This paper studies the effect of axial heat conduction and internal heat generation (viscous dissipation) on the effectiveness of a parallel flow microchannel heat exchanger. The ends of the wall separating the fluids are maintained at constant temperatures. This leads to heat transfer between the heat exchanger and its surroundings. The thermal model developed in this paper consists of three governing equations; one for each of the fluids and one for the wall. This system of coupled equations is solved simultaneously using finite difference method. The effectiveness of the fluids is found to depend on NTU, axial heat conduction parameter, end wall temperatures and internal heat generation parameter. In the presence of just internal heat generation the effectiveness of the hot and cold fluid degrades and improves, respectively. For situations when the temperature of the end wall at the inlet side is greater than that at the outlet side, increase in axial heat conduction parameter of a heat exchanger subjected internal heat generation increases and decreases the effectiveness of the hot and cold fluid, respectively. The effect of internal heat generation in a parallel flow microchannel heat exchanger with axial heat conduction is to always degrade and improve the effectiveness of the hot and cold fluid, respectively.