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                                                                    EXHIBIT 10.6

                                    MORTGAGE
                                       AND
                               SECURITY AGREEMENT
                         AND FIXTURE FINANCING STATEMENT

      THIS INDENTURE (hereinafter referred to as "Mortgage"), is made this 3rd
day of May 2004 by WSI Industries, Inc., a Minnesota corporation ("Mortgagor"),
whose post office address is 213 Chelsea Road, Monticello, Minnesota 55362 and
Excel Bank Minnesota, a Minnesota banking corporation ("Mortgagee"), whose post
office address is 50 South Sixth Street, Suite 1000, Minneapolis MN 55402.

      WITNESSETH, that the said Mortgagor in consideration of the debt
hereinafter described and the sum of One and No/100 Dollar ($1.00) to the
Mortgagor in hand paid by the said Mortgagee, the receipt whereof is hereby
acknowledged, does hereby MORTGAGE, GRANT, BARGAIN, SELL AND CONVEY unto said
Mortgagee, its successors and assigns, forever, AND GRANTS TO THE MORTGAGEE A
SECURITY INTEREST IN all of the following properties hereinafter set forth (all
of the following being hereafter collectively referred to as the "Premises").

THE MAXIMUM PRINCIPAL INDEBTEDNESS SECURED HEREBY IS ONE MILLION THREE HUNDRED
AND SIXTY THOUSAND AND 00/100 ($1,360,000.00) DOLLARS.

                                A. REAL PROPERTY

      All the tracts or parcels of real property lying and being in the County
of Wright, State of Minnesota, all as more fully described in Exhibit "A"
attached hereto and made a part hereof, together with all the estates and rights
in and to the real property and in and to lands lying in streets, alleys and
roads adjoining the real property and all buildings, structures, improvements,
fixtures and annexations, access rights, easements, rights of way or use,
servitudes, licenses, tenements, hereditaments and appurtenances now or
hereafter belonging or pertaining to the real property; and

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                              B. PERSONAL PROPERTY

      All buildings, improvements, fixtures, fittings and furnishings, owned by
Mortgagor and now or hereafter attached to, located at or placed in the
improvements on the Premises including, without limitation (i) all machinery,
fittings, fixtures, apparatus, equipment or articles used to supply heating,
gas, electricity, air conditioning, water, light, waste disposal, power,
refrigeration, ventilation, and fire and sprinkler protection, (ii) all
maintenance supplies and repair equipment, (iii) all draperies, carpeting, floor
coverings, screens, storm windows and window coverings, blinds, awnings,
shrubbery and plants, (iv) all elevators, escalators and shafts, motors,
machinery, fittings and supplies necessary for their use, (v) all building
materials and supplies now or hereafter delivered to the Premises (it being
understood that the enumeration of any specific articles of property shall in no
way be held to exclude any items of property not specifically enumerated), as
well as renewals, replacements, proceeds, additions, accessories, increases,
parts, fittings, insurance payments, awards and substitutes thereof, together
with all interest of Mortgagor in any such items hereafter acquired, as well as
the Mortgagor's interest in any lease, or conditional sales agreement under
which the same is acquired, all of which property mentioned herein shall be
deemed fixtures and accessory to the freehold and a part of the realty and not
severable in whole or in part without material injury to the Premises, (vi) all
plans and specifications now or hereafter prepared and used in the Premises by
any contractor or by others, and all surveys, site drawings, drawings and papers
related thereto, as well as any and all design documents prepared and delivered
in connection with the Premises, (vii) each contract or agreement for the
design, construction and equipping of the improvements located or to be located
on the Premises, together with all rights, title and interest of Mortgagor in
and to any existing or future changes, extensions, revisions, modifications,
guarantees or performance, or warranties of any kind thereunder including any
contract between the mortgagor, as owner, and any third party, as contractor,
and/or all of Mortgagor's right, title or interest in any architect, as project
architect, for the construction of any of the improvements on the Premises,
and/or such contracts between the Mortgagor, as owner, and any architect, as
project architect, for the providing of design and architectural services to the
Premises, (viii) all soil reports, building permits, variances, licenses,
utility permits, and other permits related to the construction of improvements
on the Premises or maintenance of the Premises, including without limitation,
all warranties and contract rights, and (ix) all rights and interests of
Mortgagor in and under any and all service agreements and other agreements
relating to the operation, maintenance, repair of the Premises and the buildings
and improvements thereon; and

                          C. RENTS, LEASES AND PROFITS

      All rents, income, contract rights, leases and profits now due or which
may hereafter become due under or by virtue of any lease, license, sublease, or
agreement, whether written or verbal, for the use or occupancy of the Premises
or any part thereof together with all tenant security deposits; and

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                             D. JUDGMENTS AND AWARDS

      All awards, compensation and settlements in lieu therefore made as a
result of the taking by power of eminent domain of the whole or any part of the
Premises, including any awards for damages sustained to the Premises, for a
temporary taking, change of grade of streets or taking of access.

      TO HAVE AND TO HOLD THE SAME, together with the possession and right of
possession of the Premises, unto the Mortgagee, its successors and assigns,
forever.

      PROVIDED NEVERTHELESS, that if the Mortgagor, its successors or assigns,
shall pay to the Mortgagee, its successors or assigns, the sum of One Million
Three Hundred and Sixty Thousand and 00/100 ($1,360,000.00) Dollars, according
to the terms of that certain promissory note in said principal amount of even
date herewith ("Note") executed by the Mortgagor and payable to the Mortgagee,
the terms and conditions of which are incorporated herein by reference and made
a part hereof, together with any extensions, amendments, modifications or
renewals thereof, due and payable with interest thereon at the initial rate of
five and thirty-seven one hundredths (5.37%) percent per annum, and as such rate
may thereafter be adjusted in accordance with the terms of the Note, the balance
of said principal sum together with interest thereon being due and payable in
any event on May 1, 2014 and shall repay to the Mortgagee, its successors or
assigns, at the times demanded and with interest thereon at the interest rate
then in effect on the Note, all sums advanced in protecting the lien of this
Mortgage, in payment of taxes on the Premises, in payment of insurance premiums
covering improvements thereon, in payment of principal and interest on prior
liens, in payment of expenses and attorneys' fees herein provided for and all
sums advanced for any other purpose authorized herein, (the Note and all such
sums, together with interest thereon, being collectively referred to as the
"Indebtedness Secured Hereby") and shall keep and perform all of the covenants
and agreements herein contained, then this Mortgage shall become null and void,
and shall be released at Mortgagor's expense.

               AND IT IS FURTHER COVENANTED AND AGREED AS FOLLOWS:

                                   ARTICLE ONE
                    GENERAL COVENANTS, AGREEMENTS, WARRANTIES

      1.1   PAYMENT OF INDEBTEDNESS: OBSERVANCE OF COVENANTS. Mortgagor will
duly and punctually pay each and every installment of principal and interest on
the Note and all other Indebtedness Secured Hereby, as and when the same shall
become due, and shall duly and punctually perform and observe all of the
covenants, agreements and provisions contained herein, in the Note and any other
instrument given as security for the payment of the Indebtedness Secured Hereby
or in conjunction with the Note.

      1.2   MAINTENANCE AND REPAIRS. Mortgagor shall not abandon the Premises,
shall keep and maintain the Premises in good condition, repair and operating
condition free from any waste or misuse, and shall promptly repair or restore
any buildings, improvements or structures now or hereafter on the Premises which
may become damaged or destroyed to their condition prior to any such damage or
destruction. Mortgagor further agrees that without the prior consent of the

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Mortgagee it will not expand any improvements on the Premises, erect any new
improvements or make any material alterations in any improvements which shall
alter the basic structure, affect the market value or change the existing
architectural character of the Premises, nor remove or demolish any improvements
and shall complete within a reasonable time any buildings now or at any time in
the process of erection on the Premises.

      1.3   COMPLIANCE WITH LAWS. Mortgagor shall comply with all requirements
of law, municipal ordinances and regulations affecting the Premises, shall
comply with all private restrictions and covenants affecting the Premises and
shall not acquiesce in or seek any rezoning classification affecting the
property.

      1.4   PAYMENT OF OPERATING COSTS: PRIOR MORTGAGES AND LIENS. Mortgagor
shall pay all operating costs and expenses of the Premises, shall keep the
Premises free from levy, attachment, mechanic's, materialmen's and other liens
("Liens") and shall pay when due all indebtedness which may be secured by
mortgage, lien or charge on the Premises.

      1.5.  PAYMENT OF IMPOSITIONS. Mortgagor shall pay when due and in any
event before any penalty attaches all taxes, assessments, governmental charges,
water charges, sewer charges, and other fees, taxes, charges and assessments of
every kind and nature whatsoever assessed or charged against or constituting a
Lien on the Premises or any interest therein ("Impositions") and will upon
demand furnish to the Mortgagee proof of the payment of any such Impositions. In
the event of a court decree or an enactment after the date hereof by any
legislative authority of any law imposing upon a mortgagee the payment of the
whole or any part of the Impositions herein required to be paid by the
Mortgagor, or changing in any way the laws relating to the taxation of mortgages
or debts secured by mortgages or a mortgagee's interest in mortgaged premises,
so as to impose such Imposition on the Mortgagee or on the interest of the
Mortgagee in the Premises then, in any such event, Mortgagor shall bear and pay
the full amount of such Imposition, provided that if for any reason payment by
Mortgagor of any such Imposition would be unlawful, or if the payment thereof
would constitute usury or render the Indebtedness Secured Hereby wholly or
partially usurious, Mortgagee, at its option, may declare the whole sum secured
by this Mortgage with interest thereon to be immediately due and payable,
without prepayment premium, or Mortgagee, at its option, may pay that amount or
portion of such Impositions as renders the Indebtedness Secured Hereby unlawful
or usurious, in which event Mortgagor shall concurrently therewith pay the
remaining lawful and non-usurious portion or balance of said imposition.

      1.6   CONTEST OF IMPOSITIONS, LIENS AND LEVIES. Mortgagor shall not be
required to pay, discharge or remove any Impositions, so long as the Mortgagor
shall in good faith contest the same or the validity thereof by appropriate
legal proceedings which shall operate to prevent the collection of the
Imposition so contested and the sale of the Premises, or any part thereof to
satisfy the same, provided that the Mortgagor shall, prior to the date such
Imposition is due and payable, have given such reasonable security as may be
demanded by the Mortgagee to insure such payments and prevent any sale or
forfeiture of the Premises by reason of such nonpayment. Any such contest shall
be prosecuted with due diligence and the Mortgagor shall promptly after final
determination thereof pay the amount of any such Imposition so determined,
together with all interest and penalties that may be payable in connection
therewith.

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Notwithstanding the provisions of this Section, Mortgagor shall (and if
Mortgagor shall fail to do so, Mortgagee may, but shall not be required to) pay
any such Imposition notwithstanding such contest if in the reasonable opinion of
the Mortgagee, the Premises shall be in jeopardy or in danger of being forfeited
or foreclosed.

      1.7   PROTECTION OF SECURITY. Mortgagor agrees to promptly notify
Mortgagee of and appear in and defend any suit, action or proceeding that
affects the value of the Premises, the Indebtedness Secured Hereby or the rights
or interest of Mortgagee hereunder. The Mortgagee may elect to appear in or
defend any such action or proceeding and Mortgagor agrees to indemnify and
reimburse Mortgagee from any and all loss, damage, expense or cost arising out
of or incurred in connection with any such suit, action or proceeding, including
costs of evidence of title and reasonable attorneys' fees and costs.

      1.8   ANNUAL STATEMENTS. Mortgagor shall within ninety (90) days after the
end of each fiscal year furnish to the Mortgagee audited financial and operating
statements of the Mortgagor for such fiscal year, including a balance sheet and
a profit and loss statement, all in reasonable detail and conforming to
generally accepted accounting principles. Mortgagor shall also within thirty
(30) days after the end of each month year furnish to the Mortgagee the interim
financial statements of the Mortgagor. All such financial statements shall be
prepared and certified by the Mortgagor to the satisfaction of the Mortgagee at
the expense of Mortgagor. In the event Mortgagor fails to furnish any such
financial statements, the Mortgagee may cause an audit to be made of the
respective books and records at the sole cost and expense of the Mortgagor (and
Mortgagee may add the expenses of such audit to the Loan) or otherwise declare
an Event of Default hereunder. Mortgagee also shall have the right to examine at
their place of safekeeping at reasonable times all books, accounts and records
relating to the business operations of the Mortgagor and the operation of the
Premises.

      1.9   ADDITIONAL ASSURANCES. Mortgagor agrees upon reasonable request by
the Mortgagee to execute and deliver such further instruments, financing
statements under the Uniform Commercial Code and assurances and will do such
further acts as may be necessary or proper to carry out more effectively the
purposes of this Mortgage and without limiting the foregoing, to make subject to
the lien hereof any property agreed to be subjected hereto or covered by the
granting clause hereof, or intended so to be. Mortgagor agrees to pay any
recording fees, filing fees, taxes or other charges arising out of or incident
to the filing or recording of the Mortgage, such further assurances and
instruments and the issuance and delivery of the Note.

      1.10  HAZARDOUS MATERIALS. Mortgagor covenants, represents and warrants to
Mortgagee, its successors and assigns, that except as otherwise disclosed in the
Phase I Environmental Report delivered to Mortgagee in conjunction herewith, the
Premises as existing and to the best of Mortgagor's knowledge, all prior uses of
the Premises comply and have at all times complied with, and Mortgagor is not in
violation of, has not violated and will not violate, in connection with the
ownership, use, maintenance or operation of the Premises and the conduct of the
business related thereto, any applicable federal, state, county or local
statutes, laws regulations, rules, ordinances, codes, standards, orders,
licenses and permits of any governmental authorities relating to environmental
matters (being hereinafter collectively referred to as the "Environmental
Laws"), including by way of illustration and not by way of limitation: The
Comprehensive

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Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601
et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et
seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Section 1802 et
seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; the
Federal Water Pollution Control Act, 33 U.S.C. Section  1251 et seq.; the Clean
Water Act, 33 U.S.C. Section 1321 et seq.; the Clean Air Act, 42 U.S.C. Section
7401 et seq.; the Minnesota Environmental Response and Liability Act, Minn.
Stat. Chap. 115B; the Minnesota Petroleum Tank Release Cleanup Act, Minn. Stat.
Chap. 115C; and any other federal, state, county, municipal or local statute,
law, ordinance or regulation that relates to or deals with human health or the
environment, all as may from time to time be amended, and including any rules,
regulations, standards or guidelines issued pursuant to any of said
Environmental Laws, and (b) all other applicable environmental standards or
requirements. Without limiting the generality of the foregoing: i) Mortgagor,
its agents, employees and independent contractors, (a) has and will operate the
Premises and has and at all times will receive, handle, use, store, treat,
transport and dispose of all petroleum products and all other toxic dangerous or
hazardous chemicals, materials, substances, pollutants and wastes, and any
chemical, material or substance exposure to which is prohibited, limited or
regulated by any federal, state, county, regional or local authority or which
even if not so prohibited, limited or regulated, may or could pose a hazard to
the health and safety of the occupants of the Premises or the occupants and/or
owners of property near the Premises (all the foregoing being hereinafter
collectively referred to as "Hazardous Materials") in strict compliance with all
applicable environmental, health or safety statutes, ordinances, orders, rules,
standards, regulations or requirements, and (b) except as specifically consented
to by Mortgagee in writing, has removed or will remove from the Premises all
Hazardous Materials; ii) there are no existing or pending statutes, orders,
standards, rules or regulations relating to environmental matters requiring any
remedial actions or other work, repairs, construction or capital expenditures
with respect to the Premises, nor has Mortgagor received any notice of any of
the same, except as Mortgagor has specifically advised Mortgagee in a writing to
which Mortgagee has given specific written consent; iii) no Hazardous Materials
will be or to the best of Mortgagor's knowledge have been released into the
environment, or will be or to the best of Mortgagor's knowledge have been
deposited, spilled, discharged, placed or disposed of at, on or near the
Premises, nor has or will the Premises be used at any time by any person as a
landfill or a disposal site for Hazardous Materials or for garbage, waste or
refuse of any kind; iv) there are no electrical transformers or other equipment
containing dielectric fluid containing polychlorinated biphenyls located in, on
or under the Premises, nor is there any friable asbestos contained in, on or
under the Premises, nor will Mortgagor permit the installation of same; v) there
are no locations off the Premises where Hazardous Materials generated by or on
the Premises have been treated, stored, deposited or disposed of; vi) there is
no fact pertaining to the physical condition of either the Premises or the area
surrounding the Premises of which Mortgagor has knowledge (a) which Mortgagor
has not disclosed to Mortgagee in writing prior to the date of this Mortgage,
and (b) which materially adversely affects or will materially adversely affect
the Premises or the use or enjoyment or the value thereof, or Mortgagor's
ability to perform the transactions contemplated by this Mortgage; vii) no
notices of any violation of any of the matters referred to in the foregoing
sections relating to the Premises or its use have been received by Mortgagor and
there are no writs, injunctions, decrees, orders or judgments outstanding, no
lawsuits, claims, proceedings or investigations pending or threatened, relating
to the ownership, use, maintenance or operation of the Premises, nor is there
any basis for any such lawsuit, claim, proceeding or investigation being
instituted or filed, and viii) the Premises is not listed in the United States
Environmental Protection Agency's National Priorities List of Hazardous

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Waste Sites nor any other log, list, schedule, inventory or record of Hazardous
Materials or Hazardous Waste sites whether maintained by the United States, any
state or local governmental unit. The Mortgagor agrees to indemnify and
reimburse the Mortgagee, its successors and assigns, for any breach of these
representations and warranties and from any loss, damage, expense or cost
arising out of or incurred by Mortgagee which is the result of a breach of,
misstatement of or misrepresentation of the above covenants, representations and
warranties, or for any loss, damage, expense or cost sustained as a result of
their being located on the Premises any Hazardous Materials or dangerous, toxic
or hazardous pollutants, chemicals, wastes or substances, together with all
attorneys' fees incurred in connection with the defense of any action against
the Mortgagee arising out of the above. These covenants, representations,
warranties and indemnities shall be deemed continuing covenants,
representations, warranties and indemnities running with the Land for the
benefit of the Mortgagee, and any successors and assigns of the Mortgagee,
including any purchaser at a mortgage foreclosure sale, any transferee of the
title of the Mortgagee or any subsequent purchaser at a foreclosure sale, and
any subsequent owner of the Premises claiming through or under the title of
Mortgagee and shall survive any foreclosure of this Mortgage and any acquisition
of title of Mortgagee. The amount of all such indemnified loss, damage, expense
or cost, shall bear interest thereon at the rate of interest in effect on the
Note and shall become so much additional Indebtedness Secured Hereby and shall
become immediately due and payable in full on demand of the Mortgagee, its
successors and assigns. The indemnification provisions contained in this Section
1.10 shall be a personal monetary obligation of the Mortgagor notwithstanding
any provisions of this Mortgage or the Note to the contrary that limit or exculp
the personal liability of the Mortgagor and/or require the Mortgagee to look
solely to the security of the Premises. Notwithstanding anything to the
contrary, nothing in this Paragraph 1.10 shall be limited by or modified by the
environmental indemnity agreement, executed by Mortgagor in favor of Mortgagee,
if any is executed herewith.

      1.11  TITLE. Mortgagor is the lawful owner of and has good and marketable
fee simple absolute title to the Premises and will warrant and defend title to
the same free of all liens and encumbrances, other than the Encumbrances
permitted under the policy of Mortgagee's title insurance issued to Mortgagee in
connection with this Mortgage, and has good right and lawful authority to grant,
bargain, sell, convey, mortgage and grant a security interest in the Premises as
provided herein.

      1.12  NO CONFLICT WITH OTHER DOCUMENTS' OBLIGATIONS. The execution and
delivery by Mortgagor of this Mortgage, the Note, the other collateral documents
to which the Mortgagor is a party and any other instruments contemplated hereby
or securing the Note, the consummation of the transactions contemplated hereby
and thereby, and the fulfillment of the terms and conditions hereof and thereof
do not and will not conflict with or result in a breach of any court order,
judgment or decree or of any mortgage, indenture, loan agreement or instrument
or to which the Mortgagor or to which any property of the Mortgagor is subject,
and do not and will not constitute a default under any of the foregoing, or
result in the creation or imposition of any lien charge or encumbrance of any
nature upon any of the property or assets of the Mortgagor contrary to the terms
of any instrument or agreement.

      1.13  NO SUITS PENDING. There are no actions, suits or proceedings pending
or, to the knowledge of the Mortgagor, threatened against the Mortgagor or the
Premises in any court or

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before any federal, state, county, city or other governmental authority or
before any arbitrator which, if decided adversely to the Mortgagor would have a
materially adverse effect upon the Mortgagor or upon the Premises, or the value
thereof, and the Mortgagor is not in default with respect to any order of any
court or governmental agency.

      1.14  CURRENT COMPLIANCE WITH LAWS. The Premises as improved on the date
hereof, comply with all material requirements of law, including requirements of
any federal and state, county, city or other governmental authority having
jurisdiction over the Mortgagor or the Premises and including, but not limited
to, any applicable zoning, occupational safety and health, energy and
environmental laws, ordinances and regulations; there is no hazardous waste
contamination in or about the Premises and no pollutants are stored thereon; and
the Mortgagor has obtained all necessary consents, permits and licenses to
construct, occupy and operate the Premises for its intended purposes.

                                   ARTICLE TWO
                              INSURANCE AND ESCROWS

      2.1   INSURANCE. Mortgagor shall obtain, pay for and keep in full force
and effect during the term of this Mortgage at Mortgagor's sole cost and
expense, the following policies of insurance:

            (a)   Insurance against loss of fire, lightning and risk customarily
                  covered by standard extended coverage endorsement, including
                  the cost of debris removal, together with a vandalism and
                  malicious mischief endorsement, all in the amounts of not less
                  than the full replacement cost of the improvements on the
                  Premises;

            (b)   Broad Form Boiler and Machinery insurance on all pressure
                  fired vehicles or apparatus situate on the Premises with full
                  repair and replacement cost coverage;

            (c)   Flood insurance in the maximum obtainable amount but not to
                  exceed the replacement cost of the improvements on the
                  Premises unless evidence is provided that the Premises are not
                  within a flood plain as defined by the Federal Insurance
                  Administration;

            (d)   Rents Loss or Business Interruption Insurance covering risk or
                  loss due to the occurrence of any hazards insured against
                  under the required fire and extended coverage insurance in an
                  amount equal to 12 months loss of income;

            (e)   Commercial general public liability insurance covering the
                  legal liability of the Mortgagor against claims for bodily
                  injury, death or property damage occurring on, in or about the
                  Premises in such minimal amount and with such minimal limits
                  as the Mortgagee may reasonably require;

            (f)   While any building is in the process of construction on the
                  Premises a hazard insurance policy written on the so called
                  "builders risk completed value form," all risk non-reporting
                  form of policy for the full replacement cost of the building
                  and such worker's compensation insurance as is required by
                  statute.

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      Such insurance policies shall be written on forms and with insurance
companies satisfactory to Mortgagee, shall be in the amounts sufficient to
prevent the Mortgagor from becoming a co-insurer of any loss thereunder, and
shall bear a satisfactory mortgagee clause in favor of the Mortgagee with loss
proceeds under any such policies to be made payable to the Mortgagee. All
required policies of insurance or acceptable certificates thereof together with
evidence of the payment of current premiums therefor shall be delivered to and
be held by the Mortgagee. Mortgagor shall deliver to Mortgagee certificates of
insurance or copies of policies satisfactory to Mortgagee evidencing the
insurance that is required under this Section, and Mortgagor shall promptly
furnish to Mortgagee all renewal notices and all receipts of paid premiums
received by Mortgagor. At least thirty (30) days prior to the expiration date of
a required policy, Mortgagor shall deliver to Mortgagee a renewal policy or
certificate of insurance in form satisfactory to Mortgagee. The Mortgagor shall,
within thirty (30) days prior to the expiration of any such policy, deliver
other original policies or certificates of the insurer evidencing the renewal of
such insurance together with evidence of the payment of current premiums
therefor. In the event of a foreclosure of this Mortgage or any acquisition of
the Premises by the Mortgagee, all such policies and any proceeds payable
therefrom, whether payable before or after a foreclosure sale, or during the
period of redemption, if any, shall become the absolute property of the
Mortgagee to be utilized at its discretion. In the event of foreclosure or the
failure to obtain and keep any required insurance, the Mortgagor empowers the
Mortgagee to effect insurance upon the Premises at Mortgagor's expense and for
the benefit of the Mortgagee in the amounts and types set forth above for a
period of time covering the time of redemption from foreclosure sale, and if
necessary, to cancel any or all existing insurance policies. At least once every
three (3) years while any sums remain outstanding under the Note, Mortgagor
agrees to cause its insurance coverage to be reappraised and furnish Mortgagee
copies of the reappraisal reports and insurance recommendations.

      2.2   ESCROWS. Mortgagor shall deposit with the Mortgagee, or at
Mortgagee's request, with a servicing agent, on same day as payments are due
under the Note each and every month hereafter as a deposit to pay the costs of
taxes, assessments and insurance premiums next due ("Charges"):

            (a)   Initially a sum such that the amounts to be deposited pursuant
                  to paragraph 2.2 (b) shall equal the estimated Charges; and

            (b)   Thereafter an amount equal to one-twelfth (1/12th) of the
                  estimated annual Charges due on the Premises.

Mortgagee will, upon the presentation to the Mortgagee by the Mortgagor of the
bills therefor, pay the Charges from such deposits or will upon presentation of
receipted bills therefor, reimburse the Mortgagor for such payments made by the
Mortgagor. In the event the deposits on hand shall not be sufficient to pay all
of the estimated Charges when the same shall become due from time to time, or
the prior deposits shall be less than the currently estimated monthly amounts,
then the Mortgagor shall pay to the Mortgagee on demand any amount necessary to
make up the deficiency. The excess of any such deposits shall be credited to
subsequent payments to be made for such items. If a default or an event of
default shall occur under the terms of this Mortgage, the Mortgagee may, at its
option, without being required so to do, apply any deposits on hand to the
Indebtedness Secured Hereby, in such order and manner as the Mortgagee may
elect. When the Indebtedness Secured Hereby has been fully paid, any remaining
deposits, shall be returned to the Mortgagor as its

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interest may appear. All deposits are hereby pledged as additional security for
the Indebtedness Secured Hereby, shall be held for the purposes for which they
were made as herein provided, may be held by Mortgagee or its servicing agent
and may be commingled with other funds of the Mortgagee, or its servicing agent,
shall be held without any allowance of interest thereon and shall not be subject
to the decision or control of the Mortgagor. Neither Mortgagee nor its servicing
agent shall be liable for any act or omission made or taken in good faith. In
making any payments, Mortgagee or its servicing agent may rely on any statement,
bill or estimate procured from or issued by the payee without inquiry into the
validity or accuracy of the same. If the taxes shown in the tax statement shall
be levied on property more extensive than the Premises, then the amounts
escrowed shall be based on the entire tax bill and Mortgagor shall have no right
to require an apportionment and Mortgagee or its servicing agent may pay the
entire tax bill notwithstanding that such taxes pertain in part to other
property and the Mortgagee shall be under no duty to seek a tax division or
apportionment of the tax bill.

                                  ARTICLE THREE
                   UNIFORM COMMERCIAL CODE SECURITY AGREEMENT

      3.1   SECURITY AGREEMENT. This Mortgage shall constitute a security
agreement as defined in the Uniform Commercial Code ("Code"). Any equipment or
fixtures installed in or used in the Premises are to be used by the Mortgagor
solely for the Mortgagor's business purposes or as the equipment and fixtures
leased or furnished by the Mortgagor, as landlord, to tenants of the Premises
and such equipment or fixtures will be kept at the buildings on the Premises and
will not be removed therefrom without the consent of the Mortgagee and may be
affixed to such buildings but will not be affixed to any other real estate. The
remedies of the Mortgagee hereunder are cumulative and separate, and the
exercise of any one or more of the remedies provided for herein or under the
Uniform Commercial Code shall not be constructed as a waiver of any of the other
rights of the Mortgagee including having any non-realty items of the Premises
deemed part of the realty upon any foreclosure thereof. If notice to any party
of the intended disposition of the Premises is required by law in a particular
instance, such notice shall be deemed commercially reasonable if given at least
ten (10) days prior to such intended disposition and may be given by
advertisement in a newspaper accepted for legal publications either separately
or as part of a notice given to foreclose the real property or may be given by
private notice if such parties are known to Mortgagee. Neither the grant of a
security interest pursuant to this Mortgage nor the filing of a financing
statement pursuant to the Code shall ever impair the stated intention of this
Mortgage that all personal property, rents, leases and profits and judgments and
awards comprising and at all times and for all purposes and in all proceedings
both legal or equitable shall be regarded as part of the real property mortgaged
hereunder irrespective of whether such item is physically attached to the real
property or any such item is referred to or reflected in a financing statement.
Mortgagor will on demand deliver any financing statements that may from time to
time be required by Mortgagee to establish and perfect the priority of
Mortgagee's security interest in the Premises and shall pay all expenses
incurred by Mortgagee in connection with the renewal or extensions of any
financing statements executed in connection with the Premises; and shall give
advance written notice of any proposed change in Mortgagor's name, identity or
structure and will execute and deliver to Mortgagee prior to or concurrently
with such change all additional financing statements that Mortgagee may require
to establish and perfect the priority of Mortgagee's security interest.

                                       10
<PAGE>

      3.2   MAINTENANCE OF PROPERTY. Subject to the provisions of this section,
in any instance where Mortgagor in its sound discretion determines that any item
subject to a security interest under this Mortgage has become inadequate,
obsolete, worn out, unsuitable, undesirable or unnecessary for the operation of
the Premises, Mortgagor may, at its expense, remove and dispose of it and
substitute and install other items not necessarily having the same function,
provided that such removal and substitution shall not impair the operating
utility and unity of the Premises. All substituted items shall become a part of
the Premises and subject to the lien of the Mortgage. Any amounts received or
allowed Mortgagor upon the sale or other disposition of the removed items of
property shall be applied first against the cost of acquisition and installation
of the substituted items. Nothing herein contained shall be construed to prevent
any tenant from removing from the Premises trade fixtures, furniture and
equipment installed by the tenant and removable by the tenant under the terms of
its lease, on the condition, however, that the tenant shall at its own cost and
expense, repair any and all damages to the Premises resulting from or caused by
the removal thereof.

      3.3   MORTGAGOR TO COMPLY WITH PRIOR SECURITY INSTRUMENTS. Mortgagor shall
at its sole cost and expense perform, comply with and discharge all obligations
of Mortgagor under any prior secured financing arrangements (whether lease
purchase, conditional sales or pure lease arrangements) for any property subject
to this security interest. Mortgagor shall not permit a surrender, assignment or
transfer of its interest in any such property without a prior written consent of
Mortgagee nor permit or suffer a default to exist under such prior financing
arrangements.

      3.4   FIXTURE FILING. THIS MORTGAGE SHALL BE EFFECTIVE AS A FINANCING
STATEMENT FILED AS A FIXTURE FILING WITH RESPECT TO ALL GOODS CONSTITUTING A
PART OF THE PREMISES WHICH ARE OR ARE TO BECOME FIXTURES RELATED TO THE
PREMISES. FOR PURPOSES OF THE UNIFORM COMMERCIAL CODE, THE FOLLOWING INFORMATION
IS FURNISHED:

            (a)   The name and address of the record owner of the real estate
                  described in this instrument is:

                  WSI Industries, Inc.
                  213 Chelsea Road
                  Monticello, Minnesota 55362

            (b)   the name and address of the Debtor is:

                  WSI Industries, Inc.
                  213 Chelsea Road
                  Monticello, Minnesota 55362

            (c)   the name and address of the Secured Party is:

                  Excel Bank Minnesota

                                       11
<PAGE>

                  50 South Sixth Street, Suite 1000
                  Minneapolis MN 55402

            (d)   Information concerning the security interest evidenced by this
                  instrument may be obtained from the Secured Party at its
                  address above.

            (e)   This document covers goods, which are or are to become
                  fixtures.

            (f)   The legal description of the real estate is: See attached
                  Exhibit A.

            (g)   The federal tax identification number of the Debtor is:
                  41-0691607 and the state charter number of the Debtor is:
                  K-680.

      3.5   MORTGAGOR'S REPRESENTATION AND WARRANTIES REGARDING THE SECURITY
INTEREST. The Mortgagor is a corporation and the true and correct address of the
Mortgagor's chief executive office is shown in Section 3.4(b) above, and all
other information contained in Section 3.4 above is true, correct and accurate.
The Mortgagor has not used any trade name, assumed name, or other name except
the Mortgagor's name stated above. The Mortgagor shall not change its state of
organization without the Mortgagee's prior written consent. The Mortgagor shall
give the Mortgagee prior written notice of any change in such address or the
Mortgagor's name or if the Mortgagor uses any other name. The Mortgagor has
authority to execute and perform this instrument. The Mortgagor authorizes the
Mortgagee to file all of the Mortgagee's financing statements and amendments to
financing statement, and all terminations of the filings of other secured
parties, all with respect to the Premises and the collateral described in this
document, in such form and substance as the Mortgagee, in its sole discretion,
may determine.

                                  ARTICLE FOUR
                       APPLICATION OF INSURANCE AND AWARDS

      4.1   DAMAGE OR DESTRUCTION OF THE PREMISES. Mortgagor shall give the
Mortgagee prompt notice of any damage to or destruction of the Premises and in
case of loss covered by policies of insurance, the Mortgagee (whether before or
after foreclosure sale) is hereby authorized at its option to settle and adjust
any claim arising out of such policies and collect and receive the proceeds
payable therefrom, provided, that the Mortgagor may itself adjust and collect
for any losses arising out of a single occurrence aggregating not in excess of
$50,000.00. Any expense incurred by the Mortgagee in the adjustment and
collection of insurance proceeds (including the cost of any independent
appraisal of the loss or damage on behalf of Mortgagee) shall be reimbursed to
the Mortgagee first out of any proceeds. The proceeds or any part thereof shall
be applied to reduction of the Indebtedness Secured Hereby then most remotely to
be paid, whether due or not, without the application of any prepayment premium,
or to the restoration or repair of the Premises, the choice of application to be
solely at the discretion of Mortgagee.

      4.2   CONDEMNATION. Mortgagor shall give the Mortgagee prompt notice of
any actual or threatened condemnation or eminent domain proceedings affecting
the Premises and hereby assigns, transfers, and sets over to the Mortgagee the
entire proceeds of any award or claim for

                                       12
<PAGE>

damages or settlement in lieu thereof for all or any part of the Premises taken
or damaged under such eminent domain or condemnation proceedings, the Mortgagee
being hereby authorized to intervene in any such action and to collect and
receive from the condemning authorities and give proper receipts and
acquittances for such proceeds. Mortgagor will not enter into any agreements
with the condemning authority permitting or consenting to the taking of the
Premises or agreeing to a settlement unless prior written consent of Mortgagee
is obtained. Any expenses incurred by the Mortgagee in intervening in such
action or collecting such proceeds, including reasonable attorney's fees, shall
be reimbursed to the Mortgagee first out of the proceeds. The proceeds or any
part thereof shall be applied upon or in reduction of the Indebtedness Secured
Hereby then most remotely to be paid, whether due or not, without the
application of any prepayment premium, or to the restoration or repair of the
Premises, the choice of application to be solely at the discretion of Mortgagee.

      4.3   DISBURSEMENT OF INSURANCE AND CONDEMNATION PROCEEDS. Any restoration
or repair shall be done under the supervision of an architect acceptable to
Mortgagee and pursuant to plans and specifications approved by the Mortgagee. In
such case where Mortgagee may elect to apply the proceeds to repair or
restoration or permit the Mortgagor to so apply the proceeds, then the proceeds
shall be held by Mortgagee for such purposes and will from time to time be
disbursed by Mortgagee to defray the costs of such restoration or repair under
such safeguards and controls as Mortgagee may establish to assure completion in
accordance with the approved plans and specifications and free of liens or
claims. Mortgagor shall on demand deposit with Mortgagee any sums necessary to
make up any deficits between the actual cost of the work and the proceeds and
provide such lien waivers and completion bonds as Mortgagee may reasonably
require. Any surplus which may remain after payment of all costs of restoration
or repair may at the option of the Mortgagee be applied on account of the
Indebtedness Secured Hereby then most remotely to be paid, whether due or not,
without application of any prepayment premium or shall be returned to Mortgagor
as Mortgagor's interest may appear, the choice of application to be solely at
the discretion of Mortgagee.

      4.4   RIGHT TO USE INSURANCE PROCEEDS. Notwithstanding the foregoing
provisions regarding the disposition of insurance proceeds, but only if
Mortgagor meets the following conditions, Mortgagee will not elect to apply all
of such proceeds to the Indebtedness Secured Hereby, but shall hold such
proceeds in an escrow account of Mortgagee, from which account the proceeds may
be withdrawn only by Mortgagee and shall be readvanced to Mortgagor for the
purpose of reconstructing or restoring the Mortgaged Property under the
following terms and conditions. Mortgagee shall make insurance proceeds
available to Mortgagor ONLY IF: (i) at the time of the occurrence of the event
for which proceeds are being received and at the time of the receipt of such
proceeds, there is no existing uncured Event of Default hereunder; and (ii) the
total proceeds to be received, together with such other sums as Mortgagor may
deposit with Mortgagee, shall be sufficient, in Mortgagee's opinion, to restore
the Mortgaged Property to its original condition. All such proceeds and sums
shall be held by Mortgagee in an interest-bearing deposit account under the sole
and exclusive control and dominion of Mortgagee, and Mortgagor shall have no
right to withdraw or otherwise direct the payment of any funds from such
account. If Mortgagor qualifies for the right to use such proceeds for the
reconstruction and restoration of the Mortgaged Property, then Mortgagee shall
advance such proceeds and sums to Mortgagor in the manner and upon such terms
and conditions as would be required by a prudent interim construction lender,

                                       13
<PAGE>

including, without limitation, Mortgagee's right to require such items as a
sworn construction statement, recordable lien waivers and appropriate title
insurance endorsements. Any excess proceeds and sums and interest thereon not
required to complete such restoration shall, at Mortgagee's option, be applied
first to payment of the Indebtedness Secured Hereby in such manner as Mortgagee
shall determine with any excess to be paid to Mortgagor.

                                  ARTICLE FIVE
                                LEASES AND RENTS

      5.1   MORTGAGOR TO COMPLY WITH LEASES. Mortgagor will, at its own cost and
expense, perform, comply with and discharge all of the obligations of Mortgagor
under any leases or agreements for the use of the Premises and use Mortgagor's
best efforts to enforce or secure the performance of each obligation and
undertaking of the respective tenants under any such leases and will appear in
and defend, at its own cost and expense, any action or proceeding arising out of
or in any manner connected with the Mortgagor's interest in any leases of the
Premises. Mortgagor shall permit no surrender or assignment of any tenant's
interest under said leases unless the right to assign or surrender is expressly
reserved under the lease, accept any installment of rent for more than one month
in advance of its due date, nor execute any mortgage or create or permit a lien
which may be or become superior to any such leases, nor permit a subordination
of any lease to such mortgage or lien. Mortgagor will not materially modify or
amend the terms of any such leases, or borrow against or pledge the rentals from
such leases or exercise or waive any default of the tenant thereunder without
the prior written consent of Mortgagee.

      5.2   MORTGAGEE'S RIGHT TO PERFORM UNDER LEASES. Should the Mortgagor fail
to perform, comply with or discharge any obligations of Mortgagor under any
lease or should the Mortgagee become aware of or be notified by any tenant under
any lease of a failure on the part of Mortgagor to so perform, comply with or
discharge its obligations under said lease, Mortgagee may, but shall not be
obligated to, without further demand upon the Mortgagor, and without waiving or
releasing Mortgagor from any obligation in this Mortgage contained, remedy such
failure, and the Mortgagor agrees to repay upon demand all sums incurred by the
Mortgagee in remedying any such failure together with interest at the rate
specified in the Note. All such sums, together with interest at the rate
described in the Note shall become so much additional Indebtedness Secured
Hereby, but no such advance shall be deemed to relieve the Mortgagor from any
default hereunder.

      5.3   LEASE APPROVAL. Each lease of the Premises to be entered into by
Mortgagor shall be approved by the Mortgagee and shall be satisfactory to the
Mortgagee in form and content. Each such lease at the election of the Mortgagee
will be either superior or subordinate to the lien of the Mortgage and each
tenant shall execute an appropriate subordination or attornment agreement as
required by the Mortgagee. Also, to the extent required by the Mortgagee, each
tenant shall execute an estoppel certificate and at Mortgagee's discretion,
acknowledge receipt of a notice of the assignment of its lease, all satisfactory
in form and content to the Mortgagee.

      5.4   ASSIGNMENT OF LEASES AND RENTS. The Mortgagor does hereby sell,
assign and transfer unto Mortgagee all of the leases, rents, income and profits
now due and which may hereafter become due under or by virtue of any lease,
whether written or verbal, or any agreement

                                       14
<PAGE>

for the use or occupancy of the Premises, it being the intention of this
Mortgage to establish an absolute transfer and assignment of all such leases and
agreements and all of the rents and profits from the Premises unto the Mortgagee
and the Mortgagor does hereby appoint irrevocably the Mortgagee its true and
lawful attorney in its name and stead, which appointment is coupled with an
interest, to collect all of said rents and profits; provided, Mortgagee grants
the Mortgagor the privilege, revocable, to collect and retain such rents,
income, and profits unless and until any Event of Default exists under this
Mortgage.

                                   ARTICLE SIX
                               RIGHTS OF MORTGAGEE

      6.1   RIGHT TO CURE DEFAULT. If the Mortgagor shall fail to comply with
any of the covenants or obligations of this Mortgage, the Mortgagee may, but
shall not be obligated to, without further notice to Mortgagor and without
waiving or releasing Mortgagor from any obligation in this Mortgage contained,
remedy such failure, and the Mortgagor agrees to repay upon demand all sums
incurred by the Mortgagee in remedying any such failure together with interest
at the then rate in effect on the Note. All such sums, together with interest at
the rate described in the Note shall become so much additional Indebtedness
Secured Hereby, but no such advance shall be deemed to relieve the Mortgagor
from any default hereunder.

      6.2   NO CLAIM AGAINST THE MORTGAGEE. Nothing contained in this Mortgage
shall constitute any consent or request by the Mortgagee, express or implied,
for the performance of any labor or services or for the furnishing of any
materials or other property in respect of the Premises or any part thereof, nor
as giving the Mortgagor or any party in interest with Mortgagor any right, power
or authority to contract for or permit the performance of any labor or services
or the furnishing of any materials or other property in such fashion as would
create any personal liability against the Mortgagee in respect thereof or would
permit the making of any claim that any lien based on the performance of such
labor or services or the furnishing of any such materials or other property is
prior to the lien of this Mortgage.

      6.3   INSPECTION. Mortgagor will permit the Mortgagee's authorized
representatives to enter the Premises at reasonable times for the purpose of
inspecting the same; provided the Mortgagee shall have no duty to make such
inspections and shall not incur any liability or obligation for making or not
making any such inspections.

      6.4   WAIVERS; RELEASES; RESORT TO OTHER SECURITY, ETC. Without affecting
the liability of any party liable for payment of any Indebtedness Secured Hereby
or performance of any obligation contained herein, and without affecting the
rights of the Mortgagee with respect to any security not expressly released in
writing, the Mortgagee may, at any time, and without notice to or the consent of
the Mortgagor or any party in interest with the Premises or the Note:

            (a)   release any person liable for payment of all or any part of
                  the Indebtedness Secured Hereby or for performance of any
                  obligation herein;

            (b)   make any agreement extending the time or otherwise altering
                  the terms of

                                       15
<PAGE>

                  payment of all or any part of the Indebtedness Secured Hereby
                  or modifying or waiving any obligation, or subordinating,
                  modifying or otherwise dealing with the lien or charge hereof;

            (c)   accept any additional security;

            (d)   release or otherwise deal with any property, real or personal,
                  including any or all of the Premises, including making partial
                  releases of the Premises; or

            (e)   resort to any security agreements, pledges, contracts of
                  guarantee, assignments of rents and leases or other
                  securities, and exhaust any one or more of said securities and
                  the security hereunder, either concurrently or independently
                  and in such order as it may determine.

      6.5   WAIVER OF APPRAISEMENT, HOMESTEAD, MARSHALING. The Mortgagor waives
to the full extent lawfully allowed the benefit of any homestead, appraisement,
evaluation, stay and extension laws now or hereinafter in force. Mortgagor
waives any rights available with respect to marshaling of assets so as to
require the separate sales of any portion of the Premises, or as to require the
Mortgagee to exhaust its remedies against a specific portion of the Premises
before proceeding against the other and does hereby expressly consent to and
authorize the sale of the Premises or any part thereof as a single unit or
parcel or as separate parcels.

      6.6   EVASION OF PREPAYMENT. If the Note contains a restrictions on any
prepayment of the Indebtedness Secured Hereby, if an Event of Default shall
occur and the Indebtedness Secured Hereby is accelerated a tender of such amount
necessary to satisfy the accelerated amount or a mortgage foreclosure sale under
this Mortgage shall be considered an evasion of the prepayment restrictions of
the Note and the Mortgagee may demand in addition to all other sums due it by
reason of an Event of Default the premium then due under the Note as if
Mortgagor had voluntarily prepaid the same (or if no prepayment be permitted
then with the premium applicable on the earliest date on which the Note may be
prepaid). The Mortgagor expressly waives the provisions of any present or future
statute, law or judicial interpretation or principle that prohibits or may
prohibit the collection of the foregoing premium in connection with any such
acceleration.

                                  ARTICLE SEVEN
                         EVENTS OF DEFAULT AND REMEDIES

      7.1   EVENTS OF DEFAULT. It shall be an event of default ("Event of
Default") under this Mortgage upon the happening of any of the following (after
any required notice and the expiration of any applicable opportunity to cure):

            (a)   failure to comply with any of the provisions of the Note
                  including without limitation the failure to make any payment
                  on the Note whether principal, interest, premium or late
                  charge, when and as the same becomes due (whether at the
                  stated maturity or at a date fixed for any installment payment
                  or any accelerated payment date or otherwise) within five (5)
                  days of the date on which such performance is due; or

            (b)   failure to pay, perform or comply with when due any other
                  Indebtedness Secured Hereby; or

                                       16
<PAGE>

            (c)   failure to comply with or perform any of the other terms,
                  conditions or covenants of this Mortgage and such failure
                  shall continue for a period of fifteen (15) days after notice
                  thereof to Mortgagor or such longer time as may be reasonably
                  necessary for Mortgagor to cure, while acting with due
                  diligence, provided in any event that such time shall be no
                  more than sixty (60) days; or

            (d)   the Mortgagor shall fail to pay Mortgagor's debts as they
                  become due, make an assignment for the benefit of Mortgagor's
                  creditors, or shall admit in writing Mortgagor's inability to
                  pay its debts as they become due or shall file a petition
                  under any chapter of the United States Bankruptcy Code or any
                  similar law, state or federal, now or hereafter existing, or
                  shall become "insolvent" as that term is generally defined
                  under the United States Bankruptcy Code, or shall in any
                  involuntary bankruptcy case commenced against it file an
                  answer admitting insolvency or inability to pay its debts as
                  they become due, or shall fail to obtain a dismissal of such
                  case within sixty (60) days after its commencement or convert
                  the case from one chapter of the United States Bankruptcy Code
                  to another chapter, or be the subject of an order for relief
                  in such bankruptcy case, or be adjudged a bankrupt or
                  insolvent, or shall have a custodian, trustee or receiver
                  appointed for, or have any court take jurisdiction of its
                  property, or any part thereof, in any proceeding for the
                  purpose of reorganization, arrangement, dissolution or
                  liquidation, and such custodian, trustee or receiver shall not
                  be discharged, or such jurisdiction shall not be relinquished,
                  vacated or stayed within sixty (60) days of the appointment;
                  or

            (e)   an event of default shall occur under any other instrument
                  securing the Note and shall not have been cured within the
                  time permitted therein to cure; or

            (f)   a judgment, writ or warrant of attachment or execution, or
                  similar process shall be entered and become a lien or be
                  issued or levied against the Premises and shall not be
                  released or fully bonded within forty-five (45) days after its
                  entry, issue or levy; or

            (g)   any material representation or warranty made by Mortgagor
                  herein, in the Note, the Loan Agreement executed in
                  conjunction herewith, or in any other instrument given as
                  security for payment of the Indebtedness Secured Hereby or
                  executed in conjunction with the Note shall be false, breached
                  or dishonored; or

            (h)   the Mortgagor shall default under or shall fail to comply with
                  any of the terms, conditions or provisions of the Loan
                  Agreement executed in conjunction with this Mortgage.

      7.2   MORTGAGEE'S RIGHT TO ACCELERATE. If an Event of Default shall occur
the Mortgagee may declare the entire unpaid principal balance of the Note
together with all other Indebtedness Secured Hereby to be immediately due and
payable and thereupon all such unpaid principal balance of the Note together
with all accrued interest thereon at the rate of interest provided under the
Note and all other Indebtedness Secured Hereby shall be and become immediately
due and payable.

                                       17
<PAGE>

      7.3   RIGHT TO FORECLOSE. If an Event of Default shall occur the Mortgagee
may, either with or without entry or taking possession, proceed by suit or suits
at law or in equity or by any other appropriate proceedings or remedy to enforce
payment of the Indebtedness Secured Hereby or the performance of any other term
hereof or any other right and the Mortgagor hereby authorizes and fully empowers
the Mortgagee to foreclose this Mortgage by judicial proceedings or by
advertisement with power of sale and grants to the Mortgagee full authority to
sell the Premises at public auction and convey title to the Premises to the
purchaser, either in one parcel or separate lots and parcels, all in accordance
with and in the manner prescribed by law, and out of the proceeds arising from
sale and foreclosure to retain the principal and interest due on the Note and
the Indebtedness Secured Hereby together with all such sums of money as
Mortgagee shall have expended or advanced pursuant to this Mortgage or pursuant
to statute together with interest thereon at the rate of interest described in
the Note and all costs and expenses of such foreclosure, including lawful
attorneys' fees, with the balance, if any, to be paid to the persons entitled
thereto by law. In any such proceeding the Mortgagee may apply all or any
portion of the Indebtedness Secured Hereby to the amount of the purchase price.

      7.4   RECEIVER. If an Event of Default shall occur, the Mortgagee shall be
entitled as a matter of right without notice and without giving bond and without
regard to the solvency or insolvency of the Mortgagor, or waste of the Premises
or adequacy of the security of the Premises, to apply for the appointment of a
Receiver (a) under Minn. Stat. Section 576.01 or any successor or supplementary
statute thereto who shall have all the rights, powers and remedies as provided
by such statute and who shall apply the rents, issues and profits as provided by
statute and thereafter to all expenses for maintenance of the Premises and to
the costs and expenses of the receivership, including reasonable attorneys' fees
and to the repayment of the Indebtedness Secured Hereby or (b) pursuant to any
assignment of leases and rents described herein or otherwise executed by the
Mortgagor to the Mortgagee who shall in addition to the rights, powers and
remedies as provided by statute have such rights, powers and remedies as
provided in such assignment of leases and rents and who shall apply the rents,
issues and profits as provided therein.

      7.5   RIGHTS UNDER UNIFORM COMMERCIAL CODE. In addition to the rights
available to a mortgagee of real property Mortgagee shall also have all the
rights, remedies and recourse available to a secured party under the Uniform
Commercial Code including the right to proceed under the provisions of the
Uniform Commercial Code governing default as to any property which is subject to
the security interest created by the Mortgage or to proceed as to such personal
property in accordance with the procedures and remedies available pursuant to a
foreclosure of real estate.

      7.6   DUE ON SALE OR MORTGAGING, ETC. In the event of the sale,
conveyance, transfer, or further mortgaging, encumbrancing or disposition of the
Premises, or any part thereof, or any interest therein without the written
consent of Mortgagee being first obtained, whether voluntary, involuntary, or by
operation of law, then at the sole option of Mortgagee, the Mortgagee may
declare the entire Indebtedness Secured Hereby due and payable in full and call
for payment of the same in full at once, together with the prepayment premium,
if any, as provided for in the Note for a voluntary prepayment at that time (and
if at such time no prepayment privilege exists under the Note, then with the
prepayment premium provided for in the Note at the earliest date on which the
Indebtedness Secured Hereby could be prepaid).

                                       18
<PAGE>

Notwithstanding the foregoing, Mortgagor may make a transfer or conveyance of
Mortgagor's interest in the Premises, with the written consent of the Mortgagee.
Consent as to any one transaction shall not be deemed to be a waiver of the
right to require consent to future or successive transactions. For purposes of
this Paragraph 7.6, any change in the legal or equitable title of the Premises
or in the beneficial ownership of the Premises whether or not of record and
whether or not for consideration shall be deemed a transfer of an interest in
the Premises. As a condition to any consent, the Mortgagee may among other
things require an assumption of the Indebtedness Secured Hereby by the
transferee, an increase in the rate of interest on the Indebtedness Secured
Hereby, a change in the terms of payment, the payment of Mortgagee's
out-of-pocket costs incurred with respect to any consent and/or a "transfer
fee."

      7.7   RIGHTS CUMULATIVE. Each right, power or remedy herein conferred upon
the Mortgagee is cumulative and in addition to every other right, power or
remedy, express or implied, now or hereafter arising, available to Mortgagee, at
law or in equity, or under any other agreement, and each and every right, power
and remedy herein set forth or otherwise so existing may be exercised from time
to time as often and in such order as may be deemed expedient by the Mortgagee
and shall not be a waiver of the right to exercise at any time thereafter any
other right, power or remedy. No delay or omission by the Mortgagee in the
exercise of any right, power or remedy arising hereunder or arising otherwise
shall impair any such right, power or remedy or the right of the Mortgagee to
resort thereto at a later date or be construed to be a waiver of any default or
event of default under this Mortgage or the Note.

      7.8   RIGHT TO DISCONTINUE PROCEEDINGS. In the event Mortgagee shall have
proceeded to invoke any right, remedy or recourse permitted under this Mortgage
and shall thereafter elect to discontinue or abandon the same for any reason,
Mortgagee shall have the unqualified right to do so and in such event Mortgagor
and Mortgagee shall be restored to their former positions with respect to the
Indebtedness Secured Hereby, and this Mortgage, the Premises and all rights,
remedies and recourse of the Mortgagee shall continue as if the same had not
been invoked.

      7.9   ACKNOWLEDGEMENT OF WAIVER OF HEARING BEFORE SALE. Mortgagor
understands and agrees that if any default is made under the terms of this
Mortgage, Mortgagee has the right, inter alia, to foreclose this Mortgage by
advertisement pursuant to Minnesota Statutes, Chapter 580, as hereafter amended,
or pursuant to any similar or replacement statute hereafter enacted; that if the
Mortgagee elects to foreclose by advertisement, it may cause the Premises, or
any part thereof, to be sold at public auction; that notice of such sale must be
published in a newspaper of general circulation for the period of time required
by law and that no personal notice is required to be served upon Mortgagor.
Mortgagor further understands that in the event of such default the Mortgagee
may also elect its rights under the Uniform Commercial Code and take possession
of any personal property and dispose of the same by sale or otherwise in one or
more parcels provided that at least ten (10) days' prior notice of such
disposition must be given, all as provided for by the Uniform Commercial Code,
as hereafter amended or by any similar or replacement statute hereafter enacted.
Mortgagor further understands that under the Constitution of the United States
and the Constitution of the State of Minnesota it may have the right to notice
and hearing before the Premises may be sold and that the procedure for
foreclosure by advertisement described above does not ensure that notice will be
given to the Mortgagor and neither said

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procedure for foreclosure by advertisement nor the Uniform Commercial Code
requires any hearing or other judicial proceeding. MORTGAGOR HEREBY EXPRESSLY
CONSENTS AND AGREES THAT THE PREMISES MAY BE FORECLOSED BY ADVERTISEMENT AND
THAT THE PERSONAL PROPERTY MAY BE DISPOSED OF PURSUANT TO THE UNIFORM COMMERCIAL
CODE, ALL AS DESCRIBED ABOVE. MORTGAGOR ACKNOWLEDGES THAT MORTGAGOR EITHER HAS
BEEN REPRESENTED BY LEGAL COUNSEL OR HAD THE OPPORTUNITY TO BE REPRESENTED BY
LEGAL COUNSEL; THAT BEFORE SIGNING THIS DOCUMENT THIS PARAGRAPH AND MORTGAGOR'S
CONSTITUTIONAL RIGHTS WERE FULLY EXPLAINED BY SUCH COUNSEL OR UNDERSTOOD BY
MORTGAGOR, WITHOUT THE ADVICE OF COUNSEL, AND THAT MORTGAGOR UNDERSTANDS THE
NATURE AND EXTENT OF THE RIGHTS WAIVED HEREBY AND THE EFFECT OF SUCH WAIVER.

      7.10  ESTOPPEL CERTIFICATES. Mortgagor agrees at any time and from time to
time, upon not less than fifteen (15) days prior notice by Mortgagee, to
execute, acknowledge and deliver, without charge, to Mortgagee or to any person
designated by Mortgagee, a statement in writing certifying that this Mortgage is
unmodified (or if there have been modifications, identifying the same by the
date thereof and specifying the nature thereof), the principal amount then
secured hereby, that Mortgagor has not received any notice of default or notice
acceleration or foreclosure of this Mortgage (or if Mortgagor has received such
a notice, that it has been revoked, if such be the case), that to the knowledge
of Mortgagor no Event of Default exists hereunder (or if any such Event of
Default does exist, specifying the same and stating that the same has been
cured, if such be the case), the Mortgagor to Mortgagor's knowledge has no
claims or offsets against Mortgagee (or if Mortgagor has any such claims,
specifying the same), and the dates to which the principal and interest and the
other sums and charges payable by Mortgagor pursuant to the Note and this
Mortgage have been paid. In the event Mortgagor fails to execute, acknowledge
and deliver such statement within the time above required, Mortgagor hereby
appoints and constitutes Mortgagee as Mortgagor's attorney-in-fact to do so
(which power of attorney is coupled with an interest and is irrevocable), and
Mortgagor shall be fully bound by any such statement executed by Mortgagee on
Mortgagor's behalf to the same extent as if Mortgagor had executed, acknowledged
and delivered the same.

                                  ARTICLE EIGHT
                                  MISCELLANEOUS

      8.1   RELEASE OF MORTGAGE. When all Indebtedness Secured Hereby has been
paid, this Mortgage and all assignments herein contained shall be void and this
Mortgage shall be released by the Mortgagee at the cost and expense of the
Mortgagor, otherwise to remain in full force and effect.

      8.2   CHOICE OF LAW. This Mortgage is made and executed under the laws of
the State of Minnesota and is intended to be governed by the laws of said State.

      8.3   SUCCESSORS AND ASSIGNS. This Mortgage and each and every covenant,
agreement and other provision hereof shall be binding upon the Mortgagor and its
successors and assigns including without limitation each and every from time to
time record owner of the Premises

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<PAGE>

or any other person having an interest therein, shall run with the land and
shall inure to the benefit of the Mortgagee and its successors and assigns. As
used herein the words "successors and assigns" shall also be deemed to include
the heirs, representatives, administrators and executors of any natural person
who is or becomes a party to this Mortgage. In the event that the ownership of
the Premises becomes vested in a person or persons other than the Mortgagor, the
Mortgagee shall not have any obligation to deal with such successor or
successors in interest unless such transfer is permitted by this Mortgage and
then only upon being notified in writing of such change of ownership. Upon such
notification, the Mortgagee may thereafter deal with such successor in place of
Mortgagor without any obligation to thereafter deal with Mortgagor and without
waiving any liability of Mortgagor hereunder or under the Note. No change of
ownership shall in any way operate to release or discharge the liability of the
Mortgagor hereunder unless such release or discharge is expressly agreed to in
writing by the Mortgagee.

      8.4   UNENFORCEABILITY OF CERTAIN CLAUSES. The unenforceability or
invalidity of any provisions hereof shall not render any other provision or
provisions herein contained unenforceable or invalid.

      8.5   CAPTIONS AND HEADINGS. The captions and headings of the various
sections of this Mortgage are for convenience only and are not to be construed
as confining or limiting in any way the scope or intent of the provisions
hereof. Whenever the context requires or permits, the singular shall include the
plural, the plural shall include the singular and the masculine, feminine and
neuter shall be freely interchangeable.

      8.6   NOTICES. Any notices and other communications permitted or required
by the provisions of this Mortgage (except for telephonic notices expressly
permitted) shall be in writing and shall be deemed to have been properly given
or served by depositing the same with the United States Postal Service, or any
official successor thereto, bearing adequate postage, or delivery by reputable
private carrier such as Federal Express, UPS or similar overnight delivery
service, and addressed as hereinafter provided. Each such notice shall be
effective upon being deposited as described above. The time period within which
a response to any such notice must be given, however, shall commence to run from
the date of the notice to the addressee thereof. Rejection or other refusal to
accept or the inability to deliver because of changed address of which no notice
was given shall be deemed to be receipt of the notice sent. Except as otherwise
provided herein, by giving to the other party hereto at least ten (10) days'
notice thereof, either party hereto shall have the right from time to time and
at any time during the term of this Mortgage to change its address and shall
have the right to specify as its address any other address within the United
States of America.

      Each notice to Mortgagee shall be addressed as follows:

                  Excel Bank Minnesota
                  50 South Sixth Street, Suite 1000
                  Minneapolis MN 55402
                  Attention: Daniel D. Poppe

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<PAGE>

      Each notice to Mortgagor shall be addressed as follows:

                  WSI Industries, Inc.
                  213 Chelsea Road
                  Monticello MN 55362

      8.7   ADJUSTABLE RATE NOTE. The Note secured by this Mortgage provides for
adjustments in its interest rate from time to time in accordance with its terms.
Reference is made to the Note for the times, terms and conditions of the
adjustment in the interest rate. Such times, terms and conditions are
incorporated herein by reference.

      IN WITNESS WHEREOF, the Mortgagor has caused these presents to be executed
effective as of the date first above written.

                                       WSI INDUSTRIES, INC., a Minnesota
                                       corporation

                                       By:   /s/  Paul D. Sheely
                                             -----------------------------------
                                             Paul D. Sheely
                                       Its:  Chief Financial Officer

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