UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C.   20549

                                     FORM 10-Q


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

For the quarterly period ended:      February 28, 1998
                                   -------------------------------------------
                                         or
- ------

- ------    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934
For the transition period from:                        to:
                                 -------------------        ------------------

Commission File Number:   0-23996
                         -----------------------------------------------------

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

             Oregon                                 93-1151989
     ------------------------                ------------------------
     (Place of Incorporation)                (IRS Employer ID Number)

                   2765 NW Nicolai Street, Portland, Oregon 97210
- --------------------------------------------------------------------------------
                (Address of registrant's principal executive office)

                                   (503) 227-7908
- --------------------------------------------------------------------------------
                          (Registrant's telephone number)


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    xx   No
                                                       ------     ------

       The number of shares of each class of common stock outstanding as of
February 28, 1998 Common stock, no par value                7,096,889

                                       

                              SCHMITT INDUSTRIES, INC.

                                 INDEX TO FORM 10-Q

                                      
Page ---- Part I - FINANCIAL INFORMATION Item 1 - Financial Statements: Consolidated Balance Sheets: - February 28, 1998 and May 31, 1997 . . . . . . . . . 3 Consolidated Statements of Income: - For the Three and Nine Months Ended February 28, 1998 and February 28, 1997. . . . . . . 5 Consolidated Statements of Cash Flows - For the Nine Months Ended February 28, 1998 and February 28, 1997. . . . . . . 6 Supplemental Schedule of Non-Cash Investing and Financing Activities . . . . . . . . . . . . . . 7 Notes to Interim Financial Statements . . . . . . . . . 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 8 Part II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . 10 Signatures - . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Exhibits - . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Page 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements SCHMITT INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS
February 28, 1998 May 31, 1997 Unaudited -------------------------------- Cash $ 890,089 $ 504,662 Marketable securities & commercial paper 213,440 168,000 Accounts receivable 1,435,699 2,725,512 Inventories 3,887,751 2,479,820 Prepaid expenses 139,247 30,668 Deferred tax asset 244,585 136,000 ------------ ----------- Total current assets 6,810,811 6,044,662 Property and equipment Land 299,000 299,000 Buildings & leasehold improvements 1,195,093 1,025,868 Furniture and equipment 863,351 760,596 Vehicles 158,886 146,299 ------------ ----------- 2,516,330 2,231,763 Less accumulated depreciation 642,114 530,587 ------------ ----------- Total property & equipment 1,874,216 1,701,176 Other assets Long-term deferred tax 679,000 679,000 Other assets -0- 90,415 ------------ ----------- Total other assets 679,000 769,415 Total assets $ 9,364,027 $ 8,515,253 ------------ ----------- ------------ -----------
Page 3 SCHMITT INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES
February 28, 1998 May 31, 1997 Unaudited -------------------------------- Current liabilities Trade accounts payable $ 662,098 $ 530,667 Accrued liabilities 153,978 306,811 Income taxes payable -0- 68,563 Current portion of long term debt -0- 29,061 ------------ ----------- Total current liabilities 816,076 935,102 Long-term debt, net of current portion -0- 150,922 ------------ ----------- Total liabilities $ 816,076 $ 1,086,024 STOCKHOLDERS' EQUITY Common stock Authorized: 20,000,000 shares without par value Issued and outstanding: February 28, 1998 5,058,406 4,952,411 and May 31, 1997 7,096,889 and 7,081,889 shares respectively Cumulative foreign translation adjustment (175,337) (36,270) Retained earnings 3,664,882 2,513,088 ------------ ----------- Total stockholders' equity 8,547,951 7,429,229 Total liabilities and stockholders' equity $ 9,364,027 $ 8,515,253 ------------ ----------- ------------ -----------
Page 4 SCHMITT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1997 (UNAUDITED)
Three Months Ended Nine Months Ended 02/28/98 02/28/97 02/28/98 02/28/97 ------------------------- ------------------------- Sales $2,372,320 $2,918,912 $8,259,736 $7,450,924 Cost of sales 1,313,120 1,059,330 3,862,310 2,776,712 ---------- ---------- ---------- ---------- Gross profit 1,059,200 1,859,582 4,397,426 4,674,212 General and administrative expenses 821,997 1,122,128 2,826,670 3,011,641 Research and development 78,655 56,650 270,579 116,161 ---------- ---------- ---------- ---------- Total operating expense 900,652 1,178,778 3,097,249 3,127,802 Income from operations 158,548 680,804 1,300,177 1,546,410 Other income and expense Interest income 7,784 14,805 31,803 27,156 Interest expense (20,104) (5,593) (22,252) (5,609) Misc. income 55,566 38,448 176,066 69,127 ---------- ---------- ---------- ---------- 43,246 47,660 185,617 90,674 Income before income tax 201,794 728,464 1,485,794 1,637,084 Provision for income tax 100,000 269,809 334,000 430,809 ---------- ---------- ---------- ---------- Net income for period $ 101,794 $ 458,655 $1,151,794 1,206,275 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income per share Basic .01 .07 .16 .17 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted .01 .06 .15 .17 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Page 5 SCHMITT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1997 (UNAUDITED)
February 28, 1998 February 28, 1997 ----------------- ----------------- Cash flows from operating activities: Net income from operations $ 1,151,794 $ 1,206,275 Items not affecting cash: Amortization -0- 23,815 Depreciation 111,487 199,768 Deferred taxes (108,585) (5,659) Unrealized gain on trading securities (45,400) -0- ----------- ----------- 1,109,296 1,424,199 Changes in certain assets & liabilities: Decrease (increase) in accounts receivable 1,289,813 (759,740) Decrease (increase) in marketable securities & commercial paper -0- (176,782) Decrease (increase) in inventory (1,407,931) (890,459) Decrease (increase) in prepaid expenses (108,579) (13,943) Decrease (increase) in other assets 90,415 -0- Increase (decrease) in accounts payable 131,431 278,756 Increase (decrease) in other liabilities (152,833) 26,419 Increase (decrease) in income tax payable (68,563) (88,140) ----------- ----------- (226,247) (1,623,889) ----------- ----------- Net cash provided (used) by operating activities: 883,049 (199,690) Cash flows used by investing activities: Acquisition of capital assets: (284,567) (313,884) ----------- ----------- Net cash provided (used) by investing activities: (284,567) (313,884) Cash flows from financing activities: Line of credit -0- 400,000 Repayment of debt (179,983) -0- Exercise of stock options 105,995 278,512 ----------- ----------- Net cash provided (used) by financing activities: (73,988) 678,512 Effect of foreign exchange rate changes on cash: (139,067) -0- Increase (decrease) in cash: 385,427 164,938 Cash beginning of period: 504,662 508,240 Cash end of period $ 890,089 $ 673,178 ----------- ----------- ----------- -----------
Page 6 February 28, 1998 February 28, 1997 ----------------- ----------------- SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES Income tax benefit of stock options exercised $ 19,370 $ 330,000 --------- -------- --------- -------- Supplemental Information Income taxes paid $ 399,200 $ 124,100 Interest paid $ 22,252 $ 5,609
NOTES TO INTERIM FINANCIAL STATEMENTS Note 1: Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, and all adjustments considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended February 28, 1998 are not necessarily indicative of the results that may be experienced for the fiscal year ending May 31, 1998. These financial statements are those of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in the preparation of the consolidated financial statements. Certain prior year amounts have been reclassified to conform with current year presentation. Such reclassifications had no effect on previously reported results of operations or stockholders' equity.
Note 2: EPS Reconciliation Three Months Ended Nine Months Ended 2/28/98 2/28/97 2/28/98 2/28/97 --------------------- --------------------- Weighted average shares (basic) 7,095,711 7,042,886 7,088,728 7,012,557 Effect of dilutive stock options 342,639 159,226 382,614 154,973 Weighted average shares (diluted) 7,438,350 7,202,112 7,471,342 7,167,530 --------- --------- --------- ---------
Page 7 SCHMITT INDUSTRIES, INC. FORM 10-Q THIRD QUARTER FISCAL YEAR 1998 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations: The following information contains certain forward-looking statements that anticipate future trends or events. These statements are based on certain assumptions that may prove to be erroneous and are subject to certain risks including but not limited to the uncertainties of the Company's new product introductions and the risks of increased competition and technological change in the Company's industry. Accordingly, actual results may differ, possibly materially, from the predictions contained herein. Company operations slowed during the third quarter of fiscal 1998, ended February 28, 1998, as evidenced by decreases in sales and profit levels. Sales of balancer products increased in the United States, the United Kingdom, Germany and other world markets during the third quarter of this fiscal year, but sales of measurement products slowed during this period due primarily to the impact of delayed orders for the Asian markets. Management expects these reduced sales trends of measurement products to continue throughout fiscal year 1998. During the third quarter ended February 28, 1998, the Company experienced declining sales of the TMS-2000 non-contact laser texture measurement systems (TMS 2000) to the computer hard drive market. Sales of the TMS series products have been made pursuant to an exclusive marketing agreement with Veeco (NASDAQ: VECO). Veeco has projected reduced delivery of these products during the balance of fiscal year 1998. RESULTS OF OPERATIONS: Sales in the third quarter of fiscal 1998 declined to $2,372,320 versus $2,918,912 in the same period last year. This 19% decline was caused by delays in orders from both domestic and international measurement customers. SMS sales accounted for $675,051 of the third quarter sales, as compared with $916,226 in third quarter 1997 SMS sales. Third quarter cost-of-sales increased to 55% of sales versus 36% in the same period last year. The declining sales of TMS-2000 products during the third quarter had a negative impact on gross earnings and net earnings. Cost-of-sales of SMS products was 59% of related revenues for the third quarter 1998 versus 42% in the same period last year. Management expects SMS cost-of-sales for fiscal 1998 to be approximately 40% of related revenues. Nine-month general operating expenses totaled $3,097,249 versus $3,127,802 for the same period last year. The acquisition of Schmitt Hofmann Systems GmbH ("SHS") and Schmitt Europe Ltd. ("SEL") added to ongoing operating expenses. General and administrative expenses for U.S.A. operations have declined slightly in fiscal year 1998 as compared with the comparable nine-month period in fiscal year 1997. Sales by the German subsidiary, SHS, totaled $410,734 for the third quarter, with SEL reporting $220,867 in sales for the period. These sales levels met management's expectations and resulted from intensive efforts expended during this quarter in Germany and the United Kingdom to expand sales levels. The quarter included operating losses for SHS of $56,357 and operating profit at SEL of $23,846. Page 8 SCHMITT INDUSTRIES, INC. FORM 10-Q THIRD QUARTER FISCAL YEAR 1998 General operating expenses as a percentage of sales during the first nine months of fiscal 1998 were 37% compared with 42% for the same period last year. Management estimates these costs will stabilize at approximately 39% for fiscal 1998, down from 41% for fiscal 1997 and 43% in fiscal year 1996. In the three-month period ended February 28, 1998, net income totaled $101,794 versus $458,655 for the same period last year. For the nine-month period, taxes were accrued at approximately a 22% rate compared with 26% in the same period last year. Management now anticipates that the tax rate for fiscal 1998 will approximate 34%, due to the timing of tax benefit realization from net operating loss carry forwards. Nine-month net income was $1,151,794 versus $1,206,275 for the same period last year. Nine-month income per share was $0.16 for fiscal year 1998 versus $0.17 last year on a basic basis and $.15 for fiscal year 1998 versus $.17 last year on a diluted basis, respectively. LIQUIDITY AND CAPITAL RESOURCES: The Company maintained its working capital position during the third quarter while still financing the growth of the new measurement products and inventory at SHS and SEL. Working capital totaled $5,994,735 at February 28, 1998 versus $5,109,560 at May 31, 1997 fiscal year end. Corporate cash and marketable securities levels stood at $1,103,529 at February 28, 1998. During the nine-month period ended February 28, 1998, net cash provided by operating activities totaled $883,049, including net income of $1,151,794. Included in cash flow was a $1,407,931 increase in inventory. During the period, accounts receivable decreased by $1,289,813 and marketable securities and commercial paper appreciated $45,400. The increase in inventory was caused by planned changes of balancer inventory for the U.S.A. and Europe and the ramp up of the new DTM-2000 measurement product line. The decrease in accounts receivable occurred because of reduced invoicing and improved collections during the nine-month period ended February 28, 1998 compared with the same nine months of fiscal year 1997. As a result of its high-quality customer base, the Company has experienced near 100% collection and no reserve for uncollectable accounts, returns or allowances has been established. Net cash used for repayment of debt was $179,983, which was used for the retirement of long-term debt obligations. Net cash used by financing activities was $73,988. Management believes that cash from operations, available credit resources and its improving cash position will provide adequate funds on a short-term basis to cover currently foreseeable debt payments, lease commitments and payments under existing and anticipated supplier agreements. Management believes that such cash flow is also sufficient to finance current short-term operations, projected capital expenditures, anticipated short-term sales agreements and other contingencies during at least the next six months. Management is currently reviewing long-range capital requirements as they relate to expansion of products and markets. This analysis may or may not result in future decisions to seek additional funding for the Company via debt or equity to service the Company's future growth requirements. Page 9 SCHMITT INDUSTRIES, INC. FORM 10-Q PART II - OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Default Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders: -- None -- Item 5. Other Information - None Item 6(a) Exhibit 10.1 - Exclusive Distribution Agreement Exhibit 27 - Financial Data Schedule Item 6(b) Reports on Form 8-K - None 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: 04/10/98 /s/ Wayne A. Case ---------------------------------------------------------- Wayne A. Case, President/CEO/Director Date: 04/10/98 /s/ Annie Windsor ---------------------------------------------------------- Annie Windsor, Chief Financial Officer Page 10 SCHMITT INDUSTRIES, INC. FORM 10-Q EXHIBIT INDEX
Number Description Location - ------ ----------- -------- 10.1 Exclusive Distribution Agreement Page 12 27 Financial Data Schedule Page 24
Page 11


                                      EXCLUSIVE
                                DISTRIBUTION AGREEMENT


THIS AGREEMENT is made this February 23, 1998, effective January 1, 1998.

BY AND BETWEEN

SCHMITT MEASUREMENT SYSTEMS, INC., a company organized and existing under the
laws of the State of Oregon, U.S.A., having its registered office at 2765 NW
Nicolai St., Portland, Oregon 97210, represented hereto by Mr. Wayne A. Case,
acting in his capacity as President and Chairman of the board (hereinafter
referred to as "SMS").

AND

SLOAN TECHNOLOGY INC. (DBA VEECO PROCESS METROLOGY), a company organized and
existing under the laws of the State of California, U.S.A., having its
registered office at 602 East Montecito Street, Santa Barbara, California 93013,
represented hereto by Dr. Timothy Stultz, Vice-President and General Manager
(hereinafter referred to as "Veeco").


WHEREAS

Veeco has committed to promote and sell the SMS products listed in Appendix (1)
hereto to Customers in the Territory, under the terms and conditions herein set
forth.


NOW THEREFORE IT HAS BEEN AGREED AS FOLLOWS:

ARTICLE 1 - DEFINITIONS

Whenever used in this Agreement, the following terms and expressions, whether
used in the singular or in the plural, shall have the meaning set forth in the
Article 1, except where the context clearly otherwise requires:

- -      "Contractual Period" shall mean a period of twenty-four consecutive
       months starting from the date of entry into force of the Agreement or
       from any anniversary date of entry into force of this Agreement.

- -      "Customers" shall mean those persons and entities comprising the micro-
       electronics markets, including, without limitations semi-conductor,
       device, materials and equipment manufacturers, data storage products,
       materials and equipment manufacturers, flat panel display products,
       materials and equipment manufacturers, and university and research
       laboratories engaged in the development, production and/or
       characterization of micro-electronic materials and devices.



- -      "Products" shall mean the products listed in Appendix 1, attached hereto,
       which products are manufactured and/or sold by SMS.

- -      "TERRITORY" SHALL MEAN THE TOTAL WORLD MICROELECTRONICS MARKETS FOR THE
       PRODUCTS.

- -      "Trademarks" shall mean the trademark "SMS" and its associated logo as
       well as the trademarks registered by Veeco (or of its affiliated
       companies) in the Territory.

- -      "Patents" shall mean issued and pending SMS Patents applicable to the
       products.


ARTICLE 2 - PURPOSE OF THIS AGREEMENT

2.1    SMS HEREBY APPOINTS VEECO AS ITS EXCLUSIVE DISTRIBUTOR FOR THE PROMOTION
       AND SALE OF THE PRODUCTS TO MICROELECTRONICS CUSTOMERS IN THE TERRITORY,
       UNDER THE TERMS AND CONDITIONS OF THIS AGREEMENT.

2.2    During the term of this Agreement, Veeco shall purchase the Products
       exclusively from SMS for the purpose of their exclusive resale by Veeco
       to Customers in the Territory.  Veeco shall resell the Products purchased
       from SMS under the names of one or more of the Trademarks and Patents of
       SMS.


ARTICLE 3 - LEGAL STATUS

Veeco is an independent legal entity acting for its own account and at its own
risk in its capacity as distributor.  Its relationship with SMS is that of a
purchaser and a seller.  Nothing in this Agreement shall be construed as
conferring upon Veeco any authority, express or implied, to bind or commit SMS
to any third party in any way.


ARTICLE 4 - EXCLUSIVITY - NON COMPETITION

4.1    During the term of this Agreement, SMS undertakes not to appoint,
       directly or indirectly, any other distributor, agent or representative
       for the promotion or sale of the Products to Customers in the Territory.
       SMS also undertakes not to sell, directly or indirectly, the Products to
       the Customers in the Territory.  Notwithstanding the foregoing, SMS may
       upon the written consent of Veeco, sell Products to Customers in the
       Territory provided that such Customers request that SMS sell Products to
       them in lieu of Veeco selling Products to them, in the event of such a
       sale, SMS shall pay to Veeco, as a commission, a sum to be agreed to by
       SMS and Veeco prior to the effectuation of any such sale but which shall
       not be less than ten percent (10%) of the gross sales price of the
       Products sold, such commission to be paid to Veeco upon SMS' receipt of
       the sale proceeds.




ARTICLE 5 - OBLIGATIONS OF VEECO

5.1    Veeco agrees to use reasonable efforts (i) to promote and sell the
       Products to customers in the Territory, (ii) to provide the customers in
       the Territory to whom Veeco sells the Products with reasonably diligent
       and efficient services, in particular after-sale services, and (iii) to
       purchase the agreed quantities of products as detailed in Appendix 3.

5.2    In order to carry out these responsibilities, Veeco, at its sole expense,
       agrees:

       (I)    to take all measures reasonably necessary to ensure the promotion,
              sale and service of the Products to Customers in the Territory;

       (II)   to treat its Customers and conduct its business activities with a
              view to maintaining and increasing the public goodwill and
              reputation attached to the Products and to the Trademarks;

       (III)  to distribute to prospective purchasers of the Products such
              commercial or technical catalogues, booklets, leaflets and other
              printed documentation as SMS may, at its own expense, supply to
              Veeco for such purpose;

       (IV)   to prepare, with the assistance of SMS, and distribute to
              potential Customers any other booklets or documentation which are
              reasonably necessary for the sale of the Products to Customers in
              the Territory;

       (V)    to participate, at its own expense, in fairs, exhibitions or other
              trade shows which are likely to promote the sale of the Products
              to Customers in the Territory;

       (VI)   to apply its general conditions of sale and warranty in compliance
              with the requirements of the laws, regulations and practices
              applicable to the sale of the Products to Customers in the
              Territory;

       (VII)  to ensure adequate after-sales service for the Products in the
              Territory by itself (or through any third party);

       (VIII) to obtain all permits and authorizations required for the import
              of the Products in the Territory; and

       (IX)   to purchase and maintain all necessary insurance policies
              reasonably required in connection with the promotion and sale of
              the Products to Customers in the Territory;

       (X)    to provide SMS with a running 90 day advanced schedule of product
              models and quantities to be purchased by Veeco.



ARTICLE 6 - OBLIGATIONS OF SMS

6.1    SMS shall provide to Veeco, upon the request of Veeco, reasonable 
       assistance in promoting the sale of the Products to Customers in the 
       Territory.  To this effect, SMS shall provide, at its offices, training 
       to Veeco's personnel with respect to the specifications, promotion, sale 
       and usage of the Products; the specifics of this training program shall 
       be jointly defined and agreed to in advance between the parties.  
       Traveling and living expenses incurred by Veeco for the training of its 
       staff shall be borne by Veeco.

6.2    SMS shall furnish to Veeco, at no charge to Veeco, specifications,
       promotional material and other documentation relevant to the Products
       which are currently in its possession.  SMS shall also furnish to Veeco
       at the prices set forth herein, demonstration units of the Products which
       are currently in its possession.

6.3    SMS shall ensure an adequate Product flow so that it is able to promptly
       deliver to Veeco Products ordered by Veeco hereunder.

6.4    SMS shall promptly deliver to Veeco all Products ordered by Veeco
       hereunder, in the condition warranted by SMS hereunder.

6.5    SMS shall produce all production products to ISO 9001 standards and have
       all such products CE certified.

6.6    SMS shall use its best efforts to respond to specific market
       requirements, as indicated by Veeco, to ensure adequate product
       availability to suit market needs with short lead times.


ARTICLE 7 - WARRANTY

7.1    SMS warrants to Veeco that each Product sold and delivered to Veeco shall
       be fit for the purpose intended, free from defects in material and
       workmanship, and be of the quality described in the Product
       specifications.

7.2    In the event Veeco receives notice from a purchaser of a Product, within
       twenty-four (24) months of the delivery of a Product to such purchaser,
       that the purchased Product fails to satisfy the warranty set forth in
       Section 7.1, Veeco shall make such product available for inspection by
       SMS and, within ten (10) days of such inspection, SMS shall at its own
       expense, either (I) correct the defect by repairing the Product or, at
       its option, (ii) replace the defective Product, and deliver the repaired
       or replaced Product to Veeco.


ARTICLE 8 - PRICES - METHODS OF PAYMENT

8.1    The discounted prices applicable to the sales of Products by SMS to Veeco
       shall be those appearing in Appendix 2, attached hereto.




8.2    The prices set forth in Appendix 2, both list and discounted, shall
       remain constant during the first Contractual Year.  Such prices may be
       increased for subsequent Contractual Years upon the written agreement of
       SMS and Veeco.

8.3    All monies due to SMS from Veeco for purchased Products shall be paid
       within forty-five (45) days of the date of invoicing, and shall be paid
       in United States dollars.

8.4    Veeco shall sell the Products to Customers at the list prices listed on
       Appendix 2, unless otherwise agreed upon in writing by SMS and Veeco.


ARTICLE 9 - CHANGES IN THE PRODUCTS

9.1    SMS shall have the right to modify any of the Products provided, however,
       (i) the modification does not change the performance to the
       specifications of the Products, and (ii) SMS furnishes Veeco with three
       (3) months prior written notice of any such modification, or immediately
       with Veeco's agreement.


ARTICLE 10 - TRADEMARK/PATENTS - ASSISTANCE AGAINST UNFAIR COMPETITION AND
INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS

10.1   SMS hereby authorizes Veeco to use the Patents and Trademarks owned by it
       but only in connection with the promotion and sale of the Products
       pursuant to this Agreement and under the terms and conditions described
       in Article 10.2 hereafter.

10.2   Veeco agrees in particular:

       -      to use the Patents and Trademarks owned by SMS only in connection
              with the promotion and sale of the Products and the performance of
              this Agreement;

       -      to inform forthwith SMS of any Patent or Trademark infringement of
              which Veeco becomes aware of in the Territory;

       -      to cease and desist from using the Patents or Trademarks owned by
              SMS at the expiry or termination of this Agreement for any reason
              whatsoever.

10.3   Veeco shall inform SMS of any act of unfair competition, and of any
       infringement of the intellectual property rights of SMS, of which Veeco
       may be aware.

10.4   SMS represents and warrants that it is the sole owner of the Products and
       the intellectual property rights associated therewith, and that the
       Products do not infringe on intellectual property rights of third
       parties.  SMS agrees to defend,





       indemnify and hold Veeco (and its affiliated companies) harmless with
       respect to any claims by others that the promotion and sale of any of the
       Products constitutes an act of unfair competition or infringes on the
       intellectual property rights of another.

10.5   SMS and Veeco shall together aggressively defend the Patents and
       Trademarks against those who are unfairly competing with the Products, or
       otherwise infringing on the intellectual property rights associated with
       the Products.


ARTICLE 11 - TERM

This agreement shall enter into force on its date of signature by both parties
and shall remain in force for an initial period of two (2) Contractual Years. 
This Agreement shall be automatically renewed for an additional two years unless
either party notifies the other party, by certified letter with return receipt
requested, of its intention not to renew this Agreement six (6) months prior to
the expiry of the current Contractual Year or any following Contractual Year.



ARTICLE 12 - EARLY TERMINATION

12.1   Either party shall have the right to terminate this Agreement by sending
       a ninety (90) day notice, by certified mail with return receipt
       requested, in the event that the other party fails to perform any of its
       material obligations under this Agreement, and has not ceased such
       failure within thirty (30) days after receipt of notice in writing to
       that effect from the first party, sent by certified letter with return
       receipt requested, without prejudice to any damages which might be
       claimed by the non-defaulting party.

12.2   Either party shall have the right to terminate forthwith this Agreement
       by sending a notice, by certified mail with return receipt requested, to
       the other party should this other party be subject to bankruptcy
       proceedings or to a reorganization plan with creditors (whether amicable
       or decided by the court), or in the event of appointment of a bankruptcy
       trustee, arrangement for the benefit of creditors, or should this other
       party be subject to winding-up or any other procedure evidencing the
       insolvency of this other party.


ARTICLE 13 - CONSEQUENCES OF EXPIRY OR EARLY TERMINATION

Upon expiry or termination of this Agreement as provided for in Articles 11 and
12 hereabove, SMS shall have the option:



(i)    either to authorize Veeco to sell, on a non-exclusive basis, the
       remaining stock of Products in its possession for a limited period of
       time, to be defined by SMS and Veeco according to the magnitude of the
       remaining stock of Products at the time of expiry or termination, or

(ii)   to repurchase all Products still existing in Veeco's stock and which were
       purchased by Veeco from SMS, at a price equivalent to the net price (all
       taxes excluded), paid to SMS by Veeco for such Products, less a 10%
       restocking charge.


ARTICLE 14 - TERMINATION OF EXCLUSIVITY

The exclusive nature of Veeco's right to promote and sell a Product to
Customers in the Territory may be terminated by SMS in the event Veeco fails to
purchase from SMS a minimum number of units of such Product, as set forth on
Appendix 3, attached hereto.  Any such termination may be effected by furnishing
to Veeco ninety (90) days written notice thereof, to be sent by certified mail,
return receipt requested.  The termination of the exclusive nature of Veeco's
right to promote and sell any one Product shall not affect the exclusive nature
of Veeco's right to promote and sell other Products, which exclusive right shall
continue unabated.


ARTICLE 15 - FORCE MAJEURE

Neither party hereto shall be in default hereunder by reason of its delay in the
performance or failure to perform any of its obligations hereunder due to any
event, circumstance or cause beyond its control such as, but not limited to,
Acts of God, strikes, lock-out, acts or restrictions of governmental
authorities, wars, threats of war, hostilities, shortage in the raw materials or
means of transportation, revolution, riots, epidemics, fire, floods, all of
which shall be considered as events of force majeure.

The party affected by any such event shall notify the other party within fifteen
(15) days of its occurrence.  The performance of this Agreement shall then be
suspended for as long as any such event shall prevent the affected party from
performing its obligations hereunder.  If such suspension lasts more than three
(3) months, either party may terminate forthwith this Agreement by sending a
thirty (30) day written notice to this effect to the other party by certified
letter with return receipt requested.

ARTICLE 16 - CONFIDENTIALITY

Each party agrees at any times, even after the expiry or termination of this
Agreement, for any reason whatsoever, to keep and maintain secret and in strict
confidence all proprietary information received from the other party under this
Agreement and not to permit such proprietary information to be disclosed to
third parties as long as this information is not in the public domain, except
for the purpose of the promotion, sale and/or servicing of the Products as
provided for in this Agreement.  See the secrecy agreement singed by both
Parties.



ARTICLE 17 - APPENDICES

The appendices to this Agreement form an integral part thereof.  There are three
(3) appendices.


ARTICLE 18 - NOTICES

Any notice required or permitted hereunder, made by any party to the other
party, shall be in writing and sent by certified mail with return receipt
requested at the addresses shown herein or at the last address notified by
either party to the other.


ARTICLE 19 - ENTIRE AGREEMENT - MODIFICATIONS

This Agreement contains the entire agreement of the parties hereto relating to
the subject matter hereof and supersedes all previous agreements between the
parties pertaining to subject matters covered by this Agreement.


ARTICLE 20 - APPLICABLE LAW

This Agreement shall be governed by and interpreted in accordance with Oregon
Law.


ARTICLE 21 - JURISDICTION

All disputes between the parties which may arise under this Agreement shall be
submitted to the exclusive jurisdiction of the Courts of Oregon, even where
there are multiple defendants or appeals.



Dated Portland, Oregon, February 23, 1998.



/s/ Wayne A. Case                            /s/ Timothy Stultz
- ----------------------------------------     -----------------------------------
Wayne A. Case, President                     Dr. Timothy Stultz, Vice President
Schmitt Measurement Systems, Inc.            Sloan Technology Inc. dba Veeco
                                             Process Metrology



                                      Exclusive
                                Distribution Agreement
                                    by and between
                        Schmitt Measurement Systems, Inc. and
                  Sloan Technology Inc. dba Veeco Process Metrology.


                                      APPENDIX 1


                                       PRODUCTS


SMS Light Scatter Surface Measurement Systems for application to the
microelectronics markets.

                                       TMS-2000
                                      TMS-2000W
                                      TMS-3000W
                                       DTM-2000


It is understood and agreed between the parties that new products to service the
microelectronics markets may be required and developed by SMS at Veeco's
request.  These products will be added to this agreement by mutual consent.






                                      Exclusive
                                Distribution Agreement
                                    by and between
                        Schmitt Measurement Systems, Inc. and
                  Sloan Technology, Inc. dba Veeco Process Metrology



                                      APPENDIX 2


            [The text of Appendix 2 has been deleted and filed separately
              with the Securities and Exchange Commission pursuant to a
                         request for confidential treatment.]




                                      Exclusive
                                Distribution Agreement
                                    by and between
                        Schmitt Measurement Systems, Inc. and
                  Sloan Technology, Inc. dba Veeco Process Metrology



                                      APPENDIX 3


            [The text of Appendix 3 has been deleted and filed separately
              with the Securities and Exchange Commission pursuant to a
                         request for confidential treatment.]

 


5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10Q OF FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS MAY-31-1998 JUN-01-1997 FEB-28-1998 890,089 213,440 1,435,699 0 3,887,751 6,810,811 2,516,330 642,114 9,364,027 816,076 0 0 0 5,058,406 3,489,545 9,364,027 8,259,736 8,259,736 3,862,310 3,862,310 3,097,249 0 22,252 1,485,794 334,000 0 0 0 0 1,151,794 16 15