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                                                                    Exhibit 10.5

                                 LOAN AGREEMENT

         This Loan Agreement ("Agreement") is made this 3rd day of May, 2004, by
WSI Industries, Inc., a Minnesota corporation ("Borrower") and the Monticello
Economic Development Authority ("Lender"), a public body corporate and politic
under the laws of Minnesota.

         RECITALS

         A.       In consideration for the loan contemplated by this Agreement,
Borrower is executing and delivering to Lender this Loan Agreement.

         B.       Lender agrees to loan to Borrower the maximum amount of
$350,000 to finance the real estate property including acquisition of a vacant
49,000 square foot manufacturing building ("Project Costs") that is located at
213 Chelsea Road ("Property") in the City of Monticello, Minnesota (the "City").

         ACCORDINGLY, to induce Lender to make the Loan to Borrower, and for
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

         1.       The Loan Amount. Subject to and upon the terms and conditions
of this Agreement, Lender agrees to loan to Borrower the sum of Three Hundred
Fifty Thousand and no/100th Dollars ($350,000), or so much thereof as is
disbursed to Borrower in accordance with this Agreement ("Loan"). The Loan shall
be evidenced by a promissory note ("Note") payable by Borrower to Lender and
substantially in the form of Exhibit A attached to this Agreement, which shall
be dated as of the date of this Agreement. Proceeds of the Loan shall be
disbursed in accordance with Section 3 hereof.

         2.       Repayment of Loan. The Loan shall be repaid with interest as
follows:

                  (a)      Interest at the rate of two percent (2.0%) per annum
         shall accrue from the Loan Closing Date (as hereinafter defined) until
         the Loan is repaid in full.

                  (b)      Payments of principal and interest shall commence on
         June 3, 2004 (the "Initial Payment Date") and continue on the third day
         of each and every month thereafter until paid in full. Such payments
         shall fully amortize any outstanding balance of the Loan over
         twenty-five (25) years; provided, however, the entire remaining unpaid
         balance of principal and interest shall be due and payable on the first
         day of the sixtieth (60th) month following the Initial Payment Date.

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         3.       Disbursement of Loan Proceeds.

                  (a)      The Loan proceeds shall be paid to Borrower on May
         3rd, 2004 or such other date as the parties hereto agree ("Loan Closing
         Date").

                  (b)      The following events shall be conditions precedent to
         the payment of the Loan proceeds to Borrower on the Loan Closing Date:

                           (i)      Borrower having executed and delivered to
                  Lender, prior to the Loan Closing Date and without expense to
                  Lender, executed copies of this Agreement and the Note, and
                  Borrower further having caused to be executed and delivered to
                  Lender a guaranty in substantially the form set forth hereto
                  at Exhibit B (the "Guaranty") ;

                           (ii)     Borrower having provided evidence
                  satisfactory to Lender that Borrower has established a
                  separate accounting system for the exclusive purpose of
                  recording the receipt and expenditure of the Loan proceeds;
                  and

                           (iii)    Borrower having paid $200 to Lender as a
                  loan origination fee; and

                           (iv)     Borrower having paid to Lender the full
                  amount of the legal fees incurred by Lender in the negotiation
                  and preparation of this Agreement and any other agreement or
                  instrument securing the Loan.

                           (v)      Borrower having provided evidence
                  satisfactory to Lender that Borrower has obtained adequate
                  financing to complete all activities related to Borrower's
                  undertakings on the Property.

         4.       Representations and Warranties. Borrower represents and
warrants to Lender that:

                  (a)      Borrower is duly authorized and empowered to execute,
         deliver, and perform this Agreement and to borrow money from Lender.

                  (b)      The execution and delivery of this Agreement, and the
         performance by Borrower of its obligations hereunder, do not and will
         not violate or conflict with any provision of law and do not and will
         not violate or conflict with, or cause any default or event of default
         to occur under, any agreement binding upon Borrower.

                  (c)      The execution and delivery of this Agreement has been
         duly approved by all necessary action of Borrower, and this Agreement
         has in fact been duly executed and delivered by Borrower and
         constitutes its lawful and binding obligation, legally enforceable
         against it.

                  (d)      Borrower warrants that it shall keep and maintain
         books, records, and other documents relating directly to the receipt
         and disbursements of Loan proceeds and that any

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         duly authorized representative of Lender shall, at all reasonable
         times, have access to and the right to inspect, copy, audit, and
         examine all such books, records, and other documents of Borrower
         pertaining to the Loan until the completion of all closeout procedures
         and the final settlement and conclusion of all issues arising out of
         this Loan.

                  (e)      Borrower warrants that it has fully complied with all
         applicable state and federal laws pertaining to its business and will
         continue to comply throughout the terms of this Agreement. If at any
         time Borrower receives notice of noncompliance from any governmental
         entity, Borrower agrees to take any necessary action to comply with the
         state or federal law in question.

                  (f)      Borrower warrants that it will use the proceeds of
         the Loan made by Lender solely for the Project Costs.

                  (g)      Borrower warrants that it will not create, permit to
         be created, or allow to exist any liens, charges, or encumbrances prior
         to the obligation created by this Loan Agreement, except as otherwise
         authorized in writing by Lender.

         5.       Event of Default by Borrower. The following shall be Events of
Default under this Agreement:

                  (a)      failure to pay any principal or interest on the Loan
         when due;

                  (b)      any representation or warranty made by Borrower
         herein or in any document, instrument, or certificate given in
         connection with this Agreement or the Note is false when made;

                  (c)      Borrower fails to pay its debts as they become due,
         makes an assignment for the benefit of its creditors, admits in writing
         its inability to pay its debts as they become due, files a petition
         under any chapter of the Federal Bankruptcy Code or any similar law,
         state or federal, now or hereafter existing, becomes "insolvent" as
         that term is generally defined under the Federal Bankruptcy Code, files
         an answer admitting insolvency or inability to pay its debts as they
         become due in any involuntary bankruptcy case commenced against it, or
         fails to obtain a dismissal of such case within sixty (60) days after
         its commencement or convert the case from one chapter of the Federal
         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 has a custodian, trustee, or receiver appointed for, or has 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 is not
         discharged, or such jurisdiction is not relinquished, vacated, or
         stayed within sixty (60) days of the appointment;

                  (d)      a garnishment summons or writ of attachment is issued
         against or served upon Lender for the attachment of any property of
         Borrower in Lender's possession or any indebtedness owing to Borrower,
         unless appropriate papers are filed by Borrower contesting

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         the same within thirty (30) days after the date of such service or such
         shorter period of time as may be reasonable in the circumstances;

                  (e)      any breach or failure of Borrower to perform any
         other term or condition of this Agreement not specifically described as
         an Event of Default in this Agreement and such breach or failure
         continues for a period of thirty (30) days after Lender has given
         written notice to Borrower specifying such default or breach, unless
         Lender agrees in writing to an extension of such time prior to its
         expiration; provided, however, if the failure stated in the notice
         cannot be corrected within the applicable period, Lender will not
         unreasonably withhold its consent to an extension of such time if
         corrective action is instituted by Borrower within the applicable
         period and is being diligently pursued until the Default is corrected,
         but no such extension shall be given for an Event of Default that can
         be cured by the payment of money (i.e., payment of taxes, insurance
         premiums, or other amounts required to be paid hereunder);

                  (f)      any breach by Borrower of any other agreement between
         Borrower, and Lender or the City of Monticello, Minnesota.

         6.       Business Subsidy Agreement. The provisions of this Section
constitute the "business subsidy agreement" between Borrower and Lender for the
purposes of Minnesota Statutes, Section 116J.993-.995 (the "Business Subsidy
Act").

         (a)      General Terms. The parties agree and represent to each other
as follows:

                  (1)      The subsidy provided to Borrower by Lender consists
         of the Loan made pursuant to this Agreement.

                  (2)      The public purposes of the subsidy are to promote
         development of a precision machining and job shop manufacturing company
         in the City, increase high quality job growth in the City, stabilize
         the economic base of the community, and retain the tax base of a vacant
         building in the City and the State.

                  (3)      The goals for the subsidy are: to retain the minimum
         improvements of a vacant building; to maintain such improvements as a
         precision machining and job manufacturing facility for at least five
         years as described in clause (6) below; and to create the jobs and wage
         levels in accordance with Section 6(b) hereof.

                  (4)      If the goals described in clause (3) are not met,
         such failure to meet the goals will constitute an Event of Default on
         the part of Borrower.

                  (5)      The subsidy is needed because costs make the Project
         infeasible without public assistance and the Loan provides needed gap
         financing.

                  (6)      Borrower must continue operation on the Property of a
         precision machining and job shop manufacturing facility for at least
         five years after the date of May 3, 2004.

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                  (7)      Borrower does not have a parent corporation.

                  (8)      Borrower does not expect to receive any additional
         public assistance in connection with the Property in addition to the
         assistance provided under this Agreement. Excel Bank will provide
         private financing for the Property.

         (b)      Job and Wage Goals. Within two years after the first date on
which any funds are disbursed pursuant to this Agreement (the "Compliance
Date"), Borrower shall cause to be created at least 46 new full-time equivalent
jobs on the Development Property (the "New Jobs") and shall cause the wages for
the New Jobs to be as follows: (i) at least 3 News Job shall pay no less than
$12.00 per hour, exclusive of benefits; (ii) at least 11 New Jobs shall pay no
less than $14.00 per hour excluding benefits; (iii) at least 5 New Jobs shall
pay no less than $16.00; (iv) at least 7 New Jobs shall pay no less than $18.00
per hour; (v) at least 4 New Jobs shall pay no less than $20.00 per hour
excluding benefits; and (vi) at least 16 New Jobs shall pay no less than $22.00
per hour excluding benefits.

         (c)      Remedies. If Borrower fails to meet the goals described in
Section 6(a)(3), Borrower shall repay (1) to Lender upon written demand from
Lender a "pro rata share" of the amount of any disbursements made to Borrower
hereunder and (2) interest on the amounts in clause (1) at the implicit price
deflator as defined in Minnesota Statutes, Section 116J.994, subd. 6, accrued
from the date of May 3, 2004 to the date of payment. The term "pro rata share"
means percentages calculated as follows:

                  (i) if the failure relates to the number of jobs, the jobs
         required less the New Jobs created, divided by the jobs required;

                  (ii) if the failure relates to wages, the number of jobs
         required less the number of jobs that meet the required wages, divided
         by the number of jobs required;

                  (iii) if the failure relates to maintenance of the Minimum
         Improvements in accordance with Section 6(a)(6), 60 less the number of
         months of operation as a precision machining and job shop manufacturing
         facility (where any month in which the facility is in operation for at
         least 15 days constitutes a month of operation), commencing on the date
         of May 3, 2004 and ending with the date the facility ceases operation
         as determined by Lender, divided by 60; and

                  (iv) if more than one of clauses (i) through (iii) apply, the
         sum of the applicable percentages, not to exceed 100%.

         Nothing in this Section shall be construed to limit Lender's other
remedies hereunder. In addition to the remedy described in this Section and any
other remedy available to Lender for failure to meet the goals stated in Section
6(a)(3), Borrower agrees and understands that it may not receive a business
subsidy from Lender or any other "grantor" (as defined in the Business Subsidy

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Act) for a period of five years from the date of the failure or until Borrower
satisfies its repayment obligation under this Section, whichever occurs first.

         (d)      Reports. Borrower must submit to Lender a written report
regarding business subsidy goals and results by no later than January 25 of each
year, commencing January 25, 2005 and continuing until the later of: (i) the
date the goals stated Section 6(a)(3) are met; or (ii) if the goals are not met,
the date the Loan is repaid in full. The report must comply with Section
116J.993-.995, subdivision 7 of the Business Subsidy Act. Lender will provide
information to Borrower regarding the required forms. If Borrower fails to
timely file any report required under this Section, Lender will mail Borrower a
warning within one week after the required filing date. If, after 14 days of the
postmarked date of the warning, Borrower fails to provide a report, Borrower
must pay to Lender a penalty of $100 for each subsequent day until the report is
filed. The maximum aggregate penalty payable under this Section $1,000.

         (e)      Audits. Upon written request of Lender or City in any year,
Borrower shall retain at its expense an independent, third party accountant to
audit any job and wage report submitted by Borrower under paragraphs (d) or (f)
of this Section. Borrower must deliver to Lender a written report from the
accountant promptly upon completion of such audit.

         7.       Lender's Remedies upon Borrower's Default. Upon an Event of
Default by Borrower and after provision by Lender of written notice, Lender
shall have the right to exercise any or all of the following remedies (and any
other rights and remedies available to it):

                  (a)      declare the principal amount of the Loan and any
         accrued interest thereon to be immediately due and payable upon
         providing written notice to Borrower;

                  (b)      suspend its performance under this Loan Agreement;

                  (c)      take any action provided for at law to enforce
         compliance by Borrower with the terms of this Agreement and the Note;

                  (d)      exercise its rights under the Guaranty; and

                  (e)      exercise its rights under the Mortgage.

         In addition to any other amounts due on the Loan, and without waiving
any other right of Lender under any this Agreement or any other instrument
securing the Loan applicable documents, Borrower shall pay to Lender a late fee
of $250 for any payment not received in full by Lender within 30 calendar days
of the date on which it is due. Furthermore, interest will continue to accrue on
any amount due until the date on which it is paid to Lender, and all such
interest will be due and payable at the same time as the amount on which it has
accrued.

         8.       Lender's Costs of Enforcement of Agreement. If an Event of
Default has occurred as provided herein, then upon demand by Lender, Borrower
shall pay or reimburse Lender for all expenses, including all attorneys fees and
expenses incurred by Lender in connection with the

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enforcement of this Agreement and the Note, or in connection with the protection
or enforcement of the interests and collateral security of Lender in any
litigation or bankruptcy or insolvency proceeding or in any action or proceeding
relating in any way to the transactions contemplated by this Agreement.

         9.       Indemnification.

                  (a)      Borrower shall and does hereby agree to protect,
         defend, indemnify and hold Lender, and its officers, agents, and
         employees, harmless of and from any and all liability, loss, or damage
         that it may incur under or by reason of this Agreement, and of and from
         any and all claims and demands whatsoever that may be asserted against
         Lender by reason of any alleged obligations or undertakings on its part
         to perform or discharge any of the terms, covenants, or agreements
         contained herein.

                  (b)      Should Lender, or its officers, agents, or employees
         incur any such liability or be required to defend against any claims or
         demands pursuant to Section 9, or should a judgment be entered against
         Lender, the amount thereof, including costs, expenses, and attorneys
         fees, shall bear interest thereon at the rate then in effect on the
         Note, shall be secured hereby, shall be added to the Loan, and Borrower
         shall reimburse Lender for the same immediately upon demand, and upon
         the failure of Borrower to do so, Lender may declare the Loan
         immediately due and payable.

                  (c)      This indemnification and hold harmless provision
         shall survive the execution, delivery, and performance of this
         Agreement and the creation and payment of any indebtedness to Lender.
         Borrower waives notice of the acceptance of this Agreement by Lender.

                  (d)      Nothing in this Agreement shall constitute a waiver
         of or limitation on any immunity from or limitation on liability to
         which Borrower is entitled under law.

                  10.      Miscellaneous.

                  (a)      Waiver. The performance or observance of any promise
         or condition set forth in this Agreement may be waived, amended, or
         modified only by a writing signed by Borrower and Lender. No delay in
         the exercise of any power, right, or remedy operates as a waiver
         thereof, nor shall any single or partial exercise of any other power,
         right, or remedy.

                  (b)      Assignment. This Agreement shall be binding upon
         Borrower and its successors and assigns and shall inure to the benefit
         of Lender and its successors and assigns. All rights and powers
         specifically conferred upon Lender may be transferred or delegated by
         Lender to any of its successors and assigns. Borrower's rights and
         obligations under this Agreement may be assigned only when such
         assignment is approved in writing by Lender.

                  (c)      Governing Law. This Agreement is made and shall be
         governed in all

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         respects by the laws of the state of Minnesota. Any disputes,
         controversies, or claims arising out of this Agreement shall be heard
         in the state or federal courts of Minnesota, and all parties to this
         Agreement waive any objection to the jurisdiction of these courts,
         whether based on convenience or otherwise.

                  (d)      Severability. If any provision or application of this
         Agreement is held unlawful or unenforceable in any respect, such
         illegality or unenforceability shall not affect other provisions or
         applications that can be given effect, and this Agreement shall be
         construed as if the unlawful or unenforceable provision or application
         had never been contained herein or prescribed hereby.

                  (e)      Notice. All notices required hereunder shall be given
         by depositing in the U.S. mail, postage prepaid, certified mail, return
         receipt requested, to the following addresses (or such other addresses
         as either party may notify the other):

                  To Lender:     Monticello Economic Development Authority
                                 505 Walnut Street
                                 Suite 1
                                 Monticello, MN 55362
                                 Attn: Executive Director

                  To Borrower:   WSI Industries, Inc.
                                 213 Chelsea Road
                                 Monticello, MN 55362

         (f)      Termination. If the Loan is not disbursed pursuant to this
Agreement by October 20, 2004, this Agreement shall terminate and neither party
shall have any further obligation to the other, except that if the Loan is not
disbursed because Borrower has failed to use its best efforts to comply with the
conditions set forth in Section 3 of this Agreement then Borrower shall pay to
Lender all reasonable attorneys fees, costs, and expenses incurred by Lender in
connection with this Agreement and the Note.

         (g)      Entire Agreement. This Agreement, together with the Exhibits
hereto, which are incorporated by reference, constitutes the complete and
exclusive statement of all mutual understandings between the parties with
respect to this Agreement, superseding all prior or contemporaneous proposals,
communications, and understandings, whether oral or written, concerning the
Loan.

         (h)      Headings. The headings appearing at the beginning of the
several sections contained in this Agreement have been inserted for
identification and reference purposes only and shall not be used in the
construction and interpretation of this Agreement.

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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the
proper officers thereunto duly authorized on the day and year first written
above.

                                                  MONTICELLO ECONOMIC
                                                  DEVELOPMENT AUTHORITY

                                                  By: /s/ Ronald Hoglund
                                                      --------------------------

                                                  Title: President

                                                  By: /s/ Ollie Koropchak
                                                      --------------------------

                                                  Title: Executive Director

            [SIGNATURE PAGE TO LOAN AGREEMENT - WSI INDUSTRIES, INC.]

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                                                  WSI INDUSTRIES, INC.

                                                  By: /s/ Paul D. Sheely
                                                      --------------------------

                                                  Title: Chief Financial Officer

         [SIGNATURE PAGE TO LOAN AGREEMENT - WSI INDUSTRIES, INC. ]

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