<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934


For the fiscal year ended December 31, 1999       Commission file number 0-7390
                          -----------------       -----------------------------


                         AERO SYSTEMS ENGINEERING, INC.
              ----------------------------------------------------
             (Exact name of registrant as specified in its charter)

    Minnesota                                                   41-0913117
 ----------------------                                     ---------------
(State of incorporation)                                   (I.R.S. Employer
                                                           Identification No.)

358 East Fillmore Avenue, St. Paul, Minnesota                     55107
---------------------------------------------                   ---------
     (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code           (651) 227-7515


Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, Par Value $.20 Per Share
                     --------------------------------------
                                (Title of Class)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                    Yes X   No
                                       ---    ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 2000 was approximately $1,532,299 based upon the
average of the closing bid and asked prices of the stock on such date.

The number of common shares outstanding as of January 31, 2000 was 4,401,625.

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                                TABLE OF CONTENTS
<TABLE>
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                                                                                                      Page
                                                                                                      ----

<S>                                                                                                    <C>
DOCUMENTS INCORPORATED BY REFERENCE.....................................................................3

CROSS-REFERENCE SHEET BETWEEN ITEMS IN PART III
OF FORM 10-K AND PROXY STATEMENT PURSUANT TO
GENERAL INSTRUCTION G(4)................................................................................4



PART I


Item 1.  Business.......................................................................................5

Item 2.  Properties.....................................................................................9

Item 3.  Legal Proceedings.............................................................................10

Item 4.  Submission of Matters to a Vote of Security Holders...........................................10

PART II

Item 5.  Market for the Registrant's Common Equity and Related
         Stockholder Matters...........................................................................11

Item 6.  Selected Financial Data.......................................................................12

Item 7.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations.....................................................................12

Item 7a. Quantitative and Qualitative Disclosure about Market Risk.....................................14

Item 8.  Financial Statements and Supplementary Data...................................................15

Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure..........................................................................33

PART III

Item 10.  Item 13.  See Documents Incorporated by Reference............................................33

PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................33

Signatures.............................................................................................34
</TABLE>

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DOCUMENTS INCORPORATED BY REFERENCE


The following documents are incorporated by reference into the Form 10-K:

                                                  PARTS OF FORM 10-K INTO WHICH
                                                          INCORPORATED BY
                                 DOCUMENT                   REFERENCE
--------------------------------------------------------------------------------

Proxy Statement to be filed on or before May 1, 2000
   for the annual meeting of shareholders on May 31, 2000                 III


                                       3

<PAGE>   4


CROSS-REFERENCE SHEET BETWEEN ITEMS IN PART III OF FORM 10-K AND PROXY STATEMENT
PURSUANT TO GENERAL INSTRUCTION G(4)

<TABLE>
<CAPTION>

                                                                               SUBJECT HEADINGS IN
                                DOCUMENT                                         PROXY STATEMENT
-----------------------------------------------------------------------------------------------------------

<S>     <C>                                                                <C>
Item 10.  Directors and Executive Officers of the Registrant                 Election of Directors

Item 11.  Executive Compensation                                             Election of Directors

Item 12.  Security Ownership of Certain Beneficial Owners and Management     Principal Shareholders

Item 13.  Certain Relationships and Related Transactions                     Election of Directors

</TABLE>
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<PAGE>   5


PART I

ITEM 1 - BUSINESS

General Development of Business - Aero Systems Engineering, Inc. ("ASE" or the
"Company") is a global turnkey provider of test facilities and systems for the
aerodynamic and propulsion test system markets. ASE is a Minnesota corporation
that was organized on May 11, 1967. From that time until 1993, the Company had
been primarily engaged in selling products and services related to testing
turbine engines. On July 30, 1993, the Company purchased substantially all of
the assets of FluiDyne Engineering Corporation ("FluiDyne") relating to
FluiDyne's business of designing, constructing and supplying various types of
test facilities, such as wind tunnels and other aerodynamic test facilities. The
acquisition also included the Aerotest Laboratory which provides aeropropulsion
component and aerodynamic testing services.

Approximately 80% of the Company's outstanding common stock is owned by Celsius
Inc. Celsius Inc. is a wholly-owned subsidiary of Celsius AB, which is a Swedish
company. Celsius AB is also publicly traded in Sweden and is partially owned by
the Swedish government. At the time of this Form 10-K filing, SAAB AB is in the
process of attempting to acquire all of the outstanding shares of Celsius AB.
According to SAAB AB, it expects to conclude its acquisition of Celsius AB by
early March 2000.

The plan of operations for 2000 with respect to the Company is to continue with
its current activities and operations in the test cell, wind tunnel and
aerodynamic testing markets. In addition, the Company plans to explore new
markets as deemed appropriate through acquisitions or using joint ventures with
established companies. Acoustic measurement processes to measure noise levels
are technologies where the Company is creating new customers and providing
additional value to existing customers.

Lines of Business/Segment Reporting - The Company is engaged in two lines of
business. The first is related to the design, equipping, manufacture and
construction of test facilities for turbine engines, engine accessories and wind
tunnels. The second business line is providing aeropropulsion component testing
and aerodynamic testing services at the Aerotest Laboratory facility. The
Company regards these lines of business as being in their entirety one segment
of business.

Products and Services - The Company's products and services include the
following:

  -   Design and overall project management for construction of jet engine
      testing facilities and wind tunnel testing facilities;
  -   Design and manufacture of electronic and mechanical turbine engine testing
      equipment;
  -   Providing of aerodynamic and propulsion system testing services;
  -   Application of engineering technology to specific engine and aerodynamic
      testing problems.

                                       5
<PAGE>   6


The Company undertakes research and development projects by applying leading
edge technology to customer situations in engine, wind tunnel and aerodynamic
testing.

The Company's principal sources of revenue are the design and construction of
turbine and wind tunnel test facilities and associated test equipment. An
additional important source of revenue for the Company is providing aerodynamic
and propulsion system testing services at the Aerotest Laboratory.

The Company does not generally produce products as inventory items; rather, the
Company's products are usually made to order and are limited to individual
application and adaptation. The Company does build and inventory limited amounts
of selected electronic products and spare parts and components for customer
support.

Most of the instrumentation and much of the equipment used in a jet engine or
wind tunnel test facility are not manufactured by the Company. The Company adds
value by combining these electronic and mechanical components purchased from
other companies and assembles them to make the desired testing equipment or
facility. For a complete test facility, which includes designing and
construction of a building, the Company subcontracts certain civil aspects of
the project.

Sales of test facilities have resulted principally from direct customer
contracts, independent sales agents and the Company's internal marketing staff.

Raw Materials - The principal raw materials used by the Company are raw and
fabricated steel and aluminum. Various electronic components are also purchased
and assembled into completed units. These materials are readily available from a
number of suppliers. Therefore, the Company anticipates no difficulty in
securing an alternate source of supply of these products should it be unable to
obtain materials from its present suppliers.

Patents and Trademarks - The Company currently owns several patents relating to
a free piston shock tube and for a test cell stack design. The Company has
applied to various foreign countries' patent offices to register the U.S.
patents in those countries.

Periodically, the Company seeks trademark protection for certain of its
products. The Company does not hold nor has it issued any significant licenses,
franchises or concessions. While the Company may apply for patents on some of
its instruments or components thereof, generally, the Company does not consider
the patentability or the protection that may be afforded by patents to be
material to its present business.

Seasonal Nature of Business - The business of the Company is not seasonal in
nature.

Working Capital - The Company is not required to maintain significant amounts of
inventory or supplies. The Company does not generally grant extended payment
terms to customers. However, because many of the Company's contracts with its
customers are
                                       6
<PAGE>   7


over multiple years, outstanding balances due from a customer may be quite
large. The Company generally is required to issue standby letters of credit as a
guarantee for customers' advances and performance of the project by the Company.

Additionally, in various governmental contracts, there are retainages, usually
5% - 10%, that are held back by governmental agencies to ensure contract
performance. The Company's practices concerning inventory and credit are
consistent with practices in the industry.

Availability of working capital financing is necessary for the current
operations of the business. The Company currently has a line of credit with a
branch of a Swedish bank in New York for $6,000,000. Funds provided by this bank
are actually provided by Celsius Inc. and ultimately by AB Celsius Finance. In
consideration of providing working capital funds, a first security interest in
all assets of the Company has been granted to Celsius Inc. and a fee is also
paid to Celsius Inc. Although the Company's management has no reason to believe
that availability of such funds from Celsius Inc. will cease in the near future,
there can be no assurance that such availability will continue indefinitely.

Customers - The Company provides products and services for numerous companies in
the aircraft industry as well as the U.S. federal government and foreign
governmental entities. The orders to provide these services can originate from
many customers and quite frequently result in repeat business. In 2000, four
customers each accounted for more than 10% of the Company's consolidated
revenues. These four customers were the U.S. Government, Boeing, General
Electric and General Electric Malaysia. The Company believes that the loss of no
other single customer would have a material adverse effect on its future
revenues.

Backlog - The Company's order backlog constitutes future revenue to be earned on
contracts, including unearned revenue on projects currently in progress. The
backlog of orders as of December 31, 1999 was $18,759,000. This compares with a
backlog of $26,518,000 on December 31, 1998.

Competition - There are several other firms in the world offering services
similar to those provided by the Company. These firms are based in North
America, Europe and the Pacific Rim. The exact competitive position of the
Company in the markets in which it operates is not known to the Company, but the
Company believes that it is one of the major suppliers in the markets it serves.
The technology used by the Company is not proprietary, and most commercial
airlines, engine manufacturers and airframe manufacturers have the in-house
engineering capability to compete directly with the Company in the design and
building of jet engine test facilities. The Company believes that in order to
reduce cost and risk, many of these firms generally prefer to engage the
services of the Company or one of its competitors. In the test cell industry in
which the Company competes, the principal means of competition are price,
technological design, project management knowledge and delivery capability.


                                       7
<PAGE>   8


In the wind tunnel facilities area, the Company has historically designed and
built high speed wind tunnels for worldwide governmental agencies, commercial
companies and other research institutions.

With worldwide defense budgets being reduced during the past few years, the
number of wind tunnel projects has been steadily declining. However, there has
been steady growth in the automotive wind tunnel area. In order to capture some
of this new automotive wind tunnel business, ASE has entered into a teaming
agreement with a leading automotive architecture and engineering company. The
team continues to pursue new opportunities but to date no contracts have been
awarded. Also, the activities involving commercial aviation wind tunnels have
been strong, and continue to provide opportunities for new business.

The Company has in the past been aided in financing projects by utilizing the
financial strength of Celsius AB. Without the ability to issue standby letters
of credit to guarantee the performance of the project, ASE would not have been
the prime contractor on many of these projects.

Research and Development - Research and development performed by the Company is
applied engineering, that is, applying present engineering knowledge and
technology toward solving customer problems in turbine engine and aerodynamic
testing. The Company is currently enhancing the ASE2000, which is the latest
computer data acquisition system. The expense of research and development was
$743,000, $521,000 and $696,000 for the years ended December 31, 1999, 1998 and
1997, respectively.

Environmental Matters - There has not been, and it is not expected that there
will be, any material effect upon capital expenditures, earnings or the
competitive position of the Company due to compliance with federal, state and
local environmental protection regulations.

Employees - As of December 31, 1999, the Company employed 181 employees.
Contract labor has been used as business conditions require.

Foreign Operations - While business in foreign countries is always subject to
interference or restrictions by foreign governments or restrictions imposed by
the United States government, the Company believes that the nature of its
business is such that it is not likely to be subject to such interference. Wind
tunnels with a Mach number in excess of 1.2 need to have approval from the U.S.
State Department if they are sold to a foreign country.

For each foreign or domestic project, the Company obtains payment terms or
financial protections, such as irrevocable letters of credit and bank
guarantees, to better assure payment to the Company in the event of any
financial difficulty. Nevertheless, foreign

                                       8
<PAGE>   9


projects always have inherent foreign currency risks with respect to currency
exposures or purchase commitments. The Company hedges currency exposure as
deemed appropriate to minimize the foreign exchange exposure.

Impact of Year 2000 - Some of the Company's older computer programs for internal
business systems were written using two digits rather than four to define the
applicable year. As a result, those computer programs have time-sensitive
software that recognize a date using "00" as the year 1900 rather than the year
2000. This could cause a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.

Prior to the end of 1999, the Company completed the conversion and replacement
of its computer and other non-IT systems so they would function properly with
respect to dates in the Year 2000 and thereafter. The total costs for the Year
2000 project through the end of 1999 was approximately $825,000, which includes
approximately $775,000 for the purchase of new hardware, software and
implementation costs that have been capitalized and approximately $50,000 that
has been expensed.

At the time of the filing of this Form 10-K, the Company has not experienced any
material problems with any of its systems related to dates in the year 2000 and
beyond. The Company has a project team that will continue to monitor all systems
for potential Year 2000 related issues.

ITEM 2 - PROPERTIES

The Company's headquarters are located in a concrete building in a light
industrial area at 358 East Fillmore Avenue, Saint Paul, Minnesota that it has
been occupying since 1971. The Company purchased this facility during 1993 from
the Port Authority of Saint Paul (the "Port Authority"). Currently, the Company
has approximately 52,000 total square feet, of which 45,000 square feet is used
for offices and 7,000 square feet is used for manufacturing.

The Company leases from the Port Authority a building that has 24,000 square
feet of manufacturing and warehouse space located at 181 East Florida Street,
Saint Paul, Minnesota. The lease agreement contains several purchase options at
various times during the lease period. The most favorable option occurs at the
end of the lease period in July 2002, when the Company may purchase the facility
for approximately $95,000.

                                       9

<PAGE>   10


The Company owns an aerodynamic testing facility located at 13825 Schmidt Lake
Road, Plymouth, Minnesota. Currently, the Company has approximately 25,000 total
square feet of specialized engineering and testing space at this facility, of
which 18,000 square feet is used for manufacturing and 7,000 square feet is used
for offices.

The Company leases 6,500 square feet of office space in Hampton, Virginia. This
office space is occupied by employees working on current contracts with NASA.
The lease is in effect until April 2004.

ITEM 3 - LEGAL PROCEEDINGS

In August 1993, the Company entered into a subcontract with Opron Inc.
("Opron"), a Quebec company, which was the prime contractor on a jet engine test
cell project. Late in 1995, a dispute arose between the Company and Opron, which
resulted in a withdrawal against an existing CDN $872,042 Letter of Credit.
During the second quarter of 1999, additional reserves were established in
anticipation of a settlement of this matter. During July 1999, the final
settlement of this legal matter occurred.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of 1999 to a vote of security
holders through the solicitation of proxies or otherwise.

                                       10

<PAGE>   11


PART II

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

The Company's common stock currently is quoted and traded on the Nasdaq SmallCap
Market(SM). On January 31, 2000, the high and low sales prices for the Company's
common stock were $2.25 and $1.94, respectively.

The high and low sales prices for the Company's common stock for each quarter
during 1998 and 1999 as quoted on Nasdaq were as follows:

<TABLE>
<CAPTION>

                                                   HIGH            LOW
                                              ---------------------------------

   1998:
<S>                                                 <C>             <C>
     First Quarter                                  $1.85           $ .80
     Second Quarter                                  2.61            1.30
     Third Quarter                                   1.57             .98
     Fourth Quarter                                  1.63            1.09

   1999:
     First Quarter                                  $1.75           $1.14
     Second Quarter                                  2.13            1.13
     Third Quarter                                   1.63             .75
     Fourth Quarter                                  2.50            1.00

</TABLE>

The quotations set forth above reflect inter-dealer prices, without retail
markup, markdown or commission, and may not necessarily represent actual
transactions.

No cash dividends have ever been paid in the history of the Company. The Company
intends to use its earnings to finance operations and does not intend to pay
cash dividends on its capital stock in the foreseeable future. During the first
quarter of 1998, the Company announced a three-for-two common stock split
effected in the form of a 50% stock dividend. This action was taken to increase
the Company's number of shares in "public float" to exceed the new minimum
required to maintain current security listing on the Nasdaq SmallCap MarketSM.
On February 22, 1999, the Company announced a 15% dividend to shareholders of
record as of March 10, 1999. Financial information contained in this report has
been adjusted to reflect the impact of the common stock split and 15% stock
dividend. As of December 31, 1999, there were approximately 199 holders of
record of common stock of the Company and 4,401,625 total shares outstanding.

                                       11

<PAGE>   12


ITEM 6 - SELECTED FINANCIAL DATA

Selected financial data for the years ended December 31 are as follows:
<TABLE>
<CAPTION>

                                    1999           1998           1997           1996           1995
                               ----------------------------------------------------------------------------
SELECTED INCOME STATEMENT DATA
<S>                               <C>            <C>            <C>            <C>            <C>
Earned revenue                    $31,061,082    $27,181,448    $25,032,452    $20,383,352    $26,037,288
Net (loss) income                    (645,307)       665,200       (400,733)    (2,527,754)       189,488
Net (loss) income per
   common share                      (.15)           .15           (.09)        (.57)             .04
Weighted average common shares
   outstanding                      4,401,625      4,401,625      4,401,625      4,401,625      4,401,625

SELECTED BALANCE SHEET DATA
Current assets                    $15,055,233    $16,004,487    $14,936,589    $11,006,645    $17,391,439
Current liabilities                15,620,895     15,850,389     15,107,440     10,469,625     13,775,994
Working capital                      (565,662)       154,098       (170,851)       537,020      3,615,445
Total assets                       20,683,801     21,480,070     20,574,712     17,754,429     24,176,077
Long-term debt and capital
   lease obligations                  170,583        234,119        732,865      1,671,191      2,255,127
Stockholders' equity                4,269,801      4,915,108      4,249,908      4,650,641      7,178,395

</TABLE>

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Aero Systems Engineering, Inc. ("Company") is engaged in selling products and
services related to (1) testing turbine engines, and design and operation of
aerodynamic wind tunnels, and (2) providing aerodynamic and propulsion system
testing services. The Company will design the testing facility but will
subcontract the civil engineering work and construction to local civil
construction companies.

Results of Operations

The backlog of orders as of December 31, 1999 was $18,759,000 which consisted of
$18,297,000 that was related to jet engine test cell projects and wind tunnel
projects and $462,000 related to Aerotest Lab/Other. Backlog of orders as of
December 31, 1998 was $26,518,000, of which $25,231,000 was related to test cell
and wind tunnel projects and $1,287,000 related to Aerotest Lab/Other.

The backlog as of December 31, 1999 and 1998 does not include the NASA task
order contract awarded in the second quarter of 1998 with a potential value of
$38 million over five years. Definitive task orders issued under this contract
will be included in backlog as they are awarded.

The change in backlog from 1998 to 1999 represents a 29% decrease in total
backlog. Also, new orders received in 1999 totaled $23,302,000 as compared to
the previous year of $39,421,000. The 1999 decrease in backlog was related to
slower order intake in 1999 and the conversion of backlog into revenue for one
large wind tunnel project.

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Earned revenue for the year ended December 31, 1999 was $31,061,000, an increase
of $3,880,000 or 14% as compared to 1998 revenue of $27,181,000. Earned revenue
for 1997 was $25,032,000. The revenue increase from 1998 to 1999 was due to
several of the larger orders received in 1998 generating revenue in 1999, and
the Company performed a significant amount of customer funded year 2000 computer
system upgrade projects in 1999.

The Company recorded a net loss of $645,000 in 1999, net income of $665,000 in
1998, and a net loss of $401,000 in 1997. The loss in 1999 was primarily
attributable to unexpected additional costs on two major wind tunnel projects
and the settlement of the dispute with Opron.

The cost of earned revenue as a percentage of earned revenue was 82% in 1999 as
compared to 78% in 1998 and 81% in 1997. The percentage increase in cost of
earned revenue during 1999 was mostly due to the additional costs on the two
major wind tunnel projects and additional reserves recorded for the settlement
of the dispute with Opron.

Operating expenses were $4,591,000, $3,916,000 and $3,677,000 in years 1999,
1998 and 1997, respectively. These expenses increased 17% in 1999 as compared to
1998 primarily as a result of investments in marketing personnel and bid and
proposal activities.

Research and Development (R&D) costs were $743,000, $521,000 and $696,000 in
years 1999, 1998 and 1997, respectively. The increase during 1999 was $222,000
or 43% as compared to 1998's R&D amount. The Company has continued to enhance
the capabilities of the ASE2000 Computer Data Acquisition System in 1999. This
activity will continue into 2000, which management believes will further improve
the marketability of the system.

Interest expense was $719,000, $888,000 and $751,000 in years 1999, 1998 and
1997, respectively. The major item bearing interest expense is the $6,000,000
line of credit. The average outstanding borrowings were $5,838,000 and
$6,813,000 during 1999 and 1998, respectively. The decrease in borrowings from
1998 to 1999 reflects improved payment terms on new contracts. The weighted
average interest rate for 1999 was 9.2% on the line of credit.

The Company recorded income tax expense of $10,000 in 1999, as compared to $0 in
1998 and $7,500 in 1997.

Liquidity and Capital Resources

The current ratio was 1.0 as of December 31, 1999, 1998 and 1997. Working
capital amounts were $(566,000) in 1999, $154,000 in 1998 and $(171,000) in
1997. Both current assets and current liabilities decreased during 1999 as
compared to 1998. As of December 31, 1999, the Company had available $2,353,000
of additional borrowings under its line of credit to meet additional working
capital needs.

                                       13

<PAGE>   14


The December 31, 1999 accounts receivable balance was $8,305,000, an increase of
$1,064,000 as compared to 1998's balance of $7,241,000. The increase in the
accounts receivable balance for 1999 was due to the timing of several large
customer billings that were recorded as receivables at the end of the year.

Accounts payable and accrued expenses amounts were $6,656,000 and $7,236,000 in
1999 and 1998, respectively. The 1999 decrease is $580,000 or 8% as compared to
1998. The decrease from 1998 is due primarily to the timing of the procurement
activities for the existing projects, of which much had been completed prior to
the end of the year.

Billings in excess of earnings were $5,238,000, an increase of $3,822,000 when
compared to 1998's balance of $1,416,000. This is due primarily to improved
payment terms on new contracts, which permit billings in advance of earned
revenue recognition on large contracts in their early phases.

The total line of credit available is $6,000,000 at a branch of a Swedish bank
in New York City which is guaranteed by the Company's immediate parent, Celsius
Inc. As of January 31, 2000, the balance of the line of credit was $1,375,000,
which reflects the collection of several large receivables outstanding at the
end of the year.

Current financial resources, i.e., working capital and short-term line of credit
facilities, plus anticipated funds from operations, are expected to be adequate
to meet cash requirements in 2000.

Capital expenditures were $1,078,000, $735,000 and $314,000 in years 1999, 1998
and 1997, respectively. The 1999 increase was 47% as compared to 1998. Most of
the 1999 capital expenditures were used to update desktop and network equipment
and acquire and install a new business computer system.

Highly competitive market conditions have minimized the effect of inflation on
contract selling prices and the cost of purchased materials.

During 1999, approximately 41% of revenues were from international projects.
Substantially all of the contract amounts are payable in U.S. dollars. For those
contracts that are denominated in foreign currencies, the Company has entered
into forward exchange contracts with banks to minimize the foreign currency
exchange rate risks.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company's debt portfolio is predominantly variable rate and substantially
all of its long-term contracts are denominated in U.S. dollars. Therefore, the
Company does not believe its operations are exposed to significant market risk
relating to interest rates or foreign currency exchange risk.

                                       14
<PAGE>   15

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                    Page
                                                                                                    ----


<S>                                                                                                  <C>
REPORT OF INDEPENDENT AUDITORS........................................................................16

FINANCIAL STATEMENTS
   Balance Sheets.....................................................................................17
   Statements of Operations...........................................................................19
   Statements of Changes in Stockholders' Equity......................................................20
   Statements of Cash Flows...........................................................................21
   Notes to Financial Statements......................................................................22

</TABLE>

                                       15

<PAGE>   16









                         Report of Independent Auditors


Stockholders and Board of Directors
Aero Systems Engineering, Inc.

We have audited the accompanying balance sheets of Aero Systems Engineering,
Inc. as of December 31, 1999 and 1998, and the related statements of operations,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aero Systems Engineering, Inc.
at December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

                                                          /s/ Ernst & Young LLP

Minneapolis, Minnesota
January 17, 2000

                                       16
<PAGE>   17


                         Aero Systems Engineering, Inc.

                                 Balance Sheets


<TABLE>
<CAPTION>
                                                                                    DECEMBER 31
                                                                                1999              1998
                                                                     --------------------------------------

<S>                                                                   <C>                <C>
ASSETS
Current assets:
   Cash and cash equivalents                                            $       48,476    $       16,091
   Accounts receivable--billed contracts, net of allowances of
     $50,000 in 1999 and 1998, including retainages of $106,000
                                                                             8,304,785         7,240,675
   Costs and estimated earnings in excess of billings on
     uncompleted contracts                                                   4,768,223         6,710,677
   Inventories                                                               1,091,063         1,406,054
   Prepaid expenses                                                            116,069            50,851
   Deferred and prepaid income taxes                                           726,617           580,139
                                                                     --------------------------------------
Total current assets                                                        15,055,233        16,004,487

Property, plant and equipment--net                                           5,628,568         5,475,583
















                                                                     --------------------------------------
Total assets                                                               $20,683,801       $21,480,070
                                                                     ======================================
</TABLE>

                                       17

<PAGE>   18


                         Aero Systems Engineering, Inc.

                           Balance Sheets (continued)

<TABLE>
<CAPTION>


                                                                                     DECEMBER 31
                                                                                1999              1998
                                                                     --------------------------------------

<S>                                                                   <C>               <C>
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
   Current maturities of capital lease obligations                      $       79,187    $       98,868
   Current maturities of long-term debt to affiliated company
                                                                                     -           400,000
   Notes payable                                                             3,646,955         6,698,996
   Accounts payable:
     Trade                                                                     916,075         3,777,507
     Affiliated companies                                                        8,362           654,067
   Billings in excess of costs and estimated earnings on
     uncompleted contracts                                                   5,238,424         1,415,825
   Accrued warranty and losses                                                 793,216           703,254
   Accrued salaries and wages                                                  846,724           595,213
   Accrued job costs                                                         3,308,570           455,350
   Income taxes payable                                                              -               590
   Other accrued liabilities                                                   783,382         1,050,719
                                                                     --------------------------------------
Total current liabilities                                                   15,620,895        15,850,389

Other liabilities:
   Deferred income taxes                                                       622,522           480,454

Capital lease obligations, less current maturities                             170,583           234,119

Stockholders' equity:
   Common Stock, $.20 par value:
     Authorized shares - 10,000,000
     Issued and outstanding shares - 4,401,625                                 880,325           880,325
   Additional paid-in capital                                                  900,292           900,292
   Retained earnings                                                         2,489,184         3,134,491
                                                                     --------------------------------------
Total stockholders' equity                                                   4,269,801         4,915,108
                                                                     --------------------------------------
Total liabilities and stockholders' equity                                 $20,683,801       $21,480,070
                                                                     ======================================
</TABLE>


See accompanying notes.

                                       18
<PAGE>   19



                         Aero Systems Engineering, Inc.

                            Statements of Operations
<TABLE>
<CAPTION>

                                                                   YEAR ENDED DECEMBER 31
                                                          1999              1998              1997
                                                   --------------------------------------------------------
<S>                                                      <C>               <C>               <C>
Earned revenue                                           $31,061,082       $27,181,448       $25,032,452
Cost of earned revenue                                    25,588,018        21,120,360        20,258,028
                                                   --------------------------------------------------------
Gross profit                                               5,473,064         6,061,088         4,774,424

Selling, general and administrative expenses
                                                           4,590,710         3,915,974         3,676,961
Research and development                                     742,559           520,600           696,498
                                                   --------------------------------------------------------
Operating profit                                             139,795         1,624,514           400,965

Other income (expense):
   Interest income                                             2,272                 9             7,482
   Interest expense                                         (718,573)         (887,965)         (750,773)
   Other                                                     (58,801)          (71,358)          (50,895)
                                                   --------------------------------------------------------
                                                            (775,102)         (959,314)         (794,186)
                                                   --------------------------------------------------------
(Loss) income before income taxes                           (635,307)          665,200          (393,221)
Income tax expense                                           (10,000)                -            (7,512)
                                                   --------------------------------------------------------
Net (loss) income                                         $ (645,307)        $ 665,200        $ (400,733)
                                                   ========================================================

Net (loss) income per common share                             $(.15)             $.15             $(.09)
                                                   ========================================================

Weighted average common and common equivalent
 shares outstanding                                        4,401,625         4,401,625         4,401,625
                                                   ========================================================
</TABLE>

See accompanying notes.



                                       19
<PAGE>   20



                         Aero Systems Engineering, Inc.

                  Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>


                                                   COMMON STOCK              ADDITIONAL
                                       ------------------------------------   PAID-IN          RETAINED
                                               SHARES          AMOUNT         CAPITAL          EARNINGS
                                       ----------------------------------------------------------------------
<S>                                          <C>               <C>            <C>             <C>
Balance at January 1, 1997                   2,551,717         $510,343       $516,722        $3,623,576
   Net loss                                          -                -              -          (400,733)
                                       --------------------------------------------------------------------
Balance at December 31, 1997                 2,551,717          510,343        516,722         3,222,843
   Three-for-two stock split                 1,275,856          255,172       (255,172)                -
   15% stock dividend                          574,052          114,810        638,742          (753,552)
   Net income                                        -                -              -           665,200
                                       --------------------------------------------------------------------
Balance at December 31, 1998                 4,401,625          880,325        900,292         3,134,491
   Net loss                                          -                -              -          (645,307)
                                       --------------------------------------------------------------------
Balance at December 31, 1999                 4,401,625         $880,325       $900,292        $2,489,184
                                       ====================================================================

</TABLE>

See accompanying notes.


                                       20
<PAGE>   21



                         Aero Systems Engineering, Inc.

                            Statements of Cash Flows
<TABLE>
<CAPTION>



                                                                             YEAR ENDED DECEMBER 31
                                                                     1999             1998              1997
                                                              ------------------------------------------------------
<S>                                                                <C>               <C>              <C>
OPERATING ACTIVITIES
Net (loss) income                                                  $  (645,307)      $   665,200      $  (400,733)
Adjustments to reconcile to net cash provided by operating
   activities:
     Depreciation and amortization                                     925,411           897,756          927,298
     (Increase) decrease in assets:
        Accounts receivable                                         (1,064,110)       (2,473,826)         372,568
        Costs and estimated earnings in excess of billings on
          uncompleted contracts                                      1,942,454         1,630,237       (4,363,779)
        Inventories                                                    314,991          (391,962)          78,165
        Prepaid expenses                                               (65,218)           62,681          (17,464)
        Refundable income taxes                                         (4,410)                -                -
     (Decrease) increase in liabilities:
        Accounts payable and accrued expenses                         (579,781)         (564,682)       4,089,512
        Income taxes payable                                              (590)           (4,334)             190
        Billings in excess of costs and estimated earnings on
          uncompleted contracts                                      3,822,599         1,187,336         (163,277)
                                                              ------------------------------------------------------
Net cash provided by operating activities                            4,646,039         1,008,406          522,480

INVESTING ACTIVITIES
Capital expenditures                                                (1,078,396)         (735,216)        (313,610)
                                                              ------------------------------------------------------
Net cash used in investing activities                               (1,078,396)         (735,216)        (313,610)

FINANCING ACTIVITIES
Net borrowings under line of credit agreements                      (3,052,041)          563,875          698,786
Principal payments on borrowings from affiliates                      (400,000)         (800,000)        (800,000)
Principal payments under capital lease obligations                     (83,217)         (137,992)        (125,722)
                                                              ------------------------------------------------------
Net cash used in financing activities                               (3,535,258)         (374,117)        (226,936)
                                                              ------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                    32,385          (100,927)         (18,066)
Cash and cash equivalents at beginning of year                          16,091           117,018          135,084
                                                              ------------------------------------------------------
Cash and cash equivalents at end of year                           $    48,476       $    16,091      $   117,018
                                                              ======================================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
 INFORMATION
Cash paid during the year for:
   Interest                                                        $   718,573       $   887,965      $   750,773
   Income taxes                                                         15,000             4,334            5,400
</TABLE>

See accompanying notes.



                                       21
<PAGE>   22


                         Aero Systems Engineering, Inc.

                          Notes to Financial Statements

                                December 31, 1999


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

The Company's major operations are in the design and manufacture of electronic,
mechanical and computerized engine and engine accessory test equipment and the
design, equipping and construction of engine test facilities, wind tunnels and
other aerodynamic test facilities. In addition, the Company provides
aeropropulsion component testing and vehicle aerodynamic testing services. The
Company is an 80% owned subsidiary of Celsius Inc. See Note 10.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.

USE OF ESTIMATES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

CONTRACTS

Income on long-term contracts is recognized using the percentage-of-completion
method. On contracts where the percentage-of-completion method is used, revenue
is recognized for a portion of the total contract revenue, in the proportion
that costs incurred bear to management's estimate of total contract costs to be
incurred, commencing when progress reaches a point where experience is
sufficient to estimate final results with reasonable accuracy. Earnings and
costs on contracts are subject to revision throughout the terms of the contract,
and any required revisions are made in the periods in which revisions become
known. Provision is made for the full amount of anticipated losses in the period
in which they are determinable.



                                       22
<PAGE>   23


                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)




1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenues recognized on contracts for which billings will be presented
in accordance with contract provisions. Such revenues are generally expected to
be billed and collected within one year.

INVENTORIES

Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market.

EARNINGS PER SHARE

Net income (loss) per share of common stock is computed by dividing net income
(loss) for the year by the weighted average number of common shares outstanding
during the year. The Company has a simple capital structure with only common
stock outstanding; therefore, basic and diluted earnings per share are the same.

On February 2, 1998, the Company's Board of Directors approved a three-for-two
stock split effected in the form of a 50% common stock dividend. On February 22,
1999, the Company announced a 15% stock dividend to shareholders of record as of
March 10, 1999. Financial information contained in this report has been adjusted
to reflect the impact of the 15% stock dividend and stock split.

WARRANTY POLICY

The Company's warranty policy generally provides for one-year coverage on
defective equipment due to faulty design, workmanship or nonconformity to
specifications. Estimated warranty costs are recorded when revenues are
recognized.

LONG-LIVED ASSETS

Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.


                                       23
<PAGE>   24

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)





1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DEPRECIATION

Property, plant and equipment are recorded at cost and depreciated over their
estimated useful lives of three to forty years using straight-line and
accelerated methods. Depreciation expense includes the amortization of capital
lease assets.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used in estimating the indicated fair
values of financial instruments:
       Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
       Short-term and long-term debt: The fair value is estimated based on
current rates offered for similar debt, which approximates carrying value.
       Foreign currency contracts: The fair values of foreign currency contracts
(used for hedging purposes) are estimated by obtaining quotes from banks. At
December 31, 1999 and 1998, there were no carrying amounts related to foreign
currency contracts in the balance sheets. The unrealized gains (losses) related
to such contracts were not material to the financial statements.

INCOME TAXES

The Company accounts for income taxes under the liability method. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Effective November 1, 1990, the
Company became a consolidated subsidiary of Celsius Inc. and is included in the
consolidated federal income tax return with Celsius Inc. The Company's income
tax provision is calculated and presented on a separate return basis.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform with the current
year presentation.


                                       24
<PAGE>   25


                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)




1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INTERNAL USE SOFTWARE

In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of Computer
Software Developed for or Obtained for Internal Use. The Company adopted the SOP
on January 1, 1999. The SOP required the capitalization of certain costs
incurred after the date of adoption in connection with developing or obtaining
software for internal use. The Company previously expensed such costs as
incurred. As a result of adopting the new SOP, the Company capitalized
approximately $248,000 related to internal use software development projects in
1999 that previously would have been expensed as incurred. This resulted in an
increase in net income of $240,000 or $.05 per share.

2. CONTRACTS IN PROCESS
<TABLE>
<CAPTION>

                                                                            YEAR ENDED DECEMBER 31
                                                                              1999         1998
                                                                     --------------------------------------

<S>                                                                        <C>               <C>
Costs incurred on uncompleted contracts                                    $35,188,033       $43,441,770
Estimated earnings thereon                                                   6,936,458        10,897,073
                                                                     --------------------------------------

Total billable on uncompleted contracts                                     42,124,491        54,338,843
Less billings applicable thereto                                            42,594,692        49,043,991
                                                                     --------------------------------------
                                                                           $  (470,201)      $ 5,294,852
                                                                     ======================================

Included in the accompanying balance sheet under the
   following captions:
     Costs and estimated earnings in excess of billings on
       uncompleted contracts                                               $ 4,768,223       $ 6,710,677
     Billings in excess of costs and estimated earnings on
       uncompleted contracts                                                 5,238,424         1,415,825
                                                                     --------------------------------------
                                                                           $  (470,201)      $ 5,294,852
                                                                     ======================================
</TABLE>

The Company is a contractor/subcontractor on various U.S. federal
government-related firm fixed-price contracts. The negotiated firm, fixed price
is subject to downward readjustment if it is subsequently determined that the
cost data submitted by the Company is erroneous.


                                       25
<PAGE>   26

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)




2. CONTRACTS IN PROCESS (CONTINUED)

In August 1993, the Company entered into a subcontract with Opron Inc.
("Opron"), a Quebec company, which was the prime contractor on a jet engine test
cell project. Late in 1995, a dispute arose between the Company and Opron, which
resulted in a withdrawal by Opron against an existing letter of credit. Funds
under the letter of credit were advanced by Celsius AB, and were included in
Accounts Payable to Affiliated Companies in the balance sheet at December 31,
1998. The claim was partly offset by unpaid subcontract costs, which were
included in costs incurred on uncompleted contracts. In 1999, management
determined that given the complexities of the multi-jurisdictional litigation,
it was appropriate to pursue settlement of this matter. In July 1999, a final
settlement agreement was reached.

CONCENTRATIONS OF CREDIT RISK

At December 31, 1999, the Company had certain concentrations of credit risk with
approximately $2,729,417 of unbilled charges and approximately $6,317,820 of
accounts receivable from six customers, which are partially secured by letters
of credit.

3. INVENTORIES

Inventories consist of the following:
<TABLE>
<CAPTION>

                                                                                   DECEMBER 31
                                                                                 1999       1998
                                                                       ------------------------------------

<S>                                                                         <C>              <C>
   Materials and supplies                                                    $  841,676       $  613,114
   Projects-in-process                                                          249,387          792,940
                                                                       ------------------------------------
                                                                             $1,091,063       $1,406,054
                                                                       ====================================
</TABLE>


                                       26
<PAGE>   27

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)





4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>

                                                                                  DECEMBER 31
                                                                            1999              1998
                                                                     --------------------------------------

<S>                                                                      <C>               <C>
Land                                                                      $    486,105      $    486,105
Buildings                                                                    3,025,460         3,025,460
Furniture, fixtures and equipment                                            7,831,630         7,028,213
Wind tunnels and instrumentation                                             2,967,175         2,702,144
Building improvements                                                        1,337,772         1,337,772
                                                                     --------------------------------------
                                                                            15,648,142        14,579,694
Less accumulated depreciation                                              (10,019,574)       (9,104,111)
                                                                     --------------------------------------
Property, plant and equipment--net                                        $  5,628,568      $  5,475,583
                                                                     ======================================
</TABLE>

5. NOTES PAYABLE TO BANKS

At December 31, 1999, the Company had borrowings of $3,647,000 on a $6,000,000
line of credit with a bank bearing interest at a variable rate (9.5% at December
31, 1999).

Funds provided under this credit line are actually provided by Celsius Inc. and
ultimately from AB Celsius Finance. A first security interest in all assets of
the Company has been granted to Celsius AB, and a fee is paid through Celsius
Inc.

At December 31, 1998, the Company had borrowings of $6,698,996 on a $6,000,000
line of credit with a bank bearing variable interest at the bank's reference
rate. As of December 31, 1998, the Company had fully utilized the available
borrowings on this line of credit. Although the line of credit has a $6,000,000
limit, Celsius Inc. has allowed the Company to exceed this limit for short
periods of time. The portion over $6,000,000 is assessed a higher interest rate.

During 1999 and 1998, the average borrowings on these lines of credit were
$5,838,000 and $6,813,000 with weighted average interest rates during the year
of 9.2% and 9.35%, respectively.


                                       27
<PAGE>   28

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)





5. NOTES PAYABLE TO BANKS (CONTINUED)

On February 15, 1994, the Company borrowed $4,000,000 from Celsius Inc. over a
five year term bearing interest at the rate of 6.7%. This loan was used to
reduce the Company's short-term borrowings under its line of credit. The balance
was fully repaid in February 1999.

6. INCOME TAXES

Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>

                                                                                   DECEMBER 31
                                                                                 1999       1998
                                                                       ------------------------------------
<S>                                                                        <C>               <C>
   Deferred tax assets:
     Contract related costs                                                 $   410,000      $   239,000
     Warranty costs                                                             148,000          148,000
     Vacation accrual                                                           176,000          157,000
     Inventory and receivable reserves                                          270,000          190,000
     Net operating loss carryforward                                          1,457,000        1,345,000
     Other                                                                       12,000           23,000
     Tax credit carryforwards                                                    79,000           67,000
                                                                       ------------------------------------
   Total deferred tax assets                                                  2,552,000        2,169,000

   Valuation allowance for deferred tax assets                               (1,929,000)      (1,689,000)
                                                                       ------------------------------------
   Net deferred tax assets                                                      623,000          480,000

   Deferred tax liabilities:
     Tax over book depreciation                                                 623,000          480,000
                                                                       ------------------------------------
   Net deferred taxes                                                       $         -      $         -
                                                                       ====================================
</TABLE>


                                       28
<PAGE>   29

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)





6. INCOME TAXES (CONTINUED)

The net operating loss carryforward of $3,937,000 will expire beginning in the
year 2010. The components of income tax expense (benefit) for the years ended
December 31 are:
<TABLE>
<CAPTION>

                                                            1999             1998              1997
                                                     ------------------------------------------------------
<S>                                                         <C>               <C>               <C>
   Current                                                  $10,000           $16,000           $8,000
   Deferred                                                       -           (16,000)               -
                                                     ------------------------------------------------------
                                                            $10,000           $     -           $8,000
                                                     ======================================================
</TABLE>

Total income tax expense differs from taxes computed by applying the United
States statutory federal income tax rate as follows:
<TABLE>
<CAPTION>

                                                                    YEAR ENDED DECEMBER 31
                                                            1999             1998              1997
                                                     ------------------------------------------------------

<S>                                                        <C>                <C>             <C>
   Income taxes at 34%                                     $(216,000)         $226,000        $(134,000)
   State taxes, net of federal benefit                         3,000             3,000            5,000
   Effect of net operating loss carryforward and
     valuation allowance                                     211,000          (230,000)         132,000
   Other                                                      12,000             1,000            5,000
                                                     ------------------------------------------------------
                                                           $  10,000          $      -        $   8,000
                                                     ======================================================
</TABLE>

7. LEASE OBLIGATIONS

The Company has capitalized leases for facilities and equipment which expire
through 2002. The capitalized cost at December 31, 1999 and 1998 was $857,844
and $840,882 less accumulated amortization of $481,638 and $397,375,
respectively. One capitalized lease agreement, which relates to a warehouse
facility in St. Paul, Minnesota, contains several purchase options at various
times during the lease period. The most favorable option occurs at the end of
the lease period on July 2002 when the Company may purchase the facility for
approximately $95,000.


                                       29
<PAGE>   30

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)





7. LEASE OBLIGATIONS (CONTINUED)

The Company also has a number of operating lease agreements primarily involving
manufacturing and warehouse space and office equipment, which expire on various
dates through 2004. Total rental expense under operating leases for occupancy
and equipment was approximately $213,000, $184,000 and $132,000 for 1999, 1998
and 1997, respectively.

Following is a schedule of future minimum lease payments:
<TABLE>
<CAPTION>

                                                                            CAPITAL         OPERATING
                                                                            LEASES            LEASES
                                                                       ------------------------------------
   Years ending December 31:
<S>                                                                          <C>               <C>
     2000                                                                     $ 98,756         $143,732
     2001                                                                       64,364           87,534
     2002                                                                      126,595           87,534
     2003                                                                            -           87,534
     2004                                                                            -           29,178
                                                                       ------------------------------------
   Total minimum lease payments                                                289,715         $435,512
                                                                                         ==================
   Less amount representing interest                                            39,945
                                                                       ------------------
   Present value                                                               249,770
   Less principal amount due currently                                          79,187
                                                                       ------------------
                                                                              $170,583
                                                                       ==================
</TABLE>

Included in the $126,595 capital lease payment in 2002 is the $95,000 purchase
option payment to the Port Authority of Saint Paul for the 181 East Florida
Street facility.

8. CONTINGENCIES AND COMMITMENTS

Guarantees of approximately $4,592,490 were outstanding at December 31, 1999 to
various customers as bid bonds or in exchange for down payments or warranty
performance bonds.



                                       30
<PAGE>   31

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)






9. RETIREMENT/SAVINGS PLAN

The Company has a Retirement/Savings Plan which qualifies under Section 401(k)
of the Internal Revenue Code and covers all employees. Members of the Plan who
have completed at least 12 consecutive months of service, during which they have
worked at least 1,000 hours, are eligible for the employer matching
contribution. Contributions up to 6% of the employees' compensation are matched
at a rate of 50% by the Company. Company contributions to the plan for the years
ended December 31, 1999, 1998 and 1997 were $246,000, $210,000 and $193,000,
respectively.

10. RELATED PARTY TRANSACTIONS

At December 31, 1999 and 1998, Celsius Inc. owned 3,522,073 shares of the
Company's common stock. This amount represents 80% of the voting shares
outstanding. Celsius Inc. is a wholly-owned subsidiary of Celsius AB, a Swedish
holding company.

Celsius Inc. and its affiliated companies provide certain administrative support
services to the Company and the Company is charged a fee for such services.

Such fees with affiliates are summarized as follows:
<TABLE>
<CAPTION>

                                                                    YEAR ENDED DECEMBER 31
                                                              1999          1998         1997
                                                     ------------------------------------------------------

<S>                                                         <C>           <C>           <C>
   Interest expense                                         $131,000      $105,000      $65,000

   Administrative charges                                   $ 59,000      $ 55,000      $65,000
</TABLE>

11. SEGMENT INFORMATION

The Company operates primarily in one business segment relating to engine and
aerodynamic test facilities. This segment represented more than 90% of
consolidated revenue, operating profit and identifiable assets during 1999. The
Company's operations are structured to achieve consolidated objectives. As a
result, significant inter-dependencies and overlaps exist among the Company's
operating units.

Export sales were $12,867,066, $14,308,277 and $11,265,844 for 1999, 1998 and
1997, respectively.



                                       31
<PAGE>   32


                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)





11. SEGMENT INFORMATION (CONTINUED)

Information concerning major customers with sales greater than 10% of total
sales for the years ended December 31:
<TABLE>
<CAPTION>

                                                                  1999           1998            1997
                                                          -------------------------------------------------
<S>                                                           <C>              <C>             <C>
   Sales to domestic customers:
     United States federal government                          $ 3,342,584     $5,211,808      $5,194,158
     Commercial customers (2 customers in 1999)
                                                                10,749,117              -       4,561,789
                                                          -------------------------------------------------
                                                               $14,091,701     $5,211,808      $9,755,947
                                                          =================================================

   Sales to foreign customers:
     Commercial customers (1 customer in 1999)                 $ 3,185,471     $5,586,014      $        -
                                                          -------------------------------------------------
                                                               $ 3,185,471     $5,586,014      $        -
                                                          =================================================
</TABLE>



                                       32

<PAGE>   33



ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10 through ITEM 13

Items 10 through 13 of this Annual Report on Form 10-K are omitted because the
Company intends to file on or before May 1, 2000 a definitive proxy statement
conforming to Schedule 14A involving the election of directors. Certain
information set forth in such proxy statement is hereby incorporated by
reference into this Annual Report on Form 10-K as Items 10, 11, 12 and 13 of
Part III.

PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)1.   Financial Statements

        The financial statements and notes thereto are set forth in the Index to
        Financial Statements filed as Item 8 to this Annual Report on Form 10-K.

(a)2.   Financial Statement Schedules

        All schedules have been omitted, as the required information is not
        present or not present in amounts sufficient to require submission of
        the schedules or because the information required is included in the
        financial statements or notes thereto.

(a)3.   Exhibits

        No exhibits are included in this filing.

(b)3.   Reports on Form 8-K

        None.



                                       33
<PAGE>   34



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                              Aero Systems Engineering, Inc.
                                              (Registrant)

February 17, 2000                             /s/ CHARLES LOUX
--------------------                       By ----------------------------------
Date                                          Charles Loux, President and Chief
                                              Executive Officer

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

February 17, 2000                             /s/ CHARLES LOUX
--------------------                          ----------------------------------
Date                                          Charles Loux, President and Chief
                                              Executive Officer, Director

February 18, 2000                             /s/ CHRISTER PERSSON
--------------------                          ----------------------------------
Date                                          Christer Persson, Chairman of the
                                              Board

February 17, 2000                             /s/ A. L. MAXSON
--------------------                          ----------------------------------
Date                                          A. L. Maxson, Director

February 17, 2000                             /s/ LEON E. RING
--------------------                          ----------------------------------
Date                                          Dr. Leon Ring, Director

February 17, 2000                             /s/ RICHARD A. HOEL
--------------------                          ----------------------------------
Date                                          Richard A. Hoel, Director

February 17, 2000                             /s/ STEVEN R. HEDBERG
--------------------                          ----------------------------------
Date                                          Steven R. Hedberg, Chief Financial
                                              Officer



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