<PAGE>
                       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, 2001        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, 2002 was approximately $1,754,555 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, 2002 was 4,401,625.


                                       1
<PAGE>




                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                      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...................................................................................10

Item 3.   Legal Proceedings............................................................................11

Item 4.   Submission of Matters to a Vote of Security Holders..........................................11

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.....................................16

Item 8.   Financial Statements and Supplementary Data..................................................17

Item 9.   Changes in and Disagreements with Accountants on Accounting and
              Financial Disclosure.....................................................................36

PART III

Item 10. through  Item 13.  See Documents Incorporated by Reference....................................36

PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................36

Signatures.............................................................................................37
</TABLE>




                                       2
<PAGE>




DOCUMENTS INCORPORATED BY REFERENCE


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

<TABLE>
<CAPTION>
                                                                           PARTS OF FORM 10-K INTO WHICH
                                                                                   INCORPORATED BY
                                 DOCUMENT                                             REFERENCE
-----------------------------------------------------------------------------------------------------------
<S>                                                                      <C>
Proxy Statement to be filed on or before April 26, 2002
   for the annual meeting of shareholders on May 29, 2002                               III
</TABLE>





                                       3
<PAGE>




          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>
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>



                                       4
<PAGE>





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.

Prior to September 25, 2001, approximately 80% of the Company's outstanding
common stock was owned by Celsius Inc. Celsius Inc. is a wholly owned subsidiary
of Celsius AB, which is a Swedish company. Celsius AB was acquired by Saab AB in
March 2000. On September 25, 2001, Minnesota ASE, LLC acquired 2,245,000 shares
of common stock of Aero Systems Engineering, Inc. from Celsius Inc., a
subsidiary of Saab AB, representing 51% of the outstanding shares. Celsius Inc.
retained a 29% stock interest in the Company.

The plan of operations for 2002 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. Currently, the Company has no agreements regarding such
opportunities. The Company is attempting to expand into the industrial engine
and small commuter engine testing marketplace. Also, acoustic measurement
processes to measure noise levels are technologies whereby 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;



                                       5
<PAGE>




  -   Providing of aerodynamic and propulsion system testing services;

  -   Application of engineering technology to specific engine and aerodynamic
      testing problems;

  -   Providing acoustic design and measurement services.

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 design and construction
of a building, the Company subcontracts certain civil aspects of the project.

Sales of test facilities have resulted principally from direct customer
contacts, 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. The Company has two patent applications in process
at the time of this filing. One is for a plate fin heat exchanger application
and the second is for an automotive wind tunnel open jet collector design.



                                       6
<PAGE>




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 certain of the Company's contracts with its
customers are over multiple years, outstanding balances due from a customer may
be quite large. The Company is occasionally 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.

The Company has consistently relied upon bank credit lines during recent years
as a source of its working capital resources and liquidity. During the third
quarter 2001, Celsius Inc. sold 51% of the total outstanding shares of common
stock of ASE to Minnesota ASE, LLC. Related to this transaction, the Company has
secured new bank financing agreements for operating funds and future letter of
credit needs. These new agreements are asset-based collateral agreements, with
the funds available under these agreements determined by the available securable
assets at any point in time, up to a maximum of $6,000,000 of operating funds
and $3,000,000 of letter of credit funds. Also related to the transaction,
Celsius Inc. has agreed to continue to hold until maturity certain existing bank
guarantees that were previously provided to a few of the Company's customers,
and Celsius Inc. has provided a three-year $1,500,000 loan to the Company at 8%
per year, which is subordinated debt to the new bank agreement. This loan is
collateralized by a third party pledge by Minnesota ASE, LLC of the shares of
ASE purchased by Minnesota ASE, LLC from Celsius Inc. The Company has provided
an indemnification agreement to Celsius Inc. to secure Celsius Inc.'s interest
in the above items. On September 25, 2001, Minnesota ASE, LLC loaned the Company
$2,600,000 in order to supplement bank financing, and $2,300,000 of the balance
was repaid prior to year end, leaving an outstanding balance of $300,000.




                                       7
<PAGE>




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 2001, three
customers each accounted for more than 10% of the Company's revenues. These
three customers were Boeing, General Electric, and DSO-Singapore. 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, 2001 was $29,483,000. This compares with a
backlog of $27,710,000 on December 31, 2000.

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.

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 growth in the automotive wind tunnel area. In order to capture some of this
new automotive wind tunnel business, ASE had previously entered into a teaming
agreement with a leading automotive architecture and engineering company, and
had established a marketing agreement with an agent in the Detroit area. Both of
these agreements have since expired. The team continues to pursue new
opportunities but to date no contracts have been awarded. Also, the activities
involving commercial aviation wind tunnel applications have been growing and
continue to provide opportunities for new business.




                                       8
<PAGE>




The Company has in the past been aided in financing projects by utilizing the
financial strength of Saab AB. Without the ability to issue standby letters of
credit to guarantee the performance of the project, ASE might not have been the
prime contractor on certain of these projects. During the third quarter 2001,
Celsius Inc. sold 51% of the total outstanding shares of common stock of ASE to
Minnesota ASE, LLC. Related to the transaction, Celsius Inc. has agreed to
continue to hold certain existing bank guarantees until maturity that were
previously provided to a few of the Company's customers. The Company has
provided an indemnification agreement to Celsius Inc. to secure Celsius Inc.'s
interest in the above items. Going forward, the Company believes it has adequate
capability to secure additional standby letters of credit for its near term
needs.

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 its latest
computer data acquisition system. The expense of research and development was
$421,000, $625,000, and $743,000 for the years ended December 31, 2001, 2000,
and 1999, 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, 2001, the Company had 178 employees.
Additionally, contract labor has been used as business conditions require. There
are currently no collective bargaining agreements covering any of the Company's
employees. The Company has not experienced a strike or work stoppage, and
management believes that its employee relations are good.

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.
However, wind tunnels with a Mach number in excess of .9 need to have approval
from the U.S. State Department if they are sold to a foreign country.

For certain foreign and domestic projects, 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 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.




                                       9
<PAGE>




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 engineering and administrative 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.

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 1,510 square feet of office space in Hampton, Virginia. This
office space is subleased by another company until April 2004. The Company no
longer has any employees located in this facility, and the remaining lease is in
effect until April 2004.



                                       10
<PAGE>




ITEM 3 -- LEGAL PROCEEDINGS

There are no significant legal proceedings in process at the time of this
report.

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

No matter was submitted during the fourth quarter of 2001 to a vote of security
holders through the solicitation of proxies or otherwise.

PART II

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

The Company's common stock currently is quoted on The Nasdaq SmallCap
Market(SM). On January 31, 2002, the closing sale price for the Company's common
stock was $1.94.

The high and low sales prices for the Company's common stock for each quarter
during 2000 and 2001, as quoted on Nasdaq, were as follows:

<TABLE>
<CAPTION>
                                                           HIGH            LOW
                                                     ---------------------------------
<S>                                                 <C>               <C>
   2000:
     First Quarter                                         $3.13           $1.44
     Second Quarter                                         2.66            1.75
     Third Quarter                                          2.25            1.25
     Fourth Quarter                                         2.06            1.28

   2001:
     First Quarter                                         $1.88           $1.44
     Second Quarter                                         1.74            1.30
     Third Quarter                                          1.60             .91
     Fourth Quarter                                         2.85             .88
</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. As of December
31, 2001, there were approximately 182 holders of record of common stock of the
Company and 4,401,625 total shares outstanding.




                                       11
<PAGE>




ITEM 6 -- SELECTED FINANCIAL DATA

Selected financial data for the years ended December 31 are as follows:

<TABLE>
<CAPTION>
                                    2001           2000           1999           1998           1997
                               ----------------------------------------------------------------------------
<S>                            <C>              <C>            <C>            <C>            <C>
SELECTED INCOME STATEMENT DATA
Earned revenue                    $27,182,583    $30,646,114    $31,061,082    $27,181,448    $25,032,452
Net income (loss)                     270,938        331,003       (645,307)       665,200       (400,733)
Net income (loss) per
   common share                      .06            .08           (.15)           .15           (.09)
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                    $11,243,385    $13,043,123    $14,180,121    $15,424,033    $14,352,090
Current liabilities                 9,375,300     13,506,301     15,368,305     15,750,389     15,007,440
Working capital                     1,868,085       (463,178)    (1,188,184)      (326,356)      (655,350)
Total assets                       15,856,797     18,226,831     19,808,689     20,899,616     19,990,213
Long-term debt and capital
   lease obligations                1,609,755        119,726        170,583        234,119        732,865
Stockholders' equity                4,871,742      4,600,804      4,269,801      4,915,108      4,249,908
</TABLE>

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

Aero Systems Engineering, Inc. 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 designs the testing facility but subcontracts the civil
engineering work and construction to local civil construction companies.

Results of Operations -- The backlog of orders as of December 31, 2001 was
$29,483,000, which consisted of $27,630,000 that was related to jet engine test
cell projects and wind tunnel projects and $1,853,000 related to Aerotest
Lab/Other. Backlog of orders as of December 31, 2000 was $27,710,000, of which
$26,221,000 was related to test cell and wind tunnel projects and $1,489,000
related to Aerotest Lab/Other. Backlog of orders as of December 31, 1999 was
$18,759,000, of which $18,297,000 was related to test cell and wind tunnel
projects and $462,000 related to Aerotest Lab/Other.

The change in backlog from 2000 to 2001 represents a 6% increase in total
backlog. Also, new orders received in 2001 totaled $28,955,000 as compared to
the previous year of $39,598,000. The 2001 increase in backlog was mostly
related to the strong order intake during the second half of 2001. The change in
backlog from 1999 to 2000 represents a 48% increase in total backlog. The 2000
increase in backlog was mostly related to the receipt of one large wind tunnel
order for $23.3 million to supply a wind tunnel in Singapore.



                                       12
<PAGE>




Earned revenue for the year ended December 31, 2001 was $27,183,000, a decrease
of $3,463,000 or 11% as compared to 2000 revenue of $30,646,000. Earned revenue
for 1999 was $31,061,000. The revenue decrease from 2000 to 2001 was mostly due
to the delay of U.S. government approval of the export license application for
the wind tunnel project in Singapore. The export license was submitted for
approval during the fourth quarter of 2000. Because of this delay, work on the
project had been very limited during 2001, resulting in lower revenue and margin
recognition. The export license was received in early September 2001, and the
activity level has now increased on the project.

The cost of earned revenue, which includes manufacturing and engineering costs,
was 75% of earned revenue in 2001 as compared to 78% in 2000 and 82% in 1999.
The percentage decrease in cost of earned revenue during 2001 was mostly due to
the fact that there were no occurrences of major cost overruns on any of the
projects during 2001 and generally the projects that were in process during 2001
were slightly lower cost projects. The higher cost of earned revenue percentage
in 1999 was due to the fact that 1999 included additional costs on two major
wind tunnel projects and additional reserves recorded for the settlement of a
long outstanding dispute with a foreign contractor.

The Company recognizes revenue and profit as work on long-term contracts
progresses using the percentage-of-completion method of accounting, which relies
on estimates of total expected contract revenues and costs. The Company follows
this method since reasonably dependable estimates of the revenue and costs
applicable to various stages of a contract can be made. Because the financial
reporting of these contracts depends on estimates, which are assessed
continually during the term of the contract, recognized revenues and profit are
subject to revisions as the contract progresses to completion. Revisions in
profit estimates are reflected in the period in which the facts that give rise
to the revision become known. Accordingly, favorable changes in estimates result
in additional profit recognition, and unfavorable changes in estimates result in
the reversal of previously recognized revenue and profits. When estimates
indicate a loss under a contract, cost of revenue is charged with a provision
for such loss. As work progresses under a loss contract, revenue continues to be
recognized, and a portion of the contract costs incurred in each period is
charged to the contract loss reserve.

Operating expenses were $5,140,000, $5,316,000, and $4,591,000 in years 2001,
2000, and 1999, respectively. These expenses decreased 3% in 2001 as compared to
2000 primarily as a result of less expenditures on bid and proposal activities.
In 2000, bid and proposal expenditures included significant activities on
several large turnkey proposals.

Research and Development (R&D) costs were $421,000, $625,000, and $743,000 in
years 2001, 2000, and 1999, respectively, and were primarily related to
activities to enhance the capabilities of the ASE2000 Computer Data Acquisition
System. This activity will continue into 2002, which management believes will
further improve the marketability of the system. The reduction from 2000 is
related to fewer active R&D programs in 2001.



                                       13
<PAGE>




Interest expense was $721,000, $574,000, and $719,000 in years 2001, 2000, and
1999, respectively. The major item bearing interest expense is the line of
credit. The average outstanding borrowings were $5,830,000 and $4,736,000 during
2001 and 2000, respectively. The increase in borrowings from 2000 to 2001
reflects the impact of the delay of the receipt of the export license for the
wind tunnel project in Singapore thereby delaying milestone invoicing
activities. The weighted average interest rate for 2001 was 8.7% on the line of
credit compared to 10.6% in 2000.

The Company recorded income tax expense of $152,000 in 2001, as compared to
$6,000 in 2000 and $10,000 in 1999. Through September 25, 2001, Aero Systems was
included in the consolidated federal income tax return of Celsius Inc. The
Company's income tax provision was calculated and presented on a separate return
basis. Upon the closing of the acquisition of 51% of Aero Systems' stock by
Minnesota ASE, LLC, Celsius Inc. will own less than 80% of Aero Systems and,
accordingly, will no longer be able to include Aero Systems in its consolidated
federal income tax return. In the third quarter, in conjunction with that
transaction, the Company recorded a non-cash charge of $100,000 to reduce its
income tax receivable from Celsius Inc. as a result of the termination of the
tax sharing agreement. Also, as a part of the termination of the federal tax
agreement with Celsius Inc., the Company and Celsius Inc. agreed to prorate the
total 2001 federal tax liability based on the relative time periods of ownership
during 2001, which reduced the Company's current income tax expense.

The Company recorded net income of $271,000 in 2001, net income of $331,000 in
2000, and a net loss of $645,000 in 1999. The reduction from 2000 was due to the
increase in income tax expense relating to the termination of the federal income
tax allocation agreement between the Company and Celsius Inc., which was
terminated at the time of the sale on September 25, 2001.

Liquidity and Capital Resources -- To minimize working capital requirements, the
Company attempts to match contract payments with related contract expenditures.
The Company's current ratio was 1.2 as of December 31, 2001, 1.0 as of December
31, 2000, and .9 as of December 31, 1999. Working capital amounts were
$1,868,000 as of December 31, 2001, $(463,000) as of December 31, 2000, and
$(1,188,000) as of December 31, 1999.

The December 31, 2001 accounts receivable balance was $4,730,000, a decrease of
$1,631,000, as compared to 2000's balance of $6,361,000. The decrease in the
accounts receivable balance for 2001 was due to the contractual timing of
customer billings.

Accounts payable and accrued expenses amounts were $5,538,000 and $4,419,000 in
2001 and 2000, respectively. The 2001 increase is $1,119,000 or 25%, as compared
to 2000. The increase from 2000 is due primarily to the timing of procurement
activities for existing projects, of which a couple of the larger projects have
moved into the procurement phase of the project schedule towards the end of the
year.



                                       14
<PAGE>




Billings in excess of earnings were $1,691,000, a decrease of $370,000 when
compared to 2000's balance of $2,061,000. This decrease is due primarily to the
timing of billing milestones related to contracts. Billings are a function of
contract terms and do not necessarily relate to the percentage of completion of
a project.

The Company has consistently relied upon bank credit lines during recent years
as a source of its working capital resources and liquidity. On September 25,
2001, the Company entered into new financing arrangements to replace its former
credit line.

The Company's new bank agreements, which expire in September 2003, are
asset-based collateral arrangements, with the funds available under these
agreements determined by the available securable assets at any point in time, up
to a maximum of $6,000,000 in operating funds, and $3,000,000 of letter of
credit funds. The average funds available and amounts outstanding on the
operating line and letter of credit during the period ended December 31, 2001
were $2,100,000 outstanding on $3,300,000 available and $1,300,000 outstanding
on $3,000,000 available, respectively.

The bank agreement contains covenants that require the Company to maintain
certain financial ratios. The Company is in compliance with these covenants as
of December 31, 2001.

The Company also obtained a $1,500,000 three-year term loan from Celsius Inc.,
which is due September 2004. The loan bears interest at 8% and is subordinated
debt under the new banking agreement. This loan is collateralized by a third
party pledge by Minnesota ASE, LLC of the shares of ASE purchased by Minnesota
ASE, LLC from Celsius Inc. Celsius Inc. has also agreed to continue to hold
certain existing bank guarantees until maturity that were previously provided to
certain of the Company's customers. The Company has provided an indemnification
agreement to Celsius Inc. to secure Celsius Inc.'s interest in the above items.

On September 25, 2001, Minnesota ASE, LLC loaned the Company $2,600,000 in order
to supplement bank financing. The maturity date was January 11, 2002 and the
loan interest rate was equal to the bank's base rate plus .25%. The Company
repaid $2,300,000 prior to December 31, 2001. The remaining $300,000 has been
converted to a note bearing interest at 8% and does not have a stated due date.

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 2002.

Capital expenditures, including amounts under capital leases, were $475,000,
$655,000, and $1,078,000 in years 2001, 2000, and 1999, respectively. Most of
the 2001 capital expenditures were used to update desktop and shop equipment and
facility improvements.

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



                                       15
<PAGE>




During 2001, approximately 52% 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 risks associated with
foreign currency exchange rates.

ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURE
           ABOUT MARKET RISK

The Company's long-term contracts are substantially all denominated in U.S.
dollars. The Company has hedged any exposure to foreign currency fluctuations. A
10% adverse change in foreign currency rates would not have a material effect on
the Company's results of operations or financial position.

The Company is also subject to interest rate risk. The Company has not hedged
its exposure to interest rate fluctuations; however, a 10% increase or decrease
in interest rates would not have a material effect on the Company's results of
operations, fair values, or cash flows.



                                       16
<PAGE>




ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY
          DATA


                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                   Page
                                                                                                   ----
<S>                                                                                              <C>
REPORT OF INDEPENDENT AUDITORS........................................................................18

FINANCIAL STATEMENTS
   Balance Sheets.....................................................................................19
   Statements of Operations...........................................................................21
   Statements of Changes in Stockholders' Equity......................................................22
   Statements of Cash Flows...........................................................................23
   Notes to Financial Statements......................................................................24
</TABLE>




                                       17
<PAGE>


                         Report of Independent Auditors

The 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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.

                                           /s/ Ernst & Young LLP

Minneapolis, Minnesota
January 18, 2002



                                       18
<PAGE>




                         Aero Systems Engineering, Inc.

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31
                                                                            2001              2000
                                                                     --------------------------------------
<S>                                                                    <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents                                            $       96,939    $       47,808
   Accounts receivable -- billed contracts, net of allowances of
     $50,000 in 2001 and 2000, including retainages of $106,000 in
     2001 and 2000                                                           4,730,460         6,361,427
   Costs and estimated earnings in excess of billings on
     uncompleted contracts                                                   4,876,894         4,996,416
   Inventories                                                               1,220,933         1,483,738
   Prepaid expenses and other, net                                             318,159            57,899
   Deferred and prepaid income taxes                                                --            95,835
                                                                     --------------------------------------
Total current assets                                                        11,243,385        13,043,123

Property, plant, and equipment, net                                          4,613,412         5,183,708








                                                                     --------------------------------------
Total assets                                                               $15,856,797       $18,226,831
                                                                     ======================================
</TABLE>




                                       19
<PAGE>




<TABLE>
<CAPTION>
                                                                                  DECEMBER 31
                                                                            2001              2000
                                                                     --------------------------------------
<S>                                                                  <C>                <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current maturities of capital lease obligations                         $   145,552       $    50,858
   Notes payable                                                             1,700,000         6,975,755
   Notes payable with related parties                                          300,000                --
   Accounts payable:
     Trade                                                                   2,147,366         1,635,791
     Related parties                                                            47,667                --
   Billings in excess of costs and estimated earnings on
     uncompleted contracts                                                   1,691,447         2,060,706
   Accrued warranty and losses                                                 460,253           463,007
   Accrued salaries and wages                                                  866,204           897,885
   Accrued job costs                                                         1,240,828           444,395
   Income tax payable                                                           47,627                --
   Other accrued liabilities                                                   728,356           977,904
                                                                     --------------------------------------
Total current liabilities                                                    9,375,300        13,506,301

Capital lease obligations, less current maturities                             109,755           119,726
Long-term debt with related parties                                          1,500,000                --

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                                                         3,091,125         2,820,187
                                                                     --------------------------------------
Total stockholders' equity                                                   4,871,742         4,600,804
                                                                     --------------------------------------

Total liabilities and stockholders' equity                                 $15,856,797       $18,226,831
                                                                     ======================================
</TABLE>

See accompanying notes.



                                       20
<PAGE>




                         Aero Systems Engineering, Inc.

                            Statements of Operations

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31
                                                          2001              2000              1999
                                                   --------------------------------------------------------
<S>                                                <C>                 <C>                <C>
Earned revenue                                           $27,182,583       $30,646,114       $31,061,082
Cost of earned revenue                                    20,415,764        23,799,532        25,588,018
                                                   --------------------------------------------------------
Gross profit                                               6,766,819         6,846,582         5,473,064

Selling, general, and administrative expenses
                                                           5,140,256         5,315,851         4,590,710
Research and development                                     420,931           625,466           742,559
                                                   --------------------------------------------------------
Operating profit                                           1,205,632           905,265           139,795

Other income (expense):
   Interest income                                             4,387             3,236             2,272
   Interest expense                                         (721,105)         (574,053)         (718,573)
   Other                                                     (65,548)            2,815           (58,801)
                                                   --------------------------------------------------------
                                                            (782,266)         (568,002)         (775,102)
                                                   --------------------------------------------------------
Income (loss) before income taxes                            423,366           337,263          (635,307)
Income tax expense                                          (152,428)           (6,260)          (10,000)
                                                   --------------------------------------------------------
Net income (loss)                                        $   270,938       $   331,003       $  (645,307)
                                                   ========================================================

Net income (loss) per common share                           $.06              $.08             $(.15)
                                                   ========================================================

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

See accompanying notes.



                                       21
<PAGE>


                         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 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
   Net income                                        --              --             --           331,003
                                       --------------------------------------------------------------------
Balance at December 31, 2000                  4,401,625         880,325        900,292         2,820,187
   Net income                                        --              --             --           270,938
                                       --------------------------------------------------------------------
Balance at December 31, 2001                  4,401,625        $880,325       $900,292        $3,091,125
                                       ====================================================================
</TABLE>


See accompanying notes.



                                       22
<PAGE>




                         Aero Systems Engineering, Inc.

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31
                                                                     2001             2000              1999
                                                              ------------------------------------------------------
<S>                                                           <C>                 <C>              <C>
OPERATING ACTIVITIES
Net income (loss)                                                 $    270,938       $   331,003     $   (645,307)
Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
     Depreciation and amortization                                   1,063,158         1,100,086          925,411
     Decrease (increase) in assets:
        Accounts receivable                                          1,630,967         1,943,358       (1,064,110)
        Costs and estimated earnings in excess of billings on
          uncompleted contracts                                        119,522          (480,783)       2,095,044
        Inventories                                                    262,805          (392,675)         314,991
        Prepaid expenses and other, net                               (182,035)           58,170          (65,218)
     (Decrease) increase in liabilities:
        Accounts payable and accrued expenses                        1,071,692        (1,984,757)        (732,371)
        Income tax payable                                              47,627             8,260           (5,000)
        Billings in excess of costs and estimated earnings on
          uncompleted contracts                                       (369,259)       (3,177,718)       3,822,599
                                                              ------------------------------------------------------
Net cash provided by (used in) operating activities                  3,915,415        (2,595,056)       4,646,039

INVESTING ACTIVITIES
Capital expenditures                                                  (329,558)         (655,226)      (1,078,396)
                                                              ------------------------------------------------------
Net cash used in investing activities                                 (329,558)         (655,226)      (1,078,396)

FINANCING ACTIVITIES
Net borrowings under line of credit agreements                      (5,275,755)        3,328,800       (3,052,041)
Proceeds received from related parties                               4,100,000                --               --
Principal payments on borrowings from related parties
                                                                    (2,300,000)               --         (400,000)
Principal payments under capital lease obligations                     (60,971)          (79,186)         (83,217)
                                                              ------------------------------------------------------
Net cash (used in) provided by financing activities                 (3,536,726)        3,249,614       (3,535,258)
                                                              ------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                    49,131              (668)          32,385
Cash and cash equivalents at beginning of year                          47,808            48,476           16,091
                                                              ------------------------------------------------------
Cash and cash equivalents at end of year                          $     96,939       $    47,808     $     48,476
                                                              ======================================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION
Cash paid during the year for:
   Interest                                                       $    721,105       $   574,053     $    718,573

   Income taxes                                                   $      8,300       $       260     $     15,000

NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchase of equipment under capital leases                        $    145,694       $        --     $         --
</TABLE>

See accompanying notes.



                                       23
<PAGE>

                         Aero Systems Engineering, Inc.

                          Notes to Financial Statements

                                December 31, 2001



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.
Minnesota ASE, LLC owns 51% of the Company. Celsius Inc. owns 29% of the
Company. See Note 10.

CASH AND CASH EQUIVALENTS

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 accounting
principles generally accepted in the United States 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 generally 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. On certain
after-service contracts, the Company recognizes revenue on a completed contract
basis.




                                       24
<PAGE>

                         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 only common stock outstanding; therefore, basic
and diluted earnings per share are the same.

On March 31, 1999, the Company issued 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.

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.



                                       25
<PAGE>

                         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 40 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.

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.

DERIVATIVES AND HEDGING

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, during the first
quarter of 2001. In doing so, the Company did not incur any material transition
adjustments.


                                       26
<PAGE>

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company uses foreign currency forward exchange contracts to offset the
effect of exchange rate fluctuations on certain foreign currency denominated
contracts. All derivatives are recognized on the balance sheet at their fair
value. The fair value of existing contracts is not material.

RECLASSIFICATION

Certain prior period amounts have been reclassified to conform to current period
presentation.

2. CONTRACTS IN PROCESS

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31
                                                                            2001              2000
                                                                     --------------------------------------

<S>                                                                  <C>                  <C>
   Costs incurred on uncompleted contracts                                 $35,094,586       $40,780,632
   Estimated earnings thereon                                               12,635,018        11,367,294
                                                                     --------------------------------------
   Total billable on uncompleted contracts                                  47,729,604        52,147,926
   Less billings applicable thereto                                         44,544,157        49,212,216
                                                                     --------------------------------------
                                                                          $  3,185,447      $  2,935,710
                                                                     ======================================

   Included in the accompanying balance sheet under the
     following captions:
        Costs and estimated earnings in excess of billings
          on uncompleted contracts                                        $  4,876,894      $  4,996,416
        Billings in excess of costs and estimated earnings
          on uncompleted contracts                                           1,691,447         2,060,706
                                                                     --------------------------------------
                                                                          $  3,185,447      $  2,935,710
                                                                     ======================================
</TABLE>




                                       27
<PAGE>

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)



2. CONTRACTS IN PROCESS (CONTINUED)

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.

CONCENTRATIONS OF CREDIT RISK

At December 31, 2001, the Company had certain concentrations of credit risk with
approximately $2,984,000 of unbilled charges and approximately $2,427,000 of
accounts receivable from three customers, which are partially secured by letters
of credit.

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31
                                                                             2001              2000
                                                                       ------------------------------------
<S>                                                                    <C>                 <C>
   Materials and supplies                                                    $  965,594       $1,103,439
   Projects-in-process                                                          255,339          380,299
                                                                       ------------------------------------
                                                                             $1,220,933       $1,483,738
                                                                       ====================================
</TABLE>

4. PROPERTY, PLANT, AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31
                                                                            2001              2000
                                                                     --------------------------------------
<S>                                                                  <C>                 <C>
   Land                                                                    $    486,105      $    486,105
   Buildings                                                                  3,025,460         3,025,460
   Furniture, fixtures, and equipment                                         8,648,346         8,325,135
   Wind tunnels and instrumentation                                           3,130,182         2,978,141
   Building improvements                                                      1,488,527         1,488,527
                                                                     --------------------------------------
                                                                             16,778,620        16,303,368
   Less accumulated depreciation                                            (12,165,208)      (11,119,660)
                                                                     --------------------------------------
   Property, plant, and equipment, net                                     $  4,613,412      $  5,183,708
                                                                     ======================================
</TABLE>



                                       28
<PAGE>

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)



5. NOTES PAYABLE

On September 25, 2001, the Company entered into new financing arrangements to
replace its former credit line. The Company's new bank agreements, which expire
in September 2003, are asset-based collateral arrangements, with the funds
available under these agreements determined by the available securable assets at
any point in time, up to a maximum of $6,000,000 in operating funds and
$3,000,000 of letter of credit funds. At December 31, 2001, $1,700,000 and
$1,300,000 were outstanding under the operating funds and letter of credit
portions of the agreements, respectively.

The bank agreement contains covenants that require the Company to maintain
certain financial ratios. The Company is in compliance with these covenants as
of December 31, 2001.

The Company also obtained a $1,500,000 three-year term loan from Celsius Inc.,
which is due September 2004. The loan bears interest at 8% and is subordinated
debt under the new banking agreement. This loan is collateralized by a
third-party pledge by Minnesota ASE, LLC of the shares of ASE purchased by
Minnesota ASE, LLC from Celsius Inc. Celsius Inc. has also agreed to continue to
hold certain existing bank guarantees until maturity that were previously
provided to certain of the Company's customers. The Company has provided an
indemnification agreement to Celsius Inc. to secure Celsius Inc.'s interest in
the above items.

On September 25, 2001, Minnesota ASE, LLC loaned the Company $2,600,000 in order
to supplement bank financing. The maturity date was January 11, 2002 and the
loan interest rate was equal to the bank's base rate plus .25%. The Company
repaid $2,300,000 prior to December 31, 2001. The remaining $300,000 has been
converted to a note bearing interest at 8% and does not have a stated due date.

During 2001 and 2000, the average borrowings on these lines of credit were
$5,830,000 and $4,736,000, respectively, with weighted average interest rates
during the year of 8.7% and 10.6%, respectively.

At December 31, 2000, the Company had borrowings of $6,975,755 on a $6,000,000
line of credit with a bank bearing interest at a variable rate (10.5% at
December 31, 2000). As




                                       29
<PAGE>


                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)


5. NOTES PAYABLE (CONTINUED)

of December 31, 2000, the Company had fully utilized the available borrowings on
this line of credit. Although the line of credit had a $6,000,000 limit, Celsius
Inc. had allowed the Company to exceed this limit for short periods of time. The
portion over $6,000,000 was assessed a higher interest rate.

Funds provided under this credit line were actually provided by Celsius Inc. and
ultimately from Saab's treasury. A first security interest in all assets of the
Company had been granted to Celsius AB, and a fee was paid through Celsius Inc.

6. INCOME TAXES

Through September 25, 2001, Aero Systems was included in the consolidated
federal income tax return of Celsius Inc. The Company's income tax provision was
calculated and presented on a separate return basis. Upon the closing of the
acquisition of 51% of Aero Systems' stock by Minnesota ASE, LLC, Celsius Inc.
will own less than 80% of Aero Systems and, accordingly, will no longer be able
to include Aero Systems in its consolidated federal income tax return. In the
third quarter, in conjunction with that transaction, the Company recorded income
tax expense of $100,000 to reduce its income tax receivable from Celsius Inc. as
a result of the termination of the tax sharing agreement. Also, as a part of the
termination of the federal tax sharing agreement with Celsius Inc., the Company
and Celsius Inc. agreed to prorate the total 2001 federal tax liability based on
the relative time periods of ownership during 2001.

The components of income tax expense (benefit) for the years ended December 31
are:

<TABLE>
<CAPTION>
                                                            2001             2000              1999
                                                     ------------------------------------------------------
<S>                                                  <C>                <C>              <C>
   Current                                                 $152,000           $18,000          $10,000
   Deferred                                                      --           (12,000)              --
                                                     ------------------------------------------------------
                                                           $152,000           $ 6,000          $10,000
                                                     ======================================================
</TABLE>




                                       30
<PAGE>

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)



6. INCOME TAXES (CONTINUED)

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
                                                            2001             2000              1999
                                                     ------------------------------------------------------

<S>                                                  <C>                 <C>              <C>
   Income taxes at 34%                                      $144,000          $115,000        $(216,000)
   State taxes, net of federal benefit                         7,000             4,000            3,000
   Effect of net operating loss carryforward and
     valuation allowance                                    (101,000)         (118,000)         211,000
   Termination of tax sharing agreement                      100,000                --               --
   Other                                                       2,000             5,000           12,000
                                                     ------------------------------------------------------
                                                            $152,000          $  6,000        $  10,000
                                                     ======================================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31
                                                                             2001              2000
                                                                       ------------------------------------
<S>                                                                    <C>                 <C>
   Deferred tax assets:
     Contract-related costs                                                 $   352,000      $   454,000
     Warranty costs                                                             148,000          148,000
     Vacation accrual                                                           180,000          171,000
     Inventory and receivable reserves                                          286,000          267,000
     Net operating loss carryforward                                             37,000        1,230,000
     Other                                                                           --           24,000
     Tax credit carryforwards                                                   108,000          103,000
                                                                       ------------------------------------
   Total deferred tax assets                                                  1,111,000        2,397,000

   Deferred tax liabilities:
     Tax over book depreciation                                                 448,000          570,000
     Other                                                                        5,000               --
                                                                       ------------------------------------
   Total deferred tax liabilities                                               453,000          570,000
                                                                       ------------------------------------
   Net deferred tax asset                                                       658,000        1,827,000
   Valuation allowance                                                         (658,000)      (1,827,000)
                                                                       ------------------------------------
   Net deferred taxes                                                       $        --      $        --
                                                                       ====================================
</TABLE>

The net state tax operating loss carryforward of approximately $1,231,000 will
expire beginning in the year 2008.



                                       31
<PAGE>

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)



7. LEASE OBLIGATIONS

The Company has capitalized leases for facilities and equipment which expire
through 2006. The capitalized cost at December 31, 2001 and 2000 was $986,577
and $857,844, less accumulated amortization of $666,162 and $562,680,
respectively. One capitalized lease agreement, which relates to a warehouse
facility in Saint 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.

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 2005. Total rental expense under operating leases for occupancy
and equipment was approximately $160,000, $217,000, and $213,000 for 2001, 2000,
and 1999, respectively.

Following is a schedule of future minimum lease payments:

<TABLE>
<CAPTION>
                                                                            CAPITAL         OPERATING
                                                                            LEASES            LEASES
                                                                       ------------------------------------
<S>                                                                     <C>                <C>
   Year ending December 31:
     2002                                                                    $161,639          $ 45,040
     2003                                                                      35,045            45,040
     2004                                                                      35,045            30,141
     2005                                                                      35,045            17,019
     2006                                                                      20,442                --
                                                                       ------------------------------------
   Total minimum lease payments                                               287,216          $137,240
                                                                                        ===================
   Less amount representing interest                                           31,909
                                                                       ------------------
   Present value                                                              255,307
   Less principal amount due currently                                        145,552
                                                                       ------------------
                                                                             $109,755
                                                                       ==================
</TABLE>

Included in the $161,639 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.



                                       32
<PAGE>

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)



8. CONTINGENCIES AND COMMITMENTS

Guarantees of approximately $5,061,600 were outstanding at December 31, 2001 to
various customers as bid bonds or in exchange for down payments or warranty
performance bonds.

9. RETIREMENT SAVINGS PLAN

The Company has a Retirement Savings Plan (the 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, 2001, 2000, and 1999 were $260,000, $269,000, and
$246,000, respectively.

10. RELATED-PARTY TRANSACTIONS

On September 25, 2001, Minnesota ASE, LLC acquired 2,245,000 shares of common
stock of Aero Systems Engineering, Inc. from Celsius Inc., a subsidiary of Saab
AB, representing 51% of the outstanding shares. Celsius Inc. retained a 29%
stock interest in the Company. See Note 5 for a description of related party
financing arrangements.

Through September 25, 2001, Celsius Inc. and its affiliated companies and, after
September 25, 2001, Minnesota ASE, LLC, provided 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
                                                            2001             2000              1999
                                                     ------------------------------------------------------

<S>                                                  <C>                 <C>               <C>
   Interest expense                                         $137,000          $150,000         $131,000
   Administrative charges                                     63,000            50,000           59,000
</TABLE>




                                       33
<PAGE>


                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)



11. SEGMENT INFORMATION

The Company operates primarily in one business segment relating to engine and
aerodynamic test facilities. The Company's operations are structured to achieve
maximum overall corporate objectives. As a result, significant
inter-dependencies and overlaps exist among the Company's operating units.

Revenues by geographic area are summarized as follows:

<TABLE>
<CAPTION>
                                                          2001              2000              1999
                                                   --------------------------------------------------------
<S>                                                <C>               <C>               <C>
   United States                                         $12,956,374       $16,578,706       $18,194,016
   Foreign countries                                      14,226,209        14,067,408        12,867,066
                                                   --------------------------------------------------------
                                                         $27,182,583       $30,646,114       $31,061,082
                                                   ========================================================
</TABLE>

The Company had three customers accounting for 36%, 19%, and 11% of revenues
during the year ended December 31, 2001, three customers accounting for 28%,
23%, and 15% of revenues in the year ended December 31, 2000, and three
customers accounting for 25%, 20%, and 11% of sales in the year ended December
31, 1999.




                                       34
<PAGE>

                         Aero Systems Engineering, Inc.

                    Notes to Financial Statements (continued)



12. QUARTERLY RESULTS (UNAUDITED)

Summary data relating to the results of operations for each quarter of the years
ended December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED
                                   MARCH 31           JUNE 30          SEPTEMBER 30        DECEMBER 31
                              -----------------------------------------------------------------------------
<S>                           <C>                  <C>               <C>                 <C>
   2001
   Earned revenue                   $5,739,000         $6,093,000        $5,709,000          $9,642,000
   Gross profit                      1,343,000          1,646,000         1,684,000           2,094,000
   Net (loss) income                  (283,000)           (96,000)            7,000             643,000

   Net (loss) income per
     common share                    $(.06)            $(.02)              $.00                $.14

   2000
   Earned revenue                   $6,760,000         $8,078,000        $8,751,000          $7,057,000
   Gross profit                      1,393,000          1,832,000         1,734,000           1,887,000
   Net (loss) income                  (466,000)           251,000           340,000             206,000

   Net (loss) income per
     common share                    $(.11)             $.06               $.08                $.05
</TABLE>

The increase in revenue and income during the fourth quarter of 2001 was due to
the resumption of normal activities on the Singapore wind tunnel project after
the receipt of the export license and to the fact that several other new
projects achieved the 10% revenue and margin recognition threshold during the
quarter.

Third quarter 2001 includes income tax expense of $100,000 related to
termination of the tax allocation agreement. See Note 6.



                                       35
<PAGE>


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 April 26, 2002 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

        No reports on Form 8-K were filed during the quarter ended December 31,
        2001, or from that date to the date of this annual report on Form 10-K.



                                       36
<PAGE>




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)

  March 5, 2002                           By    /s/ Charles Loux
-------------------------                    -----------------------------------
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:

  March 5, 2002                                /s/ Charles Loux
-------------------------                    -----------------------------------
Date                                         Charles Loux, President and Chief
                                             Executive Officer, Director

  March 6, 2002                                 /s/ Richard A. Hoel
-------------------------                    -----------------------------------
Date                                         Richard A. Hoel, Chairman of the
                                             Board

  March 7, 2002                                 /s/ A. L. Maxson
-------------------------                    -----------------------------------
Date                                         A. L. Maxson, Director

  March 11, 2002                                /s/ Dr. Leon E. Ring
-------------------------                    -----------------------------------
Date                                         Dr. Leon Ring, Director

  March 5, 2002                                 /s/ James S. Kowalski
-------------------------                    -----------------------------------
Date                                         James S. Kowalski, Director



                                       37
<PAGE>


  March 7, 2002                                 /s/ Thomas L. Auth
-------------------------                    -----------------------------------
Date                                         Thomas L. Auth, Director

  March 5, 2002                                 /s/ Steven R. Hedberg
-------------------------                    -----------------------------------
Date                                         Steven R. Hedberg, Chief Financial
                                             Officer




                                       38