WSI INDUSTRIES, INC. (Form: 10-K, Received: 11/17/2011 14:12:45)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended August 28, 2011


o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 000-00619

WSI Industries, Inc.

(Exact name of registrant specified in its charter)


Minnesota		41-0691607
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

213 Chelsea Road, Monticello, Minnesota 55362
(Address of principal executive offices)(Zip code)

Issuer’s telephone number, including area code: (763) 295-9202

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No þ

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

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 filed). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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)


Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on February 25, 2011 (the business day immediately prior to the end of the registrant’s second fiscal quarter) was $13,816,000 based upon the closing sale price on that date of $4.82 as reported by The NASDAQ Capital Market.

The number of shares of the registrant’s common stock, $0.10 par value, outstanding as of November 11, 2011 was 2,895,664.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on January 4, 2012, which will be filed within 120 days after the end of the fiscal year covered by this report, are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS


PART I
	Item 1. Description of Business
	Item 1A. Risk Factors
	Item 1B. Unresolved Staff Comments
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. [Removed and Reserved.]
PART II
	Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
	Item 9B. Other Information
PART III
	Item 15. Exhibits
SIGNATURES
Exhibit 10.24
Exhibit 10.25
Exhibit 10.26
Exhibit 10.27
Exhibit 10.28
Exhibit 10.29
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I


Item 1.		Description of Business.

WSI Industries, Inc. (the “Company”) makes its periodic and current reports available free of charge as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. These reports can be obtained by contacting the Company through its website at www.wsiindustries.com .

Overview

The Company was incorporated in Minnesota in 1950 for the purpose of performing precision contract machining for the aerospace, communication, and industrial markets. The major portions of Company revenues are derived from machining work for the aerospace/avionics/defense industries, recreational vehicles (ATV and motorcycle) markets, energy industry and bioscience industry.

Contract manufacturing constitutes the Company’s entire business.

Products and Services

The Company manufactures metal components in medium to high volumes requiring tolerances as close as one ten-thousandth (.0001) of an inch. These components are manufactured in accordance with customer specifications using materials both purchased by the Company as well as being supplied by our customer.

Sales and Marketing

In fiscal 2009, all areas of the Company’s business were affected by the national recession and we experienced decreases in sales of 27% versus fiscal 2008. Fiscal 2010 sales were flat as compared to fiscal 2009 as a decrease in the energy business was equally offset by increases in sales in all of the other industries served by the Company. In fiscal 2011, the Company experienced an increase in sales of 33% over the prior year. The sales increase came in large part from increases in the Company’s recreational vehicle market which increased 39% over the prior year. In fiscal 2011, the Company also realized a 27% increase in its sales to the energy industry. Sales to the recreational vehicle market totaled approximately 68%, 65% and 54% of total sales in fiscal 2011, 2010 and 2009, respectively. Sales to the energy industry totaled approximately 23%, 24% and 36% of sales in fiscal 2011, 2010 and 2009, respectively. Sales to the aerospace/avionics/defense markets totaled approximately 8%, 9% and 8% of total sales in fiscal 2011, 2010 and 2009, respectively. Sales to the bioscience industry amounted to approximately 1% of total sales in fiscal 2011 and 2% of total sales in fiscal 2010 and 2009.

The Company has a reputation as a dependable supplier capable of meeting stringent specifications to produce quality components at high production rates. The Company has demonstrated an ability to develop sophisticated manufacturing processes and controls essential to produce precision and reliability in its products.

Customers

Sales were made to Polaris Industries, Inc. and related entities in the amount of $16,804,000, or 67% of total Company revenues, in fiscal 2011. The Company also made sales of $4,525,000 or 18% of total Company revenues in fiscal 2011 to National Oilwell Varco.

Competition

Although there are a large number of companies engaged in machining, the Company believes the number of entities with the technical capability and capacity for producing products of the class and in the volumes manufactured by the Company is relatively small. Competition is primarily based on product quality, service, timely delivery, and price.

Research and Development; Intellectual Property

No material amount has been spent on company-sponsored research and development activities. Patents and trademarks are not deemed significant to the Company.

Employees

At August 28, 2011, the Company had 76 full-time employees, none of whom were subject to a union contract. We consider our relationship with our employees to be good.

Foreign and Domestic Operations and Export Sales

The Company has no operations or any significant sales in any foreign country.


Item 1A.		Risk Factors.

In evaluating us as a company, careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect our business, operating results and/or financial condition, as well as adversely affect the value of an investment in our common stock. In addition to the following disclosures, please refer to the other information contained in this report, including our consolidated financial statements and the related notes.

The economic conditions in the United States and around the world could adversely affect our financial results. Demand for our services depends upon worldwide economic conditions, including but not limited to overall economic growth rates, consumer spending, financing availability, employment rates, interest rates, inflation, consumer confidence, and the profits, capital spending, and liquidity of large OEMs that we serve. The economic recession in the markets we serve has caused and could continue to cause our OEM customers to reduce ordering levels, resulting in reschedules, program delays or cancelled orders of our services having an adverse effect on our business and our financial results.

We operate in the highly competitive and fragmented contract machining industry. We compete against many contract machining companies. We also compete with OEM in-house operations that are continually evaluating manufacturing products internally against the advantages of outsourcing. We may also be at a competitive disadvantage with respect to price when compared to manufacturers with excess capacity, lower cost structures and availability of lower cost labor. The availability of excess manufacturing capacity of our competitors also creates competitive pressure on price and winning new business. To respond to competitive pressures, we may be required to reduce our prices to customers or increase discounts to customers, which would result in lower gross profit margins and decreased revenue. These factors also impact the Company’s ability to obtain additional manufacturing programs and retain our current programs.

Controlling manufacturing costs is a significant factor in operating results. The Company’s ability to manage its costs on existing manufacturing programs and its ability to curtail costs and expenses on potential new manufacturing programs could have a significant impact on the Company’s operating results.

A large percentage of our sales have been made to a small number of customers in a small number of highly competitive industries, and the loss of a major customer would adversely affect us. In fiscal years 2011, 2010 and 2009, one customer in the recreational vehicle market accounted for 67%, 63% and 51% of our revenue, respectively. In addition, in fiscal years 2011, 2010 and 2009, one customer in the energy industry accounted for 18%, 24% and 30% of our revenue, respectively. If there is a loss of one or more of these major customers or a significant decline in sales to either of these major customers it could have an adverse effect on our results from operations.

Operating results may vary significantly from period to period. We can experience significant fluctuations in our revenue and operating results. One of the principal factors that contribute to these fluctuations is the significant changes in our customer’s delivery requirements. Results of operations in any period, therefore, should not be considered indicative of the results to be expected for any future period. Significant fluctuations in our revenue and operating results could also impact the Company’s ability to comply with its debt covenants of its credit facilities.

Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations. We require effective internal control over financial reporting in order to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the circumvention or overriding of controls, or fraud. Additionally, as of August 28, 2011, our management has concluded that our internal control over financial reporting was not effective due to a material weakness in the areas of segregation of duties and adequacy of personnel resulting from a staff reduction in the quarter ended May 31, 2009. Because of this material weakness in internal control over financial reporting, we may be more susceptible to misstatements in our financial statements or incidences of fraud. However, even effective internal controls can provide only reasonable and not absolute assurances with respect to the preparation and fair presentation of financial statements. The market price of our common stock has fluctuated significantly in the past and may continue in the future. The market price of our common stock has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include quarterly fluctuations in our financial results, customer contract awards, and general economic and political conditions in our various markets. In addition, the stock prices of small public contract manufacturing companies have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of such companies. This market volatility may adversely affect the market price of our common stock.

Complying with securities laws and regulations is costly for us. Changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations promulgated by the SEC and Nasdaq, are creating particular challenges for smaller publicly-held companies like us. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our assessment of our internal control over financial reporting have required, and will continue to require, the expenditure of significant financial and managerial resources. In addition to Sarbanes-Oxley, we will also be required to expend financial and managerial resources to comply with the SEC requirement that mandates that our quarterly and yearly filings with them be in an XBRL readable format.


Item 1B.		Unresolved Staff Comments.

Not applicable.


Item 2.		Properties.

The Company purchased an existing 49,000 square foot facility located in Monticello, Minnesota in May 2004 to house its production and its headquarters. The purchase price was $1.9 million and was paid for by a combination of cash and debt. The Company entered into two notes evidencing the debt used to purchase its Monticello facility that were secured by mortgages. The first note and mortgage was to Excel Bank Minnesota (now M&I Marshall and IIsley Bank) for $1,360,000 that matures on May 1, 2014. Effective May 3, 2009 the interest rate adjusted to a rate 2.5% above the monthly yield on United States Treasury five-year securities. The interest rate at August 28, 2011 is 4.38% with monthly payments of $7,637 based on a 25-year amortization schedule. The note is secured by a mortgage and security interest in all assets of the Company.

The Company also entered into a note and mortgage with the City of Monticello, Minnesota Economic Development Authority (MEDA). The MEDA mortgage was subordinated to the mortgage of Excel Bank Minnesota. The note to MEDA carried an interest rate of 2% and required monthly principal and interest payments of $1,483 based on a 25-year amortization schedule. Effective May 1, 2009, the Company amended the note to extend the maturity date to May 1, 2011, at which time the entire balance was paid in full.

In fiscal 2008, the Company commenced an addition to its facility to add manufacturing space. Upon completion in early fiscal 2009, the addition added 12,500 square feet of manufacturing space. In August 2008, the Company obtained a loan from M&I Marshall and IIsley Bank to finance this addition. The loan was secured by certain assets of the Company and guarantees by the Company’s subsidiaries. The Company was able to draw upon the loan on a non-revolving basis through May 31, 2009 in an aggregate amount not to exceed $1,200,000. The loan required monthly payments of interest only at the bank’s prime rate plus 0.50%. The loan became due and was paid in full on June 30, 2010.

The Company considers its manufacturing equipment, facilities, and other physical properties to be suitable and adequate to meet the requirements of its business.


Item 3.		Legal Proceedings.

The Company is not a party to any material legal proceedings; we may be subject from time to time ordinary routine litigation incidental to its business.


Item 4.		[Removed and Reserved.]

PART II


Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The common stock of the Company is traded on The NASDAQ Capital Market of the NASDAQ Stock Market, Inc. under the symbol “WSCI.”

As of November 7, 2011 there were 360 shareholders of record of the Company’s common stock.

The following table sets forth, for the periods indicated, the high and low closing sales price information for our common stock as reported by the Nasdaq Capital Market.


	Stock Price
	High		Low

FISCAL 2011:
First quarter	$	7.41	$	3.43
Second quarter		6.57		4.50
Third quarter		5.23		4.42
Fourth quarter		7.42		4.82

FISCAL 2010:
First quarter	$	3.22	$	2.12
Second quarter		2.20		1.74
Third quarter		2.52		1.80
Fourth quarter		4.41		1.98

In fiscal year 2010, the Company did not pay a quarterly dividend during the fiscal year. In fiscal 2011, the Company paid a quarterly cash dividend of $.04 per share in each quarter. The Company expects to continue its quarterly dividend program, subject to its financial performance.

The following table sets forth information regarding our equity compensation plans in effect as of August 28, 2011. Each of our equity compensation plans is an “employee benefit plan” as defined by Rule 405 of Regulation C of the Securities Act of 1933.

Equity Compensation Plan Information

Number of shares of

common stock remaining

common stock to be

Weighted-average

available for future issuance

issued upon exercise of

exercise price of

under equity compensation

outstanding options,

plans (excluding securities

Plan category

warrants and rights

reflected in the first column)

Equity compensation plans approved by shareholders:

2005 Stock Plan

248,166

4.16

226,220

Total

248,166

4.16

226,220

There are no outstanding equity compensation plans not approved by shareholders.

The Company made no repurchases of its common stock in fiscal year 2011.


Item 6.		Selected Financial Data

Not applicable.


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

Critical Accounting Policies and Estimates:

Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.

We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the result of which forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. The estimates and judgments utilized are reviewed by management on an ongoing basis and by the audit committee of our board of directors at the end of each quarter prior to the public release of our financial results. We made no significant changes to our critical accounting policies during fiscal 2011.

Application of Critical Accounting Policies:

Excess and Obsolete Inventory:

Inventories, which are composed of raw materials, work in process and finished goods, are valued at the lower of cost or market by comparing the cost of each item in inventory to its most recent sales price or sales order price. Inventory cost is adjusted down for any excess cost over net realizable value of inventory components.

In addition, the Company determines whether its inventory is obsolete by analyzing the sales history of its inventory, sales orders on hand and indications from the Company’s customers as to the future of various parts or programs. If, in the Company’s determination, the inventory value has become impaired, the Company adjusts the inventory value to the amount the Company estimates as the ultimate net realizable value for that inventory. Actual customer requirements in any future periods are inherently uncertain and thus may differ from our estimates. The Company performs its lower of cost or market testing, as well as its excess or obsolete inventory analyses, quarterly.

The Company has no specific timeline to dispose of its remaining obsolete inventory and intends to sell this obsolete inventory from time to time, as market conditions allow.

Goodwill Impairment:

The Company evaluates the valuation of its goodwill according to the provisions of Accounting Standards Codification (“ASC”) 350 to determine if the current value of goodwill has been impaired. The Company believes that its stock price is not necessarily an indicator of the Company’s value given its limited trading volume and its wide price fluctuations. The Company has also adopted Accounting Standard Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350). With ASU No. 2011-08, an entity is given the option to make a qualitative evaluation of goodwill impairment to determine whether it should calculate the fair value of its reporting unit. In the fiscal 2011 fourth quarter, the Company made its qualitative evaluation of its goodwill considering, among other things, the overall macroeconomic conditions, industry and market considerations, overall financial performance and other relevant company specific events. Based on this qualitative evaluation, the Company concluded that it was more likely than not that its goodwill was not impaired and that it wasn’t required to calculate the fair value of its reporting unit. If the Company has changes in events or circumstances, including reductions in anticipated cash flows generated by its operations, goodwill could become impaired which would result in a charge to earnings.

Deferred Taxes:

The Company accounts for income taxes using the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and tax bases of assets and liabilities. A deferred tax valuation allowance is set up should the realization of any deferred taxes become less likely than not to occur. The valuation allowance is analyzed periodically by the Company and may result in income tax expense being different than statutory rates. The Company has not established a valuation allowance as it believes it is more likely than not that it will fully realize the benefit of its tax assets. Currently, the Company’s deferred tax assets have two major components which relate to the Company’s net operating loss (NOL) and the Company’s alternative minimum tax (AMT) tax credit carryforwards. The Company’s AMT tax credit carryforward does not expire. The Company’s NOL carryforward is approximately $2.1 million expiring in 2021 - 2029. The Company believes that given the extended time period for the NOL carryforward to expire as well as a return to a more normal growth rate experienced prior to the economic recession of fiscal 2009, that the Company is more likely than not to fully utilize its NOL carryforward before it expires. However, a significant loss of a customer or a change in the Company’s business could affect the realization of the deferred tax assets. If a major program were discontinued, the Company would immediately assess the impact of the loss of the program on the realization of the deferred tax assets.

Revenue Recognition:

The Company considers its revenue recognition policy to fall under the guidance of FASB’s conceptual framework for revenue recognition. The Company recognizes revenue only after: (a) The Company has received a purchase order identifying price and delivery terms or services to be rendered; (b) shipment has occurred, or in the case of services, after the service has been completed; (c) the Company’s price is fixed as evidenced by the purchase order; and (d) collectability is reasonably assured. The Company continually monitors its accounts receivable for any delinquent or slow paying accounts. The Company believes that based upon its past history with minimal bad debt write-offs, that all accounts are collectible upon shipment or delivery of services. Credit losses from customers have been minimal and within management’s expectations. Based on management’s evaluation of uncollected accounts receivable, bad debts are provided for on the allowance method. Accounts are considered delinquent if they are 120 days past due. If an uncollectible account should arise during the year, it would be written-off at the point it was determined to be uncollectible. The Company mitigates its credit risk by performing periodic credit checks and actively pursuing past due accounts. The Company refers to “net sales” in its consolidated statements of operations as the Company’s sales are sometimes reduced by product returned by its customers.

Liquidity and Capital Resources:

The Company’s net working capital at the end of fiscal 2011 was $5,283,000 as compared to $4,438,000 at the end of fiscal 2010. The increase occurred primarily from increases in cash and accounts receivable and a decrease in current maturities of long-term debt. The ratio of current assets to current liabilities increased to 2.54 to 1.0 at August 28, 2011 from 2.30 to 1.0 at the end of the prior fiscal year. The Company generated $2,690,000, $1,634,000 and $1,767,000 in cash from operations in fiscal 2011, 2010 and 2009, respectively.

In fiscal 2011 and 2009, additions to property, plant and equipment either by cash or capitalized lease were $1,743,000 and $1,341,000, respectively. These amounts included $1,280,000 and $919,000 of machinery acquired through capital leases in fiscal 2011 and 2009, respectively. In fiscal 2010, the Company had minimal additions to property, plant and equipment, capitalizing $61,000 during the year.

In its fiscal 2011 first quarter, the Company added two machining centers, one of which was purchased to supplement capacity in its energy business while the other machine was bought primarily for replacement purposes. In the Company’s second and fourth quarters, the Company added two more machining centers for new programs obtained in its energy business. In its fiscal 2009 first quarter, the Company added one machining center for its energy business. Also in fiscal 2009, the Company completed its building addition and capitalized $267,000 in cost in addition to amounts capitalized in fiscal 2008.

On February 1, 2011, the Company renewed its revolving line of credit agreement with its bank. Under the agreement, the Company can borrow up to $1 million. The agreement expires on February 1, 2012. No balances were owed at August 28, 2011 and August 29, 2010, and no advances were made on the credit line during either fiscal 2011 or 2010.

In August 2008, the Company entered into an agreement with its bank to finance a building addition to its existing manufacturing facility. The Company was able to draw upon the loan on a non-revolving basis through May 31, 2009 in an aggregate amount not to exceed $1.2 million. The loan required monthly payments of interest only at the bank’s prime rate plus 0.50%. The loan matured on, and was paid in full on June 30, 2010.

The Company’s total debt was $4,925,000 at August 28, 2011 which consisted of a mortgage on its building of $1,124,000 and capital lease obligations secured by production equipment of $3,801,000. Current maturities of long-term debt consist of $947,000 due on capital leases and $42,000 on its building related debt. During fiscal 2011, the Company made principal payments on its debt of $1.3 million. It is management’s belief that the combination of its current cash balance, its internally generated funds, as well as its revolving line of credit will be sufficient to enable the Company to meet its financial requirements during fiscal 2012.

Results of Operations:

Net sales in fiscal 2011 were $25.0 million as compared to fiscal 2010 and 2009 which were $18.8 million. The increases in the fiscal 2011 sales came primarily from a 39% increase in recreational vehicle sales and a 27% increase in energy sales. The comparable sales in fiscal 2010 to fiscal 2009 came as a result of a decrease in the energy business offset by increases in all other business categories.

The following is a reconciliation of sales by major market:


	Fiscal 2011		Fiscal 2010		Fiscal 2009

Recreational vehicle	$	16,969,000	$	12,209,000	$	10,121,000
Aerospace and defense		1,886,000		1,633,000		1,507,000
Energy		5,693,000		4,485,000		6,693,000
Biosciences		337,000		379,000		351,000
Other		78,000		120,000		94,000

	$	24,963,000	$	18,826,000	$	18,766,000

The increase in sales in the recreational vehicle market in fiscal 2011 resulted from the overall increase in demand from the Company’s largest customer for the parts the Company supplies. The increase in sales in fiscal 2010 as compared to fiscal 2009 in the recreational vehicle market came from two factors. The first was a general overall increase in the level of demand in both the ATV and motorcycle markets. The second contributing factor was the Company becoming the sole source supplier on a particular part in fiscal 2010 while the part was dual sourced in fiscal 2009.

The Company’s sales in its motorcycle market are predominantly with one customer. However, in fiscal 2011, 2010 and 2009 revenues were also somewhat positively impacted by an additional customer who contributed sales of $165,000, $287,000 and $429,000 in those three years, respectively.

Sales from the Company’s aerospace and defense markets were up 15% in fiscal 2011 due primarily to increased product shipments to a new customer first announced in fiscal 2010. Fiscal 2010 sales in the aerospace and defense markets were up 8% with initial sales to that customer occurring in the Company’s fiscal fourth quarter.

Sales from the Company’s energy business were up 27% in fiscal 2011 as compared to fiscal 2010 with the increase due in large measure to sales to a new customer previously announced. The Company’s sales in its energy business decreased 33% in fiscal 2010 as compared to fiscal 2009. The Company believes that the reduction of the volume of orders from its customers in this segment in fiscal 2010 was due to a combination of factors including the recession, tight credit conditions, lower oil prices and a reduction in the demand of the particular type of oilfield equipment the Company manufactures. Sales also decreased as a result of the consignment of the raw material the Company machines in its end products as opposed to purchasing the raw material. The Company experienced in fiscal 2010 a higher percentage of consigned raw materials in its parts which then lead to a lower overall end sales price to its customers. This consignment of raw material effect has continued and has also affected sales in fiscal 2011.

Sales to the Company’s biosciences industry have fluctuated up and down in a $42,000 range in the last three fiscal years. The Company’s believes that these fluctuations are relatively minor and not indicative of any change in trend of sales in this market.

The Company’s sales from its “other” market are primarily derived from miscellaneous sales in the computer components fields and amount to less than 1% of the Company’s total sales.

The Company’s gross margin decreased in fiscal 2011 to 17.8% from 19.9% in fiscal 2010. The primary reason for the decrease were start-up expenses associated with new programs in the Company’s energy business that were incurred during the first two quarters of fiscal 2011. In addition, a higher material and outside services content as a percent of sales in fiscal 2011 was also a factor in the lower gross margins.

The Company’s gross margin increased to 19.9% in fiscal 2010 from 12.6% in fiscal 2009. The primary factor in the increase was that the fiscal 2009 margins were negatively affected by the recessionary conditions in that year. The increase in gross margin in fiscal 2010 is also partially attributable to a lower percentage of material and outside services content in product shipped during the year. Thus, the value added sales (net sales less material and outside services) were higher during fiscal 2010 than in fiscal 2009. So while the Company’s overall sales were virtually the same year-over-year, the Company’s value added sales were up 10% in fiscal 2010 versus fiscal 2009. This increase in the volume of value added sales, in combination with cost reduction efforts, were the primary drivers in the increase in the gross margin percentage in fiscal 2010.

No significant sales of obsolete items occurred in fiscal 2009 through 2011 and, correspondingly, no significant gross margin was recognized.

Selling and administrative expense in fiscal 2011 was approximately $2.8 million, an increase of $335,000 over the fiscal 2010 amount of approximately $2.4 million. The increase in fiscal 2011 was due primarily to increased payroll costs due to headcount additions as well as increased incentive compensation expense. Selling and administrative expense increased in fiscal 2010 versus 2009 by $199,000 to $2.4 million. The increase was due primarily to higher payroll costs. The Company adopted ASC 718 in fiscal 2007 and recorded a non-cash stock option compensation expense of $205,000, $211,000 and $196,000 in fiscal 2011, 2010 and fiscal 2009, respectively. In addition, the Company incurred professional service expense in each of those three fiscal years in connection with its analysis of internal controls over financial reporting as required by the Sarbanes-Oxley Act.

Interest expense in fiscal 2011 amounted to $289,000 as compared to $359,000 in fiscal 2010. The lower expense is attributable to a lower average level of debt in fiscal 2011 as compared to fiscal 2010, with the lower level being primarily related to the $1.2 million loan for the Company’s building addition that was paid off in the fiscal 2010 fourth quarter. Interest expense in fiscal 2010 was $57,000 lower than in fiscal 2009 as the Company did not enter into any new lending or capital lease arrangements and paid down its debt by approximately $2.1 million during the 2010 fiscal year.

The Company recorded income taxes at an effective tax rate of 36% for fiscal 2011, 2010 and 2009, respectively. The Company maintained its valuation allowance at zero during 2011 and 2010.

Caution Regarding Forward-Looking Statements

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the letter to shareholders, elsewhere in the Annual Report, in the Company’s Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are “forward-looking statements.” These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and are not predictions of actual future results. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. These risks and uncertainties are described above under Item 1A. Risk Factors.


Item 7A.		Quantitative and Qualitative Disclosures About Market Risk

Not applicable.


Item 8.		Financial Statements and Supplementary Data.

See Consolidated Financial Statements section of this Annual Report on Form 10-K beginning on page 20, attached hereto, which consolidated financial statements are incorporated herein by reference.


Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.


Item 9A.		Controls and Procedures.

Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based on that evaluation, Michael J. Pudil, the chief executive officer, and Paul D. Sheely, the chief financial officer, have concluded that as of August 28, 2011 our disclosure controls and procedures were not effective because of the material weakness in internal control over financial reporting described below. Notwithstanding the material weakness described below, we believe our consolidated financial statements presented in this Annual Report on Form 10-K fairly represent, in all material respects, our financial position, results of operations and cash flows for all periods presented herein.

Changes in Internal Controls over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the fourth quarter ended August 28, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

The management of the Company is responsible for the preparation of the financial statements and related financial information appearing in this Annual Report on Form 10-K. The financial statements and notes have been prepared in conformity with accounting principles generally accepted in the United States of America. The management of the Company also is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. A company’s internal control over financial reporting is defined as a process designed 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. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Management, including the chief executive officer and chief financial officer, does not expect that the Company’s internal controls will prevent all error and all fraud. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable, not absolute, assurance that the objectives of the control system are met and may not prevent or detect misstatements. Further, over time control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.

The Company’s management hired an outside consulting firm to assist it in the evaluation of the effectiveness of the Company’s internal control over financial reporting. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of August 28, 2011 based upon the framework in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of that evaluation, our management has concluded that, as of August 28, 2011, the Company’s internal control over financial reporting was not effective due to a material weakness in the areas of segregation of duties and adequacy of personnel resulting from a reduction in staff in its finance and accounting department during the quarter ended May 31, 2009.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission.


Item 9B.		Other Information.

None.

PART III

Pursuant to General Instruction E (3), the Company omits Part III, Items 10, 11, 12, 13 and 14, as a definitive proxy statement will be filed with the Commission pursuant to Regulation 14(a) within 120 days after August 28, 2011 and such information required by such items is incorporated herein by reference from the proxy statement.


Item 15.		Exhibits.

(a) Documents filed as part of this report.

Consolidated Financial Statements: Reference is made to the Index to Consolidated Financial Statements (page 20) hereinafter contained for all Consolidated Financial Statements.

	2.		Exhibits.

			Exhibit


Exhibit
No.		Description
	3.1	Restated Articles of Incorporation of WSI Industries, Inc. Incorporated by reference from Exhibit 3 of the Registrant’s Form 10-Q for the quarter ended November 29, 1998.

	3.2	Restated and Amended Bylaws, as amended through January 6, 2005. Incorporated by reference from Exhibit 3.2 of the Registrant’s Form 10-K for the year ended August 28, 2005.

	10.1	WSI Industries, Inc. 1994 Stock Plan, as amended. Incorporated by reference from Exhibit 4.1 of the Registrant’s Registration Statement on Form S-8 (SEC File No. 333-78491).

	10.2	WSI Industries, Inc. 2005 Stock Plan. Incorporated by reference from Exhibit 4.1 of the Registrant’s Registration Statement on Form S-8 (SEC File No. 333-155768).

	10.3	Form of Restricted Stock Award Agreement under the Company’s 2005 Stock Plan. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated February 23, 2007.

	10.4	Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement under the Company’s 2005 Stock Plan. Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated February 23, 2007.

	10.5	Form of Restricted Stock Bonus Award Agreement under the Company’s 2005 Stock Plan. Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the year ended August 30, 2009.


Exhibit
No.		Description
	10.6	Board of Directors Retirement Program dated June 25, 1982. Incorporated by reference from Exhibit 10.12 of the Registrant’s Form 10-K for the year ended August 25, 2002.

	10.7	Employment Agreement dated as of October 7, 2009 by and between WSI Industries, Inc. and Michael J. Pudil. Incorporated by reference to Exhibit 10.4 to the Registrant’s Form 8-K dated October 7, 2009.

	10.8	Employment (change in control) Agreement between Paul D. Sheely and Registrant dated January 11, 2001 incorporated by reference from Exhibit 10.2 of the Registrant’s Form 10-Q for the quarter ended May 27, 2001.

	10.9	Amendment No. 1 to Employment (change in control) Agreement between Paul D. Sheely and Registrant dated November 1, 2002. Incorporated by reference from Exhibit 10.11 of the Registrant’s Form 10-K for the year ended August 25, 2002.

	10.10	Second Amendment to Employment Change in Control Agreement dated December 29, 2008 by and between WSI Industries, Inc. and Paul D. Sheely. Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K dated December 29, 2008.

	10.11	Severance Letter Agreement dated October 7, 2009 by and between WSI Industries, Inc. and Paul D. Sheely. Incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K dated October 7, 2009.

	10.12	Employment Offer Letter dated October 5, 2009 by WSI Industries, Inc. to Benjamin Rashleger. Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K dated October 7, 2009.

	10.13	Employment (Change In Control) Agreement dated October 12, 2009 by and between WSI Industries, Inc. and Benjamin Rashleger. Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K dated October 7, 2009.

	10.14	Form of Restrictive Covenant Agreement by and between WSI Industries, Inc. and Michael J. Pudil, Paul D. Sheely and Benjamin Rashleger. Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K dated October 7, 2009.

	10.15	Promissory Note dated as of May 3, 2004 by WSI Industries, Inc. as debtor and Excel Bank Minnesota as holder in the original principal amount of $1,360,000. Incorporated by reference from Exhibit 10.2 of the Registrant’s Form 8-K dated May 3, 2004.

	10.16	Loan Agreement dated as of May 3, 2004 between WSI Industries, Inc. and Excel Bank Minnesota. Incorporated by reference from Exhibit 10.3 of the Registrant’s Form 8-K dated May 3, 2004.

	10.17	Mortgage and Security Agreement and Fixture Financing Statement dated as of May 3, 2004 between WSI Industries, Inc. and Excel Bank Minnesota. Incorporated by reference from Exhibit 10.6 of the Registrant’s Form 8-K dated May 3, 2004.


Exhibit
No.		Description
	10.18	Second Amendment and Modification of Revolving Line of Credit Loan Agreement and Reaffirmation of Guaranties dated as of May 3, 2004 by and among WSI Industries, Inc., Taurus Numeric Tool, Inc. and WSI Rochester, Inc. and Excel Bank Minnesota. Incorporated by reference from Exhibit 10.8 of the Registrant’s Form 8-K dated May 3, 2004.

	10.19	Third Amendment and Modification of Revolving Line of Credit Loan Agreement and Reaffirmation of Guaranties dated as of January 1, 2005 by and among WSI Industries, Inc., Taurus Numeric Tool, Inc. and WSI Rochester, Inc. and Excel Bank Minnesota. Incorporated by reference from Exhibit 10.1 of the Registrant’s Form 10-Q for the quarter ended November 28, 2004.

	10.20	Fourth Amendment and Modification of Revolving Line of Credit Loan Agreement and Reaffirmation of Guaranties dated as of January 1, 2006 by and among WSI Industries, Inc., Taurus Numeric Tool, Inc. and WSI Rochester, Inc. and Excel Bank Minnesota. Incorporated by reference from Exhibit 10.1 of the Registrant’s Form 10-QSB for the quarter ended November 27, 2005.

	10.21	Fifth Amendment and Modification of Revolving Line of Credit Loan Agreement and Reaffirmation of Guaranties dated as of January 1, 2007 by and among WSI Industries, Inc., Taurus Numeric Tool, Inc. and WSI Rochester, Inc. and Excel Bank Minnesota. Incorporated by reference from Exhibit 10.1 of the Registrant’s Form 10-QSB for the quarter ended November 26, 2006.

	10.22	Sixth Amendment and Modification of Revolving Line of Credit Loan Agreement and Reaffirmation of Guaranties dated as of January 31, 2008 by and among WSI Industries, Inc., Taurus Numeric Tool, Inc. and WSI Rochester, Inc. and M&I Marshall and IIsley Bank. Incorporated by reference from Exhibit 10.1 of the Registrant’s Form 10-QSB for the quarter ended February 24, 2008.

	10.23	Loan agreement dated February 1, 2011 between WSI Industries, Inc., Taurus Numeric Tool, Inc., WSI Rochester, Inc., and M&I Marshall & Ilsley Bank. Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q for the quarter ended February 27, 2011.

	10.24	Amended and Restated Revolving Credit Promissory Note dated February 1, 2011 in the principal amount of $1,000,000 by WSI Industries, Inc. in favor of M&I Marshall & Ilsley Bank.

	10.25	Amended and Restated Security Agreement dated February 1, 2011 by and between WSI Industries, Inc. and M&I Marshall & Ilsley Bank.

	10.26	Amended and Restated Security Agreement dated February 1, 2011 by and between Taurus Numeric Tool, Inc. and M&I Marshall & Ilsley Bank.

	10.27	Amended and Restated Security Agreement dated February 1, 2011 by and between WSI Rochester, Inc. and M&I Marshall & Ilsley Bank.


Exhibit
No.		Description
	10.28	Guaranty dated February 1, 2011 by and WSI Rochester, Inc. and M&I Marshall & Ilsley Bank

	10.29	Guaranty dated February 1, 2011 by and between Taurus Numeric Tool, Inc. and M&I Marshall & Ilsley Bank

	14.1	Code of Ethics & Business Conduct adopted by WSI Industries, Inc. on October 29, 2003. Incorporated by reference to Exhibit 14.1 of the Registrant’s Annual Report on Form 10-K for the year ended August 31, 2003.

	21.1	Subsidiaries of the Registrant.

	23.1	Consent of Schechter Dokken Kanter Andrews & Selcer Ltd.

	31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.

	31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.

	32.1	Certification pursuant to 18 U.S.C. §1350.

SIGNATURES

Pursuant to the requirements of Section 13 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.


	WSI INDUSTRIES, INC.
	BY:		/s/ Michael J. Pudil
			Michael J. Pudil
			Chief Executive Officer (principal executive officer)

	BY:		/s/ Paul D. Sheely
			Paul D. Sheely
			Vice President and Treasurer (principal financial and accounting officer)

DATE: November 17, 2011

Each person whose signature appears below hereby constitutes and appoints Michael J. Pudil and Paul D. Sheely, and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments to this Form 10-K and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.

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


Signature	Title	Date

/s/ Michael J. Pudil Michael J. Pudil	Chief Executive Officer and Director	November 17, 2011

/s/ Benjamin T. Rashleger Benjamin T. Rashleger	President, Chief Operating Officer and Director	November 17, 2011

/s/ Thomas C. Bender Thomas C. Bender	Director	November 17, 2011

/s/ Burton F. Myers II Burton F. Myers II	Director	November 17, 2011

/s/ James D. Hartman James D. Hartman	Director	November 17, 2011

INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE


	Page

CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm		21

Consolidated Balance Sheets — August 28, 2011 and August 29, 2010		22

Consolidated Statements of Income — Years Ended August 28, 2011, August 29, 2010 and August 30, 2009		23

Consolidated Statements of Stockholders’ Equity — Years Ended August 28, 2011, August 29, 2010 and August 30, 2009		24

Consolidated Statements of Cash Flows — Years Ended August 28, 2011, August 29, 2010 and August 30, 2009		25

Notes to Consolidated Financial Statements		26-35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
WSI Industries, Inc.
Monticello, Minnesota

We have audited the consolidated balance sheets of WSI Industries, Inc. and Subsidiaries as of August 28, 2011 and August 29, 2010 and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended August 28, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of WSI Industries, Inc. and Subsidiaries as of August 28, 2011 and August 29, 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended August 28, 2011, in conformity with accounting principles generally accepted in the United States of America.


/s/ Schechter Dokken Kanter Andrews & Selcer Ltd

Minneapolis, Minnesota
November 17, 2011

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AUGUST 28, 2011 AND AUGUST 29, 2010


	2011			2010

ASSETS

Current assets:
Cash and cash equivalents	$	2,920,078		$	2,347,113
Accounts receivable, less allowance for doubtful accounts of $10,074		3,292,227			3,087,087
Inventories (Note 2)		2,016,325			2,185,283
Prepaid and other current assets		227,239			60,686
Deferred tax assets (Note 6)		254,439			171,713

Total current assets		8,710,308			7,851,882

Property, plant, and equipment, at cost:
Land		819,000			819,000
Building and improvements		2,306,220			2,299,648
Machinery and equipment		12,507,519			10,998,303
Less accumulated depreciation		(8,554,678	)		(7,610,282	)

Total property, plant, and equipment		7,078,061			6,506,669

Deferred tax assets (Note 6)		—			258,901

Other assets (Note 10):
Goodwill and related acquisition costs		2,368,452			2,368,452

	$	18,156,821		$	16,985,904


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Trade accounts payable	$	1,302,958		$	1,266,641
Accrued compensation and employee withholdings		1,018,665			615,048
Other accrued expenses		116,609			367,218
Current portion of long-term debt (Note 3)		989,191			1,165,192

Total current liabilities		3,427,423			3,414,099

Long-term debt, less current portion (Note 3)		3,935,712			3,736,505

Deferred tax liabilities (Note 6)		308,061			—

Stockholders’ equity (Note 5):
Common stock, par value $.10 a share; authorized 10,000,000 shares; issued and outstanding 2,889,567 shares and 2,888,492 respectively		288,957			288,850
Capital in excess of par value		3,149,674			2,922,048
Deferred compensation		(275,106	)		(250,412	)
Retained earnings		7,322,100			6,874,814

Total stockholders’ equity		10,485,625			9,835,300

	$	18,156,821		$	16,985,904

See notes to consolidated financial statements.

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 28, 2011, AUGUST 29, 2010 AND AUGUST 30, 2009


	2011			2010			2009

Net sales (Note 8)	$	24,963,235		$	18,826,498		$	18,765,982

Cost of products sold		20,527,925			15,079,679			16,394,530

Gross margin		4,435,310			3,746,819			2,371,452

Selling and administrative expense		2,759,493			2,424,651			2,225,914
Interest and other income		(18,640	)		(33,183	)		(22,385	)
Interest expense		289,108			359,269			416,650

		3,029,961			2,750,737			2,620,179


Income (loss) before income taxes		1,405,349			996,082			(248,727	)

Income taxes (benefits) (Note 6)		505,926			358,589			(89,542	)


Net income (loss)	$	899,423		$	637,493		$	(159,185	)


Basic earnings (loss) per share	$	.32		$	.23		$	(.06	)


Diluted earnings (loss) per share	$	.31		$	.23		$	(.06	)


Cash dividend per share	$	.16		$	—		$	.0375


Weighted average number of common shares outstanding, basic		2,825,921			2,801.210			2,789,717


Weighted average number of common shares outstanding, diluted		2,877,064			2,801,210			2,789,717

See notes to consolidated financial statements.

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Common						Capital in									Total
	Stock						Excess of			Deferred			Retained			Stockholders’
	Shares			Amount			Par Value			Compensation			Earnings			Equity

Balance at August 31, 2008		2,825,358		$	282,536		$	2,573,797		$	(245,984	)	$	6,501,010		$	9,111,359

Net loss		—			—			—			—			(159,185	)		(159,185	)
Restricted stock grants		63,382			6,338			226,591			(232,929	)		—			—
Restricted stock issuance		—			—			(48,176	)		48,176			—			—
Stock option compensation		—			—			196,284			—			—			196,284
Restricted stock grants not earned and payment of withholding taxes		(9,872	)		(988	)		(77,428	)		68,876			—			(9,540	)
Dividends paid		—			—			—			—			(104,504	)		(104,504	)


Balance at August 30, 2009		2,878,868		$	287,886		$	2,871,068		$	(361,861	)	$	6,237,321		$	9,034,414

Net income		—			—			—			—			637,493			637,493
Restricted stock grants		58,405			5,841			133,215			(139,056	)		—			—
Restricted stock issuance		—			—			(94,919	)		94,919			—			—
Stock option compensation		—			—			210,712			—			—			210,712
Restricted stock grants not earned and payment of withholding taxes		(48,781	)		(4,877	)		(198,028	)		155,586			—			(47,319	)


Balance at August 29, 2010		2,888,492		$	288,850		$	2,922,048		$	(250,412	)	$	6,874,814		$	9,835,300

Net income		—			—			—			—			899,423			899,423
Restricted stock grants		37,715			3,771			227,475			(231,246	)		—			—
Restricted stock issuance		—			—			(97,316	)		97,316			—			—
Stock option compensation		—			—			205,232			—			—			205,232
Restricted stock grants not earned and payment of withholding taxes		(52,148	)		(5,215	)		(122,080	)		109,236			—			(18,059	)
Exercise of stock appreciation rights and payment of withholding taxes		15,508			1,551			14,315			—			—			15,866
Dividends paid		—			—			—			—			(452,137	)		(452,137	)


Balance at August 28, 2011		2,889,567		$	288,957		$	3,149,674		$	(275,106	)	$	7,322,100		$	10,485,625

See notes to consolidated financial statements.

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 28, 2011, AUGUST 29, 2010 AND AUGUST 30, 2009


	2011			2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	899,423		$	637,493		$	(159,185	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of property and equipment		1,171,259			1,074,457			1,050,833
Amortization of deferred financing cost		—			—			4,409
Net tax (benefits) expense related to share based compensation		(21,901	)		30,496			—
Deferred taxes		506,138			339,979			(79,571	)
Stock option compensation		205,232			210,712			196,284
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable		(205,140	)		(351,501	)		1,017,768
Inventories		168,958			(38,752	)		389,475
Prepaid and other current assets		(166,553	)		(8,784	)		137,031
Increase (decrease) in accounts payable and accrued expenses		132,720			(259,953	)		(790,058	)

Net cash provided by operating activities		2,690,136			1,634,147			1,766,986

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment		(462,588	)		(60,767	)		(421,634	)

Net cash used in investing activities		(462,588	)		(60,767	)		(421,634	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt		(1,256,857	)		(2,075,723	)		(829,497	)
Net tax benefits (expense) related to share based compensation		21,901			(30,496	)		—
Proceeds from issuance of long-term debt		—			—			625,000
Issuance of common stock		32,510			—			—
Dividends paid		(452,137	)		—			(104,504	)

Net cash used in financing activities		(1,654,583	)		(2,106,219	)		(309,001	)


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		572,965			(532,839	)		1,036,351

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		2,347,113			2,879,952			1,843,601


CASH AND CASH EQUIVALENTS AT END OF YEAR	$	2,920,078		$	2,347,113		$	2,879,952


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest	$	289,274		$	363,278		$	413,120
Payroll withholding taxes in cashless stock option exercise		56,604			16,823			9,540
Income taxes		35,641			15,536			13,762
Noncash investing and financing activities:
Acquisition of machinery through capital lease		1,280,063			—			919,043

See notes to consolidated financial statements.

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 28, 2011, AUGUST 29, 2010 AND AUGUST 30, 2009

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description — WSI Industries, Inc. and Subsidiaries (the Company) is involved in the precision contract metal machining business primarily serving the recreational vehicle, energy, aerospace/avionics and bioscience industries.

Fiscal Year — WSI Industries, Inc.’s fiscal years represent a 52- to 53-week period ending the last Sunday in August. Fiscal 2011, 2010 and 2009 each consisted of 52 weeks.

Basis of Presentation — The consolidated financial statements include the accounts of WSI Industries, Inc. and its subsidiaries. All material intercompany balances and transactions have been eliminated. Our consolidated financial statements for the year ended August 28, 2011 were evaluated for subsequent events through the date it was filed with the SEC on Form 10-K.

Cash and Cash Equivalents — Cash and cash equivalents include cash on hand, demand deposits with financial institutions and short-term, highly liquid investments with original maturities of three months or less. At times bank balances may exceed federally insured limits and the risk of losses related to such concentrations may have increased as a result of economic developments, particularly with the instability in the commercial and investment banking system. Cash equivalents are carried at cost plus accrued interest which approximates fair value.

Inventories — Inventory costs determined using the average cost method consist of material, direct labor, and manufacturing overhead. They are valued at the lower of cost or market by comparing the cost of each item in inventory to its most recent sales price or sales order price. Inventory cost is adjusted down for any excess of cost over the net realizable value of inventory components.

In addition, the Company determines whether its inventory is excess and obsolete by analyzing the sales history of its inventory, sales orders on hand and indications from the Company’s customers as to the future of various parts or programs. If, in the Company’s determination, the inventory value has become impaired, the Company adjusts the inventory value to the amount the Company estimates as the ultimate net realizable value for that inventory. The Company performs its lower of cost or market testing, as well as its excess or obsolete inventory analyses, quarterly.

Property, plant, equipment and depreciation and amortization — The cost of substantially all machinery and equipment, and buildings and improvements are being depreciated using the straight-line method. The estimated useful lives of the assets are as follows:


Machinery and equipment			3 to 7 years
Building and improvements			15 to 40 years

Long-lived Assets — The Company evaluates long-term assets on a periodic basis in compliance with Accounting Standards Codification (“ASC”) 360, Accounting for the Impairment of Long-lived Assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount. If the undiscounted cash flows are less than the carrying amount, the impairment recognized is measured by the amount the carrying value of the assets exceeds their fair value determined primarily through the present value of estimated future cash flows.

Goodwill — The Company assesses the valuation of its goodwill according to the provisions of ASC 350 to determine if the current value of goodwill has been impaired. The Company has also adopted Accounting Standard Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350). With ASU No. 2011-08, an entity is given the option to make a qualitative evaluation of goodwill impairment to determine whether it should calculate the fair value of its reporting unit. In the fiscal 2011 fourth quarter, the Company made its qualitative evaluation of its goodwill considering, among other things, the overall macroeconomic conditions, industry and market considerations, overall financial performance and other relevant company specific events. Based on this qualitative evaluation, the Company concluded that it was more likely than not that its goodwill was not impaired and that it wasn’t required to calculate the fair value of its reporting unit. If the Company has changes in events or circumstances, including reductions in anticipated cash flows generated by our operations, goodwill could become impaired which would result in a charge to earnings.

Income Taxes — The determination of the Company’s income tax-related account balances requires the exercised of significant judgment by management. Accordingly, the Company determines deferred tax assets and liabilities based upon the difference between financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year the differences are expected to affect taxable income. Management assesses the likelihood that deferred tax assets will be recovered from future taxable income and establishes a valuation allowance when management believes recovery is unlikely.

Revenue Recognition — Revenues from sales of product are recorded generally upon shipment. The Company considers its revenue recognition policy to fall under the guidance of FASB’s conceptual framework for revenue recognition. The Company recognizes revenue only after: (a) the Company has received a purchase order identifying price and delivery terms or services to be rendered; (b) shipment has occurred, or in the case of services, after the service has been completed; (c) the Company’s price is fixed as evidenced by the purchase order; and (d) collectability is reasonably assured. The Company refers to its revenues as “net sales” in its Consolidated Statements of Income as the Company’s sales are reduced for any product returned by customers.

The Company generally does not require collateral on its trade receivables. The maximum loss that the Company would incur if a customer failed to pay amounts owed would be limited to the recorded amount due after any allowances provided. Credit losses relating to customers have been minimal and within management’s expectations. Based on management’s evaluation of uncollected accounts receivable throughout the year, bad debts are provided for on the allowance method. Accounts are considered delinquent if they are 120 days past due. The Company mitigates its credit risk by performing credit checks and actively pursuing past due accounts.

Freight costs — The Company includes freight, shipping and handling costs, in the cost of goods sold.

Use of Estimate s — The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates made in those financial statements consist of estimates related to the impairment of goodwill, the evaluation of excess or obsolete inventory and the valuation allowance connected to the deferred tax assets.

Earnings per Share — Basic earnings per share is computed using the weighted average number of common shares outstanding. Diluted earnings per share is computed using the combination of dilutive common share equivalents and the weighted average number of common shares outstanding.

Stock-based compensation — The following information has been determined as if the Company had accounted for its stock options under the fair value method of ASC 718. The fair value for these options was estimated, for the purpose of determining compensation, at the date of grant using the Black-Scholes option pricing model with the following assumptions as set forth in the table below. The estimated fair value of the options is amortized to expense over the options’ vesting period.


Date of Grant in fiscal —	2011	2010	2009
Dividend yield	2.3%-3.25%	—	—
Expected volatility	77.3%-78.5%	69.8%-70.2%	60.8%
Risk free interest rate	1.2%-3.3%	2.6%-3.8%	1.6%-2.47%
Expected term	5-10 years	5-10 years	5-10 years

ASC 718 also requires the benefit of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than an operating cash flow under current accounting literature.

The Company granted shares of non-vested restricted stock to various employees during the years ended August 28, 2011, August 29, 2010 and August 30, 2009. The grants consisted of both outright stock grants as well as stock that could be earned in connection with the Company’s incentive compensation program should certain predetermined targets be met. Both kinds of non-vested restricted stock vest over three years with the grantees of the restricted stock entitled to receive dividends in additional shares of restricted stock that also vest yearly and to voting rights for the shares. The shares are accounted for under ASC 718 as expense over the period that they vest. The shares are also reflected in stockholder’s equity as deferred compensation which is calculated at the value of the shares at the date of the grant.

Reclassification — Certain prior year items have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement to amend the accounting and disclosure requirements on fair value measurements. This ASU limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, this update expands the disclosure on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. ASU No. 2011-04 is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this update will have a material effect on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income . This ASU presents an entity with the option to present the total of comprehensive income, the components of net income, and the component of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity/deficit. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU No. 2011-05 should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after 15 December 2011. As ASU No. 2011-05 relates only to the presentation of Comprehensive Income, the Company does not expect the adoption of this update will have a material effect on its consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08. Intangibles and Goodwill — Other (Topic 350) . This ASU gives the entity the option to make a qualitative evaluation of goodwill impairment to determine whether it should calculate the fair value of its reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the amendments improve the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company has adopted this update effective with these financial statements.

INVENTORIES

Inventories consist primarily of raw material, work-in-process (WIP) and finished goods valued at the lower of cost or market value:


	August 28, 2011		August 29, 2010

Raw material	$	347,829	$	584,719
WIP		976,879		939,085
Finished goods		691,617		661,479

	$	2,016,325	$	2,185,283

DEBT

Long-term debt consists of the following:


	August 28, 2011		August 29, 2010

Building related mortgages & term debt	$	1,123,771	$	1,442,676
Capitalized lease obligations		3,801,132		3,459,021

		4,924,903		4,901,697
Less current portion		989,191		1,165,192

Long-term debt	$	3,935,712	$	3,736,505

The Company purchased its land and building in May 2004 and at that time entered into two mortgages. The first mortgage was with its bank for $1,360,000 that matures on May 1, 2014. The mortgage had an initial interest rate of 5.37% and required monthly principal and interest payments of $8,307 based on a 25-year amortization schedule. Effective May 3, 2009 the interest rate adjusted to a rate 2.5% above the monthly yield on United States Treasury five-year securities. The new interest rate is 4.38% with monthly payments of $7,637 also based on a 25-year amortization schedule. The mortgage is secured by all assets of the Company.

The Company also entered into a mortgage with the City of Monticello, Minnesota Economic Development Authority (MEDA). The MEDA mortgage was subordinated to the bank mortgage, carried an interest rate of 2% and required monthly principal and interest payments of $1,483 based on a 25-year amortization schedule. The entire balance was due May 1, 2011 and it was fully paid as of that date.

Maturities of long-term debt are as follows:


Fiscal years ending August:
2012	$	989,191
2013		974,537
2014		1,910,520
2015		530,723
2016		222,648
Thereafter		297,284

Included in the consolidated balance sheet at August 28, 2011 are cost and accumulated depreciation on equipment subject to capitalized leases of $8,852,678 and $5,221,130, respectively. At August 29, 2010, the amounts were $7,537,576 and $4,258,583, respectively. The capital leases carry interest rates from 4.5% to 8.4% and mature from 2012 — 2018.

The present value of the net minimum payments on capital leases which is included in long-term debt as of August 28, 2011 is as follows:


Fiscal years ending August:
2012	$	1,151,040
2013		1,073,681
2014		958,590
2015		570,940
2016		242,196
Thereafter		308,660

Total minimum lease payments		4,305,107
Less amount representing interest		503,975

Present value of net minimum lease payments		3,801,132
Current portion		946,642

Capital lease obligation, less current portion	$	2,854,490

Line of Credit:

The Company renewed its revolving credit agreement with its bank on February 1, 2011. Under the agreement, the Company can borrow up to $1 million, with the loan being collateralized by all assets of the Company. The agreement expires February 1, 2012 and has restrictive provisions requiring minimum net worth, current and debt service coverage ratios as well as a maximum ratio of debt to tangible net worth. At August 28, 2011, the Company was in compliance with these provisions. Interest on any amounts borrowed under the agreement would be at a rate equal to the London Interbank Offered Rates (LIBOR) (.22% at August 28, 2011) plus 3.0%. However, the rate shall never be less than 3.75%. There were no amounts outstanding related to its revolving credit agreement at August 28, 2011 and August 29, 2010, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of financial instruments, including cash and equivalents, receivables, accounts payable and accrued expenses, and current maturities on long-term debt obligations approximates fair values due to their short term nature. Interest on long-term debt is primarily at fixed rates which do not differ significantly from approximate market rates at August 28, 2011.

STOCK-BASED COMPENSATION

Stock Options — The 1994 Stock Option Plan was approved and 450,000 shares of common stock were reserved for granting of options to officers, key employees, and directors. The Plan expired on September 29, 2004 and therefore no shares remain to be granted.

The 2005 Stock Option Plan was approved and 600,000 shares of common stock were reserved for granting of options to officers, key employees and directors. The Plan has a term of 10 years and will expire in 2015.

Stock options vest over a period of six months to three years for both stock option plans.

Option transactions during the three years ended August 28, 2011 are summarized as follows:


	1994 Stock					2005 Stock
	Option Plan					Option Plan
				Average					Average
	Shares			Price		Shares			Price
Outstanding at August 31, 2008		2,000		$	2.75		121,666		$	4.35
Granted		—			—		53,000			3.46
Forfeited		(2,000	)		2.75		—			—
Exercised		—			—		—			—

Outstanding at August 30, 2009		—		$	—		174,666			4.08

Granted							45,000			2.32
Forfeited							—			—
Exercised							—			—

Outstanding at August 29, 2010							219,666			3.72
Granted							61,000			5.39
Forfeited							(7,000	)		4.18
Exercised							(25,500	)		3.30

Outstanding at August 28, 2011							248,166		$	4.16

Of the 25,500 stock options from the 2005 Plan that were exercised in fiscal 2011, 9,992 shares were returned to the Company to pay for the exercise price and for related payroll withholding taxes.

The weighted fair value of options granted during the years ended August 28, 2011, August 29, 2010, and August 30, 2009 was $3.10, $1.74 and $2.34, respectively. The total intrinsic value of options exercised for the years August 28, 2011, August 29, 2010 and August 30, 2009 was $50,900, $0 and $0, respectively. The intrinsic value for options outstanding at August 28, 2011 was $317,922.

Cash received from option exercises for years ended August 28, 2011. August 29, 2010 and August 30, 2009 was $32,510, $0 and $0, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $21,901, $0 and $0 for fiscal years 2011, 2010 and 2009, respectively.

As of August 28, 2011, there was $135,287 of total unearned compensation cost related to option-based compensation arrangements to be recognized over an expected weighted average of 1 year.

As of August 28, 2011, there were 31,000 shares with an exercise price of $2.13, 103,166 shares with exercise prices between $3.00 and $3.47 and 114,000 options outstanding with exercise prices between $4.93 and $6.82. At August 28, 2011, outstanding options had a weighted-average remaining contractual life of 7 years.

The number of options exercisable as of August 28, 2011, August 29, 2010 and August 30, 2009 were 193,999, 169,999 and 115,666, respectively, at weighted average share prices of $4.02, $3.89, and $3.30 per share, respectively. At August 28, 2011, there were 54,167 options that had not vested.

The Company also grants non-vested restricted shares as part of the 2005 Stock Option Plan. These shares typically vest over a three year period and sometimes contain required minimum threshold levels before the shares are earned. Non-vested restricted share transactions during the three years ended August 28, 2011 are as follows:


	Options			Average Price
Outstanding at August 31, 2008		42,375		$	5.80
Granted		63,382			3.67
Vested		(13,444	)		5.53
Forfeited		(6,174	)		6.93

Outstanding at August 30, 2009		86,139			4.20
Granted		58,405			2.38
Vested		(20,129	)		4.72
Forfeited		(41,104	)		3.78

Outstanding at August 29, 2010		83,311			3.00
Granted		37,715			6.13
Vested		(22,478	)		2.46
Forfeited		(44,405	)		4.33

Outstanding at August 28, 2011		54,143		$	5.08

As of August 28, 2011, there was $95,877 in total unrecognized compensation cost related to non-vested restricted stock compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 1 year. The total intrinsic value of restricted stock options that vested during the year ended August 28, 2011 was $119,190.

INCOME TAXES

Income taxes consisted of the following:


	Years Ended
	August 28,		August 29,		August 30,
	2011		2010		2009
Current:
Federal	$	—	$	15,289	$	—
State		19,457		15,676		(9,971	)

		19,457		30,965		(9,971	)

Deferred:
Federal		486,469		323,378		(72,577	)
State		—		4,246		(6,994	)

		486,469		327,624		(79,571	)

Total	$	505,926	$	358,589	$	(89,542	)

A reconciliation of the federal income tax provision at the statutory rate with actual taxes provided on earnings from continuing operations is as follows:


	Years Ended
	August 28,			August 29,			August 30,
	2011			2010			2009
Ordinary federal income tax statutory rate		34.0	%		34.0	%		(34.0	)%
State income taxes net of federal tax effect		2.0			2.0			(2.0	)

Effective rate		36.0	%		36.0	%		(36.0	)%

Deferred income taxes are provided for the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities. Temporary differences, net operating loss carryforwards, and valuation allowances comprising the net deferred taxes on the balance sheet are as follows:


	August 28, 2011			August 29, 2010
Deferred Tax Assets
Accrued liabilities	$	86,764		$	78,998
Inventory valuation adjustments		54,026			26,262
Net operating loss carryforwards		767,705			827,896
Tax credit carryforwards		494,728			510,993
Stock option expense		174,551			151,244
Other		145,562			114,989

		1,723,336			1,710,382

Deferred Tax Liabilities
Tax depreciation and amortization greater than book		(1,776,958	)		(1,279,768	)

Net deferred taxes	$	(53,622	)	$	430,614

Included in the balance sheet as:
Deferred tax assets — current		254,439			171,713
Deferred tax assets — long-term		—			258,901
Deferred tax liabilities — long-term		(308,061	)		—

Net deferred taxes	$	(53,622	)	$	430,614

Based on the long-term nature of its net operating loss carryforwards and the Company’s recent operating history and growth in fiscal 2011, management believes that it is more likely than not that the Company will be able to generate taxable income in the future sufficient to utilize these deductions and carryforwards, and accordingly no tax asset valuation allowance is deemed necessary.

As of August 28, 2011, the Company had federal net operating loss carryforwards of approximately $2.1 million expiring in 2021-2029. Also as of August 28, 2011, the Company had $454,000 in federal alternative minimum tax (AMT) credit carryforward that has no expiration. The AMT credits are available to offset future tax liabilities only to the extent that the Company has regular tax liabilities in excess of AMT tax liabilities.

EMPLOYEE BENEFITS

The Company maintains a 401(k) retirement savings plan that all employees are eligible to participate in as well as a profit sharing plan. Profit sharing contributions are discretionary and are based on Company results. Contributions charged to operations for the profit sharing plan and matching contributions for the 401(k) plan for fiscal 2011, 2010 and 2009, were $239,463, $184,037 and $137,762, respectively.

INFORMATION CONCERNING SALES TO MAJOR CUSTOMERS

The Company had sales to two customers that exceeded 10 percent of total sales during fiscal years 2011, 2010 and 2009 as listed below:


	2011		2010		2009
Customer # 1	$	16,804,000	$	11,922,000	$	9,652,000
Customer # 2	$	4,525,000	$	4,480,000	$	5,680,000

The Company had accounts receivable from customer #1 of $1,938,000 and $2,171,000 at August 28, 2011 and August 29, 2010, respectively. The Company had accounts receivable from customer #2 of $607,000 and $633,000 at August 28, 2011 and August 29, 2010, respectively. Realization of these receivables, sale of inventory, and its future operations could be significantly affected by adverse changes in the financial condition or the Company’s relationship with these customers.

EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:


	2011		2010		2009

Net Income (loss)	$	899,423	$	637,493	$	(159,185	)

Denominator for earnings per share:

Weighted average shares; denominator for basic earnings per share		2,825,921		2,801,210		2,789,717

Effect of dilutive securities; employee and non-employee options		51,143		—		—


Dilutive common shares; denominator for diluted earnings per share		2,877,064		2,801,210		2,789,717


Basic earnings (loss) per share	$	.32	$	.23	$	(.06	)


Dilutive earnings (loss) per share	$	.31	$	.23	$	(.06	)

10.

OTHER ASSETS

Goodwill consists of costs resulting from business acquisitions which total $2,368,452 (net of accumulated amortization of $344,812 recorded prior to the adoption of ASC 350 Goodwill and Other Intangible Assets ).

EXHIBIT 10.24

Loan Number:

AMENDED AND RESTATED
REVOLVING CREDIT
PROMISSORY NOTE



$1,000,000.00		Eden Prairie, Minnesota
		February 1, 2011

FOR VALUE RECEIVED, WSI Industries, Inc., a Minnesota corporation, (the “Borrower”) promises to pay to the order of M&I Marshall & Ilsley Bank, a Wisconsin banking corporation, or any future holder hereof (“Lender”), the principal sum of One Million and no/100 Dollars ($1,000,000.00), or so much thereof as may be advanced and be outstanding pursuant to and subject to the restrictions contained in, that certain Amended and Restated Loan Agreement between Borrower and Lender of even date herewith (“Loan Agreement’’), together with interest accruing from and after the date hereof on the unpaid principal balance from time to time outstanding at a fluctuating annual interest rate equal to the LIBOR Rate, as hereinafter defined, plus Three Hundred (300) basis points per year (collectively the LIBOR Rate plus Three Hundred (300) basis points is the “Note Rate”). The Note Rate shall change concurrently with each change in the LIBOR Rate. The Note Rate is not necessarily the lowest rate charged by Lender on loans at any given time. NOTICE: Under no circumstances will the Note Rate be less than Three and Seventy-five/One Hundredths percent (3.75%) per annum or more than the maximum rate allowed by applicable law. Principal and interest due hereunder shall be paid in immediately available funds as follows:

1. Payments . Interest only (at the Note Rate) on the principal balance outstanding from time to time shall be paid on or before the first day of the first calendar month after the date hereof, and on or before the first day of each and every month thereafter throughout the term of this Note.

2. Application of Payments . Unless otherwise determined by Lender in its sole discretion, all payments shall be applied first to interest, second to principal then due, third to late charges (including any Default Rate Margin as defined below), if any, and fourth to any escrow required under the Loan Documents, with the balance to be applied to principal then owing, provided however, that if any advance made by the Lender as the result of a default on the part of the Borrower under the terms of this Note or any instrument securing this Note is not repaid on demand, any monies received, at the option of the Lender, may first be applied to repay such advances, plus interest thereon at an interest rate equal to the sum of the Note Rate plus the Default Rate Margin, and the balance, if any, shall be applied in accordance with the provisions hereof. Any application of principal hereunder shall not reduce the periodic amounts due and payable as provided in this Note.

3. Interest Calculation . Interest on this Note is computed on a 365/360 basis; that is, by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. All interest payable under this Note shall be computed using this method. This calculation method results in a higher effective interest rate than the numeric interest rate stated in this Note. If any payment received is less than the amount of interest due through the effective date of receipt of such payment, Lender reserves the right to add any such deficiency to principal.

4. Payment Location . If Lender does not require automatic withdrawal of payments from Borrower’s account as provided herein, all payments of principal and interest due hereunder shall be paid to Lender at 11455 Viking Road, Eden Prairie, Minnesota 55344, Attention: David Orlady, or to such other person or at such other address as Lender may from time to time direct.

5. Maturity Date . The entire outstanding balance of principal, if not sooner paid, together with all accrued interest thereon, shall be due and payable on February 1, 2012.

6. Loan Agreement . The terms, covenants, conditions and agreements contained in all other Loan Documents defined in that certain Loan Agreement (the “Loan Agreement”) by and between Borrower, WSI Rochester, Inc. and Taurus Numeric Tool, Inc. (“Guarantors”) and Lender of even date hereof, including but not limited to those certain Guaranties executed by Guarantors pursuant to which Guarantors agreed to guarantee Borrower’s obligations under this Note and the other Loan Documents, are hereby made a part hereof to the same extent and effect as if the same were fully set forth herein.

7. Prepayment . This Note may be prepaid at any time, in whole or in part, with out premium or penalty.

8. Interest Rate . The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the one month British Bankers Association (BBA) LIBOR and reported by a major news service selected by Lender (such as Reuters, Bloomberg or Moneyline Telerate), set two (2) London business days prior to the Loan payment date and effective on the first day of the accrual period to the last day, with settlement in arrears (the “Index”). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this Loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower’s request. The interest rate change will not occur more often than each Loan payment date and will become effective without notice to Borrower.

9. Default . A default under this Note shall occur if:

(a) there is a default in payment of any installment of principal and/or interest due hereunder or any payments due pursuant to the Loan Documents; or

(b) there is a default in the performance by Borrower, any Guarantor or any grantor of a mortgage, deed of trust, or other security in connection with this Note of any of the terms, conditions or provisions contained herein other than those identified in subsection (a) above, or contained in the Loan Documents (including, but not limited to, the Events of Default set forth in the Loan Agreement), or contained in any document executed and/or delivered by Borrower, any Guarantor, or any other individual or entity affiliated with Borrower and/or any Guarantor in connection herewith, or contained in any other agreement between Borrower and/or any Guarantor and Lender or between Borrower and/or any Guarantor and any other creditor; or

(i)

becomes insolvent or takes any action which constitutes an admission of inability to pay its debts as they mature;

(ii)

makes an assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its assets;

(iii)

becomes the subject of an “order for relief” within the meaning of the United States Bankruptcy Code;

	(iv)		files a petition in bankruptcy, or for reorganization, or to effect a plan or other arrangement with creditors;

	(v)		is adjudged a bankrupt;

(vi)

files an answer to a creditor’s petition, admitting the material allegations thereof, for an adjudication of bankruptcy or for reorganization or to effect a plan or other arrangement with creditors;

(vii)

applies to a court for the appointment of a receiver or a custodian for any of its assets or proceedings;

(viii)

has filed against it an involuntary petition pursuant to the United States Bankruptcy Code;

(ix)

has a receiver, trustee, custodian, liquidator or like officer appointed to take custody, control or possession of any property subject to any lien, encumbrance or security interest securing payment of this Note;

(x)

dies or becomes incapacitated, or is dissolved or ceases to continue its business as a going concern;

(xi)

has filed against any collateral securing this Note any foreclosure or forfeiture proceedings, whether by judicial proceedings, self-help, repossession or otherwise, by any creditor of Borrower or any governmental entity;

(xii)

has filed against it a judgment which is not satisfied or “bonded over” within thirty (30) days after the entry thereof; or has issued against it any attachments or garnishments or the filing of any lien which is not discharged or “bonded over” within thirty (30) days after such issuance or filing; or

(d) any representation, certification or warranty made or provided by or on behalf of Borrower or any Guarantor to induce Lender to extend credit to Borrower hereunder, made or provided in the Loan Documents or made or provided in any document delivered to Lender in conjunction with this transaction is at anytime false, misleading or inaccurate, in any material respect; or

(e) upon the occurrence of a default under any of the Loan Documents (including, but not limited to, the Events of Default set forth in the Loan Agreement), a default under any agreement executed in connection with an interest rate swap or similar transaction between Borrower and Lender, or upon the occurrence of a default under any loan, extension of credit, security agreement, purchase or sale agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s property or Borrower’s ability to repay this Note or perform Borrower’s obligations under this Note or any of the Loan Documents; or

(f) upon any merger, consolidation, reorganization or other transaction or event that results in any change in the managing member, general partner or majority shareholder of the Borrower, and/or upon any change in ownership of twenty-five percent (25%) or more of the common stock, membership units, limited partnership, limited liability partnership, or general partnership interests, or other ownership units of Borrower; or

(g) a material adverse change occurs in Borrower’s or any Guarantor’s financial condition, or Lender believes the prospect of payment or performance of this Note or the Guaranty is impaired, or Lender in good faith believes itself to be insecure;

(h) Borrower or any Guarantor shall be in default under any other agreement with Lender or with any other creditor (whether in connection with the Loan or otherwise) and any required notice shall have been given and any time in which to cure the default shall have elapsed. For purposes of this Section, the term “Like-Owned Affiliates” shall mean any Affiliate of Borrower that has the same ultimate owner(s), whether directly or indirectly, as Borrower as of the date of any such default. For purposes of this Section, the term “Affiliate” shall mean any person or entity that controls, is controlled by, or is under common control with, Borrower as of the date of any such default.

If Borrower fails to pay any installment of principal and/or interest when due or fails to make any other payments when due under this Note or the Loan Documents (including, but not limited to, any payments of real estate taxes or insurance required to be paid by Borrower), or if Borrower or any Guarantor fails to perform any other obligation under this Note or the Loan Documents or if Borrower, any of its Like-Owned Affiliates or any Guarantor shall otherwise be in default under this Note or the Loan Documents, and such failure is not cured within the cure period, if any, provided in this Section, then such failure shall constitute an “Event of Default” hereunder. If any default (other than: (i) a default in payment of principal and/or interest or any other payments required to be made under this Note or the Loan Documents including, but not limited to, any payments of real estate taxes or insurance; or (ii) a default which is an Event of Default under any of the Loan Documents for which a cure period has already been provided for under the applicable document), is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, such default may be cured if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within thirty (30) days or (2) if the cure requires more than thirty (30) days, immediately initiates steps which Lender deems in Lender’s sole discretion to be sufficient to cure the default and thereafter Borrower continues to diligently pursue such cure and completes all reasonable and necessary steps sufficient to cure such default as soon as reasonably practical.

Upon the occurrence of an Event of Default, the entire unpaid principal balance plus accrued interest shall immediately become due and payable.

Upon the occurrence of an Event of Default, including failure to pay upon final maturity, the interest rate on this Note shall be increased by adding a 5.000 percentage point margin (“Default Rate Margin”) to the then applicable Note Rate. The Default Rate Margin shall also apply to each succeeding interest rate change that would have applied had there been no occurrence of an Event of Default. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law.

10. Waivers . Borrower waives and renounces presentment, protest, demand and notice of dishonor and any and all lack of diligence or delay in collection or endorsement hereof, and expressly consents to any extension of time, release of any party liable for this obligation, release of any security which may have been or which may hereafter be granted in connection herewith, or any other indulgence or forbearance which may be made without notice to Borrower and without in any way affecting the liability of Borrower. In all circumstances, the indebtedness due hereunder shall be repaid without relief from any valuation or appraisement laws, which Borrower hereby waives.

11. Late Payments . If any installment of principal and/or interest due under this Note or any payment required under the Loan Documents is not fully paid within ten (10) days after the due date thereof, Borrower shall pay to Lender a late charge equal to five percent (5%) of such installment or payment, to compensate Lender for the extra cost of handling delinquent payments. Neither the requirement that such late charge be paid, nor the payment of the late charge, will be deemed to be a waiver of a default arising from the late payment. In addition, Borrower will pay a fee to Lender of Thirty Dollars ($30.00) if Borrower makes a payment on this Note and the check or preauthorized charge with which Borrower pays is later dishonored.

12. Maximum Interest Rate . Nothing contained herein nor any transaction related hereto shall be construed or shall so operate either presently or prospectively: (a) to require the payment of interest at a rate greater than is now lawful in such case to contract for, but shall require payment of interest only to the extent of such lawful rate; or (b) to require the payment or the doing of any act contrary to law; but if any clause or provision herein contained shall otherwise so operate to invalidate this Note and/or the transaction related hereto, in whole or in part, then only such clause(s) and provision(s) shall be held for naught as though not contained herein (or if allowed by applicable law, limited to the extent necessary to make such clause(s) or provision(s) enforceable, but then only to the extent such limited or modified enforcement is more beneficial to Lender than having such clause(s) or provision(s) deemed struck) and the remainder of this Note shall remain operative and in full force and effect.

If for any reason interest in excess of the amount as limited in the foregoing paragraph shall have been paid hereunder, whether by reason of acceleration or otherwise, then in that event any such excess interest shall constitute and be treated as a payment of principal hereunder and shall operate to reduce such principal by the amount of such excess, or if in excess of the then principal indebtedness, such excess shall be refunded.

13. General Provisions . The terms of this Note shall be binding upon Borrower, upon Borrower’s heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. Whenever used, the singular shall include the plural, the plural the singular, and the use of any gender shall include all genders. The rights and remedies of Lender as provided in this Note or any document securing this Note shall be cumulative and concurrent, and may be pursued singularly, successively or together against Borrower, the property described in the Security Documents or any document securing this Note or any other security for the debt evidenced by this Note, at the discretion of Lender. If any part of this Note cannot be enforced, this fact will not affect the rest of this Note. Lender may delay or forego enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless expressly stated in writing, no party who signs this Note, whether as maker, any Guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this Loan or release any party or any Guarantor or collateral; or impair, fail to realize upon or perfect Lender’s security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties agree that Lender may modify this Loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. In the event of any inconsistencies between this Note and any of the Loan Documents, any loan commitment or term sheet issued by Lender in connection with the making of this Note, or other documents executed in connection with the making of this Note, the terms of this Note shall control. Capitalized terms used and not defined herein shall have the meanings given to them in the Loan Agreement.

14. Governing Law . This Note shall be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Minnesota without regard to conflicts of laws provisions. This Note has been accepted by Lender in the State of Minnesota.

15. Attorney’s Fees . Borrower agrees that if, and as often as, this Note is placed in the hands of an attorney for collection, or to defend or enforce any of Lender’s rights hereunder or under any document securing this Note, whether or not litigation is commenced, the undersigned shall pay to Lender (subject to any limits under applicable law) Lender’s reasonable attorney’s fees, together with all court costs and other expenses incurred or paid by Lender in connection therewith.

16. CHOICE OF VENUE . BORROWER HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS INITIATED BY BORROWER AND ARISING DIRECTLY OR INDIRECTLY OUT OF THIS NOTE OR THE LOAN DOCUMENTS SHALL BE LITIGATED IN THE DISTRICT COURT OF HENNEPIN COUNTY, MINNESOTA, OR AT LENDER’S DISCRETION IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA. BORROWER HEREBY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED BY LENDER IN SUCH COURT. BORROWER WAIVES ANY CLAIM THAT HENNEPIN COUNTY, MINNESOTA OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF VENUE. THE EXCLUSIVE CHOICE OF FORUM FOR BORROWER SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT, BY LENDER, OF ANY JUDGMENT OBTAINED IN ANY OTHER FORUM OR THE TAKING, BY LENDER, OF ANY ACTION TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE JURISDICTION, AND BORROWER HEREBY WAIVES THE RIGHT, IF ANY, TO COLLATERALLY ATTACK ANY SUCH JUDGMENT OR ACTION.

17. WAIVER OF JURY TRIAL . LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER.

18. Notices . Any notice or election required or permitted to be given or served by Lender or Borrower hereunder to the other party shall be given in accordance with the Loan Agreement.

19. Automatic Payments; Right of Setoff . Borrower hereby authorizes Lender automatically to deduct from Borrower’s account the amount of any payment due under this Note. If the funds in the account are insufficient to cover any payment, Lender shall not be obligated to advance funds to cover the payment. At any time and for any reasons, Lender may voluntarily terminate such automatic payments. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or other account). This includes all accounts Borrower holds jointly with a third party and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this Section.

20. Amended and Restated Note . This Note amends and restates in its entirety that certain Revolving Credit Promissory Note dated December 4, 2002, as previously amended, made by Borrower in favor of Excel Bank Minnesota, predecessor in interest to Lender (Note No. 80607, Account No. 200350) and is not in payment thereof.

IN WITNESS WHEREOF, the undersigned Borrower has executed this Note as of the date first above written.


	BORROWER: WSI Industries, Inc.
	By:
		Name:
		Title:


STATE OF MINNESOTA	)
	) SS
COUNTY OF	)

On this _____ day of March, 2011, before me appeared , to me personally known, who, being by me duly sworn, did say that he/she is the of WSI Industries, Inc., a Minnesota corporation, and that said instrument was signed on behalf of said company by its authority, and said person acknowledged said instrument to be the free act and deed of said company.

In Testimony Whereof, I have hereunto set my hand and affixed my official seal the day and year first above written.



		Name:

		Notary Public, State of

		My Commission Expires:

[SEAL]

EXHIBIT 10.25

AMENDED AND RESTATED
SECURITY AGREEMENT

Date: February 1, 2011

DEBTOR: WSI Industries, Inc., a Minnesota corporation
Address: 213 Chelsea Road, Monticello, MN 55362
State Charter No .: K-680

SECURED PARTY: M&I Marshall & Ilsley Bank
Address: 11455 Viking Drive, Eden Prairie, MN 55344

1. OBLIGATIONS SECURED . This Agreement secures the following (called the “Obligations”):

All debts, liabilities and obligations of every type and description which the Debtor may now or at any time owe to the Secured Party, including but not limited to all principal, interest, and other charges, fees, expenses and amounts, and all notes, guaranties, agreements, and other writings in favor of the Secured Party, whether now existing or hereafter arising, direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, independent, joint, several, or joint and several.

2. SECURITY INTEREST. To secure the payment and performance of the Obligations, the Debtor grants the Secured Party a security interest (the “Security Interest”) in, and assigns to the Secured Party, the following property (called the “Collateral”):

All inventory of the Debtor, and all returns of such inventory, and all warehouse receipts, bills of lading and other documents of title covering such inventory, whether now existing or hereafter arising, whether now owned or hereafter acquired;

All equipment of the Debtor, including but not limited to all accessions, accessories, attachments, fittings, increases, parts, repairs, returns, renewals and substitutions of all or any part thereof, and all warehouse receipts, bills of lading and other documents covering such equipment, whether now existing or hereafter arising, whether now owned or hereafter acquired;

All accounts (including but not limited to all health-care-insurance receivables), instruments, chattel paper, investment property, letter of credit rights, letters of credit, other rights to payment, documents, deposit accounts, money, patents, patent applications, trademarks, trademark applications, copyrights, copyright applications, trade names, other names, software, payment intangibles, and other general intangibles of the Debtor, together with all good will related to the foregoing property and all rights, liens, security interests and other interests which the Debtor may at any time have by law or agreement against any account debtor, issuer or obligor obligated to make any such payment or against any of the property of such account debtor, issuer, or obligor, and all supporting obligations relating to the foregoing, whether now existing or hereafter arising, whether now owned or hereafter acquired;

All other assets of the Debtor, not described above; and

All products and proceeds of the foregoing property, including without limitation all accounts, instruments, chattel paper, investment property, letter of credit rights, letters of credit, other rights to payment, documents, deposit accounts, money, insurance proceeds and general intangibles related to the foregoing property, and all refunds of insurance premiums due or to become due under all insurance policies covering the foregoing property.

3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS . The Debtor represents and warrants to the Secured Party and agrees as follows:

a. The Debtor is a Minnesota corporation and the address of the Debtor’s chief executive office is shown at the beginning of this Agreement. The Debtor has not used any trade name, assumed name, or other name except the Debtor’s name stated above. The Debtor shall not change its state of organization without the Secured Party’s prior written consent. The Debtor shall give the Secured Party prior written notice of any change in such address or the Debtor’s name or if the Debtor uses any other name. The Debtor has authority to execute and perform this Agreement.

b. If any Collateral is or will become a fixture, the record owner of the real estate is WSI Industries, Inc. and the legal description of the real estate is set forth on the attached Exhibit A.

c. Except as set forth in any existing or future agreement executed by the Secured Party: the Debtor is the owner of the Collateral, or will be the owner of the Collateral hereafter acquired, free of all security interests, liens and encumbrances other than the Security Interest and any other security interest of the Secured Party; and except for certain security interests granted in favor of lessors of leased equipment, the Debtor shall not permit any security interest, lien or encumbrance, other than the Security Interest and any other security interest of the Secured Party, to attach to any Collateral without the prior written consent of the Secured Party; the Debtor shall defend the Collateral against the claims and demands of all persons and entities other than the Secured Party, and shall promptly pay all taxes, assessments and other government charges upon or against the Debtor, any Collateral and the Security Interest; and no financing statement covering any Collateral is on file in any public office. If any Collateral is or will become a fixture the Debtor, at the request of the Secured Party, shall furnish the Secured Party with a statement or statements executed by all persons and entities who have or claim an interest in the real estate, in a form acceptable to the Secured Party, which statement or statements shall provide that such persons and entities consent to the Security Interest.

-2-

d. The Debtor shall not sell or otherwise dispose of any Collateral or any interest therein without the prior written consent of the Secured Party, which consent shall not be unreasonably withheld, except that, until the occurrence of an Event of Default or the revocation by the Secured Party of the Debtor’s right to do so, the Debtor (i) may sell or lease any Collateral constituting inventory in the ordinary course of business at prices constituting the fair market value thereof, or (ii) sell or dispose of collateral as otherwise permitted by the Loan Agreement between Secured Party and Debtor of even date herewith. For purposes of this Agreement, a transfer in partial or total satisfaction of a debt, obligation or liability shall not constitute a sale or lease in the ordinary course of business.

e. Each account, instrument, investment property, chattel paper, letter-of-credit right, letter of credit, other right to payment, document, and general intangible constituting Collateral is, or will be when acquired, the valid, genuine and legally enforceable obligation of the account debtor or other issuer or obligor named therein or in the Debtor’s records pertaining thereto as being obligated to pay such obligation, subject to no defense, setoff or counterclaim. The Debtor shall not, without the prior written consent of the Secured Party, agree to any material modification or amendment of any such obligation or agree to any subordination or cancellation of any such obligation.

f. Other than inventory in transit and motor vehicles in use, all tangible Collateral shall be located at the Debtor’s address stated above and no such Collateral shall be located at any other address without the prior written consent of the Secured Party.

g. The Debtor shall: (i) keep all tangible Collateral in good condition and repair, normal depreciation excepted; (ii) from time to time replace any worn, broken or defective parts thereof; (iii) promptly notify the Secured Party of any loss of or material damage to any Collateral or of any adverse change in the prospect of payment of any account, instrument, chattel paper, letter of credit other right to payment or general intangible constituting Collateral; (iv) not permit any Collateral to be used or kept for any unlawful purpose or in violation of any federal, state or local law; (v) keep all tangible Collateral insured in such amounts, against such risks and in such companies as shall be acceptable to the Secured Party, with lender loss payable clauses in favor of the Secured Party to the extent of its interest in form acceptable to the Secured Party (including without limitation a provision for at least 30 days prior written notice to the Secured Party of any cancellation or modification of such insurance), and deliver policies or certificates of such insurance to the Secured Party; (vi) at the Debtor’s chief executive office, keep accurate and complete records pertaining to the Collateral and the Debtor’s financial condition, business and property, and Provide the Secured Party such periodic reports concerning the Collateral and the Debtor’s financial condition, business and property as the Secured Party may from time to time request; (vii) at all reasonable times permit the Secured Party and its representatives to examine and inspect any Collateral, and to examine, inspect and copy the Debtor’s records pertaining to the Collateral and the Debtor’s financial condition, business and property; and (viii) at the Secured Party’s request, promptly execute, endorse and deliver such financing statements and other instruments, documents, control agreements, chattel paper and writings and take such other actions deemed by the Secured Party to be necessary or desirable to establish, protect, perfect or enforce the Security Interest and the rights of the Secured Party under this Agreement and applicable law, and pay all costs of filing financing statements and other writings in all public offices where filing is deemed by the Secured Party to be necessary or desirable.

-3-

h. The Debtor authorizes the Secured Party to file all of the Secured Party’s financing statements and amendments to financing statement, and all terminations of the filings of other secured parties, all with respect to the Collateral, in such form and substance as the Secured Party, in its sole discretion, may determine.

4. COLLECTION RIGHTS. At any time after an Event of Default, the Secured Party may, and at the request of the Secured Party the Debtor shall, promptly notify any account debtor, issuer or obligor of an account, instrument, investment property, chattel paper, letter-of-credit right, letter of credit, other right to payment or general intangible constituting Collateral that the same has been assigned to the Secured Party and direct such account debtor, issuer or obligor to make all future payments to the Secured Party. In addition, at the request of the Secured Party, the Debtor shall deposit in a collateral account designated by the Secured Party all proceeds constituting Collateral, in their original form received (with any necessary endorsement), within one business day after receipt of such proceeds by the Debtor. Until the Debtor makes each such deposit, the Debtor will hold all such proceeds separately in trust for the Secured Party for deposit in such collateral account, and will not commingle any such proceeds with any other property. The Debtor shall have no right to withdraw any funds from such collateral account, and the Debtor shall have no control over such collateral account. Such collateral account and all funds at any time therein shall constitute Collateral under this Agreement. Before or upon final collection of any funds in such collateral account, the Secured Party, at its discretion, may release any such funds to the Debtor or any account of the Debtor or apply any such funds to the Obligations whether or not then due. Any release of funds to the Debtor or any account of the Debtor shall not prevent the Secured Party from subsequently applying any funds to the Obligations. All items credited to such collateral account and subsequently returned and all other costs, fees and charges of the Secured Party in connection with such collateral account may be charged by the Secured Party to any account of the Debtor, and the Debtor shall pay the Secured Party all such amounts on demand.

5. LIMITED POWER OF ATTORNEY . If the Debtor at any time fails to perform or observe any agreement herein, the Secured Party, in the name and on behalf of the Debtor or, at its option, in its own name, may perform or observe such agreement and take any action which the Secured Party may deem necessary or desirable to cure or correct such failure. The Debtor irrevocably authorizes Secured Party and grants the Secured Party a limited power of attorney in the name and on behalf of the Debtor or, at its option, in its own name, to collect, receive, receipt for, create, prepare, complete, execute, endorse, deliver and file any and all financing statements, control agreements, insurance applications, remittances, instruments, documents, chattel paper and other writings, to grant any extension to, compromise, settle, waive, notify, amend, adjust, change and release any obligation of any account debtor, issuer, obligor, insurer or other person or entity pertaining to any Collateral, to demand terminations of other security interests in any of the Collateral and to take any other action deemed by the Secured Party to be necessary or desirable to establish, perfect, protect or enforce the Security Interest. All of the Secured Party’s advances, fees, charges, costs and expenses, including but not limited to audit fees and expenses and reasonable attorneys’ fees and legal expenses, in connection with the Obligations and in the protection and exercise of any rights or remedies hereunder, together with interest thereon at the highest rate then applicable to any of the Obligations, shall be secured hereunder and shall be paid by the Debtor to the Secured Party on demand.

-4-

6. EVENTS OF DEFAULT . The occurrence of any of the following events shall constitute an “Event of Default”: (a) any breach or default in the payment or performance of any of the Obligations; or (b) any breach or default under the terms of this Agreement or any other note, obligation, mortgage, deed of trust, assignment, guaranty, other agreement, or other writing heretofore, herewith or hereafter existing to which the Debtor or any maker, endorser, guarantor or surety of any of the Obligations or any other person or entity providing security for any of the Obligations or for any guaranty of any of the Obligations is a party; or (c) the insolvency, dissolution, liquidation, merger or consolidation of the Debtor or any such maker, endorser, guarantor, surety or other person or entity; or (d) any appointment of a receiver, trustee or similar officer of any property of the Debtor or any such maker, endorser, guarantor, surety or other person or entity; or (e) any assignment for the benefit of creditors of the Debtor or any such maker, endorser, guarantor, surety or other person or entity; or (f) any commencement of any proceeding under any bankruptcy, insolvency, receivership, dissolution, liquidation or similar law by or against the Debtor or any such maker, endorser, guarantor, surety or other person or entity; or (g) the sale, lease or other disposition (whether in one or more transactions) to one or more persons or entities of all or a substantial part of the assets of the Debtor or any such maker, endorser, guarantor, surety or other person or entity; or (h) the Debtor or any such maker, endorser, guarantor, surety or other person or entity takes any action to go out of business, or to revoke or terminate any agreement, liability or security in favor of the Secured Party; or (i) the entry of any judgment or other order for the payment of money in the amount of $50,000.00 or more against the Debtor or any such maker, endorser, guarantor, surety or any other person or entity, and the continuance of such judgment, or order unsatisfied and in effect for any period of 60 consecutive days without a stay of execution; or j) the issuance or levy of any writ, warrant, attachment, garnishment, execution or other process against any property of the Debtor or any such maker, endorser, guarantor, surety or any other person or entity; or (k) the attachment of any tax lien to any property of the Debtor or any such maker, endorser, guarantor, surety or other person or entity; or (1) any statement, representation or warranty made by the Debtor or any such maker, endorser, guarantor, surety or other person or entity (or any representative of the Debtor or any such maker, endorser, guarantor, surety or other person or entity) to the Secured Party at any time shall be incorrect or misleading in any material respect when made; or (m) there is a material adverse change in the condition (financial or otherwise), business or property of the Debtor or any such maker, endorser, guarantor, surety or other person or entity; or (n) the Secured Party shall in good faith believe that the prospect for due and punctual payment or performance of any of the Obligations, this Agreement or any other note, obligation, mortgage, deed of trust, assignment, guaranty, or other agreement heretofore, herewith or hereafter given to or acquired by the Secured Party in connection with any of the Obligations is impaired.

-5-

7. REMEDIES. Upon the commencement of any proceeding under any bankruptcy law by or against the Debtor or any such maker, endorser, guarantor, surety or other person or entity, all Obligations automatically shall become immediately due and payable in full, without declaration, presentment, or other notice or demand, all of which are hereby waived by the Debtor. In addition, upon the occurrence of any Event of Default and at any time thereafter, the Secured Party may exercise any one or more of the following rights and remedies: (a) declare all Obligations to be immediately due and payable in full, and the same shall thereupon be immediately due and payable in full, without presentment or other notice or demand, all of which are hereby waived by the Debtor; (b) require the Debtor to assemble all or any part of the Collateral and make it available to the Secured Party at a place to be designated by the Secured Party which is reasonably convenient to both parties; (c) exercise and enforce any and all rights and remedies available upon default under this Agreement, the Minnesota Uniform Commercial Code, as amended from time to time (the “UCC”), and any other applicable agreements and laws. If notice to the Debtor of any intended disposition of Collateral or other action is required, such notice shall be deemed reasonably and properly given if mailed by regular or certified mail, postage prepaid, to the Debtor at the address stated at the beginning of this Agreement or at the most recent address shown in the Secured Party’s records, at least 10 days prior to the action described in such notice. The Debtor consents to the personal jurisdiction of the state and federal courts located in the State of Minnesota in connection with any controversy related to this Agreement, the Collateral, the Security Interest or any of the Obligations, waives any argument that venue in such forums is not convenient, and agrees that any litigation initiated by the Debtor against the Secured Party in connection with this Agreement, the Collateral, the Security Interest or any of the Obligations shall be venued in either the District Court of Hennepin County, Minnesota or the United States District Court, District of Minnesota, Fourth Division.

8. MISCELLANEOUS . All terms in this Agreement that are defined in the UCC shall have the meanings set forth in the UCC, and such meanings shall automatically change at the time that any amendment to the UCC, which changes such meanings, shall become effective. A carbon, photographic or other reproduction of this Agreement is sufficient as a financing statement. No provision of this Agreement can be waived, modified, amended, abridged, supplemented, terminated or discharged and the Security Interest cannot be released or terminated, except by a writing duly executed by the Secured Party. A waiver shall be effective only in the specific instance and for the specific purpose given. No delay or failure to act shall preclude the exercise or enforcement of any of the Secured Party’s rights or remedies. All rights and remedies of the Secured Party shall be cumulative and may be exercised singularly, concurrently or successively at the Secured Party’s option, and the exercise or enforcement of any one such right or remedy shall not be a condition to or bar the exercise or enforcement of any other. No notice or other communication by the Debtor to the Secured Party, which relates to any of the Obligations, the Security Interest or the Collateral, shall be effective until it is received by the Secured Party at the Secured Party’s address above. This Agreement shall bind and benefit the Debtor and the Secured Party and their respective heirs, representatives, successors and assigns and shall take effect when executed by the Debtor and delivered to the Secured Party, and the Debtor waives notice of the Secured Party’s acceptance hereof. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation, payment and performance of the Obligations. This Agreement and the rights and duties of the parties shall be governed by and construed in accordance with the internal laws of the State of Minnesota (excluding conflict of law rules).

-6-

9. AMENDED AND RESTATED SECURITY AGREEMENT. This Security Agreement amends and restates in its entirety that certain Security Agreement dated December 4, 2002, made by Debtor in favor of Excel Bank Minnesota, predecessor in interest to Lender.

THE DEBTOR REPRESENTS AND WARRANTS TO THE SECURED PARTY AND AGREES THAT THE DEBTOR HAS READ ALL OF THIS AGREEMENT AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS AGREEMENT.


		WSI INDUSTRIES, INC. , a Minnesota corporation

		By:

		Its:

-7-

EXHIBIT A

LEGAL DESCRIPTION
Lot 1, Block 1, Remmele Addition, Wright County, Minnesota

-8-

EXHIBIT 10.26

AMENDED AND RESTATED
SECURITY AGREEMENT

Date: February 1, 2011

DEBTOR: Taurus Numeric Tool, Inc., a Minnesota corporation
Address: 213 Chelsea Road, Monticello, MN 55362
State Charter No .: 5U-184

SECURED PARTY: M&I Marshall & Ilsley Bank
Address: 11455 Viking Drive, Eden Prairie, MN 55344

1. OBLIGATIONS SECURED . This Agreement secures the following (called the “Obligations”):

All other assets of the Debtor, not described above; and

3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS . The Debtor represents and warrants to the Secured Party and agrees as follows:

b. If any Collateral is or will become a fixture, the record owner of the real estate is WSI Industries, Inc. and the legal description of the real estate is set forth on the attached Exhibit A.

c. Except as set forth in any existing or future agreement executed by the Secured Party: the Debtor is the owner of the Collateral, or will be the owner of the Collateral hereafter acquired, free of all security interests, liens and encumbrances other than the Security Interest and any other security interest of the Secured Party; and except for that certain security interest in favor of Rodney G. Winter, which has been subordinated to the Security Interest in favor of Secured Party, the Debtor shall not permit any security interest, lien or encumbrance, other than the Security Interest and any other security interest of the Secured Party, to attach to any Collateral without the prior written consent of the Secured Party; the Debtor shall defend the Collateral against the claims and demands of all persons and entities other than the Secured Party, and shall promptly pay all taxes, assessments and other government charges upon or against the Debtor, any Collateral and the Security Interest; and no financing statement covering any Collateral is on file in any public office. If any Collateral is or will become a fixture the Debtor, at the request of the Secured Party, shall furnish the Secured Party with a statement or statements executed by all persons and entities who have or claim an interest in the real estate, in a form acceptable to the Secured Party, which statement or statements shall provide that such persons and entities consent to the Security Interest.

-2-

-3-

-4-

-5-

-6-

THE DEBTOR REPRESENTS AND WARRANTS TO THE SECURED PARTY AND AGREES THAT THE DEBTOR HAS READ ALL OF THIS AGREEMENT AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS AGREEMENT.


		TAURUS NUMERIC TOOL, INC. , a Minnesota corporation

		By:

		Its:

-7-

EXHIBIT A

LEGAL DESCRIPTION
Lot 1, Block 1, Remmele Addition, Wright County, Minnesota

-8-

EXHIBIT 10.27

AMENDED AND RESTATED
SECURITY AGREEMENT

Date: February 1, 2011

DEBTOR: WSI Rochester, Inc., a Minnesota corporation
Address: 213 Chelsea Road, Monticello, MN 55362
State Charter No .: 3S-626

SECURED PARTY: M&I Marshall & Ilsley Bank
Address: 11455 Viking Drive, Eden Prairie, MN 55344

1. OBLIGATIONS SECURED . This Agreement secures the following (called the “Obligations”):

All other assets of the Debtor, not described above; and

3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS . The Debtor represents and warrants to the Secured Party and agrees as follows:

b. If any Collateral is or will become a fixture, the record owner of the real estate is WSI Industries, Inc. and the legal description of the real estate is set forth on the attached Exhibit A.

c. Except as set forth in any existing or future agreement executed by the Secured Party: the Debtor is the owner of the Collateral, or will be the owner of the Collateral hereafter acquired, free of all security interests, liens and encumbrances other than the Security Interest and any other security interest of the Secured Party; and except for that certain security interest in favor of Rodney G. Winter, which has been subordinated to the Security Interest in favor of Secured Party, the Debtor shall not permit any security interest, lien or encumbrance, other than the Security Interest and any other security interest of the Secured Party, to attach to any Collateral without the prior written consent of the Secured Party; the Debtor shall defend the Collateral against the claims and demands of all persons and entities other than the Secured Party, and shall promptly pay all taxes, assessments and other government charges upon or against the Debtor, any Collateral and the Security Interest; and no financing statement covering any Collateral is on file in any public office. If any Collateral is or will become a fixture the Debtor, at the request of the Secured Party, shall furnish the Secured Party with a statement or statements executed by all persons and entities who have or claim an interest in the real estate, in a form acceptable to the Secured Party, which statement or statements shall provide that such persons and entities consent to the Security Interest.

-2-

-3-

-4-

-5-

-6-

THE DEBTOR REPRESENTS AND WARRANTS TO THE SECURED PARTY AND AGREES THAT THE DEBTOR HAS READ ALL OF THIS AGREEMENT AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS AGREEMENT.


		WSI ROCHESTER, INC. , a Minnesota corporation

		By:

		Its:

-7-

EXHIBIT A

LEGAL DESCRIPTION
Lot 1, Block 1, Remmele Addition, Wright County, Minnesota

-8-

EXHIBIT 10.28

Loan Number:

GUARANTY

THIS GUARANTY (this “Guaranty”), is made as of the 1st day of February, 2011, by WSI Rochester, Inc., a Minnesota corporation, having an address of 213 Chelsea Road, Monticello, MN 55362 (hereinafter called the “Guarantor”) for the benefit of M&I Marshall & Ilsley Bank, a Wisconsin banking corporation (hereinafter called the “Lender”).

W I T N E S S E T H:

WHEREAS, WSI Industries, Inc., a Minnesota corporation (the “Borrower”), desires to obtain a loan (the “Loan”) from Lender in the aggregate principal amount of One Million and no/100 Dollars ($1,000,000.00), pursuant to the terms and conditions of that certain Amended and Restated Loan Agreement (the “Loan Agreement”) entered into by and between Borrower and Lender as of the date hereof and which Loan shall be evidenced by a $1,000,000.00 Amended and Restated Revolving Credit Promissory Note (the “Note”) dated as of the date hereof;

WHEREAS, Guarantor is a related entity to Borrower, is interested in the affairs of Borrower, and has determined it is in the interest of the undersigned that Lender make the Loan to Borrower;

WHEREAS, Lender has required as a condition of making such Loan that Guarantor executes this Guaranty as further security for payment of the Indebtedness (as hereinafter defined) and all of Borrower’s obligations under the Loan Agreement and Note, in manner and form as herein provided, and Guarantor, by reason of its relationship to Borrower and in order to induce Lender to make the Loan, has agreed to execute this Guaranty;

WHEREAS, all documents executed in conjunction with the Note and Loan Agreement, as from time to time renewed, modified or extended, are hereinafter referred to as the “Loan Documents”; and

WHEREAS, Guarantor will directly benefit from the extension of credit from Lender to Borrower.

NOW, THEREFORE, in consideration of the extension of credit by Lender to Borrower, the mutual promises contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Guarantor agrees as follows:

1. Guaranty of Payment . For good and valuable consideration, Guarantor absolutely and unconditionally guarantees, jointly and severally with any and all other guarantors now or hereafter guarantying the Note, full and punctual payment and satisfaction of the Indebtedness of Borrower to Lender, and the performance and discharge of all Borrower’s obligations under the Note and the Loan Documents. This is a guaranty of payment and performance and not of collection. Lender may enforce this Guaranty against Guarantor even when Lender has not commenced or exhausted Lender’s remedies against Borrower or any other party obligated to pay the Indebtedness or against any collateral securing the Indebtedness, this Guaranty or any other guaranty of the Indebtedness. Guarantor will make any payments to Lender or its order, on demand, in legal tender of the United States of America, in same-day funds, without set-off or deduction or counterclaim, and will otherwise perform Borrower’s obligations under the Note and the Loan Documents. Under this Guaranty, Guarantor’s liability is unlimited and Guarantor’s obligations are continuing.

If Lender presently holds one or more guaranties, or hereafter receives additional guaranties from Guarantor, Lender’s rights under all guaranties shall be cumulative. This Guaranty shall not (unless specifically provided below to the contrary) affect or invalidate any such other guaranties. Guarantor’s liability will be Guarantor’s aggregate liability under the terms of this Guaranty and any such other unterminated guaranties.

2. Definition of Indebtedness . The word “Indebtedness” as used in this Guaranty shall mean all of the principal amount outstanding from time to time and at any one or more times, accrued unpaid interest thereon, and all collection costs and legal expenses related thereto permitted by law, and attorneys’ fees arising from any and all debts, liabilities and obligations of every nature or form, now existing or hereafter arising or acquired, that Borrower individually or collectively or interchangeably with others, owes or will owe Lender. “Indebtedness” includes, without limitation, loans, advances (including, but not limited to, protective advances made by Lender), debts, overdraft indebtedness, credit card indebtedness, lease obligations, liabilities and obligations under any interest rate protection agreements or foreign currency exchange agreements or commodity price protection agreements, other obligations and liabilities of Borrower, or any one or more of them, and any present or future judgments against Borrower, or any one or more of them, future advances, loans or transactions that renew, extend, modify, refinance, consolidate or substitute these debts, liabilities and obligations whether: voluntarily or involuntarily incurred; due or to become due by their terms or acceleration; absolute or contingent; liquidated or unliquidated; determined or undetermined; direct or indirect; primary or secondary in nature or arising from a guaranty or surety; secured or unsecured; joint or several or joint and several; evidenced by a negotiable or non-negotiable instrument or writing; originated by Lender or another or others; barred or unenforceable against Borrower for any reason whatsoever; for any transactions that may be voidable for any reason (such as infancy, insanity, ultra vires or otherwise); and originated then reduced or extinguished and then afterwards increased or reinstated. The definition of “Indebtedness” shall also include the amount of any payments made to Lender on behalf of Borrower (including payments resulting from liquidation of collateral) which are recovered from Lender by a trustee, receiver, creditor or other party pursuant to applicable Federal or state law (the “Surrendered Payments”). In the event that Lender makes any Surrendered Payments (including pursuant to a negotiated settlement), the Surrendered Payments shall immediately be reinstated as Indebtedness, regardless of whether Lender has surrendered or cancelled this Guaranty prior to returning the Surrendered Payments.

3. Continuing Guaranty . THIS IS A “CONTINUING GUARANTY” UNDER WHICH GUARANTOR AGREES TO GUARANTEE THE FULL AND PUNCTUAL PAYMENT, PERFORMANCE AND SATISFACTION OF THE INDEBTEDNESS OF BORROWER TO LENDER, NOW EXISTING OR HEREAFTER ARISING OR ACQUIRED, ON AN OPEN AND CONTINUING BASIS. ACCORDINGLY, ANY PAYMENTS MADE ON THE INDEBTEDNESS WILL NOT DISCHARGE OR DIMINISH GUARANTOR’S OBLIGATIONS AND LIABILITY UNDER THIS GUARANTY FOR ANY REMAINING AND SUCCEEDING INDEBTEDNESS EVEN WHEN ALL OR PART OF THE OUTSTANDING INDEBTEDNESS MAY BE A ZERO BALANCE FROM TIME TO TIME.

Guarantor agrees that the obligations of Guarantor hereunder shall be primary obligations, shall not be subject to any counterclaim, set-off, abatement, deferment or defense based upon any claim that Guarantor may have against Lender, Borrower, any other guarantor of the Indebtedness or any other person or entity, and shall remain in full force and effect without regard to, and shall not be released, discharged or affected in any way by, any circumstance or condition (whether or not Guarantor shall have any knowledge thereof), including without limitation:

(a) any lack of validity or enforceability of the Indebtedness or any of the Loan Documents;

(b) any termination, amendment, modification or other change in the Indebtedness or any of the Loan Documents, including, without limitation, any modification of the interest rate(s) described therein;

(c) any furnishing, exchange, substitution or release of any collateral securing repayment of the Loan, or any failure to perfect any lien in such collateral;

(d) any failure, omission or delay on the part of Borrower, Guarantor, any other guarantor of the Indebtedness or Lender to conform or comply with any term of any of the Loan Documents or any failure of Lender to give notice of any Event of Default (as defined in the Loan Documents);

(e) any waiver, compromise, release, settlement or extension of time of payment or performance or observance of any of the obligations or agreements contained in any of the Loan Documents;

(f) any action or inaction by Lender under or in respect of any of the Loan Documents, any failure, lack of diligence, omission or delay on the part of Lender to enforce, assert or exercise any right, power or remedy conferred on it in any of the Loan Documents, or any other action or inaction on the part of Lender;

(g) any voluntary or involuntary bankruptcy, insolvency, reorganization, arrangement, readjustment, assignment for the benefit of creditors, composition, receivership, liquidation, marshalling of assets and liabilities or similar events or proceedings with respect to Borrower, Guarantor or any other guarantor of the Indebtedness, as applicable, or any of their respective property or creditors, or any action taken by any trustee or receiver or by any court in any such proceeding;

(h) any merger or consolidation of Borrower into or with any entity, or any sale, lease or transfer of any of the assets of Borrower, Guarantor or any other guarantor of the Indebtedness to any other person or entity;

(i) any change in the ownership of Borrower or any change in the relationship between Borrower, Guarantor or any other guarantor of the Indebtedness, or any termination of any such relationship;

(j) any release or discharge by operation of law of Borrower or any other guarantor of the Indebtedness from any obligation or agreement contained in any of the Loan Documents;

(k) any other occurrence, circumstance, happening or event, whether similar or dissimilar to the foregoing and whether foreseen or unforeseen, which otherwise might constitute a legal or equitable defense or discharge of the liabilities of a guarantor or surety or which otherwise might limit recourse against Borrower or Guarantor; or

(l) any invalidity, irregularity or unenforceability in whole or in part (including with respect to any netting provision) of any interest rate swap, basis swap, forward rate, interest rate option, collar or corridor agreement or transaction or any similar transaction between Borrower and Lender or any confirmation, instrument or agreement required thereunder or related thereto, or any transaction entered into thereunder, or any limitation on the liability of Borrower thereunder or any limitation on the method or terms of payment thereunder which may now or hereafter be caused or imposed in any manner whatsoever.

4. Duration of Guaranty . This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all the Indebtedness incurred shall have been fully and finally paid and satisfied and all of Guarantor’s other obligations under this Guaranty shall have been performed in full. Release of any other guarantor or termination of any other guaranty of the Indebtedness shall not affect the liability of Guarantor under this Guaranty. It is anticipated that fluctuations may occur in the aggregate amount of the Indebtedness covered by this Guaranty, and Guarantor specifically acknowledges and agrees that reductions in the amount of the Indebtedness, even to zero dollars ($0.00), shall not constitute a termination of this Guaranty. This Guaranty is binding upon Guarantor and Guarantor’s heirs, successors and assigns so long as any of the Indebtedness remains unpaid and even though the Indebtedness may from time to time be zero dollars ($0.00).

5. Binding Nature; Successors and Assigns . Guarantor agrees that this Guaranty shall be a continuing guaranty and shall inure to the benefit of and may be enforced by Lender and any subsequent holder of the Note and/or successor in interest under the Loan Agreement and Loan Documents (Guarantor hereby consenting to any transfer of the Note, Loan Agreement, and/or Loan Documents without notice). This Guaranty shall be binding upon and inure to the benefit of the parties, their successors and assigns. This Guaranty shall bind Guarantor’s estate as to the Indebtedness created both before and after Guarantor’s death or incapacity, regardless of Lender’s actual notice of Guarantor’s death.

6. Representations and Warranties . Guarantor represents and warrants to Lender that: (a) no representations or agreements of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty; (b) the making of the Loan by Lender to Borrower confers a real and substantial benefit to Guarantor and is fully supportive of and provides valuable consideration for the execution of this Guaranty; (c) Guarantor is interested in the affairs of Borrower and is thoroughly familiar with the business affairs, books, records, financial condition and operations of Borrower; (d) Guarantor has full power, right and authority to enter into this Guaranty, and this Guaranty has been duly executed and delivered by Guarantor and constitutes the legally enforceable obligation of Guarantor in accordance with its terms; (e) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument binding upon Guarantor and do not result in a violation of any law, regulation, court decree or order applicable to Guarantor; (f) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor’s assets, or any interest therein; (g) upon Lender’s request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial information which currently has been, and all future financial information which will be provided to Lender is and will be true and correct in all material respects and fairly present Guarantor’s financial condition as of the dates the financial information is provided; (h) no material adverse change has occurred in Guarantor’s financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor’s financial condition; (i) Guarantor has not filed any petition nor has any petition been filed against Guarantor in bankruptcy or insolvency or reorganization or for the appointment of a receiver or trustee or for the arrangement of debts, nor has Guarantor been the subject of such action, nor has such action been threatened by or against Guarantor, and Guarantor is not insolvent nor will Guarantor be rendered insolvent by the consummation of the Loan and execution of this Guaranty; (j) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Guarantor is pending or threatened; (k) Lender has made no representation to

Guarantor as to the creditworthiness of Borrower; (l) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower’s financial condition; and (m) that if any interest rate swap, basis swap, forward rate, interest rate option, collar or corridor agreement or transaction or any similar transaction between Borrower and Lender shall at any time be in effect, (x) Guarantor has received and examined copies of each document relating to such transaction, the observance and performance of which by Borrower is hereby guaranteed; (y) Guarantor will benefit from Lender entering into each such agreement and any transactions thereunder with Borrower, and Guarantor has determined that the execution and delivery by Guarantor of this Guaranty are necessary and convenient to the conduct, promotion and attainment of the business of Guarantor; and (z) Lender has no duty to determine whether any such agreement or transaction will be or has been entered into by Borrower for purposes of hedging interest rate, currency exchange rate, or other risks arising in its businesses or affairs and not for purposes of speculation, or is otherwise inappropriate for Borrower. Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Guarantor’s risks under this Guaranty, and Guarantor further agrees that, absent a request for information, Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower or to monitor the performance of Borrower under the Loan Documents. It is the intention of the parties that Lender may rely completely on this Guaranty for its repayment of the Indebtedness whether or not Borrower is creditworthy and whether or not it would be prudent to make loans or advances to Borrower or to permit the same to remain outstanding.

7. Guarantor’s Authorizations . Guarantor authorizes Lender, without notice or demand and without lessening Guarantor’s liability under this Guaranty, from time to time: (a) to make one or more additional secured or unsecured loans to Borrower, to lease equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower; (b) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the Indebtedness or any part of the Indebtedness, including increases and decreases of the rate of interest on the Indebtedness; extensions may be repeated and may be for longer than the original loan term; (c) to take and hold security for the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any such security, with or without the substitution of new collateral; (d) to release, substitute, agree not to sue, or deal with any one or more of Borrower’s sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (e) to determine how, when and what application of payments and credits shall be made on the Indebtedness; (f) to apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or mortgage, as Lender in its discretion may determine; (g) to sell, transfer, assign or grant participations in all or any part of the Indebtedness; and (h) to assign or transfer this Guaranty in whole or in part.

8. Waivers by Guarantor . Except as prohibited by applicable law, Guarantor waives any right to require Lender: (a) to continue lending money or to extend other credit to Borrower; (b) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the Indebtedness or of any nonpayment related to any collateral, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Indebtedness or in connection with the creation of new or additional loans or obligations; (c) to resort for payment or to proceed directly or at once against any person, including Borrower or any other guarantor; (d) to proceed directly against or exhaust any collateral held by Lender from Borrower, any other guarantor, or any other person; (e) to give notice of the terms, time, and place of any public or private sale of personal property security held by Lender from Borrower or to comply with any other applicable provisions of the Uniform Commercial Code; (f) to pursue any other remedy within Lender’s power; or (g) to commit any act or omission of any kind, or at any time, with respect to any matter whatsoever.

Guarantor also waives any relief available under valuation and appraisement laws and any and all rights or defenses based on suretyship or impairment of collateral including, but not limited to, any rights or defenses arising by reason of: (i) any “one action” or “anti-deficiency” law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor, before or after Lender’s commencement or completion of any foreclosure action, either judicially or if permitted by applicable law by exercise of a power of sale; (ii) any election of remedies by Lender which destroys or otherwise adversely affects Guarantor’s subrogation rights or Guarantor’s rights to proceed against Borrower for reimbursement, including without limitation, any loss of rights Guarantor may suffer by reason of any law limiting, qualifying, or discharging the Indebtedness; (iii) any disability or other defense of Borrower, of any other guarantor, or of any other person, or by reason of the cessation of Borrower’s liability from any cause whatsoever, other than payment in full in legal tender, of the Indebtedness; (iv) any right to claim discharge of the Indebtedness on the basis of unjustified impairment of any collateral for the Indebtedness; (v) any statute of limitations, if at any time any action or suit brought by Lender against Guarantor is commenced, there is outstanding Indebtedness which is not barred by any applicable statute of limitations; or (vi) any defenses given to guarantors at law or in equity other than actual payment and performance of the Indebtedness. Without limiting the provisions of the last two (2) sentences of Section 2 above, if payment is made by Borrower, whether voluntarily or otherwise, or by any third party, on the Indebtedness and thereafter Lender is forced to remit the amount of that payment to Borrower’s trustee in bankruptcy or to any similar person under any federal or state bankruptcy law or law for the relief of debtors, the Indebtedness shall be considered unpaid for the purpose of the enforcement of this Guaranty.

Guarantor further waives and agrees not to assert or claim at any time any deductions to the amount guaranteed under this Guaranty for any claim of setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right may be asserted by the Borrower, the Guarantor, or both.

Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor’s full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective only to the extent permitted by law or public policy.

9. Acknowledgments of Guarantor . Guarantor acknowledges and agrees that Lender has not made any representations or warranties with respect to, does not assume any responsibility to Guarantor for, and has no duty to provide information to Guarantor regarding, the collectability or enforceability of the Indebtedness or the financial condition of Borrower or any Guarantor. Guarantor has independently determined the collectability and enforceability of the Indebtedness and, until the Indebtedness is paid in full, will independently and without reliance on Lender continue to make such determinations. Guarantor agrees that Guarantor has read and fully understands the terms of this Guaranty, Guarantor has had the opportunity to be advised by Guarantor’s attorney with respect to this Guaranty, and the Guaranty fully reflects Guarantor’s intentions and parol evidence is not required to interpret the terms of this Guaranty. Guarantor hereby indemnifies and holds Lender harmless for, from and against all losses, claims, damages, and costs (including Lender’s attorneys’ fees) suffered or incurred by Lender as a result of any breach by Guarantor of the warranties, representations and agreements of this Section.

10. Subordination of Debts to Guarantor . Guarantor agrees that the Indebtedness, whether now existing or hereafter created, shall be superior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the Indebtedness. Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower; provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness. If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor, from time to time to file financing statements and continuation statements and to execute documents and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this Guaranty.

Notwithstanding any payment or performance by Guarantor pursuant to this Guaranty, Guarantor shall not be entitled to be subrogated to any rights of Lender against Borrower or any other guarantor of the Indebtedness prior to the time at which the Indebtedness is repaid in full and all periods under applicable bankruptcy law for the contest of any payment by Guarantor or Borrower as a preferential or fraudulent payment have expired, and Guarantor knowingly and with the advise of counsel waives and releases all rights and claims to indemnification, reimbursement and contribution Guarantor now has or at any time hereafter may have against Borrower or Borrower’s estate prior to the time at which the Indebtedness is repaid in full and all periods under applicable bankruptcy law for the contest of any payment by Guarantor or Borrower as a preferential or fraudulent payment have expired, including, without limitation, any rights which may allow Borrower, Borrower’s successors, a creditor of Borrower, or a trustee in bankruptcy of the Borrower to claim in bankruptcy or any other similar proceedings that any payment made by Borrower or Borrower’s successors and assigns to Lender was on behalf of or for the benefit of Guarantor and that such payment is recoverable by Borrower, a creditor or trustee in bankruptcy of Borrower as a preferential payment, fraudulent conveyance, payment of an insider or any other classification of payment which may otherwise be recoverable from Lender.

11. Setoff . To the extent permitted by applicable law, Lender reserves a right of setoff in all Guarantor’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Guarantor holds jointly with someone else and all accounts Guarantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Guarantor authorizes Lender, to the extent permitted by applicable law, to hold these funds if there is a default, and Lender may apply the funds in these accounts to pay what Guarantor owes under the terms of this Guaranty.

12. Applicable Law . This Guaranty will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Minnesota without regard to its conflicts of law provisions.

13. CHOICE OF VENUE . GUARANTOR HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS INITIATED BY GUARANTOR AND ARISING DIRECTLY OR INDIRECTLY OUT OF THIS GUARANTY OR THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED IN THE DISTRICT COURT OF HENNEPIN COUNTY, MINNESOTA, OR AT LENDER’S DISCRETION IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA. GUARANTOR HEREBY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED BY LENDER IN SUCH COURT. GUARANTOR WAIVES ANY CLAIM THAT HENNEPIN COUNTY, MINNESOTA, OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF VENUE. THE EXCLUSIVE CHOICE OF FORUM FOR GUARANTOR SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT, BY LENDER, OF ANY JUDGMENT OBTAINED IN ANY OTHER FORUM OR THE TAKING, BY LENDER, OF ANY ACTION TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE JURISDICTION, AND GUARANTOR HEREBY WAIVES THE RIGHT, IF ANY, TO COLLATERALLY ATTACK ANY SUCH JUDGMENT OR ACTION.

14. WAIVER OF RIGHT TO JURY TRIAL . LENDER AND GUARANTOR HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR GUARANTOR AGAINST THE OTHER.

15. Fees Relating to Enforcement . Guarantor agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Guaranty. Lender may hire or pay someone else to help enforce this Guaranty, and Guarantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender’s attorneys’ fees and legal expenses whether or not there is a lawsuit, including attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Guarantor also shall pay all court costs and such additional fees as may be directed by the court.

16. Annual Financial Information . Guarantor agrees to furnish Lender Guarantor’s financial statements included as a part of the consolidated financial statement of the Borrower.

17. Remedy for Failure to Deliver Financial Statements . Upon any failure of Guarantor to deliver Guarantor’s periodic financial statements as required pursuant to Section 16 above, Lender shall have the option of imposing an administrative fee of Five Hundred Dollars ($500.00) for each such failure and for each entity for which such financial statements were required to be delivered. Lender shall notify Guarantor of Guarantor’s failure to deliver such financial statements and, if Guarantor does not cure such failure within thirty (30) days after receipt of such notice from Lender, Lender shall have the right to impose such fee by delivering written notice thereof to Guarantor. Within ten (10) days after receipt of such written notice, Guarantor shall pay the fee to Lender. Lender’s receipt of such fee in any instance shall not relieve Guarantor from its obligation to deliver the required financial statements, whether for the then-current period or any future period. A waiver by Lender of its right to impose such fee shall not constitute a waiver of Lender’s right to impose such fee upon any future failure of Guarantor to deliver the required financial statements.

18. No Waiver by Lender . Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender’s rights or of any of Guarantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

IN WITNESS WHEREOF, the undersigned Guarantor has executed and delivered this Guaranty to take effect as of the date first above written.


	GUARANTOR: WSI Rochester, Inc.
	By:
		Name:
		Title:


STATE OF MINNESOTA	)
	) SS
COUNTY OF	)

On this _____ day of March, 2011, before me appeared , to me personally known, who, being by me duly sworn, did say that he/she is the of WSI Rochester, Inc., a Minnesota corporation, and that said instrument was signed on behalf of said company by its authority, and said person acknowledged said instrument to be the free act and deed of said company.

In Testimony Whereof, I have hereunto set my hand and affixed my official seal the day and year first above written.



		Name:

		Notary Public, State of

		My Commission Expires:

EXHIBIT 10.29

Loan Number:

GUARANTY

THIS GUARANTY (this “Guaranty”), is made as of the 1st day of February, 2011, by Taurus Numeric Tool, Inc., a Minnesota corporation, having an address of 213 Chelsea Road, Monticello, MN 55362 (hereinafter called the “Guarantor”) for the benefit of M&I Marshall & Ilsley Bank, a Wisconsin banking corporation (hereinafter called the “Lender”).