<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   Form 10-K

          [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                    For the fiscal year ended August 29, 1999

                                       OR

          [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
               THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
           For the transition period ended from           to
                                                ---------    ---------
                            Commission File No. 0-619

                              WSI INDUSTRIES, INC.
             (Exact name of Registrant as specified in its charter)

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

          2605 West Wayzata Boulevard
            Long Lake, Minnesota                               55356
    ---------------------------------------                  ----------
    (Address of principal executing offices)                 (Zip Code)

Registrant's telephone number, including area code           (612) 473-1271
                                                   -----------------------------

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

                     Common stock (par value $.10 per share)
                     ---------------------------------------
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]

The aggregate market value of the common shares held by non-affiliates of the
Registrant on November 8, 1999 (based upon the closing sale price of those
shares on the NASDAQ National Market System) was approximately $8,605,000.

Number of shares outstanding of the Registrant's common stock, par value $.10
per share, as of November 8, 1999 is 2,458,425.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the annual meeting of shareholders to be
held on January 6, 2000 are incorporated by reference into Part III.

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

This form 10-K Report consists of 43 pages (including exhibits); the index to
the exhibits is set forth on page 15.


<PAGE>   2


                              WSI INDUSTRIES, INC.

                           ANNUAL REPORT ON FORM 10-K

                           YEAR ENDED AUGUST 29, 1999

                         INFORMATION REQUIRED IN REPORT

                                     PART I

Item 1.   Business:

               (a)  General development of business:

                    The Company was incorporated in Minnesota in 1950 for the
                    purpose of performing precision contract machining for the
                    aerospace, communication, and industrial markets. Several
                    years later, the Company focused on providing precision
                    machining services for the computer peripheral market. That
                    segment of business has since declined as a major portion of
                    Company revenues as machining work for agricultural related
                    markets, the aerospace industry and construction markets
                    have been and are expected to be of greater importance to
                    the Company in the future.

                    On February 15, 1999, the Company purchased Taurus Numeric
                    Tool, Inc. ("Taurus") for approximately $7.2 million, with
                    $5.5 million being paid in cash and bank debt and an
                    additional $1.7 million being in the form of a Subordinated
                    Promissory Note to the prior owner. Taurus is a precision
                    contract machining company that sells primarily to the
                    aerospace and avionics markets. In calendar year 1998 prior
                    to the acquisition, Taurus had approximately $7.6 million in
                    sales.

                    On August 6, 1999, the Company purchased Bowman Tool &
                    Machining, Inc. ("Bowman") for approximately $7.6 million,
                    with $6.8 million being paid by additional debt and $844,000
                    being paid in the form of a Subordinated Promissory Note to
                    the prior owner of Bowman. Bowman is a precision contract
                    machining company serving the construction industry. In the
                    year ended July 31, 1999 prior to the acquisition, Bowman
                    had approximately $8.5 million in sales.

                    The acquisitions were completed as a result of the Company's
                    publicly stated objective of diversifying the markets that
                    its serves.

                    After its fiscal year end, the Company announced that it was
                    consolidating all of its manufacturing operations into its
                    facilities at Taurus and Bowman. The consolidation would
                    result in the Company closing its Long Lake, Minnesota
                    facility. The initiative will place the Company in closer
                    proximity to its major customers as well as reduce its
                    overhead structure and optimize plant capacity.

                    Contract manufacturing constitutes the Company's business.

                                       2
<PAGE>   3



               (b)  Financial information about industry segments:

                    As noted above, the Company's business is now conducted in a
                    single industry segment--contract manufacturing.

               (c)  Narrative description of the business:


                    (1)(i)    The principal products and services of the
                              Company are set forth below.

                    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
                    generally purchased by the Company, but occasionally
                    supplied by the customer. The major markets served by the
                    Company have changed in the past several years because of
                    declining requirements in several mature computer programs
                    and the Company's effort to diversify its customer and
                    market base. Company sales to the computer industry amounted
                    to 5%, 7% and 6% of total sales in fiscal 1997, 1998 and
                    1999, respectively. Sales to the agricultural industry were
                    73%, 76% and 53% of total Company sales in fiscal years
                    1997, 1998 and 1999, respectively. Sales to the recreational
                    vehicle and aerospace/avionics markets totaled 13% and 12%
                    respectively in fiscal 1999. The Company expects that in
                    fiscal 2000 a much smaller portion of its sales will be to
                    the agricultural industry due to its recent acquisitions and
                    continued diversification efforts to broaden its customer
                    and industry base.

                    The Company has a reputation as a dependable supplier, one
                    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.

                                    * * * * *

                    (ii)  The Company's machining business is continually
                          developing or modifying processes, but no new single
                          process in development is expected to require the
                          investment of a material amount of the assets of the
                          Company.

                    (iii) Purchased materials for the Company are generally
                          available in adequate supply.

                    (iv)  Patents and trademarks are not deemed significant to
                          the Company.

                    (v)   Seasonal patterns in the Company's business are
                          reflections of its customers seasonal patterns since
                          the Company's business is that of a provider of
                          manufacturing services.

                    (vi)  The Company does not believe that its business demands
                          unusual working capital requirements.


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<PAGE>   4

                    (vii)  Sales in excess of 10 percent of fiscal 1999
                           consolidated revenues were made to Deere & Co. in the
                           amount of $11,748,000 or 55% of Company revenues.
                           Sales were also made to Polaris Industries and
                           Rockwell in the amount of $2,884,000 and $2,682,000
                           or 13% and 12% of Company sales, respectively.

                    (viii) Approximate dollar backlog at August 29, 1999, August
                           30, 1998, and August 31, 1997 was $16,032,000,
                           $8,831,000, and $6,395,000, respectively. Backlog is
                           not deemed to be any more significant for the Company
                           than for other companies engaged in similar
                           businesses. The above backlog amounts are believed to
                           be firm, and no appreciable amount of the backlog as
                           of August 29, 1999 is scheduled for delivery later
                           than during the current fiscal year.

                    (ix)   No material portion of the contract business is
                           subject to renegotiation of profits or termination of
                           contracts or subcontracts at the election of the
                           government.

                    (x)    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.

                    (xi)   No material amount has been spent on
                           company-sponsored research and development
                           activities.

                    (xii)  No material capital expenditures for environmental
                           control were made or are anticipated in the
                           foreseeable future.

                    (xiii) At August 29, 1999, the Registrant had 153 employees,
                           65 of whom were subject to a union contract.

               (d)  Financial information about foreign and domestic operations
                    and export sales:

                    The Company has no operations in any foreign country. The
                    Company's export sales in fiscal 1999, 1998, and 1997 were
                    not significant. See Note 8 to the Consolidated Financial
                    Statements.

Item 2.   Properties:

               The Company's executive offices and a production facility are
               located in Long Lake, Minnesota (a western suburb of
               Minneapolis). The one-story, concrete block building is owned by
               the Company, contains approximately 182,500 square feet of floor
               space, and is located on approximately 25 acres of property owned
               by the Company.

               The Company leases two other production facilities that are
               located in Osseo, Minnesota and Rochester, Minnesota. The
               Rochester facility is approximately 38,000 square feet and is
               leased for one year with options to renew. The Osseo facility is
               approximately 28,000 square feet and is leased for three years
               with options to renew.



                                       4
<PAGE>   5



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

               As stated in Item 1(a), the Company intends on closing its Long
               Lake, Minnesota building which will result in the anticipated
               sale of the property.

Item 3.   Legal Proceedings:

               Registrant is not a party to any material legal proceedings,
               other than ordinary routine litigation incidental to its
               business.

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

               None.

Item 4A.  Executive Officers of Registrant:

               The following table sets forth certain other information
               regarding Registrant's executive officers:
<TABLE>
<CAPTION>
                     Name              Age                 Position
                     ----              ---                 --------
<S>                                    <C>   <C>
               George J. Martin        62    Chairman of the Board
               Michael J. Pudil        51    President, Chief Executive Officer, and Director
               Paul D. Sheely          40    Vice President, Treasurer, and Assistant Secretary
               Gerald E. Magnuson      69    Secretary and Director

</TABLE>
               Mr. Martin was engaged as Chairman of the Board on July 28, 1993
               and previously served as the Company's Chief Executive Officer
               from December 1983 to January 1985 and on an interim basis from
               July 1993 to November 1993. Mr. Martin was the President, Chief
               Executive Officer and Chairman of PowCon, Incorporated, a
               manufacturer of electronic welding systems, from 1987 to October
               1995. Mr. Martin now serves as an independent consultant.

               Mr. Pudil was elected President, Chief Executive Officer, and a
               Director of the Company on November 4, 1993. During the prior
               nine years, Mr. Pudil served as General Manager and Vice
               President and General Manager of the Production Division for
               Remmele Engineering, Inc. Remmele Engineering is a contract
               manufacturer primarily involved in machining metal.

               Mr. Sheely joined the Company in September 1998 as Vice President
               of Finance. From 1996 to 1998 he served as Chief Financial
               Officer of Graseby Medical, Inc., a medical device manufacturer
               of volumetric infusion pumps.

               Mr. Magnuson has served as Secretary of the Company since 1961
               and as a Director since 1962. He is a retired partner of the law
               firm of Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota.








                                       5


<PAGE>   6


                                     PART II


Item 5.   Market for the Registrant's Common Stock and Related Stockholder
          Matters:

               (a)  The common stock of the Company is traded on the
               and  NASDAQ National Market System under the symbol WSCI.
               (c)

                    Common stock information:

<TABLE>
<CAPTION>
                                                     Stock Price
                                              -------------------------
                                              High                  Low
<S>                                          <C>                  <C>
                    FISCAL 1999:
                       First quarter         $6-11/16             $5-1/2
                       Second quarter         6                    4-13/16
                       Third quarter          5-3/16               2-3/4
                       Fourth quarter         4-5/8                2-7/8

                    FISCAL 1998:
                       First quarter         $6-1/2               $5-1/2
                       Second quarter         6                    4-9/16
                       Third quarter          7-3/4                5-1/8
                       Fourth quarter         8                    6-3/8
</TABLE>




                    The Company's credit agreement restricts payment of
                    dividends. The Company has not paid any cash dividends since
                    fiscal 1992 and does not anticipate payment of cash
                    dividends in the foreseeable future.

               (b)  As of November 8, 1999 there were 615 shareholders of
                    record of the Company's Common Stock.














                                       6
<PAGE>   7


Item 6.   Selected Financial Data:

FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for per share information
and financial ratios)

<TABLE>
<CAPTION>
                                                   1999         1998         1997         1996         1995
                                                   ----         ----         ----         ----         ----
<S>                                              <C>          <C>          <C>          <C>          <C>
Net sales                                        $ 21,550     $ 23,948     $ 24,153     $ 20,173     $ 30,409

Cost of products sold                              18,279       19,547       20,495       18,555       27,534
                                                 --------     --------     --------     --------     --------
   Gross margin                                     3,271        4,401        3,658        1,618        2,875

Selling and administrative expense                  2,661        2,453        2,329        2,145        2,560
   Pension curtailment (gain)                          --           --           --           --         (254)
Real estate sale (gain)                                --           --           --           --         (890)
Interest and other income                            (158)        (162)        (583)        (658)        (109)
Interest expense                                      481          190          286          492          645
                                                 --------     --------     --------     --------     --------
Earnings (loss) from continuing
   operations before taxes                            287        1,920        1,626         (361)         923
   Income tax expense (benefit)                        26           46           42            6          (22)
                                                 --------     --------     --------     --------     --------
Net earnings (loss)                              $    261     $  1,874     $  1,584     $   (367)    $    945
                                                 ========     ========     ========     ========     ========

Basic earnings (loss)
   per common share                              $    .11     $    .77     $    .65     $   (.15)    $    .39
                                                 ========     ========     ========     ========     ========

Average number of common shares                     2,452        2,434        2,425        2,411        2,446

Diluted earnings (loss) per common
   and dilutive potential common share           $    .10     $    .73     $    .64     $   (.15)    $    .37
                                                 ========     ========     ========     ========     ========
Average number of common
   and dilutive potential
   common shares                                    2,527        2,555        2,482        2,411        2,575

Additional information:
Financial Data:
   Working capital                               $  1,411     $  3,239     $  3,241     $  2,196     $  2,740
   Total plant and equipment additions              1,238        2,102          507        1,694        2,086
   Long-term debt                                  10,666        1,802        2,671        4,124        4,852
   Total assets                                    24,525       13,615       12,791       11,573       13,265
   Cash flow from operations                        2,641        3,047        2,610        1,720        2,262
   Stockholders' equity                             8,264        7,995        6,055        4,453        4,711

Financial Ratios:
   Current ratio                                   1.27:1       1.94:1       1.90:1       1.87:1       1.83:1
   Percentage of long term debt to equity            129%          23%          44%          93%         103%
   Book value per basic common share             $   3.37     $   3.28     $   2.50     $   1.85     $   1.98
</TABLE>


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<PAGE>   8



Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operation

LIQUIDITY AND CAPITAL RESOURCES:

As discussed in Item 1., the Company purchased both Taurus Numeric Tool, Inc.
and Bowman Tool & Machining, Inc. during the fiscal year. The Taurus acquisition
was valued at approximately $7.2 million, $2.3 million of which came from the
Company's cash, $3.2 from new term debt obtained from the Company's bank, and
$1.7 million from a Subordinated Promissory Note with the seller of Taurus. As a
result of the acquisition, the Company acquired approximately $2.5 million of
working capital. During the period between the date of the Taurus acquisition to
the Bowman acquisition, the Company paid down $1.5 million of the bank term debt
originally borrowed at the closing of the Taurus acquisition.

The Bowman acquisition was valued at approximately $7.6 million, $2.7 million of
which came from additional term debt from the Company's bank, $2.5 million from
a mortgage from the same bank, $1.3 million from the Company's Revolving Line of
Credit, $844,000 from a Subordinated Promissory Note to the seller of Bowman and
approximately $500,000 to be paid in Fiscal 2000 to the seller for tax
considerations. As a result of the acquisition, the Company acquired
approximately $1.2 million in working capital.

The Company's working capital of $1,411,000 on August 29, 1999 reflected a
decrease of $1,828,000 from the prior year. Larger fluctuations in working
capital of the Company's Long Lake operation included a decrease in cash and
accounts receivable along with an increase in current maturities of long-term
debt offset by an increase in inventory and a decrease in accounts payable.
Working capital was also affected by the purchase of Bowman and Taurus as
described above. The fiscal 1999 ratio of current assets to current liabilities
decreased to 1.27 to 1.0 from 1.94 to 1.0 for fiscal 1998.

Cash provided by operating activities in fiscal 1999 was $2,641,000. Non-cash
charges for depreciation and amortization as well as changes in elements of
working capital primarily accounted for the cash provided by operating
activities. Cash provided by operations was $3,047,000 in fiscal 1998 and
$2,563,000 in fiscal 1997.

Additions to property, plant and equipment were $1,238,000 in fiscal 1999
compared to $2,102,000 in 1998 and $507,000 in 1997 including $980,000 and
$1,390,000 of machinery acquired through capital leases in 1999 and 1998,
respectively. The major 1999 capital expenditures consisted of the acquisition
of new production equipment.

Proceeds from the sale of equipment amounted to $57,000 in fiscal 1999 and
$537,000 in fiscal 1997 which primarily resulted from disposition of excess
equipment related to completed and discontinued manufacturing programs.

The Company's total debt was $12,108,000 at August 29, 1999 and consisted of
$4,400,000 of bank Term Debt, a $2,500,000 mortgage, seller subordinated notes
of $2,507,000 and capital lease obligations of $2,701,000.

At August 29, 1999 and August 30, 1998 the Company had available a line of
credit of $3,000,000 and $1,000,000, respectively. At August 29, 1999, the
outstanding balance on the line was $280,000 while there was no balance owed at
August 30, 1998.

It is managements' belief that internally generated funds combined with the line
of credit will be sufficient to enable the Company to meet its financial
requirements during fiscal 2000.




                                       8
<PAGE>   9

RESULTS OF OPERATIONS:

Net sales of $21,550,000 decreased $2,398,000 or 10% from fiscal 1998 sales of
$23,948,000 and $2,603,000 or 11% from fiscal 1997 sales of $24,153,000.
However, comparable sales decreased at the Company's Long Lake operations by 24%
and 25% versus 1999 and 1998, respectively, due primarily to lower sales in the
agribusiness market. The Company also recorded sales from its acquired
subsidiaries in the amount of $3,006,000 and $423,000, for Taurus and Bowman,
respectively.

In fiscal 1999, the Company reported net earnings of $261,000 or $.10 per share
compared to net earnings of $1,874,000 or $.73 per share in 1998 and $1,584,000
or $.64 per share in 1997. The net earnings in 1997 included a gain of $410,000
or $.17 per share from the disposition of excess equipment related to completed
or discontinued manufacturing programs.

The gross margin on parts sold in fiscal 1999 was 15.2% of sales compared to
18.4% of sales and 15.1% of sales in 1998 and 1997, respectively. The decrease
in gross margin in 1999 can be primarily attributed to volume inefficiencies
related to lower agribusiness sales offset by generally higher margins at Taurus
and Bowman.

Selling and administrative expense of $2,661,000 in fiscal 1999 was an increase
of $208,000 and $332,000 from fiscal years 1998 and 1997, respectively. For both
fiscal 1998 and 1997 the increase was related to the addition of Taurus and
Bowman expenses offset by lower performance based compensation.

Interest and other income of $158,000 was $4,000 lower in fiscal 1999 than 1998,
and $425,000 lower than 1997 primarily due to the gain on the disposition of
excess equipment that occurred in 1997.

Interest and other expense of $482,000 in fiscal 1999 was $292,000 higher than
1998 and $195,000 higher than 1997 because of higher debt levels due to the
acquisitions.

Income tax expense is significantly less than the statutory amount due to the
utilization of net operating loss carryforwards in each of fiscal 1999 and 1998
and 1997.

See Notes to Consolidated Financial Statements regarding recent accounting
standards to be adopted.

YEAR 2000 COMPLIANCE:

The Year 2000 presents potential concerns for business and consumer computing.
In addition to the well-known calculation problems with the use of 2-digit date
formats as the year changes from 1999 to 2000, the Year 2000 is a special case
leap year and in many organizations using older technology, dates were used for
special programmatic functions. The problem exists for many kinds of software
and hardware, including mainframes, mini computers, PCs, and embedded systems.
The consequences of this issue may include systems failures and business process
interruption.

At the end of fiscal 1999, all of the Company's critical and priority
manufacturing and non-manufacturing systems were determined to be already year
2000 capable, or necessary remediation (replacements, changes, upgrades or
workarounds) had been determined and unit testing and deployment had been
completed. The Company continues to work on internal systems that were not
categorized as critical or priority, and expects to have work on these systems
substantially completed by the end of calendar 2000.

The Company has also been actively working with suppliers of products and
services to determine the extent to which the suppliers' operations are year
2000 capable, and to monitor their progress toward year 2000 capability. The
Company has made inquiries of its major suppliers and has received responses to
its inquiries




                                       9
<PAGE>   10

from 100% of critical suppliers. Follow-up activities seek to determine whether
the supplier is taking all appropriate steps to fix year 2000 problems and to be
prepared to continue functioning effectively as a supplier in accordance with
the Company's standards and requirements. As discussed below, contingency plans
are being developed to address issues should any suppliers be unable to become
year 2000 capable.

As discussed below, the Company has developed contingency plans to address
possible changes in customer order patterns due to year 2000 issues. As with the
Company's suppliers, the readiness of customers, and their suppliers, to deal
with year 2000 issues may affect their operations and their ability to order and
pay for products. The Company has surveyed its major direct customers about
their year 2000 readiness in critical areas of their operations. The results
identified certain key areas to be addressed by the customers, primarily related
to supplier readiness, including external infrastructure providers, and
contingency planning. The Company has also been communicating information about
its own readiness to customers. Communications with customers for the remainder
of 1999 will be primarily aimed at focusing customer attention on contingency
planning.

The Company believes that its most reasonably likely worst-case year 2000
scenarios would relate to problems with the systems of third parties rather than
with the Company's internal systems or its products. Because the Company has
less control over assessing and remediating the year 2000 problems of third
parties, the Company believes the risks are greatest with infrastructure (e.g.,
electricity supply and water and sewer service), telecommunications,
transportation supply channels and critical suppliers of materials and services.

The Company's operations are conducted in three Minnesota based facilities. Each
location relies on local private and governmental suppliers for electricity,
water, sewer and other needed supplies. Failure of an electricity grid or an
uneven supply of power, for example, would be a worst-case scenario that would
completely shut down the affected facilities. Electrical failure could also shut
down airports and other transportation facilities.

Although most sites have some back-up electrical power, the Company does not
generally maintain its own facilities that would generate sufficient electrical
or water supply for full operations. A worst-case scenario involving a critical
supplier of materials would be the partial or complete shutdown of the supplier
and its resulting inability to provide critical materials to the Company on a
timely basis. The Company does not maintain the capability to replace most
third-party materials with internal production. Where efforts to work with
critical suppliers to ensure year 2000 capability have not been successful,
contingency planning includes provisions for extra raw materials above that
needed for normal operations, scheduling the New Year's holiday to provide extra
time for recovery in the event it is needed, and duplication of production
capabilities at its various facilities. These contingency plans apply to all
Company facilities as appropriate. Because of the Company's internal Year 2000
program, the Company does not believe there is a significant risk of disruption
of operations due to malfunction of its internal systems or equipment.







                                       10
<PAGE>   11


The Company is not in a position to identify or to avoid all possible scenarios;
however, the Company is currently assessing scenarios and taking steps to
mitigate the impacts of various scenarios if they were to occur. Preliminary
contingency plans for critical business operations were in place by the end of
fiscal 1999. It is expected that these plans will be expanded and refined as the
Company learns more about the preparations and vulnerabilities of third parties
regarding year 2000 issues. Due to the large number of variables involved, the
Company cannot provide an estimate of the damage it might suffer if any of these
scenarios, or a combination of scenarios, were to occur.

The Company's year 2000 efforts have been undertaken largely with its existing
personnel. In some instances, consultants have been engaged to provide specific
assessment, remediation or other services. Activities with suppliers and
customers have also involved their staffs and consultants. The Company engaged a
third-party firm to assist with planning and taking the inventory of internal
computer systems.

The Company currently expects that the total cost of these programs, including
both incremental spending and redeployed resources, will be less than $25,000.
This amount has been expensed as incurred. No significant internal systems
projects are being deferred due to the year 2000 program efforts. In some
instances, the installation schedule of new software and hardware in the normal
course of business was accelerated to also afford a solution to year 2000
capability issues. In addition, the estimated cost does not include any
potential costs related to customer or other claims, or potential amounts
related to executing contingency plans, such as costs incurred as a result of an
infrastructure or supplier failure. All expected costs are based on the current
assessment of the programs and are subject to change as the programs progress.

Based on currently available information, management does not believe that the
year 2000 matters discussed above related to internal systems or products sold
to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations; however, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure year 2000 capability by a
supplier, customer or another party would not have a material adverse effect on
the Company's financial condition or overall trends in results of operations
through business interruption or shutdown, financial loss, reputational damage
and legal liability to third parties.

CAUTIONARY STATEMENT:

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 and are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. 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. The following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) the Company's ability to obtain additional
manufacturing programs and retain current programs; (ii) the loss of significant
business from any one of its current customers could have a material adverse
effect on the Company; (iii) a significant downturn in the industries in which
the Company participates, principally the agricultural industry, could have an
adverse effect on the demand for Company services; (iv) the ability of the
Company to integrate its acquisitions with their current operations; (v)
successful evaluation and remediation of all year 2000 issues including, but not
limited to, internal production and non-manufacturing systems, the ability of
key suppliers to avoid year 2000 problems and general infrastructure issues. The
foregoing list should not be construed as exhaustive and the Company disclaims
any obligation subsequently to revise any






                                       11
<PAGE>   12

forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.

















































                                       12
<PAGE>   13

Item 8.   Financial Statements and Supplementary Data:

               See Consolidated Financial Statements section of this Annual
               Report on Form 10-K beginning on page 19, attached hereto, which
               consolidated financial statements are incorporated herein by
               reference.

                Quarterly earnings summary (unaudited):

<TABLE>
<CAPTION>
                                                                                Basic       Diluted
                                        Net         Gross           Net       Earnings     Earnings
                                       Sales       Margin        Earnings     Per Share    Per Share
<S>                                <C>           <C>           <C>            <C>          <C>
                  FISCAL 1999:
                  First quarter    $ 5,640,708   $  825,031    $ 276,972      $  .11       $   .11
                  Second quarter     3,729,158      166,007     (421,144)       (.17)         (.17)
                  Third quarter      5,989,248      955,757       57,334         .02           .02
                  Fourth quarter     6,190,747    1,324,574      347,903         .14           .14


                  FISCAL 1998:
                  First quarter    $ 5,313,700   $  805,076    $ 246,793      $  .11       $   .10
                  Second quarter     5,677,479    1,125,910      497,971         .20           .20
                  Third quarter      6,634,918    1,302,627      569,395         .23           .22
                  Fourth quarter     6,322,019    1,167,367      559,925         .23           .22

</TABLE>
















                                       13
<PAGE>   14






                                    PART III

               Pursuant to General Instruction G(3), Registrant omits Part III,
               Items 10, 11, 12, and 13, except that portion of Item 10 relating
               to Executive Officers of the Registrant (which is included in
               Part I, Item 4A), as a definitive proxy statement will be filed
               with the Commission pursuant to Regulation 14(a) within 120 days
               after August 29, 1999, and such information required by such
               items is incorporated herein by reference from the proxy
               statement.










































                                       14
<PAGE>   15


                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K:

               (a)  Documents filed as part of this report:

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

                    2.   Financial Statement Schedules:
                         Schedule II - Valuation and Qualifying Accounts-page 35
     `                   Schedules not listed above have been omitted, because
                         they are either not applicable or not material, or the
                         required information is included in the financial
                         statements or related notes.

                    3.   Exhibits.

<TABLE>
<CAPTION>
                         Exhibit                                                      Page
                           No.               Description                               No.
                           ---               -----------                               ---
<S>                                 <C>                                               <C>
                           3.1      Articles of Incorporation as amended,
                                    incorporated by reference from Exhibit
                                    3 of the Registrant's Form 10-Q for
                                    the quarter ended November 29, 1998.

                           3.2      Bylaws, as amended.                                36


                          10.1      1987 Stock Option Plan, incorporated
                                    by reference from Exhibit 10.4 of the
                                    Registrant's Form 10-K for the fiscal
                                    year ended August 30, 1987.

                          10.2      Amendment dated August 31, 1989 to the
                                    1987 Stock Option Plan, incorporated
                                    by reference from Exhibit 10.5 of the
                                    Registrant's Form 10-K for the fiscal
                                    year ended August 27, 1989.

                          10.3      Washington Scientific Industries, Inc.
                                    1994 Stock Plan, incorporated by
                                    reference from Exhibit 4.1 of the
                                    Registrant's Form S-8 as registered on
                                    May 14, 1999.

                          10.4      Employment Agreement between Michael
                                    J. Pudil and Registrant dated November
                                    4, 1993, is incorporated by reference
                                    from Exhibit 10.4 of Registrant's Form
                                    10K for the fiscal year ended August
                                    28, 1994.
</TABLE>




                                       15
<PAGE>   16

<TABLE>
<CAPTION>
                          Exhibit                                              Page
                            No.     Description                                 No.
                            ---     -----------                                 ---
<S>                                 <C>                                        <C>
                          10.5      Amendment dated January 9, 1997 to the
                                    employment agreement between the
                                    Registrant and Michael J. Pudil
                                    incorporated by reference from Exhibit
                                    10 of the Registrant's Form 10-Q for the
                                    quarter ended February 23, 1997.

                          10.6      Employment (Change of Control) Agreement
                                    between Michael J. Pudil and Registrant
                                    dated October 18, 1995 incorporated by
                                    reference from Exhibit 10.8 of the
                                    Registrant's Form 10-K for the year
                                    ended August 27, 1995.

                          10.7      Amended and Restated Credit and
                                    Security Agreement between the Company
                                    and FBS Business Finance Corporation
                                    dated March 31, 1995, incorporated by
                                    reference from Exhibit 10.4 of the
                                    Registrant's Form 10-Q for the quarter
                                    ended February 26, 1995.

                          10.8      Stock Purchase Agreement dated August
                                    6, 1999, between William D. Bowman and
                                    the Registrant incorporated by
                                    reference from Exhibit 2.1 of Form 8-K
                                    filed August 21, 1999.

                          10.9      Stock Purchase Agreement dated
                                    February 15, 1999 between Rodney
                                    Winter and the Registrant incorporated
                                    by reference from Exhibit 2.1 of Form
                                    8-K filed February 28, 1999.

                          10.10     Fifth Amendment to Amended and
                                    Restated Credit and Security Agreement
                                    dated August 6, 1999, incorporated by
                                    reference from Exhibit 4.1 of the
                                    Registrant's Form 8-K filed August 21,
                                    1999.

                          10.11     Loan Agreement dated August 6, 1999
                                    between Registrant and US Bank
                                    National Association incorporated from
                                    Exhibit 4.2 of the Registrant's Form
                                    8-K filed August 21, 1999.


                          23.1      Consent of Ernst & Young LLP.               42

                          27        Financial Data Schedule.                    43

</TABLE>







                                       16
<PAGE>   17



               (b)  Reports on Form 8-K.

                    1.   There was a Form 8-K filed August 21, 1999 describing
                         the Company's purchase of Bowman Tool & Machining, Inc.




















































                                       17
<PAGE>   18


                                   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, President and
                                              Chief Executive Officer

                                         BY:  /s/ Paul D. Sheely
                                              ----------------------------------
                                              Paul D. Sheely
                                              Vice President and Treasurer
DATE:  November 18, 1999

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:

<TABLE>
<CAPTION>
      Signature                          Title                                 Date
      ---------                          -----                                 ----
<S>                         <C>                                          <C>

/s/ Michael J. Pudil        President, Chief Executive Officer,          November 18, 1999
------------------------
Michael J. Pudil            Director


/s/ Paul Baszucki           Director                                     November 18, 1999
------------------------
Paul Baszucki


/s/ Melvin L. Katten        Director                                     November 18, 1999
------------------------
Melvin L. Katten


/s/ Gerald E. Magnuson      Director                                     November 18, 1999
------------------------
Gerald E. Magnuson


/s/ George J. Martin        Director                                     November 18, 1999
------------------------
George J. Martin


/s/ Eugene J. Mora          Director                                     November 18, 1999
------------------------
Eugene J. Mora
</TABLE>








                                       18


<PAGE>   19


                                    INDEX TO
                 CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
                                                                                             Page
                                                                                             ----
<S>                                                                                          <C>
CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors                                                                20
Consolidated Balance Sheets - August 29, 1999 and August 30, 1998                             21
Consolidated Statements of Operations - Years Ended August 29, 1999,
   August 30, 1998 and August 31, 1997                                                        22
Consolidated Statements of Stockholders' Equity - Years Ended
   August 29, 1999, August 30, 1998, August 31, 1997                                          23
 Consolidated Statements of Cash Flows - Years Ended
   August 29, 1999, August 30, 1998 August 31, 1997                                           24
Notes to Consolidated Financial Statements                                                    25

SCHEDULE

Schedule II - Valuation and Qualifying Accounts                                               35
</TABLE>





































                                       19
<PAGE>   20






REPORT OF INDEPENDENT AUDITORS


Board of Directors and Shareholders
WSI Industries, Inc.

We have audited the accompanying consolidated balance sheets of WSI Industries,
Inc. and subsidiaries as of August 29, 1999 and August 30, 1998, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the years ended August 29, 1999, August 30, 1998 and August 31, 1997.
Our audits also included the financial statement schedule listed in the Index at
Item 14 (a). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WSI Industries,
Inc. and subsidiaries as of August 29, 1999 and August 30, 1998, and the
consolidated results of their operations and their cash flows for the years
ended August 29, 1999, August 30, 1998 and August 31, 1997, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

                                                           ERNST & YOUNG LLP


Minneapolis, Minnesota
October 6, 1999


















                                       20
<PAGE>   21

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AUGUST 29, 1999 AND AUGUST 30, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                       1999              1998
                                                                                       ----              ----
<S>                                                                              <C>               <C>
ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                                     $       131,588   $     2,697,104
   Accounts receivable, less allowance for doubtful
     accounts of $27,500 at August 29, 1999 and $25,000
     at August 30, 1998, respectively                                                  2,962,268         2,852,604
   Inventories                                                                         3,491,900           919,418
   Prepaid and other current assets                                                       72,478           207,100
                                                                                 ---------------   ---------------
         Total current assets                                                          6,658,234         6,676,226

PROPERTY, PLANT, AND EQUIPMENT, AT COST (NOTE 4):
   Land                                                                                   66,906            66,906
   Buildings and improvements                                                          5,198,081         5,186,144
   Machinery and equipment                                                            22,670,046        18,378,615
                                                                                 ---------------   ---------------
                                                                                      27,935,033        23,631,665
   Less accumulated depreciation                                                      15,753,124        16,693,157
                                                                                 ---------------   ---------------
         Total property, plant, and equipment                                         12,181,909         6,938,508

INTANGIBLE ASSETS:
     Goodwill and related acquisition costs                                            5,684,869                 -
                                                                                 ---------------   ---------------
                                                                                 $    24,525,012   $    13,614,734
                                                                                 ===============   ===============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Revolving credit facility (Note 3)                                            $       279,578   $             -
   Trade accounts payable                                                              1,438,324         1,535,451
   Accrued compensation and employee withholdings                                        627,731           709,782
   Accrued real estate taxes                                                             166,709           170,505
   Miscellaneous accrued expenses                                                        549,946           312,982
   Acquisition payments due                                                              742,733                 -
   Current portion of long-term debt (Note 3)                                          1,442,199           708,949
                                                                                 ---------------   ---------------
         Total current liabilities                                                     5,247,220         3,437,669

Long-term debt, less current portion (Note 3)                                         10,666,120         1,802,072

Long-term pension liability (Note 7)                                                     347,437           380,073

COMMITMENTS (Note 4)

STOCKHOLDERS' EQUITY  (Note 5):
   Common stock, par value $.10 a share; authorized
     10,000,000 shares; issued and outstanding 2,453,425 and
     2,448,800 shares, respectively                                                      245,343           244,880
     Capital in excess of par value                                                    1,600,302         1,592,515
   Retained earnings                                                                   6,418,590         6,157,525
                                                                                 ---------------   ---------------
           Total stockholders' equity                                                  8,264,235         7,994,920
                                                                                 ---------------   ---------------
                                                                                 $    24,525,012   $    13,614,734
                                                                                 ===============   ===============
</TABLE>

See notes to consolidated financial statements.


                                       21
<PAGE>   22

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 29, 1999, AUGUST 30, 1998, AND AUGUST 31, 1997

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

<TABLE>
<CAPTION>
                                                                         1999              1998             1997
                                                                                           ----             ----
<S>                                                              <C>                <C>                <C>
Net sales (Note 8)                                               $     21,549,861   $    23,948,116    $    24,153,089

Cost of products sold                                                  18,278,492        19,547,136         20,494,767
                                                                 ----------------   ---------------    ---------------
      Gross margin                                                      3,271,369         4,400,980          3,658,322

Selling and administrative expense                                      2,660,683         2,452,496          2,328,808
Interest and other income                                                (157,748)         (161,753)          (583,056)
Interest expense                                                          481,569           190,353            286,707
                                                                 ----------------   ---------------    ---------------
                                                                        2,984,504         2,481,096          2,032,459
                                                                 ----------------   ---------------    ---------------

Earnings before income taxes                                              286,865         1,919,884          1,625,863
Income tax expense (Note 6)                                                25,800            45,800             41,800
                                                                 ----------------   ---------------    ---------------


Net earnings                                                     $        261,065    $    1,874,084    $     1,584,063
                                                                 ================    ==============    ===============
Basic earnings per common share                                  $            .11    $          .77    $           .65
                                                                 ================    ==============    ===============

Diluted earnings per common and dilutive
   potential common share                                        $            .10    $          .73    $           .64
                                                                 ================    ==============    ===============

Weighted average number of common
   shares outstanding                                                   2,451,836         2,434,125          2,424,922
                                                                 ================   ===============    ===============

Weighted average number of common and
   dilutive potential common shares                                     2,527,299         2,555,518          2,481,873
                                                                 ================   ===============    ===============

</TABLE>

See notes to consolidated financial statements.

















                                       22




<PAGE>   23
WSI INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                            COMMON STOCK             CAPITAL                          TOTAL
                                         ------------------         IN EXCESS      RETAINED       STOCKHOLDERS'
                                         SHARES      AMOUNT       OF PAR VALUE     EARNINGS          EQUITY
                                         ------      ------       ------------     --------          ------
<S>                                   <C>         <C>          <C>             <C>             <C>
 BALANCE AT AUGUST 25, 1996         $  2,420,850   $  242,085   $ 1,511,598     $2,699,378      $  4,453,061

   Net earnings                                                                  1,584,063         1,584,063
   Exercise of stock options               8,130          813        17,187                           18,000
                                    ------------   ----------   -----------     ----------      ------------

BALANCE AT AUGUST 31, 1997             2,428,980      242,898     1,528,785      4,283,441         6,055,124

   Net earnings                                                                  1,874,084         1,874,084
   Exercise of stock options              19,820        1,982        63,730                           65,712
                                    ------------   ----------   -----------     ----------      ------------

BALANCE AT AUGUST 30, 1998             2,448,800      244,880     1,592,515      6,157,525         7,994,920

   Net earnings                                                                    261,065           261,065
   Exercise of stock options               4,625          463         7,787                            8,250
                                    ------------   ----------   -----------     ----------      ------------

BALANCE AT AUGUST 29, 1999             2,453,425   $  245,343   $ 1,600,302     $6,418,590      $  8,264,235
                                    ============   ==========   ===========     ==========      ============
</TABLE>


See notes to consolidated financial statements.

                                       23


<PAGE>   24


WSI INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 29, 1999, AUGUST 30, 1998, AND AUGUST 31, 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                               1999           1998          1997
                                                                               ----           ----          ----
<S>                                                                     <C>           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                     $   261,065   $  1,874,084   $  1,584,063
   Adjustments to reconcile net income (loss) to net cash provided by
         operating activities:
      Depreciation and amortization                                        1,530,523      1,115,529      1,365,863
      Gain on sale of property, plant, and equipment
         and other assets                                                    (48,164)             -       (508,365)
      Increase (decrease) in pension liability                               (32,636)       (87,000)         8,571
      Changes in assets and liabilities:
         (Increase) decrease in:
           Accounts receivable                                             1,515,192       (307,286)      (676,376)
           Inventories                                                      (429,587)       437,020       (257,825)
           Prepaid and other current assets                                  159,260       (117,420)        34,031
         (Decrease) increase in accounts payable and accrued expenses       (314,294)       131,692      1,013,105
                                                                         ------------  ------------   ------------
           Net cash provided by operating activities                       2,641,359      3,046,619      2,563,067

CASH FLOWS FROM INVESTING ACTIVITIES:
   Additions to property, plant, and equipment                              (257,897)      (793,497)      (507,002)
   Proceeds from sale of equipment and other assets                           57,036              -        536,720
   Purchase of subsidiaries, net of cash assumed                          (8,704,234)             -              -
                                                                         ------------  ------------   ------------
      Net cash provided by (used in) investing activities                 (8,905,095)      (793,497)        29,718

CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of long-term debt                                              6,690,399              -              -
   Payments of long-term debt                                             (3,000,429)    (2,469,328)    (1,405,926)
   Issuance of common stock                                                    8,250         65,712         18,000
                                                                         -----------   ------------   ------------
      Net cash provided by (used in) financing activities                  3,698,220     (2,403,616)    (1,387,926)
                                                                         -----------   -------------  ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      (2,565,516)      (150,494)     1,204,859

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                             2,697,104      2,847,598      1,642,739
                                                                         -----------   ------------   ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                 $   131,588   $  2,697,104   $  2,847,598
                                                                         ===========   ============   ============

SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash paid during the year for:
      Interest                                                           $   420,874   $    192,071   $   297,123
      Income taxes                                                            45,361         71,777         5,800
   Noncash investing and financing activities:
      Acquisition of machinery through capital lease                         980,250      1,308,517             -
      Acquisition related debt                                             5,206,657
</TABLE>


See notes to consolidated financial statements.

                                       24

<PAGE>   25


WSI INDUSTRIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 29, 1999, AUGUST 30, 1998, AND AUGUST 30, 1997
--------------------------------------------------------------------------------

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Fiscal Year - WSI Industries, Inc. and Subsidiaries' (the Company) fiscal
       years represent a 52-to 53-week period ending the last Sunday in August.
       Fiscal 1999 and 1998 each consisted of 52 weeks. Fiscal 1997 consisted of
       53 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.

       Cash and Cash Equivalents - Cash and cash equivalents include cash on
       hand, bank account balances and money market investments including debt
       obligations issued by the U. S. Government or its agencies and corporate
       obligations. Cash equivalents are carried at cost plus accrued interest
       which approximates fair value.

        Inventories - Inventories are stated at the lower of cost (first-in,
        first-out method) or market. Inventory costs consist of material, direct
        labor, and manufacturing overhead. The Company's inventories are stated
        net of valuation allowances of approximately $155,000 at August 29, 1999
        and August 30, 1998. Inventories consist primarily of work-in-process.

       Depreciation - The cost of buildings and substantially all equipment is
       being depreciated using the straight-line method. The estimated useful
       lives of the assets are as follows:

       Buildings and improvements                    15 to 32 years
       Machinery and equipment                        3 to 10 years
       Transportation equipment                       3 to  5 years

       The Company evaluates long-term assets on a periodic basis in compliance
       with Statement of Financial Accounting Standards (SFAS) No. 121,
       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.

       Income 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.

       Revenue Recognition - Revenues from sales of product are recorded upon
       shipment. The Company performs periodic credit evaluations of its
       customers' financial condition. Credit losses relating to customers have
       been minimal and within management's expectations.

       Use of Estimates - The preparation of financial statements in conformity
       with generally accepted accounting principals 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.



                                       25

<PAGE>   26


       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 Options - The Company has adopted the disclosure-only provisions of
       Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
       for Stock-Based Compensation, but applies Accounting Principles Board
       Opinion No. 25 (APB 25) and related interpretation in accounting for its
       plans. Under APB 25, when the exercise price of employee stock options
       equals the market price of the underlying stock on the date of grant, no
       compensation expense is recognized.

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


2.     ACQUISITIONS

       On February 15, 1999, the Company completed the acquisition of Taurus
       Numeric Tool, Inc. ("Taurus") by purchasing all the shares of common
       stock from its sole shareholder. The value of the transaction was
       approximately $7.2 million including acquisition costs, with $5.5 million
       being paid by cash and debt borrowings, and an additional $1.7 million
       being in the form of a Subordinated Promissory Note to the prior owner.
       The acquisition was accounted for by the purchase method.

       The Taurus consideration was allocated to assets and liabilities based on
       fair values as follows:

             Net assets acquired                            $   4,535,000
             Goodwill and other intangible assets               2,713,000
                                                            -------------
                                                            $   7,248,000
                                                            =============

       On August 6, 1999, the Company completed the acquisition of Bowman Tool &
       Machining, Inc. ("Bowman") by purchasing all the shares of common stock
       from its sole shareholder. The value of the transaction was approximately
       $7.6 million, with $6.8 million being paid by debt borrowings, and
       approximately $844,000 being paid in the form of a Subordinated
       Promissory Note to the prior owner. The acquisition was accounted for by
       the purchase method.

       The Bowman consideration was allocated to assets and liabilities based on
       fair values as follows:

             Net assets acquired                            $   4,560,000
             Goodwill and other intangible assets               3,054,000
                                                            -------------
                                                            $   7,614,000
                                                            =============
       Goodwill and other intangible assets are being amortized over their
       estimated useful lives of 20 years on a straight-line basis. Amortization
       for the year ended August 29, 1999 was $82,300.

       The following table shows the unaudited pro forma consolidated results of
       operations as if both Taurus and Bowman had been acquired as of the
       beginning of the periods presented:

                                        Unaudited Pro Forma Consolidated Results

                                                   Years Ended
                                        ----------------------------------------
                                        August 29, 1999          August 30, 1998
                                        ---------------          ---------------



                                       26

<PAGE>   27

       Sales                          $  33,802,000         $   39,918,000
       Net earnings                   $   2,105,000         $    3,879,174
       Net earnings per share         $         .83         $         1.52

       The unaudited pro forma results are not necessarily indicative of what
       actually would have occurred if the acquisitions had been in effect for
       the entire period presented. In addition, they are not intended to be a
       projection of future results and do not reflect any synergies that might
       have been achieved from combined operations.

3.     DEBT

       Long-term debt consisted of the
       following:
                                         August 29, 1999      August 30, 1998

       Bank term debt                  $   4,400,000         $            -
       Mortgage note payable               2,500,000                      -
       Subordinated promissory notes       2,506,657                      -
       Capitalized lease obligations       2,701,662              2,511,021
       (Notes 3)                       -------------         --------------
                                          12,108,319              2,511,021
       Less current portion                1,442,199                708,949
                                       -------------         --------------
       Long-term debt                     10,666,120         $    1,802,072
                                       =============         ==============


       During fiscal 1999, the Company renegotiated its term debt and its line
       of credit with the same bank with which the Company previously had its
       debt and line of credit. The agreement requires principal payments of
       $52,381 per month on the Term Note with the agreement expiring on March
       31, 2002. At August 29, 1999, the balance of term debt was $4,400,000.
       Interest on the term debt is calculated at the bank's base rate (9.0% at
       August 29, 1999 and 8.5% at August 30, 1998) plus .75% and is also paid
       monthly.

       During fiscal 1999 the Company obtained a mortgage with the same bank
       that it currently has its term debt and line of credit facility. The
       agreement requires monthly principal payments of $13,889. Interest on the
       mortgage is calculated at the bank's base rate plus 1.0% and is paid
       monthly. The entire balance is due August 6, 2004.

       Interest on the line of credit is at the bank's base rate plus 0.5
       percentage points for August 29, 1999. The line expires March 31, 2002.
       The agreement provides for secured borrowing of up to $3,000,000;
       however, the Company is charged an annual unused credit line fee of 0.5%.
       At August 29, 1999, there was a balance outstanding of $279,578.

       Restrictive provisions of the agreement require, among other provisions,
       that the Company (1) maintain a net worth of not less than $7,000,000,
       (2) maintain a ratio of liabilities to net worth not greater than 4.0 to
       1.0, (3) limit capital expenditures to $3,000,000 in each fiscal year
       with no more than $1,000,000 coming from its line of credit and (4)
       maintain a defined cash flow coverage ratio of no less than 1.1 to 1.0.
       Cash dividends are fully restricted. At August 29, 1999, the Company was
       in compliance with the various covenants of the credit agreement. The
       notes, line of credit and capital leases are collateralized by the
       receivables, inventories, and property, plant, and equipment of the
       Company. The mortgage is secured by the building in Long Lake, Minnesota.


                                       27

<PAGE>   28

       During fiscal 1999, and in connection with the acquisitions of Bowman
       Tool & Machining, Inc. and Taurus Numeric Tool, Inc., the Company entered
       into Subordinated Promissory Notes with the sellers of the respective
       companies. The agreements call for quarterly interest payments at 7.75%.
       The note in connection with the Bowman transaction is due in three equal
       annual installments commencing August 6, 2002. The note in connection
       with the Taurus transaction is also due in three annual installments
       commencing February 15, 2002. The notes are subordinated to all bank debt
       and the mortgage, but are collateralized by equipment.

       Maturities of long-term debt, excluding capital lease obligations, for
       the fiscal years subsequent to August 29, 1999 are as follows:

                                   2000                $    795,240
                                   2001                     795,240
                                   2002                   4,145,076
                                   2003                   1,002,220
                                   2004                   2,668,881
                                                       ------------
                                                       $  9,406,657
                                                       ============
4.     COMMITMENTS

       Leases - Included in the consolidated balance sheet at August 29, 1999
       are cost and accumulated depreciation on equipment subject to capitalized
       leases of $5,439,045 and $2,531,647, respectively. At August 30 1998, the
       amounts were $4,526,435 and $1,826,568, respectively.


The present value of the net minimum payments on capital leases as of August 29,
1999 is as follows:

                                                                     Capital
                                                                     Leases
       Fiscal years ending August:                              ------------
          2000                                                  $    803,073
          2001                                                       597,697
          2002                                                       597,697
          2003                                                       470,050
          2004                                                       427,590
          Thereafter                                                 359,848
                                                                ------------
       Total minimum lease payments                                3,255,955
       Less amount representing interest                             554,293
                                                                ------------
       Present value of net minimum lease payments                 2,701,662
       Current portion                                               646,959
                                                                ------------
       Capital lease obligation, less current portion           $  2,054,703
                                                                ============

       The Company leases its Taurus facility under an operating lease that
       expires in February 2002 with a monthly base rent of $8,900. Operating
       expenses and real estate taxes are paid by the Company.

       The Company also leases its Bowman facility under a lease that expires in
       August, 2000 and is responsible for operating expenses and real estate
       taxes. The Company also leases certain manufacturing equipment under
       leases that expire in August, 2000.

       Future minimum lease payments for operating leases are:

                                       28

<PAGE>   29


       Fiscal years ending August:
          2000                                                   $    218,735
          2001                                                        106,800
          2001                                                         48,950
                                                                 ------------
       Total minimum lease payments                              $    374,485
                                                                 ============

       Rent expense of approximately $67,000, $1,000, and $2,000 have been
       charged to operations for the years ended August 29, 1999, August 30,
       1998 and August 31, 1997, respectively.

5.      STOCK OPTIONS

       Stock Options - In fiscal 1988, the 1987 stock option plan was approved
       and 175,000 shares of common stock were reserved for granting of options
       to officers, key employees, and directors. No shares remain available for
       grant from this plan since the term of grant is limited to ten years from
       the date of the plan.

       In fiscal 1995, the 1994 stock option plan was approved and 250,000
       shares of common stock were reserved for granting of options to officers,
       key employees, and directors. During fiscal 1999, the plan was amended to
       reserve an additional 200,000 shares. At August 29, 1999, 182,666 shares
       remained reserved and available for grant under the plan.

       No shares remain reserved, available for grant or outstanding under the
       1981 employee incentive stock option plan at August 29, 1999. Option
       transactions during the three years ended August 29, 1999 are summarized
       as follows:

<TABLE>
<CAPTION>
                                               1981 Employee
                                                    Incentive            1987 Stock                 1994 Stock
                                                   Option Plan           Option Plan               Option Plan
                                                -----------------     ------------------        -------------------
                                                           Average                Average                   Average
                                                 Shares     Price    Shares        Price       Shares        Price
                                                 ------     -----    ------        -----       ------        -----
<S>                                            <C>      <C>         <C>       <C>            <C>            <C>
       Outstanding at August 25, 1996            2,000   $    2.50   155,000    $    2.42       26,000       $ 3.86
          Granted                                    -        -            -         -         101,000         4.62
          Lapsed                                     -        -       (8,000)        3.36            -         -
          Exercised                             (2,000)       2.50    (7,000)        2.21            -         -
                                                ------               --------                  -------

       Outstanding at August 31, 1997                -        -      140,000         2.38      127,000         4.46
          Granted                                    -        -            -                    25,000         4.75
          Lapsed                                     -        -            -            -       (9,666)        4.03
          Exercised                                  -        -      (12,000)        3.01       (8,334)        3.85
                                                ------               -------                   -------

       Outstanding at August 30, 1998                -        -      128,000         2.32      134,000         4.58
                                                ------               -------                   -------
          Granted                                    -                     -                   125,000         4.99
          Lapsed                                     -                     -                         -
          Exercised                                  -                (5,000)        2.06            -
                                                ------                                         -------
       Options exercisable at August 29, 1999        -   $    -      123,000    $    2.33      259,000       $ 4.78
                                                ======               =======                   =======
</TABLE>


        The following pro forma information has been determined as if the
        Company had accounted for its stock options under the fair value method
        of SFAS 123. The fair value for these options was estimated at the date
        of grant using the Black-Scholes option pricing model with the following
        assumptions for grants issued during fiscal 1999, fiscal 1998 and fiscal
        1997 as set forth in the table below. The estimated fair value of the
        options is amortized to expense over the options' vesting period.

<TABLE>
<CAPTION>

                                                1999                 1998               1997
                                                ----                 ----               ----
<S>                                           <C>                 <C>                 <C>
        Dividend yield                           None                 None                 None

</TABLE>
                                       29

<PAGE>   30

<TABLE>
<S>                                         <C>                   <C>                  <C>
        Expected volatility                     47.7%                43.9%                38.9%
        Risk free interest rate                  6.0%                 5.5%                 6.38%
        Expected term                        10 years              5 years              5 years
</TABLE>

The Company's net income and income per share would be adjusted to the pro forma
amounts as follows:

<TABLE>
<CAPTION>
                                                                                   Years ended
                                                       ----------------------------------------------------------------
                                                       August 29, 1999           August 30, 1998        August 31, 1997
                                                       ---------------           ---------------        ---------------
<S>                                                   <C>                       <C>                    <C>
        Net Income:
           As reported                                 $      261,065            $    1,874,084         $    1,584,063
           Pro forma                                           71,632            $    1,738,962         $    1,550,636

        Income per basic common share:
           As reported                                 $         .11             $          .77         $          .65
           Pro forma                                   $         .03             $          .71         $          .64

        Income per diluted common share:
           As reported                                 $         .10             $          .73         $          .64
           Pro forma                                   $         .03             $          .68         $          .62
</TABLE>

        As of August 29, 1999, there were 108,000 options outstanding with
        exercise prices between $2.00 and $2.13, 149,000 options outstanding
        with exercise prices between $3.00 and $4.75, and 125,000 options
        outstanding with exercise prices between $5.50 and $6.13. At August 29,
        1999, outstanding options had a weighted-average remaining contractual
        life of 6.2 years.

        The numbers of options exercisable as of August 29, 1999, August 30,
        1998 and August 31, 1997 were 251,171, 199,504, and 168,000
        respectively, at weighted average share prices of $3.50, $3.04, and
        $2.60 per share, respectively.

        The weighted average fair value of options granted during the years
        ended August 29, 1999, August 30, 1998, and August 31, 1997 was $3.28,
        $2.82, and $2.83 per share, respectively.

                                       30


<PAGE>   31


6.     INCOME TAXES

       Income tax expense (benefit) consisted of the following:

<TABLE>
<CAPTION>
                                                                             Years Ended
                                                        ------------------------------------------------------
                                                        August 29               August 30          August 31,
                                                          1999                    1998                1997
                                                          ----                    ----                ----
<S>                                                 <C>                   <C>                   <C>
       Currently payable:
          Federal                                    $    17,500           $      40,000         $      36,000
          State                                            8,300                   5,800                 5,800
                                                     -----------           -------------         -------------
                                                          25,800                  45,800                41,800
       Deferred:
          Federal                                              -                       -                     -
          State                                                -                       -                     -
                                                     -----------           -------------         -------------
          Total                                      $    25,800           $      45,800         $      41,800
                                                     ===========           =============         =============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                          Years Ended
                                                                         --------------------------------------------
                                                                         August 29,       August 30,       August 31,
                                                                            1999             1998             1997
                                                                            ----             ----             ----
<S>                                                                     <C>              <C>              <C>
       Ordinary federal income tax statutory rate                             35.0%            35.0%             35.0%
       Limitation on (utilization of) tax assets                             (28.9)           (34.0)            (34.0)
       State income taxes, net of federal tax benefit                          2.9              0.2               0.2
       Impact of graduated income tax                                          -               (1.0)             (1.0)
       Other                                                                   -                2.2               2.4
                                                                      ------------     -------------    -------------
       Taxes provided                                                          9.0%             2.4%              2.6%
                                                                      ============     ============     =============
</TABLE>

       Deferred income taxes are provided for the temporary differences between
       the financial reporting and tax bases 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:

<TABLE>
<CAPTION>
                                                          Year ended August 29,        Year ended August 30,
                                                                   1999                        1998
                                                       ---------------------------- ---------------------------
<S>                                                        <C>                                 <C>
       DEFERRED TAX ASSETS
       Accrued liabilities                                  $             79,841           $          170,424
       Inventory valuation accruals                                       52,768                       52,700
       Net operating loss carryforwards                                  604,309                      700,224
       Tax credit carryforwards                                          530,380                      524,599
       Pension liability                                                  81,216                       55,545
       Other                                                              34,050                        9,360
                                                      ---------------------------- ---------------------------
                                                                       1,382,564                    1,512,852
       DEFERRED TAX LIABILITIES
       Tax depreciation less than book                                   210,320                      259,824
                                                      ---------------------------- ---------------------------
       Net deferred tax assets                                         1,172,244                    1,253,028
       Valuation allowance                                            (1,172,244)                  (1,253,028)
                                                      ============================ ===========================
                                                            $                  -           $                -
                                                      ============================ ===========================
</TABLE>

          As of August 29, 1999, the Company had federal and California state
income tax net operating loss carryforwards of approximately $1,761,000 and
$644,000, respectively, of which most will expire in fiscal years 2008 and 2009.
Also as of August 29, 1999, the Company had $478,000 in federal alternative
minimum

                                       31

<PAGE>   32



tax (AMT) credit carryforward and approximately $46,000 in other credit
carryforward. 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.

7.     EMPLOYEE BENEFITS

       The Company combined its two non-contributory pension plans into one plan
       effective February 1, 1995, for employees who are at least 21 years of
       age and have completed at least one year of service. Benefits for the
       union employees are based on years of service and a pre-established rate
       in the year of retirement. Benefits for non-union employees are based on
       years of service and a percentage of annual compensation in the five
       years preceding retirement. Plan assets consist primarily of shares of a
       balanced fund offered by a major regional bank.

       Net periodic pension cost consisted of the following:

<TABLE>
<CAPTION>
                                                                                         Years Ended
                                                                   --------------------------------------------------
                                                                         1999               1998            1997
                                                                         ----               ----            ----
<S>                                                               <C>               <C>               <C>
       Service cost - benefits earned during the year              $       119,314   $      128,068    $      141,872
       Interest cost on projected benefit obligation                       509,347          461,123           472,272
       Actual return on plan assets                                       (661,377)         (18,369)       (1,502,308)
       Net amortization and deferral                                        (1,339)        (657,893)          896,735
                                                                   ---------------   --------------    --------------
       Net periodic pension cost                                   $       (34,055)  $      (87,071)   $        8,571
                                                                   ===============   ==============    ==============
</TABLE>


      The funded status of the plans and the amount recognized on the balance
      sheet are as follows:

<TABLE>
<CAPTION>
                                                                             Years Ended
                                                               ---------------------------------------
                                                               August 29, 1999         August 31, 1998
                                                               ---------------         ---------------
<S>                                                           <C>                      <C>
       Actuarial present value of benefit obligations:
          Vested benefits                                      $  7,601,590             $   6,906,823
          Nonvested benefits                                        140,629                   202,955
                                                               ------------             -------------
          Accumulated benefit obligations                         7,742,219                 7,109,778
          Effect of projected future compensation
             increases                                              406,842                   218,397
                                                               ------------             -------------
       Projected benefit obligations                              8,149,061                 7,328,175
       Plan assets at fair value                                  8,674,648                 7,626,174
                                                               ------------             -------------
       Plan assets (in excess of) less than projected
          benefit obligations                                      (525,587)                 (297,999)
       Unrecognized net gain (loss)                               1,709,719                 1,070,750
       Unrecognized prior-service cost                           (1,043,389)                 (641,638)
       Unrecognized net transition assets                           205,204                   248,960
                                                               ------------             -------------
       Pension liability                                       $    345,947             $     380,073
                                                               ============             =============

       Weighted average discount rate                                  7.00%                     7.00%
       Rate of increase in future compensation
          levels, non-union employees                                  4.50%                     4.25%
       Expected long-term rate of return on
          plan assets                                                  9.0%                      9.0%
</TABLE>

       The Company's policy is to currently fund an amount to include full
       current costs and amortization of the unfunded actuarial accrued
       liability over the expected future service of active participants;
       however, contributions are not in excess of the maximum allowable tax
       deduction for the Company. Pension

                                       32

<PAGE>   33



       liability amounts expected to be funded under this policy within one year
       are included in miscellaneous accrued expenses with amounts expected to
       be funded in periods beyond one year included as long-term liabilities.

       The Company has a management incentive compensation plan for certain key
       employees designated annually by a committee of the Board of Directors.
       The amount of incentive compensation for eligible participants is
       contingent on attaining minimum pre-tax earnings.

       The Company and its two operating subsidiaries, Bowman Tool & Machining,
       Inc and Taurus Numeric Tool, Inc. each have their own retirement savings
       401(k) plains. All employees are eligible to participate in their
       respective plans. Contributions charged to operations for fiscal 1999,
       1998, and 1997, were approximately $51,954, $51,710, and $47,836,
       respectively.

8.     INFORMATION CONCERNING SALES TO MAJOR CUSTOMERS

       The Company had sales to five customers which exceeded 10 percent of
       total sales during any one of fiscal years 1999, 1998, or 1997 as listed
       below:

<TABLE>
<CAPTION>
                                                       Fiscal Year Sales
                        ----------------------------------------------------------------------
                        Customer               1999              1998               1997
                        --------               ----              ----               ----
                        <S>            <C>                 <C>                 <C>

                            #1          $  11,748,000       $  18,128,000       $  17,604,000
                            #2              2,884,000       $   1,394,000       $           0
                            #3              2,682,000       $           0       $           0
                            #4              1,388,000       $   1,666,000       $   1,298,000
                            #5                549,000       $     182,000       $   1,769,000
</TABLE>






                                       33



<PAGE>   34


9.     EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                1999                  1998                 1997
                                                                ----                  ----                 ----
<S>                                                      <C>                   <C>                 <C>
       Net Income (loss)                                  $     261,065         $   1,874,084       $    1,584,063
       Denominator for earnings per share:

          Weighted average shares;
          denominator for basic earnings
          per share                                           2,451,836             2,434,125            2,424,922

          Effect of dilutive securities;
          employee and nonemployee options                       75,463               121,393               56,951
                                                          -------------         -------------       --------------

          Dilutive common shares;
          denominator for diluted earnings
          per share                                           2,527,299             2,555,518            2,481,873

       Basic earnings (loss) per share                     $        .11          $        .77       $          .65
                                                           ============          ============       ==============

       Dilutive earnings (loss) per share                  $        .10          $        .73       $          .64
                                                           ============          ============       ==============
</TABLE>

10.    SUBSEQUENT EVENT

       Subsequent to year-end, the Company announced plans to consolidate all
       manufacturing operations into its Rochester, Minnesota (Bowman Tool) and
       Osseo, Minnesota (Taurus Numeric Tool) facilities. Upon completion of the
       consolidation, the current Long Lake, Minnesota facility will be closed.

       Consolidation expenses including, but not limited to, severance,
       relocation costs and partial plan termination of the defined benefit
       pension plan will be incurred primarily in the first quarter of fiscal
       2000.

                                       34


<PAGE>   35


WSI INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

                                   BALANCE AT            NET ADDITIONS                              BALANCE AT
                                    BEGINNING             CHARGED TO                  NET             END OF
        DESCRIPTION                 OF PERIOD          COST AND EXPENSES          DEDUCTIONS          PERIOD
        -----------                 ---------          -----------------          ----------          ------
<S>                        <C>                     <C>                      <C>                   <C>
Reserves deducted
from assets to
which it applies:

   ALLOWANCE FOR
      DOUBTFUL
      ACCOUNTS:

   Year ended
      August 31, 1997         $          50,000      $                       $                     $       50,000
                              =================      ==================      =============         ==============

   Year ended
      August 30, 1998         $          50,000      $                       $      25,000   (2)   $       25,000
                              =================      ==================      =============         ==============

   Year ended
      August 29, 1999         $          25,000      $            2,500  (3) $                     $       27,500
                              =================      ==================      =============         ==============

   ALLOWANCE FOR
      EXCESS OR
      OBSOLETE
      INVENTORY:

   Year ended
      August 31, 1997         $          16,716      $          155,342      $      16,716   (1)   $      155,342
                              =================      ==================      =============         ==============

   Year ended
      August 30, 1998         $         155,342      $                       $         342   (1)   $      155,000
                              =================      ==================      =============         ==============

   Year ended
      August 29, 1999         $         155,000      $                       $                     $      155,000
                              =================      ==================      =============         ==============
</TABLE>


(1) Write-offs of excess or obsolete inventory.

(2) Level of reserve reduced due to management assessment of exposure to
    potential write-offs.

(3) Additional amount assumed due to the acquisition of Taurus Numeric Tool,
    Inc.

                                       35