UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-K/A

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

Commission file number 1-10367

Advanced Environmental Recycling Technologies, Inc.

Registrant’s telephone number, including area code:
(479) 756-7400

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, $.01 par value

     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 12 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. YES: [X] NO: [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES: [  ] NO: [X]

     On June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity beneficially held by non-affiliates of the registrant was $46,821,503 (for the purposes hereof, directors, executive officers and 10% or greater shareholders have been deemed affiliates).

     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Number of shares of common stock outstanding at March 23, 2004:

Class A – 29,500,147
Class B – 1,465,530

Table of Contents

PART I

Item 1. Business

Summary

     Advanced Environmental Recycling Technologies, Inc. (“AERT”) develops, manufactures and markets composite building materials that are used in place of traditional wood products for exterior applications in building and remodeling homes. Our products are made from approximately equal amounts of waste wood fiber and reclaimed polyethylene plastics, have been extensively tested, and are sold by leading national companies such as the Weyerhaeuser Company (Weyerhaeuser), Lowe’s Companies, Inc. (Lowe’s) and Therma-Tru Corporation. Our composite building materials are marketed as a substitute for wood and plastic filler materials for standard door components, windowsills, brick mould, fascia board, decking and heavy industrial flooring under the trade names LifeCycle®, MoistureShield®, MoistureShield® CornerLoc™, Weyerhaeuser ChoiceDek® Classic, Weyerhaeuser ChoiceDek® Plus, Weyerhaeuser ChoiceDek® Premium, ChoiceDek® Classic Colors, and ChoiceDek® Premium Colors. We operate manufacturing facilities in Junction, Texas, Springdale and Lowell, Arkansas and Alexandria, Louisiana. Our customers are primarily regional and national door and window manufacturers, industrial flooring companies and Weyerhaeuser, our primary decking customer.

Products

     Using the same basic material, we manufacture three product lines:

     The wood fiber content of our products gives them many properties similar to all-wood products, but we believe the plastic content makes our products superior to either all-wood or all-plastic alternatives because:

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     Our composites manufacturing process involves proprietary technologies, certain of which are patented. We also use manufacturing equipment that has been custom-built or modified to our specifications. Our composite building material became a patented product in June 1998 under U.S. Patent No. 5,759,680.

Manufacturing

     We operate the following manufacturing and recycling facilities:

     During the first quarter of 2003, we began road and bridge infrastructure work on an 18.8-acre tract that adjoins the existing Springdale, Arkansas facility. In the second quarter of 2004 we plan to complete a portion of the infrastructure site work and roadwork for a second composite manufacturing facility in Springdale. The existing site work completed is currently providing storage space for finished goods and or other inventory. We then plan to have the manufacturing facility completed and operational in the second quarter of 2005.

     Over the last 24 months, the Company has invested $14.2 million in plant, property and equipment. Our expansion plans currently are prioritized around increasing plastic recycling capacity and lowering raw material costs, in conjunction with further automation of production processes to improve efficiencies. These projects will be followed by construction of a second warehouse and manufacturing facility in Springdale, Arkansas and additional composite extrusion capacity. New capital projects are currently being paid for from cash flow and there is no assurance as to the timing of when additional funds will be available to complete the aforementioned capital improvement program (see Liquidity and Capital Resources and Note 4: Bonds Payable).

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Operations 2003

     Three significant events impacted AERT during 2003:

     1. Junction Plant fire:

     On March 28, 2003, there was an accidental fire at the Junction, Texas plant. We began demolition and partial rebuilding on April 16, 2003. The initial restoration project, completed on May 20, 2003, included one extrusion line that had been partially damaged, electrical system replacement, and roof replacement. We expect complete restoration, including replacement of the second extrusion line and the raw material system, to be finished by June 30, 2004. There is no assurance as to the timing of the completion of the second extrusion line. The Junction plant was, and is, fully insured for fire damage and business interruption. Through December 31, 2003, we received $5.4 million in insurance proceeds related to this incident.

     Damage caused by the fire required us to write down gross assets by approximately $4.91 million. We simultaneously adjusted accumulated depreciation on those assets by $3.96 million, resulting in a net book value decrease in assets of about $950,000. At December 31, 2003, we had invested approximately $3.9 million in reconstructing the Junction facility. Insurance proceeds received to reimburse costs incurred to reconstruct the facility resulted in a gain of $2,962,041 through December 31, 2003. Additionally, we received $1,366,682 in business interruption insurance during 2003, including $1,125,372 to replace lost income and $241,310 to cover fixed expenses. At December 31, 2003, approximately $484,000 was included in accounts receivable for expected insurance reimbursements. The Junction facility was, and is, fully insured and we believe that our insurance will cover the total rebuild costs.

     2. In October 2003, we completed a $17 million bond refinancing, which included $14.4 million in tax-free bonds and a $2.6 million note (see Management’s Discussion and Analysis - Liquidity and Capital Resources).

     3. During the third quarter of 2003, we began producing a new decking product line with wood-like aesthetics, including embossed wood grain and five earth tone colors. This required retooling and re-structuring our manufacturing process.

Marketing and Sales

     General Market Strategy. Our products are designed for applications where we can add the greatest value and address market needs, i.e. for external applications where wood is prone to rot and/or requires substantial yearly maintenance in the form of staining or water sealing. We have developed an extensive customer and end-user base in the national door, window, and decking markets. We are working to constantly develop and improve strong customer relationships.

     Outdoor Decking Systems. Weyerhaeuser Building Materials distributes our decking products through its 71 customer service centers across the U.S. and Canada. Weyerhaeuser also sells our ChoiceDek Premium decking products to Lowe’s Home Improvement Centers. In December 2001, we entered into a contract with Weyerhaeuser under which they guarantee to purchase a minimum quantity of decking products each year. The Weyerhaeuser Contract (the “Contract”) automatically renews each December for the three subsequent years unless Weyerhaeuser or we specifically act to cancel it. If the Contract is cancelled, it will remain in effect for the remaining two years of its term. The Contract automatically renewed in December 2003 to cover 2004 through 2006. The Contract requires us to produce, and Weyerhaeuser to purchase, a minimum number of truckloads of ChoiceDek decking and accessories during 2004. Weyerhaeuser has traditionally sold ChoiceDek through its retail network of over 5,000 primarily independent lumberyards. These lumberyards service contractor and retail accounts as well as large tract homebuilding companies. AERT, through Weyerhaeuser regional distribution centers, has established a network of around 750 ChoiceDek stocking dealers. In addition, independent lumber dealers can special order ChoiceDek from the Weyerhaeuser distribution network. Additional information is available online at www.choicedek.com. Weyerhaeuser entered into a rolling

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three year agreement with Lowe’s whereby Lowe’s has the exclusive right to carry the ChoiceDek Premium product line. Lowe’s has agreed to provide dedicated retail shelf space in all of it’s over 900 stores and to promote ChoiceDek Premium through a national print and advertising campaign. We believe the Weyerhaeuser contract strengthens our competitive position in the decking marketplace and gives us the opportunity to develop and sell new products through the same channel.

     As previously indicated, we recently began producing a new line of colored decking products that are embossed with a wood-grain look. This required a research and development (R&D) and factory changeover effort, but we believe our product offerings are among the best in the marketplace.

     We promote our decking products through displays and presentations at regional and local home, lawn and garden shows, and through in-store displays. We have an on-going print advertising program that targets the residential decking market. Lowe’s is also conducting a national print and television advertising campaign for ChoiceDek Premium.

     Weyerhaeuser purchases and re-sells substantially all of our decking products, which represented about 81% of our 2003 revenues. If Weyerhaeuser were to cancel its contract, we would have to develop an alternative distribution system for decking products, which could be expensive and time consuming. Though Weyerhaeuser has purchased substantially all of our decking production since 1995, there is no assurance that it will continue to do so past the terms of the contract in 2005 (see Note 2 to the financial statements regarding concentration of risk).

     Door and Window Products. We sell our MoistureShield products to door and window manufacturers for use as component parts of their products. For example, we manufacture a windowsill that is built into products like Portrait windows by Stock Building Supply or Vetter windows, among others, and we manufacture door rails built into doors by Therma-Tru Corporation. In marketing, we emphasize the “value-added” potential of the MoistureShield composite product, which, unlike competing wood products, can be engineered to incorporate certain desired end-product characteristics, which saves our customers time and expense. Customers will also avoid the need for chemical treatments to their final product, which are otherwise often necessary to prevent rot and sustain durability. The durability of our MoistureShield composite components allow our customers to extend the lifetime or warranties of their products while reducing or eliminating warranty claims costs. Information about MoistureShield products is available on the Internet at www.moistureshield.com.

     Therma-Tru and Stock Building Supply each purchase a large portion of our MoistureShield production. The loss of either customer would negatively impact sales and earnings. We are unable to predict the future size of the markets for MoistureShield, however, we believe that the national door and window, commercial and residential trim and residential decking material markets are significant and will allow us to diversify our customer base over time.

     Exterior Trim and Fascia Products. We have been marketing an exterior trim and fascia system under the trade name MoistureShield CornerLoc. Three national homebuilders are now using the product. With the fire in Junction, our production capacity was strained to meet the demand for our decking systems, so we have been forced to limit CornerLoc production. We also had some limited sales to various retail distributors in 2003. More information is available at our website, www.moistureshield.com. We believe this product line has significant growth potential, and we are striving to increase production capacity so that we can begin a full production and marketing program, but the timetable of a full product launch is dependent upon our construction and financing timetable.

     Sales and Customer Service. We provide sales support and customer service through our own marketing department, through Weyerhaeuser, and through training programs for our customers and their sales associates. Our in-house sales team is focused on serving commercial decking contractors and supporting the Weyerhaeuser and Lowe’s sales professionals. Information and customer service are provided through the website, www.choicedek.com, and through a national toll-free telephone number. We also use independent, outside sales representatives in some markets to promote and serve door, window and decking customers.

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     Cyclical Building Products Industry. Our products are used in home improvement and new home construction. The home improvement and housing construction industries are subject to significant fluctuations in activity and periodic downturns caused by general economic conditions. Increased interest rates and economic uncertainty, in particular, can lead to reduced homebuilding and/or home improvement activity. Reductions in such activity could have an adverse effect on the demand for our products.

Sources of Raw Materials

     Wood Fiber. All of our products were originally made with cedar wood fiber from mills located in or near the Junction, Texas facility. As our operations have grown and the availability of cedar fiber diminished, we have switched to using hardwood waste from the numerous mills and manufacturers in the Ozark mountain region where our Springdale plant is located. We now have supply contracts for a variety of hardwood fiber.

     Recycled Plastics. We use the following classes of industrial and consumer waste polyethylene:

     The materials we use are highly contaminated with paper and other non-plastic materials, which lessens their value to other plastic recyclers. Our proprietary recycling process does not require the purity, extensive cleaning, additional washing and melt filtration required for conventional plastics manufacturing, and can be conducted faster and more economically. By using primarily contaminated plastics, we produce a usable, but lower cost, feedstock for our composite extrusion lines. We also purchase additional plastic raw materials from outside sources and sometimes virgin resin producers. These materials are more expensive and more sensitive to swings related to the petrochemical industry.

     Competition for Raw Materials. As the wood/plastic composites industry grows, we sometimes compete for raw materials with other plastic recyclers or plastic resin producers. We believe, however, that our ability to use highly contaminated polyethylene limits the number of competitors because most recycling processes require “cleaner” waste plastic sources. Nonetheless, we expect to encounter new entrants into the composites or plastics reclamation business. These new entrants may have greater financial and other resources than we do, and may include domestic and foreign beverage bottlers, manufacturers, distributors and retailers, forestry product producers, petrochemical and other companies. The requirement to source increased amounts of plastic raw materials from outside vendors, combined with increases in scrap waste plastics prices increased our cost of materials and lowered our profit margins in 2003 and may continue to do so in the future. We are increasing our capacity for processing waste plastic, which reduces our dependence on outside suppliers and reduces our overall costs, but there is no assurance that we will be able to control the effect that increasing waste plastic costs has on our profitability.

Patented and Proprietary Technology

     Our composite manufacturing process and our development efforts in connection with waste plastics reclamation technologies involve patents and many trade secrets that we consider to be proprietary. We have also developed certain methods, processes and equipment designs for which we have sought additional patent protection. We have taken measures to safeguard our trade secrets by, among other things, entering into confidentiality and nondisclosure agreements, and restricting access to our facilities. We also have installed advanced security systems, including limited access and cameras, at all facilities.

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     We have filed nineteen patent applications and have received issuance from the United States Patent and Trademark Office for fifteen patents, six of which relate to our composite materials manufacturing operations and product, and nine of which relate to waste plastics reclamation technologies. The patents cover our composite product, extrusion process and apparatus, our continuous down-stream cooling and forming conveyor system and our plastic reclamation process and equipment. Should our trade secrets be disclosed notwithstanding these efforts, our business and prospects could be materially and adversely affected. The cost of patent protection and, in particular, patent litigation is extremely high. It can also strain resources and inhibit growth.

Industry Standards

     Local building codes often require that building materials meet strength and safety standards developed by the American Society for Testing Materials and that, in order to qualify, the materials be evaluated by an independent testing organization. Our decking, handrails and stair applications have a national evaluation report “NER” code rating under NER-596. The NER rating provides local building inspectors and code officials with independent testing and installation information regarding our products. We believe that the NER listing has helped to increase sales and market acceptance of our decking products.

Competition

     Competition for Sales. Our products compete with high-grade western pine, cedar and other premium woods, aluminum, high-performance plastics, and an increasing number of composites and other construction materials. We believe that our products have superior physical characteristics, which make them a better value for the consumer. Manufacturers of some competing products, however, have long-established ties to the building and construction industry and have well-accepted products. Many of our competitors are larger and have research and development budgets, marketing staffs and financial and other resources which surpass our resources.

     Sales of non-wood decking products to date represent a small portion of the decking market. Pressure treated pine, cedar, redwood and other traditional woods constitute the vast majority of annual decking sales. We thus view wood decking as our principal competitor. The wood decking industry is highly segmented with many small to medium sized manufacturers. Wood decking is principally a commodity that competes as the low-priced product, whereas the more-expensive non-wood products must compete on features and performance.

     Among manufacturers of alternative decking materials, we view Trex Company, Crane Plastic’s TimberTech, Louisiana-Pacific Corporation’s WeatherBest, CertainTeed Corporation’s Boardwalk and Fiber Composites, LLC’s Fiberon, as our primary competitors.

     The market for door, windowsill, and trim products is highly segmented, with many competitors. We believe that our MoistureShield products have superior characteristics and are competitively priced. We emphasize durability, which means that manufacturers and homebuilders using our products should see reduced warranty callbacks and higher customer satisfaction. Our product competes on durability and the ability of the customer to order a product that is custom manufactured to their specifications.

Employees

     On December 31, 2003, we employed 388 people. We had 79 employees at the Texas facility, of which 3 were executive and/or office personnel and 76 were full-time factory personnel. The Arkansas facilities employed 290 people, of which 44 were executives and/or office personnel and 246 were full-time factory personnel. We had 19 full-time employees at our Louisiana facility. From time-to-time, we hire part-time employees to supplement our factory workforce. In 2004, we are focused on streamlining and automating our manufacturing operations, and we hope to increase output and improve efficiencies without substantially increasing the number of employees.

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Item 2. Properties

     We conduct our composite products manufacturing operations from two separate facilities. Our original facility is a 49,000 square foot manufacturing and storage facility on a seven-acre site in Junction, Texas. On October 9, 2003, we completed the purchase of the Junction facility with the acquisition of the buildings for $75,000 from Marjorie S. Brooks, a major shareholder. We believe that the Junction facility is currently suitable for composite materials manufacturing requirements on a regional basis.

     Our Springdale, Arkansas manufacturing facility consists of 103,000 square feet and is located on 10 acres with a rail siding in the Springdale Industrial District. We have added 30,440 square feet of shed storage space since 1999 and installed a dual sprinkler system. We purchased this facility for $1.8 million with proceeds from the bond financing (see Liquidity and Capital Resources and Note 4: Bonds Payable).

     We lease an office, storage building and parking lot adjacent to the Springdale facility. The lease is for two years, renewable yearly. We also lease an adjacent parking area. The office and storage facility is comprised of 10,000 square feet on 2.36 acres and houses our corporate offices. We have an option to purchase this property for $360,000, with half of the lease payments applicable to the purchase price.

     We own 18.8 acres of land, south of and adjoining the existing manufacturing facility. This land was acquired for $785,000 and is where a second Springdale manufacturing facility will be built.

     We lease a 55,000 square foot second plastic storage warehouse and laboratory with a lease term of two years expiring on May 1, 2005. There remain options for two more two-year terms.

     In the third quarter of 2002 we entered into an agreement to purchase land and a building in Northwest Arkansas, on approximately 10 acres, for $900,000. This purchase was completed with funds from the bond financing in October 2003. We expanded and retrofitted the building to become a plastic regrinding and blending facility and serve as a reload area for finished products. In addition, we are adding equipment to provide the capability of processing waste plastic.

     We are leasing two warehouses in Northwest Arkansas. One warehouse is used to store finished goods and store raw materials. The second warehouse is currently used as a paint facility for our OEM products.

     We are leasing plastic recycling equipment and factory space in Alexandria, Louisiana in a 50,000 square foot warehouse. We have made improvements and installed additional equipment to increase the facility’s throughput. The upgrades provide flexibility to economically process different types of scrap plastic and to provide plastic feedstock of a quality and consistently required in order to more effectively operate our extrusion facilities.

Item 3. Legal Proceedings

     At this time, we are not a party to any material legal proceedings.

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

     There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2003.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

     AERT’s Class A common stock is traded on the NASDAQ in the SmallCap market and is listed under the symbol AERTA. In order to remain listed on NASDAQ, we are required to meet certain criteria as maintenance standards established by NASDAQ. One such standard is a minimum bid price of $1.00 per share. At December 31, 2003, our closing stock price per share was $1.57 (and $1.22, as of March 18, 2004). There is no assurance that our stock price will continue to be greater than the minimum required for NASDAQ listing.

     The following table sets forth the ranges of high and low quarterly sales prices (as reported by NASDAQ) of our Class A common stock for the years ended December 31, 2002 and 2003. The quotations represent prices between dealers, do not include retail markup, markdown or commission, and do not necessarily represent actual transactions.

     As of December 31, 2003, there were approximately 1,600 record holders of Class A common stock and 11 record holders of Class B common stock. We have not previously paid cash dividends on the common stock and there are currently restrictions under various debt obligations and preferred securities that would prevent the payment of such dividends for the foreseeable future.

Recent Sales of Unregistered Securities

     On October 13, 2003, one of our current directors exercised options to purchase 25,000 shares of our Class A common stock at an exercise price of $0.72 per share. We believe, due to his position as a director of our company and the isolated nature of the transaction, that the issuance and sale of the shares of Class A common stock underlying such options was exempt from registration under the Securities Act of 1933, as amended, as a private placement pursuant to Section 4(2) of that Act.

     In addition, on September 17, 2003 and December 22, 2003, we sold an aggregate of 40,000 shares of our Class A common stock in two isolated transactions upon exercise of options at an exercise price of $0.469 per share, granted to employees of Razorback Farms, Inc. who provided engineering and support services for us. We believe, due to the nature of the relationship of these persons to us and the isolated nature of the transactions, that each issuance and sale of the shares of Class A common stock underlying such options was exempt from registration under the Securities Act of 1933, as amended, as a private placement pursuant to Section 4(2) of that Act.

Item 6. Selected Financial Data

     The following tables set forth selected historical data for the years ended December 31, 1999 through 2003, derived from our audited financial statements for each such year and should be read in conjunction with such financial statements and the footnotes attached thereto as well as the discussion contained herein in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Certain prior period amounts have been reclassified to conform to the current period presentation.

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Item 7. Management’s Discussion and Analysis of Financial Condition and

Results of Operations

Three Year Comparison

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

      Net sales increased 5.1% in 2003 to $43.5 million from $41.4 million in 2002. Increased national demand for our ChoiceDek Premium products and additional production capacity caused net sales at the Springdale facility to increase 27.1% to $34.2 million from $26.9 million in 2002. Net sales in the Junction facility decreased 35.8% from $14.5 million in 2002 to $9.3 million in 2003 due to the major fire in March 2003 that temporarily shut down plant operations. The facility resumed operations with one extrusion line in May 2003, and we have been operating at 50% capacity since then. As previously discussed in Item 1. Business- Operations 2003, we are now rebuilding the second line and the material transfer system. We plan to have Junction fully rebuilt by the end of the second quarter of 2004.

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Cost of Goods Sold

     Our cost of goods sold, as a percent of sales, increased significantly in 2003 versus 2002 primarily due to the rising cost of acquiring recyclable plastics. A sharp increase in petroleum prices early in the year drove up virgin resin prices, which caused industrial consumers to turn to recycled plastics, which then forced up the price that we had to pay for waste plastic. To help offset rising material costs, we are expanding the plastic recovery process capacity at the second Northwest Arkansas facility and seeking new sources of waste plastic materials.

Selling and Administrative Expenses

     The increase in selling and administrative costs as a percentage of sales from 18.9% in 2002 to 20.7% in 2003 is the result of the decrease in revenue at the Junction facility, the additional sales staff and increased marketing and brand building expenses related to decking sales.

Income

     Income before the extraordinary gain decreased from 2002 to 2003 primarily because we had to pay more for raw materials, Junction sales fell due to the fire, and we experienced delays in automating portions of our production process. Additionally, net interest expense increased approximately $728,000 in 2003 over 2002, due primarily to the completion of the bond financing in the fourth quarter of 2003, which resulted in higher interest costs and the write-off of debt issuance costs related to the Arkansas State Bank loan (see Note 4 to the financial statements).

Extraordinary Item

     There were no extraordinary items in 2002. The extraordinary event in 2003 was the major fire at the Junction facility. The Junction facility was, and is, fully insured. Damage caused by the fire required us to write down gross assets by approximately $4.91 million. We simultaneously adjusted accumulated depreciation on those assets by $3.96 million, resulting in a net book value decrease in assets of about $950,000. At December 31, 2003, we had invested approximately $3.9 million in reconstructing the Junction facility. Insurance proceeds received to reimburse costs incurred to reconstruct the facility resulted in a gain of $2,962,041 through December 31, 2003. Additionally, we received $1,366,682 in business interruption insurance during 2003, including $1,125,372 to replace lost income and $241,310 to cover fixed expenses. At December 31, 2003, approximately $484,000 was included in accounts receivable for expected insurance reimbursements.

Year ended December 31, 2002 compared to year ended December 31, 2001

Net Sales

     Net sales increased 23.9% in 2002 versus 2001. The increase in sales were primarily at the Springdale facility, which produces ChoiceDek premium. Sales were driven by higher demand for the ChoiceDek premium decking. Sales at the Junction facility increased slightly in 2002, up 3.6% over 2001.

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Cost of Goods Sold

     As a percentage of sales, cost of goods sold decreased 0.5% in 2002 as compared to 2001. In 2002, the cost of raw material decreased and was the major contributor to the lower cost. However, in the last quarter of 2002, the cost of acquiring plastics began to increase. We began to increase our internal capacity to lessen our dependence on third party processors for our plastic.

Selling and Administrative Costs

     Selling and administrative costs were approximately $7.8 million in 2002, an increase of approximately $269,000 from 2001, which is a 3.7% decrease in total selling and administrative costs as a percentage of sales.

Net Income

     The increase in net income, when comparing 2002 to 2001, was due to higher sales and slower growth in operating costs. We believe increased production and sales, improved product focus, increased job training, and increased throughputs have allowed us to attain and increase profitability.

Liquidity and Capital Resources

     At December 31, 2003, we had a working capital deficit of $1.9 million compared to a working capital deficit of $6.6 million at December 31, 2002. Excluding the $3.9 million spent to reconstruct the Junction facility, we spent approximately $8.2 million on capital expansion during 2003. Expenditures were primarily for improving our equipment at both production facilities in the areas of extrusion, raw material processing and plastic production. Although the refinancing decreased the working capital deficit, it was not eliminated because our gross margin and profitability fell and we continued to fund capital improvements through cash flow and short-term loans. As of December 31, 2003, the working capital deficit involved total current liabilities of approximately $10.5 million, of which $1.9 million was for miscellaneous accrued liabilities, $7.1 million was in payables and $1.5 million was a combination of short-term notes payable and the current portion of long-term debt. The $1.9 million working capital deficit reflects management’s decision to enter into short-term debt financing to build and improve production and sales capacities to increase cash flows from operations. Our plan continues to be using short-term debt, which can be refinanced in the future, rather than more expensive and dilutive equity financing.

     On October 9, 2003, we finalized a long-term financing package with the City of Springdale, Arkansas and Allstate Insurance Company that resulted in the release to us of most of the funds previously held in the restricted bond escrow fund and terminating such escrow agreement. The package consists of $14.4 million tax-exempt industrial development bonds and a $2.6 million loan that is subordinated to the bonds.

     Net proceeds from the financing were used to repay short-term loans, pay down accounts payable incurred to develop qualified solid waste disposal facilities, purchase the Springdale, Arkansas extrusion facility, purchase the Lowell, Arkansas plastic facility, pay issuance fees and provide limited capital for further expansion. The obligations are secured by substantially all of our real estate assets and personal property, although provision is made for us to incur additional working capital lines of credit (subject to compliance with financial covenants) that would be secured by

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accounts receivable and inventory on a basis senior to obligations. Marjorie S. Brooks, the major shareholder personally guaranteed repayment of up to $4 million of the tax-exempt bonds.

     Cash increased $1,004,759 to $1,509,124 in 2003. Significant components of that increase were: (i) cash provided by operating activities of $2,504,285, which consisted of the net income for the period of $2,020,120 increased by depreciation and amortization of $3,671,512 and decreased by other uses of cash of $3,187,347; (ii) cash used in investing activities of $7,576,063, and (iii) cash provided by financing activities of $6,076,537. Payments on notes during the period were $9,112,156, and proceeds from the issuances of notes amounted to $17,000,000. At December 31, 2003, we had bonds and notes payable in the amount of $18,167,117, of which $1,507,876 was current notes payable and the current portion of long-term debt.

Critical Accounting Policies and Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported on our financial statements. The estimates made in applying the accounting policies described below are material to the financial statements and notes thereto due to the level of judgment involved in arriving at those estimates.

Accounts Receivable

     Trade accounts receivable are stated at the amount management expects to collect from outstanding balances. Delinquency fees are not assessed. Payments of accounts receivable are allocated to the specific invoices identified on the customers’ remittance advice. Accounts receivable are carried at the original invoice amount less an estimated reserve made for returns and discounts based on quarterly review of historical rates of returns and expected discounts to be taken. The carrying amount of accounts receivable is reduced, if needed, by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances that exceed sixty days from invoice date and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation based on its assessment of the current status of the individual accounts. Balances that remain outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Changes in the valuation allowance have not been material to the financial statements. Recoveries of trade receivables previously written off are recorded when received.

Inventories

     We state inventories at the lower of cost (first-in, first-out method) or market. Our inventories are not prone to obsolescence, and therefore we have not included a reserve for obsolescence in our financial statements.

Buildings and Equipment

     Property additions and betterments include capitalized interest and acquisition, construction and administrative costs allocable to construction projects and property purchases. Provision for depreciation of buildings and equipment is provided on a straight-line basis over the estimated useful lives of the assets. Gains or losses on sales or other dispositions of property are credited or charged to income in the period incurred. Repairs and maintenance costs are charged to income in the period incurred, unless it is determined that the useful life of the respective asset has been extended.

     We account for the impairment or disposal of long-lived assets in accordance with the provisions of the Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 requires an assessment of the recoverability of our investment in long-lived assets to be held and used in

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operations whenever events or circumstances indicate that their carrying amounts may not be recoverable. Such assessment requires that the future cash flows associated with the long-lived assets be estimated over their remaining useful lives and an impairment loss recognized when the future cash flows are less than the carrying value of such assets.

Stock-Based Compensation

     We account for our stock option plans and other stock-based compensation under Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB Statement No. 123, which allows us to use the “intrinsic value” method of accounting set forth in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations (see Note 2 to the financial statements). Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of our common stock at the date of the grant over the amount an employee must pay to acquire the stock.

Contractual Obligations

     The following table represents our contractual obligations outstanding as of December 31, 2003:

Uncertainties, Issues and Risks

     There are many factors that could adversely affect AERT’s business and results of operations. These factors include, but are not limited to, general economic conditions, decline in demand, business or industry changes, critical accounting policies, government rules and regulations, environmental concerns, litigation, new products / product transition, competition, acts of war, terrorism, public health issues, concentration of customer base, availability of raw material (plastic) at a reasonable price, management’s failure to execute effectively, inability to obtain adequate financing (i.e. working capital), equipment breakdowns, low stock price, and fluctuations in quarterly performance.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     AERT has no material exposures relating to its long-term debt because all of the Company’s long-term debt bears interest at fixed rates. See Note 4 to the financial statements for a discussion of outstanding debt. We depend on the market for favorable long-term mortgage rates to help generate sales of our product for use in the residential construction industry. Should mortgage rates increase substantially, our business could be impacted by a reduction in the residential construction industry. Important raw materials that we purchase are recycled plastic and wood fiber, which are subject to price fluctuations. We attempt to limit the impact of price increases on these materials by negotiating with each supplier on a term basis.

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Forward-looking Information

     An investment in AERT’s securities involves a high degree of risk. Prior to making an investment, prospective investors should carefully consider the following factors, among others, and seek professional advice. In addition, this Form 10-K contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements, which are often identified by words such as “believes,” “anticipates,” “expects”, “estimates,” “should,” “may,” “will” and similar expressions, represent AERT’s expectations or beliefs concerning future events. Numerous assumptions, risks and uncertainties could cause actual results to differ materially from the results discussed in the forward-looking statements. Prospective purchasers of the Company’s securities should carefully consider the information contained herein or in the documents incorporated herein by reference.

     The foregoing discussion contains certain estimates, predictions, projections and other forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) that involve various risks and uncertainties. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect management’s current judgment regarding the direction of the business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, or other future performance suggested herein. Some important factors (but not necessarily all factors) that could affect the sales volumes, growth strategies, future profitability and operating results, or that otherwise could cause actual results to differ materially from those expressed in any forward-looking statement include the following: market, political or other forces affecting the pricing and availability of plastics and other raw materials; accidents or other unscheduled shutdowns affecting AERT, its suppliers’ or its customers’ plants, machinery, or equipment; competition from products and services offered by other enterprises; state and federal environmental, economic, safety and other policies and regulations, any changes therein, and any legal or regulatory delays or other factors beyond our control; execution of planned capital projects; weather conditions affecting our operations or the areas in which AERT’s products are marketed; adverse rulings, judgments, or settlements in litigation or other legal matters. AERT undertakes no obligation to publicly release the result of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Item 8. Financial Statements and Supplementary Data

     The response to this item is submitted in a separate section of this report.

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

     Not applicable.

Item 9A. Controls and Procedures

     Each of our Co-Chief Executive Officers, Joe G. Brooks and Stephen W. Brooks, and our Chief Financial Officer, Edward J. Lysen, have reviewed and evaluated the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that we have in place with respect to, among other things, the timely accumulation and communication of information to management and the recording, processing, summarizing and reporting thereof for the purpose of preparing and filing this annual report on Form 10-K. Such review was conducted as of the end of the period covered by this Form 10-K. Based upon their review, these executive officers have concluded that we have an effective system of disclosure controls and procedures and an effective means for timely communication of information required to be disclosed in this Report. Subsequent to this evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect such controls.

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PART III

Item 10. Directors and Executive Officers of the Registrant

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The directors and executive officers of the Company are as follows:

     The Company’s board of directors elected Joe G. Brooks as its chairman and the Company’s co-chief executive officer in December 1998, and he has served as president since February 2000. Mr. Brooks has previously served as president and has been a director since the Company’s inception in December 1988. He was also previously chairman and CEO from inception until August 1993. He was a member of Clean Texas 2000, appointed by then Governor George W. Bush in 1995.

     In December 1998, the Company’s board of directors elected Sal Miwa as its vice-chairman. Mr. Miwa also served as chairman of the board between December 1995 and December 1998. He has been an outside director of the Company since January 1994. From 2000 to present, Mr. Miwa has been COO and director of RealRead Inc., an online document service company located in New York, New York. From 1995 to 2000, he was CEO/President of Seiwa Optical America Corp., an importer/distributor of electronic and optical components for the semiconductor industry. For more than 20 years Mr. Miwa has been engaged in various international businesses and serves on boards of several closely held family businesses around the world. He received his master’s degree in Aerospace Engineering from the Massachusetts Institute of Technology.

     The Company’s board of directors elected Stephen W. Brooks as co-chief executive officer in December 1998. Mr. Brooks has served as its chief executive officer and has been a director since January 1996. Mr. Brooks was appointed CEO and chairman of the board of Razorback Farms, Inc. in January 1996. Razorback Farms is a Springdale, Arkansas based firm that specializes in vegetables processing. Mr. Brooks also serves on the board of the Ozark Food Processors Association.

     J. Douglas Brooks has served as executive vice-president, has been in charge of raw material sourcing and strategic relationships since 1998 and has been a senior vice president since September 2003. Mr. Brooks was vice-president of plastics from 1995 through 1998, was previously project manager for AERT’s polyethylene recycling

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program with The Dow Chemical Company, and is a joint inventor on several of AERT’s process patents for recycling polyethylene film for composites.

     Jim Precht has served as executive vice-president of sales and marketing for the Company since February 2001, and senior vice president since September 2003. Mr. Precht was formerly general manager of Weyerhaeuser Building Materials’ Pittsburgh Customer Service Center with 32-years of industry experience.

     Marjorie S. Brooks has been secretary, treasurer and a director since the Company’s inception in December 1988. Mrs. Brooks has served as secretary and treasurer of Brooks Investment Co., a holding company for the Brooks’ family investments, for more than thirty years.

     Edward J. Lysen joined AERT in April 1999 as chief financial officer and has been a senior vice president since September 2003. Mr. Lysen has over 30 years experience in financial management. Prior to entering the private sector, Mr. Lysen was a consultant in the Management Consulting Group, KPMG-Peat Marwick from 1966 to 1979. From 1979 to 1992, Mr. Lysen was senior vice-president, CFO and on the board of Tuesday Morning, Inc., a publicly traded retailer. From 1993 to 1996, he served as chairman of the board and CFO of Distribution Data Management Systems, a computer service provider in the office products industry. In 1996, Mr. Lysen entered the financial planning industry with AAL, a leading fraternal benefits society. From 1998 to 1999, he was the CFO of Hairston Roberson, a leading designer and manufacturer of women’s fashion apparel. He has an MBA in Finance from Northwestern University and is a certified public accountant.

     Alford Drinkwater has served as senior vice president of logistics, laboratories and plastic operations since September 2003. Prior to joining the Company in May 2000, Mr. Drinkwater had been the Assistant Director for the Established Industries Division of the Arkansas Department of Economic Development and was on the Advocacy Team from November 1988 until January 2000. From September 1986 until July 1988, he owned and operated Town and Country Waste Services, Inc. a waste services company engaging in the development of waste recycling, energy recovery, and disposal systems. From April 1981 until January 1987, Mr. Drinkwater was the Resource Recovery Manager for Metropolitan Trust Company, and was primarily involved in waste-to-energy systems development. From July 1974 until April 1981, Mr. Drinkwater worked for the State of Arkansas as Assistant to the Chief of the Solid Waste Control Division of the Arkansas Department of Pollution Control & Ecology and as the Manager of the Biomass and Resource Recovery Program of the Arkansas Department of Energy.

     Jerry B. Burkett was appointed to the board of directors of the Company in May 1993. Mr. Burkett has been a rice and grain farmer since 1979 and has been a principal in other closely held businesses. He is the past president of the Arkansas County Farm Bureau. In April 2002, Mr. Burkett was elected to serve as a director of the Ag Heritage Farm Credit Services board.

     Michael M. Tull was appointed to the board of directors of the Company in December 1998. Mr. Tull has served since 1990 as the president and majority owner of Tull Sales Corporation, a manufacturer’s representative company, which professionally represents eight manufacturing companies and is responsible for the sales and marketing of those companies’ window and door related components in the southeastern United States. Mr. Tull serves on boards of several closely held family businesses and is the chairman and a board of director member of the National Wild Turkey Federation, which is one of the largest North American conservation organizations.

     Samuel L. “Tony” Milbank was elected to the board of directors in July 2000. From 1997 to the present, Mr. Milbank has been a managing director of Zanett Securities Corporation, an investment advisory company focusing on small and microcap companies. From 1992 to 1996, Mr. Milbank was a senior vice-president and sales manager with Lehman Brothers, Inc. in New York, where he managed a team that provided interest rate and currency risk management for central banks and other official institutions. From 1973 to 1992, Mr. Milbank worked with Salomon Brothers, Inc. as a director and manager of the international department. Since 1990, Mr. Milbank has served as chairman of Milbank Memorial Fund, a private operating foundation (established in 1905), concerned with environmental and public health

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issues. He has a BS from Columbia University and a MBA in Finance from The Amos Tuck School of Business Administration at Dartmouth College.

     Melinda Davis was elected to the board of directors in July 2001. Since December 2000 to the present, Ms. Davis has provided professional consulting services in the areas of financial management and cost accounting for manufacturing operations. Ms. Davis retired as senior vice-president and treasurer from Allen Canning Co. in December 2000, after serving for 39 years in various accounting and financial management positions.

     Jim Robason was elected to the board of directors in July 2003. Mr. Robason joined Allen Canning Co. in 1967. In 1974, Mr. Robason was appointed senior vice-president-operations until his retirement in 2002. As senior vice-president of operations with Allen Canning Co., he was responsible for the operation of twelve plants with plant managers and raw product procurement managers, as well as special projects engineering, reporting to him. He has a vast amount of knowledge in all phases of manufacturing including infrastructure, building, equipment and engineering; excellent management skills with a focus on the full production arena from product procurement through the production process. Mr. Robason is a graduate of West Texas State University. He has served on the executive committee and the Allen Canning profit sharing/retirement plan committee in addition to his operations responsibilities.

     Joe G. Brooks, Stephen W. Brooks and J. Douglas Brooks are brothers and sons of Marjorie S. Brooks. There are no other familial relationships between the current directors and executive officers.

     Each of the Company’s directors has been elected to serve until the next annual meeting of stockholders or until their successors are elected and qualified. Officers serve at the discretion of the Board of Directors.

     The audit committee of the board of directors consists of three outside directors: Melinda Davis (chairman), Jerry B. Burkett, and Sal Miwa. The audit committee is directly responsible for the engagement of the Company’s independent accountants and is responsible for approving the services performed by the Company’s independent accountants and for reviewing and evaluating the Company’s accounting principles and its system of internal accounting controls.

     The board of directors has determined that Melinda Davis qualifies as an audit committee financial expert, as such term is defined in recently adopted rules of the SEC implementing requirements of the Sarbanes-Oxley Act of 2002. In addition, Melinda Davis is independent, as that term is defined under the listing standards of the National Association of Securities Dealers.

     The compensation and stock option committee consists of Samuel L. “Tony” Milbank (chairman), Marjorie S. Brooks and Michael M. Tull. The compensation and stock option committee establishes and administers the Company’s compensation and stock option plans on behalf of the board of directors and approves stock options granted thereunder.

     The nominating committee consists of Michael M. Tull (chairman) and Samuel L. “Tony” Milbank. The nominating committee evaluates the efforts of AERT and its board of directors to maintain effective corporate governance practices. The committee identifies candidates for election to the board of directors.

Code of Ethics

     AERT adopted a Code of Business Conduct and Ethics applicable to all its directors and employees, including its chief executive officers, chief financial officer and principal accounting officer or controller, which is a “code of ethics” as defined by applicable rules of the SEC. This code is publicly available on AERT’s website at www.aertinc.com. If AERT makes any amendments to this code other than technical, administrative or other non-substantive amendments or grants any waivers, including implicit waivers, from a provision of this code that applies to AERT’s chief executive officers, chief financial officer or principal accounting officer or controller and relates to an element of the SEC’s “code of ethics”

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definition, AERT will disclose the nature of the amendment or waiver, its effective date and to whom it applies on its website or in a report on Form 8-K filed with the SEC.

Section 16(a) of the Exchange Act

     Section 16(a) of the Securities Exchange Act of 1934 requires AERT’s executive officers and directors, and persons who own more than ten-percent of a registered class of the Company’s securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission and National Association of Securities Dealers. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all forms filed pursuant to Section 16(a). Based on a review of the copies of such forms received by it and written representations from certain reporting persons that no Forms 4 or Forms 5 were required for those persons, the Company believes that during the fiscal year ended December 31, 2003, all Section 16(a) filing requirements were met.

Item 11. Executive Compensation

Director Compensation

     Non-employee directors are entitled to receive cash compensation for serving on the Company’s board of directors, as follows: board meeting fee - $1,500, committee meeting fee — $500 and teleconference fee — $250. Directors are reimbursed for out-of-pocket expenses in connection with their attendance at meetings.

     Directors are paid long-term compensation in the form of stock option grants under the Company’s Non-Employee Director Stock Option Plan. Such plan provides for annual grants of options to purchase 25,000 shares of Class A common stock at the fair market value of said stock on the date of such grant. Also, certain directors are hired on a contract basis from time to time by the board of directors to perform services for the Company.

     The following table sets forth the aggregate compensation paid by the Company during the three years ended December 31, 2003, to each executive officer of the Company whose aggregate compensation in 2003 exceeded $100,000, and to the chief executive officers.

Summary Executive Compensation Table

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Aggregated Option Exercises in Year Ended December 31, 2003
and Option Values at December 31, 2003

Compensation Committee Interlocks and Insider Participation

     The board of directors, as a whole, reviews and acts upon personnel policies and executive compensation matters. Joe G. Brooks and Stephen W. Brooks serve as executive officers of the Company; however, such individuals do not participate in compensation decisions or in forming compensation policies in which they have a personal interest, nor do they vote on any such matters.

Limited Liability of Officers and Directors

     The Delaware Supreme Court has held that a director’s duty of care to a corporation and its stockholders requires the exercise of an informed business judgment. Having become informed of all material information reasonably available to them, directors must act with requisite care in the discharge of their duties. The Delaware general corporation law permits a corporation through its certificate of incorporation to exonerate its directors from personal liability to the corporation or its stockholders for monetary damages for breach of the fiduciary duty of care as a director, with certain exceptions. The exceptions include a breach of the director’s duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violations of law, improper declarations of dividends and transactions from

20

which the directors derived an improper personal benefit. The Company’s certificate of incorporation exonerates its directors, acting in such capacity, from monetary liability to the extent permitted by this statutory provision. The limitation of liability provision does not eliminate a stockholder’s right to seek non-monetary, equitable remedies such as injunction or rescission to redress an action taken by directors. However, as a practical matter, equitable remedies may not be available in all situations and there may be instances in which no effective remedy is available.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     The following table sets forth, as of December 31, 2003, certain information with regard to the beneficial ownership of the Company’s capital stock by each holder of 5% or more of the outstanding stock, by each officer and director of the Company, and by all officers and directors as a group:

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(1) The Class B common stock is substantially identical to the Class A common stock, except that each share of Class B common stock has five votes per share and each share of Class A common stock has one vote per share. Each share of Class B common stock is convertible into one share of Class A common stock. Each share of Preferred Stock is convertible at the lower of $1.20 and the ten-trading day average of the Company’s Class A common stock, and would be convertible into 833 shares of Class A common stock, based upon the trading price prevailing at December 31, 2003. The Series B Preferred Stock (900 shares) has voting rights of 2,500 votes per share. No other Preferred Stock carries any voting rights.

(2) Beneficial ownership of shares was determined in accordance with Rule 13d-3(d)(1) of the Exchange Act and included shares underlying outstanding warrants and options which the named individual had the right to acquire within sixty days (February 29, 2004) of December 31, 2003.

(3) Includes 2,837,148 shares owned directly, 693,057 in trusts or corporations controlled by Mrs. Brooks, 1,175,000 shares issuable upon exercise of stock options, 3,000 shares issuable upon exercise of bonus warrants, 325,000 shares issuable upon exercise of Class C Warrants, 3,974,080 shares issuable upon exercise of Class F and Class G Warrants issued in connection with a private placement of Class A common stock in May of 1994, 1,771,792 shares issuable upon exercise of Class H Warrants, 323,000 shares issuable upon exercise of Series X and Y warrants owned directly and 493,333 shares issuable upon exercise of Series X and Series Y Warrants owned indirectly through two corporations controlled by Mrs. Brooks.

(4) Includes 403,946 shares owned directly by Mrs. Brooks and 433,642 shares owned by two corporations controlled by Mrs. Brooks. (Razorback Farms, Inc. is the record owner of 312,320 shares and SMF is the record owner of 121,322 shares, representing approximately 21.3% and 8.3%, respectively, of the Class B common stock). Excludes additional shares owned by adult children of Mrs. Brooks, including Joe G. Brooks, Stephen W. Brooks and J. Douglas Brooks, as to which she disclaims a beneficial interest.

(5) Includes 425 shares of Series A preferred stock owned directly and 400 shares of Series B Preferred Stock owned indirectly by Mrs. Brooks. Razorback Farms, Inc. is the record owner of 165 shares. Brooks Investment Company is the record owner of 235 shares.

(6) Includes 607,400 shares owned directly, 4,500 shares owned as custodian for Joe G. Brooks’ minor child, 38,205 shares owned as custodian for Brooks’ Children’s Trust, 1,500 shares issuable upon exercise of Bonus Warrants owned as custodian for Mr. Brook’s minor child, 38,250 shares issuable upon exercise of Bonus Warrants owned as custodian for Brook’s Children’s Trust, 1,875 shares issuable upon exercise of Bonus Warrants owned directly and 246,667 shares issuable upon exercise of stock options.

(7) Includes 313,212 shares owned directly, 84,741 shares owned indirectly, 7,620 shares issuable upon exercise of bonus warrants and 530,000 shares issuable upon exercise of stock options.

(8) Includes 38,000 shares owned directly, 2,000 shares owned by Mr. Burkett as custodian for his minor child, 10,000 shares owned by a partnership controlled by Mr. Burkett and 215,000 shares issuable upon exercise of stock options.

(9) Includes 3,000 shares owned directly and 503,963 shares issuable upon exercise of stock options.

(10) Includes 296,112 shares owned directly and 525,000 shares issuable upon exercise of stock options.

(11) Includes 13,816 shares owned directly and 60,800 shares issuable upon exercise of Series X and Series Y warrants.

(12) Represents 50,000 shares issuable upon exercise of stock options and 60,800 shares issuable upon exercise of Series X and Series Y warrants.

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(13) Includes 85,781 shares owned directly, 75,000 shares issuable upon exercise of stock options and 443,333 shares issuable upon exercise of Series X and Series Y warrants.

(14) Includes 337,562 shares owned directly, 112,697 shares issuable upon exercise of Series X Warrants, 41,604 shares issuable upon exercise of Series Y Warrants, 31,886 shares issuable upon exercise of Class I Warrants, and 50,000 shares issuable upon exercise of stock options.

(15) Includes 7,700 shares owned directly and 300,000 shares issuable upon the exercise of stock options.

(16) Includes 2,000 shares owned directly and 300,000 shares issuable upon the exercise of stock options.

(17) Represents shares owned directly.

(18) Class A common stock beneficial ownership was calculated by dividing the beneficial ownership of each individual by the sum of: (i) the total shares of Class A common stock outstanding at December 31, 2003, and (ii) the total shares underlying outstanding warrants and options which the named individual had the right to acquire within 60 days (February 29, 2004) of December 31, 2003. Class B common stock beneficial ownership is calculated based on 1,465,530 shares outstanding on December 31, 2003. Preferred stock beneficial ownership is calculated based on 2,760 shares outstanding on December 31, 2003.

(19) Calculated by dividing the voting rights of the beneficial ownership of each individual by the sum of: (i) the total votes available to be cast at December 31, 2003, and (ii) in footnote (18) above.

     At December 31, 2003, there were 29,275,147 shares of Class A common stock and 1,465,530 shares of Class B common stock issued and outstanding. The previous table sets forth those directors, officers and 5% shareholders, as a group, beneficially owned shares representing approximately 51.3% of the votes entitled to be cast upon matters submitted to a vote of the Company’s stockholders, and Marjorie S. Brooks and corporations controlled by her beneficially owned shares representing approximately 35.8% of the votes entitled to be cast and may be in a position to control the Company.

Equity Compensation Plan Information

     The following table provides information as of December 31, 2003, regarding shares outstanding and available for issuance under the Company’s existing stock option plans.

Item 13. Certain Relationships and Related Transactions

     During 2003, the Company had an agreement with an affiliate, Brooks Investment Co., controlled by Marjorie S. Brooks whereby the Company agreed to transfer certain of its trade receivables as collateral, which Brooks Investment Co. deemed acceptable, up to $2.5 million at any one time. Upon acceptance of a transfer of a receivable, Brooks Investment Co. remitted to the Company 85% of the receivable, as defined in the agreement. Upon collection of the receivable, the Company remitted to Brooks Investment Co. 1.25% of the receivable as a factoring charge, and the additional 13.75% of the receivable was remitted to the Company, less interest costs, which were based on the time period over which the receivable was outstanding. The Company indemnified Brooks Investment Co. for any loss arising out of rejections or returns of any merchandise, or any claims asserted by the Company’s customers. During 2003, the Company transferred an aggregate of approximately $45 million in receivables under this agreement, of which $2.1 million remained to be collected as of December 31, 2003. During 2002 and 2001 the Company transferred an aggregate of approximately $42.8 million and $34 million, respectively, in receivables under this agreement, none of which remains to be collected. Costs of $512,233, $343,752 and $517,349 associated with the factoring agreement were included in selling and administrative costs at December 31, 2003, 2002 and 2001, respectively.

     At December 31, 2003, accounts payable-related parties included advances on factored receivables of approximately $1.8 million and $83,736 relating to other items owed to related parties.

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Item 14. Principal Accounting Fees and Services

     The information below sets forth the fees charged by Tullius Taylor Sartain & Sartain LLP during 2003 and 2002 for services provided to the Company in the following categories and amounts:

     All of Tullius Taylor’s fees for 2002 and 2003 were pre-approved by the audit committee through a formal engagement letter with Tullius Taylor. The audit committee’s policy is to pre-approve all services by AERT’s independent accountants.

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Part IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

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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.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

INDEX TO FINANCIAL STATEMENTS

F-1

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of
Advanced Environmental Recycling Technologies, Inc.

We have audited the accompanying balance sheets of Advanced Environmental Recycling Technologies, Inc. as of December 31, 2003 and 2002, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. 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 of America. 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 Advanced Environmental Recycling Technologies, Inc. as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

F-2

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

BALANCE SHEETS

ASSETS

The accompanying notes are an integral part of these financial statements.

F-3

LIABILITIES AND STOCKHOLDERS’ EQUITY

The accompanying notes are an integral part of these financial statements.

F-4

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these financial statements.

F-5

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY

[Continued from above table, first column(s) repeated]

The accompanying notes are an integral part of these financial statements.

F-6

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS