nature of the Damages, and a good-faith estimate of the amount of the Damages.

(b) The indemnifying party will have 30 days after its receipt of the claim notice to notify the indemnified party in writing regarding whether the indemnifying party accepts or disputes liability for all or any part of the Damages described in the claim notice. If the indemnifying party does not so notify the indemnified party, the indemnifying party will be deemed to accept liability for all the Damages described in the claim notice.

(c) A party’s failure to give timely notice will not constitute a defense (in part or in whole) to any claim for indemnification by such party, except if, and only to the extent that, such failure results in any material prejudice to the indemnifying party.

14.5 Setoff. In the event of any Damages for which the Buyer’s Indemnified Person has a right to indemnity under this Agreement, the Buyer will be entitled to offset the amount of such Damages against any unpaid amount of the Purchase Price remaining payable including under the Royalty Agreement. On giving notice of a claim for indemnity pursuant to Section 14.4, the Buyer will have the right to withhold payment of that portion of the Purchase Price that equals the amount of the estimated Damages, and such withholding will not constitute a default under this Agreement or any Related Agreement. The right to indemnification for the Buyer’s Indemnified Persons will not be limited to the amount of setoff under this section.

14.6 Rights Not Exclusive. An indemnified party’s rights to indemnification under Section 14 are in addition to, and not in lieu of, any other rights to which the indemnified party may be entitled at law or in equity.

SECTION 15. CLOSING

15.1 Time and Place. This Agreement will be closed at the offices of Holland & Knight LLP, at 2300 U.S. Bancorp Tower, 111 SW Fifth Avenue, Portland, Oregon 97204, on September 30, 2009, or at such other time as the parties may agree in writing (the “ Closing ”).

15.2 Obligations of Seller at Closing. At the Closing, the Seller will deliver to the Buyer the following:

(a) Bills of sale, assignments, properly endorsed certificates of title, and other instruments of transfer, in form and substance reasonably satisfactory to counsel for the Buyer, necessary to transfer and convey all of the Assets to the Buyer, including but not limited to the Bill of Sale described in Section 6(d) and the Assignment and Assumption Agreement described in Section 6(b);

(b) The Royalty Agreement described in Section 6(a);

(d) The Subscription Agreement described in Section 6(e);

(e) A cashier’s check, certified check, or wire transfer of immediately available funds for prorated items owing to the Buyer under Section 5; and

(f) Such other certificates and documents as may be called for by the provisions of this Agreement.

15.3 Buyer’s Obligations at Closing. At the Closing, the Buyer will deliver to the Seller the following:

(a) A cashier’s check, certified check, or wire transfer for $100,000 as described in Section 3(a);

(b) The Royalty Agreement described in Section 6(a);

(d) The Change in Control Agreement described in Section 6(d);

(e) The Stock Subscription Agreement described in Section 6(e); and

(f) Such other certificates and documents as may be called for by the provisions of this Agreement.

SECTION 16. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING

Possession and custody of the books and records, except for the Seller’s general ledger, may be retained by the Buyer at the place of business that the Buyer is acquiring from the Seller under this Agreement for a period of two years. During this period, the Seller or its agents will have access to such books and records and may make copies of them. The Buyer will exercise reasonable care in the safekeeping of such records and will retain all such records for a period of at least five years. The Seller will retain its general ledger but will make it available for inspection by the Buyer from time to time on reasonable request.

SECTION 17. DEFAULT

17.1 Remedies. If the Buyer fails to perform any of the terms, covenants, conditions, or obligations of this Agreement or the Royalty Agreement, time of payment and performance being of the essence, then the Seller, subject to the requirements of the notice provided in Section 17.2, may have any or all of the following remedies:

(a) The right to exercise each and all of the remedies granted to the Seller by the Oregon Uniform Commercial Code; and

(b) The right to exercise any other remedy available to the Seller.

17.2 Notice of Default. The Buyer will not be deemed in default for failure to perform the terms, covenants, and conditions of this Agreement, other than failure to make payments on the Royalty Agreement, until notice of the default has been given to the Buyer and the Buyer has failed to remedy the default within 30 days after the notice.

17.3 Cross-Default Provision. A default in this Agreement, including a default in payment of the Royalty Agreement, will constitute a default in the Related Agreements described in Section 6, and a default in any one or more of the Related Agreements described in Section 6 will constitute a default in this Agreement.

SECTION 18. TERMINATION OF AGREEMENT

18.1 Right of Parties to Terminate.

18.1.1 This Agreement may be terminated by the Buyer if:

(a) Any of the licenses, permits, or consents described in Sections 11.2 and 11.3 have been denied, not permitted to go into effect, or obtained on terms not reasonably satisfactory to the Buyer and all reasonable final appeals have been exhausted; or

(b) The Seller breaches any of its obligations under this Agreement in any material respect.

18.1.2 This Agreement may be terminated by the Seller if:

(a) Any of the consents described in Section 11.3 have not been obtained on terms satisfactory to the Seller; or

(b) The Buyer breaches any of its obligations under this Agreement in any material respect.

18.1.3 This Agreement may be terminated by either the Seller or the Buyer, by written notice to the other party, if the Closing fails to occur on or before November 30, 2009; however, the right to terminate this Agreement under this Section 18.1.3 will not be available to any party whose failure to fulfill or perform any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date.

18.2 Effect of Termination. If either the Buyer or the Seller decides to terminate this Agreement pursuant to Section 18.1, such party will promptly give written notice to the other party to this Agreement of such decision. In the event of a termination of this Agreement, the parties to this Agreement will be released from all liabilities and obligations arising under this Agreement (other than those described in Section 10.2) with respect to the matters contemplated by this Agreement, other than for damages arising from a breach of this Agreement.

SECTION 19. MISCELLANEOUS PROVISIONS

19.1 Binding Effect. This Agreement will be binding on and inure to the benefit of the parties and their respective heirs, personal representatives, successors, and permitted assigns.

19.2 Assignment. Neither this Agreement nor any of the rights, interests, or obligations under this Agreement may be assigned by any party without the prior written consent of the other parties, which consent will not be unreasonably withheld.

19.3 No Third-Party Beneficiaries. Nothing in this Agreement, express or implied, is intended or will be construed to confer on any person, other than the parties to this Agreement, any right, remedy, or claim under or with respect to this Agreement.

19.4 Notices. All notices and other communications under this Agreement must be in writing and will be deemed to have been given if delivered personally, sent by facsimile (with confirmation), mailed by certified mail, or delivered by an overnight delivery service (with confirmation) to the parties at the following addresses or facsimile numbers (or at such other address or facsimile number as a party may designate by like notice to the other parties):


To:		Schmitt Industries, Inc.
		2765 N.W. Nicolai Street
		Portland, OR 97210
		Attention: James Fitzhenry
		Facsimile No.: (503) 223-1258


With a copy to:


		Holland & Knight LLP
		2300 U.S. Bancorp Tower
		111 S.W. Fifth Avenue
		Portland, OR 97204
		Attention: Mark von Bergen
		Facsimile No.: (503) 241-8014


To:		Optical Dimensions
		27472 Portola Parkway, Suite 205-208
		Foothill Ranch, CA 92610
		Attention: Glenn Valliant


With a copy to:


		Axilon Law Group, PLLC
		Electric Building, Suite 310
		115 North Broadway
		Billings, MT 59101
		Attention: Tom Singer
		Facsimile No.: (406) 294-9468

Any notice or other communication will be deemed to be given (a) on the date of personal delivery, (b) at the expiration of the third day after the date of deposit in the United States mail, or (c) on the date of confirmed delivery by facsimile or overnight delivery service.

19.5 Amendments. This Agreement may be amended only by an instrument in writing executed by both parties.

19.6 Construction. The captions used in this Agreement are provided for convenience only and will not affect the meaning or interpretation of any provision of this Agreement. All references in this Agreement to “Section” or “Sections” without additional identification refer to the Section or Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Whenever the words include or including are used in this Agreement, they will be deemed to be followed by the words without limitation .

19.7 Counterparts. This Agreement may be executed in counterparts, each of which will be considered an original and all of which together will constitute one and the same agreement.

19.8 Facsimile Signatures. Facsimile transmission of any signed original document, and retransmission of any signed facsimile transmission, will be the same as delivery of an original. At the request of any party, the parties will confirm facsimile transmitted signatures by signing an original document.

19.9 Further Assurances. Each party agrees (a) to execute and deliver such other documents and (b) to do and perform such other acts and things, as any other party may reasonably request, to carry out the intent and accomplish the purposes of this Agreement.

19.10 Time of Essence. Time is of the essence with respect to all dates and time periods set forth or referred to in this Agreement.

19.11 Expenses. Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear the party’s own expenses in connection with the preparation, execution, and performance of this Agreement and the transactions contemplated by this Agreement.

19.12 Waiver. Any provision or condition of this Agreement may be waived at any time, in writing, by the party entitled to the benefit of such provision or condition. Waiver of any breach of any provision will not be a waiver of any succeeding breach of the provision or a waiver of the provision itself or any other provision.

19.13 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the state of Oregon, without regard to conflict-of-laws principles.

19.14 Attorney Fees. With respect to any dispute relating to this Agreement, or in the event that a suit, action, arbitration, or other proceeding of any nature whatsoever is instituted to interpret or enforce the provisions of this Agreement, including, without limitation, any proceeding under the U.S. Bankruptcy Code and involving issues peculiar to federal bankruptcy law or any action, suit, arbitration, or proceeding seeking a declaration of rights or rescission, the prevailing party shall be entitled to recover from the losing party its reasonable attorney fees, paralegal fees, expert fees, and all other fees, costs, and expenses actually incurred and reasonably necessary in connection therewith, as determined by the judge or arbitrator at trial, arbitration, or other proceeding, or on any appeal or review, in addition to all other amounts provided by law.

19.15 Injunctive and Other Equitable Relief. The parties agree that the remedy at law for any breach or threatened breach by a party may, by its nature, be inadequate, and that the other parties will be entitled, in addition to damages, to a restraining order, temporary and permanent injunctive relief, specific performance, and other appropriate equitable relief, without showing or proving that any monetary damage has been sustained.

19.16 Venue. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement will be brought against any of the parties in Multnomah County Circuit Court of the State of Oregon or, subject to applicable jurisdictional requirements, in the United States District Court for the District of Oregon, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to such venue.

19.17 Exhibits. The exhibits and schedules referenced in this Agreement are part of this Agreement as if fully set forth in this Agreement.

19.18 Severability. If any provision of this Agreement is invalid or unenforceable in any respect for any reason, the validity and enforceability of such provision in any other respect and of the remaining provisions of this Agreement will not be in any way impaired.

19.19 Entire Agreement. This Agreement (including the documents and instruments referred to in this Agreement) constitutes the entire agreement and understanding of the parties with respect to the subject matter of this Agreement and supersedes all prior understandings and agreements, whether written or oral, among the parties with respect to such subject matter.

The parties enter into this Agreement as of the date first written above.



Glenn Valliant

SCHMITT INDUSTRIES, INC.

By:
		James Fitzhenry, President

EXHIBITS

Exhibit A

ROYALTY AGREEMENT

Exhibit B

ASSIGNMENT AND ASSUMPTION AGREEMENT

Exhibit C

BILL OF SALE

Exhibit D

CHANGE IN CONTROL AGREEMENT

Exhibit E

STOCK SUBSCRIPTION AGREEMENT

SCHEDULES


1.1(a)		Equipment, Tools, Furniture, and Fixtures

1.1(g)		Approvals and Consents

1.1(h)		Accounts Receivable

1.1(i)		Causes of Action

1.1(l)		Telephone Lines and Numbers

1.2		Accounts Payable

2.0		Allocation of Purchase Price

7.3		Financial Statements

7.6		Contracts

7.10(3)		Employee Benefits

7.10(4)		Employment Agreements

7.10(5)		Compensation

7.11(2)		Personal Property

7.12		Intellectual Property

7.17(1)		Product Warranties

EXHIBIT A

ROYALTY AGREEMENT

This ROYALTY AGREEMENT (this “ Agreement ”), dated as of September 30, 2009, is between Glenn Valliant (the “ Seller ”) and Schmitt Industries, Inc. (the “ Buyer ”), an Oregon corporation.

RECITALS

A. Pursuant to an Asset Purchase Agreement dated September 23, 2009 (the “ Asset Purchase Agreement ”), the Seller sold all of the assets used in the operation of its Optical Dimensions business (the “ Business ”).

B. Pursuant to the Asset Purchase Agreement, part of the consideration for the assets being sold thereunder is the payment of royalties on the sales of products incorporating the Seller’s intellectual property.

AGREEMENT

The parties agree as follows:

SECTION 1. DEFINITIONS

1.1 Inventions. “Inventions” means any devices, systems, or processes that may incorporate the Patents.

1.2 Patents. “Patents” means the patents and patent applications described in Schedule A to this Agreement, and all patents that are continuations, continuations in part, divisions, reissues, renewals, extensions, or additions of those patents and patent applications (or that otherwise claim priority from them) and their corresponding patents.

1.3 Covered Products. “Covered Products” means products or processes whose manufacture, use, or sale are covered by a claim contained in the Covered Patents.

1.4 New Developments. “New Developments” means all improvements, new developments, or modifications to the Technical Materials, Invention, Covered Products, and Patents that the Buyer may develop or acquire during the term of this Agreement, and any extension of it, in connection with making, selling, and using the Covered Products, both inside and outside the Territory.

1.5 Royalty. “Royalty” or “Royalties” means the fees paid by the Buyer to the Seller pursuant to Section 2 of this Agreement.

1.6 Subsidiary. “Subsidiary” means a corporation, company, or other entity, more than 50% of whose outstanding shares or securities are now or hereafter owned or controlled, directly or indirectly, by a party to this Agreement, or a corporation, company, or other entity

Exhibit A – Royalty Agreement – Page 1

that has no outstanding shares or securities, but more than 50% of whose ownership interest representing the right to make the decisions for the entity is now or hereafter owned or controlled, directly or indirectly, by a party to this Agreement. Such corporation, company, or other entity shall be deemed to be a subsidiary only as long as such ownership or control exists.

1.7 Technical Materials. “Technical Materials” means copies of all inventor notebooks (or relevant portions of them), files, data, information, results of testing, drawings, schematics, and all models and prototypes that are owned by the Seller and that are in the Seller’s possession on the date of this Agreement and that relate to the Patents.

SECTION 2. ROYALTY PAYMENTS

As partial consideration for the purchase of the assets pursuant to the Asset Purchase Agreement, for the term of this Agreement, the Buyer agrees to pay the Seller a Royalty of 5% on the invoiced sales price (net of any sales commissions) of each unit sold worldwide by the Buyer and any Subsidiaries thereof that incorporates a Patent, including, but not limited to, the Covered Products, New Developments, and Inventions. Payment shall be made every three months, commencing three months after the execution of this Agreement.

SECTION 3. RECORDS

3.1 The Buyer shall keep records in accordance with generally accepted accounting principles and in sufficient detail to permit the determination of the amounts due to the Seller under Section 2 of this Agreement. Such records shall be kept during the term of this Agreement and for three years thereafter.

3.2 On two business days’ written notice requesting an audit, the Buyer shall permit auditors designated by the Seller, together with any legal and technical support that the Seller deems necessary, to examine, during ordinary business hours, books, records, materials, and manufacturing processes of the Buyer for the purpose of verifying compliance with this Agreement. Each party shall pay its own costs incurred in the course of the audit. No more than four audits may be conducted in any one calendar year.

SECTION 4. TERM

The term of this Agreement shall expire upon the expiration of the Patents, including any Inventions or New Developments, or upon the Seller attaining the age of 65, whichever occurs first.

SECTION 5. NEW DEVELOPMENTS

New Developments shall be owned solely by the Buyer. Furthermore, the Buyer shall have the sole right to file any patent, copyright, or other intellectual property rights applications or registrations resulting from any such New Developments anywhere in the world. The Seller acknowledges and agrees that all such New Developments become the exclusive property of the Buyer, and the Buyer shall have the sole right to determine the treatment of any New Developments, including the rights to keep New Developments as trade secrets, to file and

Exhibit A – Royalty Agreement – Page 2

execute patent applications on New Developments, to use and disclose New Developments without prior patent application, to file registrations for any other intellectual property rights, and to transfer any intellectual property rights to any party the Buyer so chooses, or to follow any other procedure that the Buyer deems appropriate.

SECTION 6. MISCELLANEOUS

6.1 Binding Effect. This Agreement will be binding on and inure to the benefit of the parties and their respective heirs, personal representatives, successors, and permitted assigns.

6.2 Assignment. Neither this Agreement nor any of the rights, interests, or obligations under this Agreement may be assigned by any party without the prior written consent of the other parties, which consent will not be unreasonably withheld.

6.3 No Third-Party Beneficiaries. Nothing in this Agreement, express or implied, is intended or will be construed to confer on any person, other than the parties to this Agreement, any right, remedy, or claim under or with respect to this Agreement.

6.4 Amendments. This Agreement may be amended only by an instrument in writing executed by both parties.

6.5 Counterparts. This Agreement may be executed in counterparts, each of which will be considered an original and all of which together will constitute one and the same agreement.

6.6 Facsimile Signatures. Facsimile transmission of any signed original document, and retransmission of any signed facsimile transmission, will be the same as delivery of an original. At the request of any party, the parties will confirm facsimile transmitted signatures by signing an original document.

6.7 Further Assurances. Each party agrees (a) to execute and deliver such other documents and (b) to do and perform such other acts and things, as any other party may reasonably request, to carry out the intent and accomplish the purposes of this Agreement.

6.8 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the state of Oregon, without regard to conflict-of-laws principles.

6.9 Attorney Fees. With respect to any dispute relating to this Agreement, or in the event that a suit, action, arbitration, or other proceeding of any nature whatsoever is instituted to interpret or enforce the provisions of this Agreement, including, without limitation, any proceeding under the U.S. Bankruptcy Code and involving issues peculiar to federal bankruptcy law or any action, suit, arbitration, or proceeding seeking a declaration of rights or rescission, the prevailing party shall be entitled to recover from the losing party its reasonable attorney fees, paralegal fees, expert fees, and all other fees, costs, and expenses actually incurred and reasonably necessary in connection therewith, as determined by the judge or arbitrator at trial, arbitration, or other proceeding, or on any appeal or review, in addition to all other amounts provided by law.

Exhibit A – Royalty Agreement – Page 3

6.10 Venue. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement will be brought against any of the parties in Multnomah County Circuit Court of the State of Oregon or, subject to applicable jurisdictional requirements, in the United States District Court for the District of Oregon, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to such venue.

6.11 Exhibits. The exhibits and schedules referenced in this Agreement are part of this Agreement as if fully set forth in this Agreement.

6.12 Severability. If any provision of this Agreement is invalid or unenforceable in any respect for any reason, the validity and enforceability of such provision in any other respect and of the remaining provisions of this Agreement will not be in any way impaired.

The parties enter into this agreement as of the date first written above.

Exhibit A – Royalty Agreement – Page 4

EXHIBIT B

ASSIGNMENT AND ASSUMPTION AGREEMENT

This ASSIGNMENT AND ASSUMPTION AGREEMENT (this “ Agreement ”), dated as of September 30, 2009 (the “ Effective Date ”), is between Glenn Valliant (the “ Assignor ”) and Schmitt Industries, Inc., an Oregon corporation (the “ Assignee ”).

RECITALS

A. The Assignee is purchasing certain assets used in the operation of the Optical Dimensions (the “ Business ”) from the Assignor.

B. In connection with the asset sale, the parties wish to provide for the assignment to the Assignee of the Assignor’s rights under certain contracts and the assumption by the Assignee of the Assignor’s obligations those contracts.

AGREEMENT

The parties agree as follows:

SECTION 1. ASSIGNMENT TO ASSIGNEE

The Assignor transfers and assigns to the Assignee, and its successors and assigns, all of the Assignor’s right, title, and interest in the contracts and agreements identified on the attached Schedule A (the “ Contracts ”) as of the Effective Date of this Agreement.

SECTION 2. ASSUMPTION BY ASSIGNEE

The Assignee accepts the assignment of the Contracts and assumes, from and after the Effective Date, all of the Assignor’s obligations pursuant to each of the Contracts, provided, however, that the Assignee does not assume and shall not be responsible for payments due or other obligations arising under the Contracts before the Effective Date. The Assignee agrees to be bound by the terms of the Contracts and to perform all obligations under the Contracts.

SECTION 3. MISCELLANEOUS PROVISIONS

3.1 Binding Effect. This Agreement will be binding on and inure to the benefit of the parties and their respective heirs, personal representatives, successors, and permitted assigns.

3.2 Assignment. Neither this Agreement nor any of the rights, interests, or obligations under this Agreement may be assigned by any party without the prior written consent of the other parties, which consent will not be unreasonably withheld.

3.3 No Third-Party Beneficiaries. Nothing in this Agreement, express or implied, is intended or will be construed to confer on any person, other than the parties to this Agreement, any right, remedy, or claim under or with respect to this Agreement.

Exhibit B – Assignment and Assumption Agreement – Page 1

3.4 Amendments. This Agreement may be amended only by an instrument in writing executed by both parties.

3.5 Counterparts. This Agreement may be executed in counterparts, each of which will be considered an original and all of which together will constitute one and the same agreement.

3.6 Facsimile Signatures. Facsimile transmission of any signed original document, and retransmission of any signed facsimile transmission, will be the same as delivery of an original. At the request of any party, the parties will confirm facsimile transmitted signatures by signing an original document.

3.7 Further Assurances. Each party agrees (a) to execute and deliver such other documents and (b) to do and perform such other acts and things, as any other party may reasonably request, to carry out the intent and accomplish the purposes of this Agreement.

3.8 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the state of Oregon, without regard to conflict-of-laws principles.

3.9 Attorney Fees. With respect to any dispute relating to this Agreement, or in the event that a suit, action, arbitration, or other proceeding of any nature whatsoever is instituted to interpret or enforce the provisions of this Agreement, including, without limitation, any proceeding under the U.S. Bankruptcy Code and involving issues peculiar to federal bankruptcy law or any action, suit, arbitration, or proceeding seeking a declaration of rights or rescission, the prevailing party shall be entitled to recover from the losing party its reasonable attorney fees, paralegal fees, expert fees, and all other fees, costs, and expenses actually incurred and reasonably necessary in connection therewith, as determined by the judge or arbitrator at trial, arbitration, or other proceeding, or on any appeal or review, in addition to all other amounts provided by law.

3.10 Venue. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement will be brought against any of the parties in Multnomah County Circuit Court of the State of Oregon or, subject to applicable jurisdictional requirements, in the United States District Court for the District of Oregon, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to such venue.

3.11 Exhibits. The exhibits and schedules referenced in this Agreement are part of this Agreement as if fully set forth in this Agreement.

3.12 Severability. If any provision of this Agreement is invalid or unenforceable in any respect for any reason, the validity and enforceability of such provision in any other respect and of the remaining provisions of this Agreement will not be in any way impaired.

Exhibit B – Assignment and Assumption Agreement – Page 2

The parties enter into this Agreement as of the date first written above.

Exhibit B – Assignment and Assumption Agreement – Page 3

SCHEDULE A

CONTRACTS

Contract with Advance Electronic Design, Inc. for engineering work dated January 1, 2009.

Contract with Greg Domek, Process Corporation, for services as a distributor dated October 15, 2004.

Exhibit B – Assignment and Assumption Agreement – Page 4

EXHIBIT C

BILL OF SALE

FOR VALUABLE CONSIDERATION, receipt of which is here acknowledged, Glenn Valliant (“ Seller ”) does hereby grant, bargain, sell, transfer, and deliver to Schmitt Industries, Inc. (“ Buyer ”) all of Seller’s right, title, and interest in and to the items of personal property (“ Property ”) listed on Schedule A attached to this bill of sale and located as set forth in it, to have and to hold unto Buyer and Buyer’s legal representatives, successors, and assigns forever.

Seller represents and warrants to Buyer that Seller is the sole owner of the Property; that the Property is free and clear of all liens, security interests, options, and encumbrances; and that Seller has good right to sell the Property.

This Bill of Sale shall be construed in accordance with the laws of the state of Oregon.

DATED: September 30, 2009.



Glenn Valliant

SCHMITT INDUSTRIES, INC.

By:
		James Fitzhenry, President

Exhibit C – Bill of Sale

EXHIBIT D

CHANGE OF CONTROL AGREEMENT

September 30, 2009

Mr. Glenn Valliant

d/b/a Optical Dimensions

27472 Portola Parkway, #206-208

Foothill Ranch, CA 92610

Dear Glenn:

Pursuant to our conversation and the non-binding letter of intent (“LOI”) between you and Schmitt Industries, Inc. (the “Company”) dated August 27, 2009 regarding the acquisition by the Company of the assets of Optical Dimensions, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change of Control may exist and that such possibility, and the uncertainty and questions that it may raise, may result in your decision not to enter into the contemplated transaction. Accordingly, the Board of Directors of the Company (the “Board”) has determined that appropriate steps should be taken to address your concerns and induce you to enter into the transaction as contemplated by the Asset Purchase Agreement dated September 23, 2009 without distraction in circumstances arising from the possibility of a Change of Control of the Company.

This letter agreement (“Agreement”) sets forth the severance benefits which the Company will provide to you in the event your employment with the Company is terminated following a Change of Control, as defined herein, under the circumstances described below.

1. Term of Agreement . The term of this Agreement is September 30, 2009 until September 30, 2011; provided, however, that this Agreement shall continue in effect for a period of ninety (90) days beyond the stated term if a Change of Control, as defined in Section 3 below, occurs during such term.

2. Change of Control . For the purpose of this Agreement, Change of Control means a merger or consolidation to which Company is a party if the individuals and entities who were stockholders of Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined voting power for election of directors of the surviving corporation immediately following the effective date of such merger or consolidation.

Exhibit D – Change of Control Agreement – Page 1

3. Termination Following Change of Control . If a Change of Control occurs during the term of this Agreement and your employment is terminated by the Company within sixty (60) days before or ninety (90) days after the Change of Control, you will be entitled to the benefits provided in Section 4 below unless such termination is (a) due to your death or Disability, or (b) for Cause. For the purpose of this Section 3, “Disability” means your inability to perform the duties of your position under this Agreement for a continuous period of five (5) months, with or without reasonable accommodation, because of a physical or mental impairment, as determined by the Board. For the purpose of this Section 3, “Cause” means you committed any one or more of the following: (i) theft, embezzlement, fraud, misappropriation of funds, other acts of dishonesty or the violation of any law or ethical rule relating to your employment by the Company; (ii) a felony or any act involving moral turpitude for which you were convicted or entered a plea of nolo contendere; (iii) a breach of any material provision of this Agreement or any confidentiality or other agreement between you and the Company, and if such violation or breach is susceptible of cure, the failure to effect such cure within 30 days after written notice of such breach is given to you; or (iv) a breach of your fiduciary duty to the Company.

4. Change of Control Benefits . In the event you become eligible for benefits under Section 3, you will receive the following benefits, conditioned upon your signing a release of claims in a form satisfactory to Company:

(a) If your employment is terminated as defined in Section 3 by the Company following a Change of Control as defined in Section 2 during the first year of your employment, a payment of $75,000;

(b) If your employment is terminated as defined in Section 3 by the Company following a Change of Control as defined in Section 2 during the second year of your employment, a payment of $50,000; and

(c) If your employment is terminated as defined in Section 3 by the Company following a Change of Control as defined in Section 2 during the third year of your employment, a payment of $25,000.

5. Right to Terminate . Nothing in this Agreement modifies the at will nature of your employment with the Company. Both you and the Company retain the right to terminate the employment relationship at any time.

6. Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the Company, each subsidiary and their respective successors and assigns, and shall be binding upon you, your administrators, executors, legatees, and heirs. In that this Agreement is a personal service contract, you may not assign it.

7. Notices . All notices, requests and demands given to or made pursuant to this Agreement shall, except as otherwise specified herein, be in writing and be delivered or mailed to any such party at its address as set forth in this Agreement. Either party may change its address, by notice to the other party given in the manner set forth in this Section. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the third business day thereafter or when it is actually received, whichever is sooner.

Exhibit D – Change of Control Agreement – Page 2

8. Captions . The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement.

9. Mediation . In the case of any dispute arising under this Agreement which cannot be settled by reasonable discussion, the parties agree that, prior to commencing any proceeding as contemplated by Sections 10 and 11, they will first engage the services of a professional mediator agreed upon by the parties and attempt in good faith to resolve the dispute through confidential nonbinding mediation. Each party shall bear one-half ( ¹ / 2 ) of the mediator’s fees and expenses and shall pay all of its own attorneys’ fees and expenses related to the mediation.

10. Governing Law and Jurisdiction . The validity, construction and performance of this Agreement shall be governed by the laws of the State of Oregon, which shall be the exclusive jurisdiction for any action to interpret or enforce this Agreement.

11. Attorney Fees . In the event of any suit, action or arbitration to interpret or enforce this Agreement, the prevailing party shall be entitled to recover its attorney fees, costs and out-of-pocket expenses at trial and on appeal.

12. Construction . Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement.

12. Waivers . No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law.

13. Modification . This Agreement may not be modified or amended except by written instrument signed by the parties hereto.

14. Entire Agreement . This Agreement constitutes the entire agreement between the parties and supersedes all prior or contemporaneous oral or written understandings, agreements, statements, representations or promises with respect to its subject matter. This Agreement was the subject of negotiation between the parties and, therefore, the parties agree that the rule of construction requiring that the agreement be construed against the drafter shall not apply to the interpretation of this Agreement.

Exhibit D – Change of Control Agreement – Page 3


EXECUTIVE	COMPANY

	SCHMITT INDUSTRIES, INC.
Glenn Valliant
	By:
		James Fitzhenry, President

Exhibit D – Change of Control Agreement – Page 4

EXHIBIT E

SUBSCRIPTION AGREEMENT

This SUBSCRIPTION AGREEMENT, dated as of September 30, 2009, is between Schmitt Industries, Inc. (the “ Company ”), an Oregon corporation, and Glenn Valliant (the “ Subscriber ”).

AGREEMENT

1. The Subscriber hereby subscribes for 24,642 shares of common stock of the Company (the “ Shares ”). The Shares are being issued pursuant to an Asset Purchase Agreement between the Company and the Subscriber dated September 23, 2009 (the “ Asset Purchase Agreement ”).

2. The Subscriber represents and warrants to the Company that:

(a) The Subscriber is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Shares. The Subscriber has such knowledge and experience in financial and business matters that the Subscriber is capable of evaluating the merits and risks of an investment in the Company.

(b) The Subscriber has had an opportunity to ask questions and receive answers concerning the business, properties, prospects, and financial condition of the Company and to obtain any additional information that the Subscriber believes is necessary or desirable to evaluate the merits and risks of the purchase of the Shares. The Subscriber has received all information that the Subscriber believes is necessary or desirable in connection with the purchase of the Shares.

(c) The Subscriber is purchasing the Shares for investment for the Subscriber’s own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act of 1933, as amended (the “ Securities Act ”).

(d) The Subscriber is a bona fide resident of the state of California.

(e) The Subscriber owns the property it is selling to the Company pursuant to the Asset Purchase Agreement free and clear of all liens, encumbrances, options and adverse claims.

3. The Subscriber understands that the Shares have not been registered under the Securities Act in reliance on an exemption from registration. The Subscriber understands that the Shares must be held indefinitely unless the Shares subsequently are registered under the Shares Act or unless an exemption from registration is otherwise available. The Subscriber understands that the Company is not obligated to register the Shares. The Subscriber agrees that the Shares may not be offered, sold, transferred, pledged, or otherwise disposed of in the absence of an

Exhibit E – Subscription Agreement – Page 1

effective registration statement under the Securities Act and applicable state securities laws or an opinion of counsel acceptable to the Company that such registration is not required. The Subscriber understands that the certificate representing the Shares will be imprinted with a legend in substantially the following form:

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. NO OFFER, SALE, TRANSFER, PLEDGE, OR OTHER DISPOSITION OF THE SHARES MAY BE EFFECTED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

Subscriber:

Glenn Valliant


Accepted by the Company on
September 30, 2009.

SCHMITT INDUSTRIES, INC.

By:
		James Fitzhenry, President

Exhibit E – Subscription Agreement – Page 2

Exhibit 31.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Wayne A. Case, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Schmitt Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 12, 2010

/s/ Wayne A. Case

Wayne A. Case,

Chairman of the Board and Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey T Siegal, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Schmitt Industries, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 12, 2010

/s/ Jeffrey T Siegal

Jeffrey T Siegal,

Chief Financial Officer and Treasurer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Schmitt Industries, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended November 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Wayne A. Case and Jeffrey T Siegal, Chairman of the Board and Chief Executive Officer and Chief Financial Officer and Treasurer, respectively, of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Wayne A. Case

Wayne A. Case

Chairman of the Board and Chief Executive Officer

January 12, 2010

/s/ Jeffrey T Siegal

Jeffrey T Siegal

Chief Financial Officer and Treasurer

January 12, 2010

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company