ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES INC - 10-Q Quarterly Report

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United States Securities and Exchange Commission
Washington, DC 20549

FORM 10-Q

(X) Quarterly Report Pursuant To Section 13 or 15(d)
Of The Securities Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

Commission File Number 1-10367

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 71-0675758
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

914 NORTH JEFFERSON STREET
SPRINGDALE, ARKANSAS 72764
(Address of Principal Executive Office) (Zip Code)

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

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 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:

As of September 30, 2002, the number of shares outstanding of the Registrant's
Class A Common Stock, which is the class registered under the Securities
Exchange Act of 1934, was 28,331,340 and the number of shares outstanding of the
Registrant's Class B Common Stock was 1,465,530.

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

Form 10-Q Index

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

BALANCE SHEETS

ASSETS

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

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ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

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

3

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS (UNAUDITED)

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

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ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS (UNAUDITED)

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

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NOTES TO FINANCIAL STATEMENTS

NOTE 1: UNAUDITED INFORMATION

Advanced Environmental Recycling Technologies, Inc. has prepared the
financial statements included herein without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). However, all
adjustments have been made to the accompanying financial statements which are,
in the opinion of the Company's management, of a normal recurring nature and
necessary for a fair presentation of the Company's operating results. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented herein not misleading. It is recommended that
these financial statements be read in conjunction with the financial statements
and the notes thereto included in the Company's latest annual report on Form
10-K. The Company has reclassified certain prior period amounts to conform to
the current period presentation.

NOTE 2: DESCRIPTION OF THE COMPANY

Advanced Environmental Recycling Technologies, Inc. (the Company or
AERT) manufactures composite building materials made from reclaimed plastic and
wood fiber waste. The Company markets this material as a substitute for wood and
plastic in outdoor decking systems, standard door components, windowsills, brick
mould, fascia board, and heavy industrial flooring. The Company operates
composite extrusion lines in Junction, Texas, a dual purpose composite extrusion
and plastics recycling facility in Springdale, Arkansas, a raw material
warehouse and testing lab in Springdale, Arkansas, a warehouse and reload
facility in Tonitown, Arkansas, and will soon open a dual purpose facility for
plastic processing and finished goods storage and reload in Lowell, Arkansas.
The Company's customers are primarily regional and national door and window
manufacturers, industrial-flooring companies and Weyerhaeuser -- the Company's
primary decking customer. The Company recently renewed its exclusive three year
ongoing agreement with Weyerhaeuser and Lowe's Home Improvement Warehouse to
supply Lowe's with the Company's ChoiceDek Premium brand of decking products.

NOTE 3: MANAGEMENT'S PLANS AND FUTURE OPERATIONS

The Company's financial statements have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. Prior to 2001, the Company incurred net losses in each year since
its inception in 1989. As of the quarter ended September 30, 2002, the Company
has produced six consecutive profitable quarters.

At September 30, 2002, the Company had a working capital deficit of
$4,332,151. The Company is currently engaged in an aggressive facilities
expansion and improvement program designed to fulfill customer demand and
increase profitability. For the nine months ended

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September 30, 2002, the Company invested $3,257,540 in new plant and equipment
which was financed primarily with $2,919,681 net cash flow from operations
generated during the same period. Net cash flow from operations might otherwise
have been used to reduce the working capital deficit. Until such time as long
term financing is available on terms satisfactory to the Company, and while the
Company continues to expand its facilities and production capacity, management
plans to use cash flow from operations to fund the facilities expansion program
instead of reducing the working capital deficit.

In October 1999, the Company entered into an agreement with the City of
Springdale, Arkansas for the issuance of $16.5 million principal amount of
industrial development revenue bonds, the proceeds of which were to be used for
facilities expansion and for reducing the working capital deficit. The bonds
were originally closed into escrow and are currently secured by cash deposits
sufficient to retire both principal and interest. The Company is now attempting
to remarket the bonds on terms that it finds acceptable. If the bonds are
successfully remarketed, the proceeds will be used to reduce the working capital
deficit and accelerate the Company's facilities expansion program. If the bonds
are not remarketed by October 16, 2003, the Company will be required to buy them
back.

If the Company is unsuccessful in remarketing the bonds, and if
alternative expansion financing is also not available, it could slow the
Company's expansion plans, limit its ability to increase decking production to
meet customer demand and would require the Company to make other mutually
agreeable provisions for the payment of its outstanding short-term debts. In
which case, the ability of the Company to continue as a going concern could be
dependent upon the ongoing support of its stockholders, investors, customers and
creditors. There is no commitment or assurance that such support would be
available if needed.

NOTE 4: STATEMENTS OF CASH FLOWS

In order to determine net cash provided by operating activities, net
income has been adjusted by, among other things, changes in current assets and
current liabilities, excluding changes in cash and cash equivalents, current
maturities of long-term debt and current notes payable.

Those changes, shown as an (increase) decrease in current assets and an
increase (decrease) in current liabilities for the nine months ended September
30, are as follows:

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Supplemental Disclosure of Non-Cash Investing and Financing Activities:

NOTE 5: SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION POLICY

Revenue is recognized at the time of shipment.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out
method) or market. Inventories consisted of the following:

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

RESEARCH AND DEVELOPMENT

Expenditures relating to the development of new products and processes,
including significant improvements to existing products, are expensed as
incurred.

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NOTE 6: INCOME TAXES

No income tax provision was recorded for the nine months ended
September 30, 2002 and 2001, due to the realization of previously unrecognized
net operating loss carryforwards.

NOTE 7: COMMITMENTS AND CONTINGENCIES

The Company was sued in May 2000 by Three H Enterprises, LLC (3-H) an
Illinois investment company seeking royalties allegedly owed but unpaid from a
1987 settlement of prior litigation against a predecessor entity and two members
of the Brooks family. 3-H acquired its rights in the cause of action from
parties to the prior litigation. In July 2002, the court rendered judgment
against the Company for $820,000 in past royalties on production from the
Junction, Texas plant, plus $240,000 in prejudgment interest and post-judgment
interest until paid. In October 2002, the court entered a judgment against the
Company for an additional $754,074 in attorney fees, plus post-judgment interest
until paid. The Company has appealed both judgments to the Fifth Circuit Court
of Appeals and posted a $1.87 million bond pending a decision in the appeal.
Although the trial court declined to grant 3-H's post-trial request for an order
requiring royalty payments for future production from the Junction plant, there
is no assurance that 3-H will not pursue such royalties in subsequent
litigation. There is also no assurance that the Company will be successful upon
appeal. The Company believes these actions are without merit and will continue
to defend itself appropriately.

NOTE 8: SEGMENT INFORMATION

SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information", (SFAS 131), establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. SFAS 131
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Reportable operating
segments are defined as a component of an enterprise:

o That engages in business activities from which it may earn
revenues and expenses,

o Whose operating results are regularly reviewed by the
enterprise's chief operating decision-maker; and,

o For which discrete financial information is available.

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As of September 30, 2002, the Company does not have available discrete
financial information to disclose gross margin by product line. All operating
expenses are allocated primarily on capacity. Corporate overhead is not
allocated by product line, neither are selected assets. Net sales segregated by
product line and gross margin by plant location are as follows:

NOTE 9: EARNINGS PER SHARE

The Company calculates and discloses earnings per share (EPS) in
accordance with SFAS No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 replaces
the presentation of Primary EPS with Basic EPS and requires dual presentation of
Basic and Diluted EPS on the face of the statements of operations and requires a
reconciliation of the numerator and denominator of the Basic EPS computation to
the numerator and denominator of the Diluted EPS computation. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company. Diluted EPS is computed similarly to Fully Diluted EPS pursuant to
Accounting Principles Board Opinion No. 15, "Earnings Per Share".

In computing Diluted EPS, only potential common shares that are
dilutive--those that reduce earnings per share or increase loss per share--are
included. Exercise of options and warrants or conversion of convertible
securities is not assumed if the result would be antidilutive,

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such as when a loss from continuing operations is reported. The "control number"
for determining whether including potential common shares in the Diluted EPS
computation would be antidilutive is income from continuing operations. As a
result, if there was a loss from continuing operations, Diluted EPS would be
computed in the same manner as Basic EPS is computed, even if an entity had net
income after adjusting for discontinued operations, an extraordinary item or the
cumulative effect of an accounting change.

The Company has additional options and warrants that were not included
in the calculation of diluted earnings per share (EPS). Those options (for
1,125,000 shares and for 925,000 shares) and warrants (for 2,333,933 shares)
were either antidilutive and/or not exercisable during the three and nine months
ended September 30, 2002, respectively. Although the above financial instruments
were not included due to being antidilutive and/or not exercisable, such
financial instruments may become dilutive and would then need to be included in
future calculations of Diluted EPS.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

GENERAL

PRODUCTS. AERT develops, manufactures and markets composite building
materials that are used as an alternative to traditional wood products for
exterior applications in building and remodeling homes. Our composites
manufacturing process involves proprietary technologies, certain of which are
patented, and specialized manufacturing equipment that is custom-built or
modified for us. The encapsulation of wood fibers in plastic creates a
consistent material, free of foreign matter, which can be extruded into a
desired shape. The process uses plentiful, lower cost raw materials, such as
recycled plastics and wood-filler materials and, in certain cases, special
additives or virgin plastics in varying mixtures. The mixtures can be
specifically formulated based on our customers' desired end-product
specifications. Our composite building material became a patented product in
June 1998, under U. S. Patent No. 5,759,680. Our decking products include deck
boards, handrail and deck post systems, and trim, and are marketed under the
trade names Weyerhaeuser ChoiceDek(R) Classic, Weyerhaeuser ChoiceDek(R) Plus
and Weyerhaeuser ChoiceDek(R) Premium, and LifeCycle(R). On April 26, 2001, our
decking, handrails and stair applications received 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. Other building components, including door
and window sills, exterior trim and fascia systems, are marketed under the name
MoistureShield(R) and MoistureShield(R) CornerLoc(TM).

MARKETING AND SALES. Our decking products are distributed exclusively
by Weyerhaeuser Building Materials through their 71 customer service centers
across the U.S. and Canada. Weyerhaeuser also distributes the ChoiceDek Premium
line exclusively to Lowe's Companies, Inc. (Lowe's) under a three year contract
that provides for certain minimum purchase quantities each year. As the product
distributor, Weyerhaeuser provides logistics services to manufacturers, lumber
dealers and home centers. Weyerhaeuser and Lowes also conduct national
advertising and brand-building programs for ChoiceDek decking systems. Our
MoistureShield(R) products are sold directly to national and regional door and
window manufacturers such as Therma-Tru Corporation.

FACILITIES. Our Junction, Texas facility has two extrusion lines that
manufacture primarily ChoiceDek Classic and ChoiceDek Premium decking and
decking components. Our Springdale, Arkansas facility has three extrusion lines
that produce MoistureShield door, window and housing trim components and our
LifeCycle, ChoiceDek Plus, and ChoiceDek Premium lines of decking products. Our
plastics recycling facility is located in the Springdale extrusion plant. In
2001, we opened a plastic recycling warehouse, testing lab, and transfer
facility in Springdale, Arkansas, and increased our plastic collection efforts,
in preparation for building additional plastic recycling capacity. In 2002 we
opened a plastics warehouse and finished goods reload facility in Tonitown,
Arkansas.

EXPANSION PROGRAM. Because of increasing demand for our products, a
fourth composite extrusion line will be installed and started up during the
fourth quarter of 2002, and we are planning a fifth line for the first half of
2003 - both at the Springdale extrusion plant. In September 2002, the Company
entered into an agreement to purchase an existing plant facility and land in
Lowell, Arkansas, which is adjacent to Springdale. The Lowell site will house a
second plastics recycling plant that is scheduled for startup in the fourth
quarter 2002. We are building a reload facility at the Lowell site that will
hold finished goods prior to shipping. We

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believe this will allow us to improve customer service and reduce our cost of
goods sold. Over the next twelve months, we also intend to launch several new
products, increase the sales and marketing staff, and increase research and
development expenditures. The implementation schedule for our expansion program
is subject to cash flow from operations and to the availability of financing
from either the successful remarketing of our industrial development bonds or
from other debt or equity financing. There is no assurance that additional
financing can be acquired on terms acceptable to the Company (see Liquidity and
Capital Resources).

RESULTS OF OPERATIONS

QUARTER ENDED SEPTEMBER 30, 2002 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2001

Net income for the quarter ended September 30, 2002 was $870,495. This
is an earnings improvement of $619,108 when compared to the net income of
$251,387 for the third quarter of 2001. Significant components of earnings
follow.

Net sales increased to $11,045,046 for the quarter ended September 30,
2002, which is an increase of $1,729,377 or 19% over the quarter ended September
30, 2001. Third quarter 2002 sales consisted of decking product (ChoiceDek)
sales of $8,779,200, and door, window and housing trim component
(MoistureShield) sales of $2,265,846. These figures compare with third quarter
2001 ChoiceDek sales of $7,197,962 and MoistureShield sales of $2,117,707.

The Springdale plant generated net sales of $7,130,885 in the third
quarter of 2002, compared to $5,860,048 in the third quarter of 2001, a 22%
increase. The Junction, Texas plant net sales increased to $3,914,161 in the
third quarter of 2002, from $3,455,621 in the third quarter of 2001, a 13%
increase.

Cost of goods sold increased $708,180, from $6,767,941 for the quarter
ended September 30, 2001, to $7,476,121 in 2002. As a percentage of sales, cost
of goods sold decreased 5% to 68% for the quarter ended September 30, 2002, as
compared to 73% for the same period in 2001. The decrease was attributable to
cost of goods sold increasing at a lower rate than the sales growth rate. The
Springdale plant cost of goods sold decreased as a percentage of sales by 3% to
66% in 2002, from 69% in 2001. The Texas plant cost of goods sold decreased 7%
to 71% in 2002, from 78% in 2001.

Significant cost categories were as follows for the quarter ended
September 30:

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Selling, general and administrative expenses increased $469,326 in the
third quarter of 2002 to $2,397,373, compared to $1,928,047 for 2001. The
increase was due primarily to increases in salaries and professional fees. Some
of the increases were offset by decreases in commissions and factoring fees. As
a percentage of sales, selling and administrative expenses increased to 22% from
21% in 2001.

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001

Net income for the nine month period ended September 30, 2002 was
$1,492,329. This is an earnings improvement of $1,202,328 when compared to net
income of $290,001 for the same period in 2001. Significant components of
earnings follow.

Net sales increased to $30,616,774 for the nine months ended September
30, 2002, which represented an increase of $5,149,220 or 20% over the same
period a year ago. The nine months composite net sales consisted of decking
product (ChoiceDek) net sales of $24,718,731, and door, window and housing trim
components (MoistureShield) net sales of $5,898,043. These figures compare to
the same period a year ago of ChoiceDek net sales of $20,085,872 and
MoistureShield net sales of $5,381,682.

The Springdale, Arkansas plant reported composite net sales of
$19,854,296 for the nine month period ended September 30, 2002, compared to
$14,591,570 for the same period a year ago, which represented a 36% increase.
The Junction, Texas plant net sales decreased to $10,762,478 for the nine month
period ended September 30, 2002, from $10,875,984 for the same period a year
ago, a 1% decrease. As a result of upgrades made in the extrusion department,
the Texas plant now has two larger extrusion lines. This move streamlined and
focused the products produced at the Texas plant and helped make it more
efficient.

Cost of goods sold increased $3,353,550 from $18,554,601 for the nine
month period ended September 30, 2001, to $21,908,151. As a percentage of sales,
cost of goods sold decreased 1% to 72% for the nine month period ended September
30, 2002, as compared to 73% for the same period a year ago. The Springdale
plant cost of goods sold decreased 1% as a percentage of sales to 69% for the
nine month period in 2002, from 70% for the same period in 2001. The Junction
plant cost of goods sold remained constant at 77% for the nine month period in
2002.

There was an increase in manufacturing overhead costs in the nine month
period ended September 30, 2002, which was primarily attributable to outsourcing
charges from third party vendors to finish components for a new railing system
while additional equipment to perform this work in-house was being installed.
The outsourcing was required to meet customer deadlines, and cost approximately
$976,000, which is 3% of net sales. The Company installed the required equipment
to bring these additional processes in-house during the third quarter 2002.

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Significant cost categories were as follows for the nine months ended
September 30:

Selling, general and administrative expenses increased $370,013 for the
nine month period ended September 30, 2002 to $6,027,318 when compared to
$5,657,305. However, this was a decrease of 2% as a percentage of sales to 20%
for the nine month period in 2002 from 22% for the same period in 2001. The
percentage decrease was due to decreases in travel and meal expenses,
professional fees, factoring fees, and commissions. Some of the decreases were
offset by increases in salaries and wages, amortization of debt costs and
research and development costs.

LIQUIDITY AND CAPITAL RESOURCES

Management's decision in recent years to finance significant capital
expenditures from operating cashflow and with short-term bridge loans has
created and sustained the Company's working capital deficit. At September 30,
2002, the working capital deficit was $4,332,151 million compared to $4,535,600
million at December 31, 2001, a decrease of $203,449. The Company committed
approximately $1.9 million to be expended on capital projects during the quarter
ended September 30, 2002.

As of September 30, 2002, current liabilities were $27.6 million, which
includes $16.5 million bonds payable that are currently escrowed and offset by a
$16.5 million restricted bond escrow fund. Other current liabilities include
$3.0 million due to the Company's major shareholder or companies controlled by
her, $2.1 million in short-term bridge loans, and approximately $3.9 million in
accounts payable. The Company generated sufficient cash flow to more than cover
debt service in the third quarter of 2002. Cash flow available for debt service
was approximately $1.9 million, up 46% from $1.3 million for the quarter ended
September 30, 2001.

In October 1999, the Company entered into an agreement with the City of
Springdale, Arkansas for the issuance of $16.5 million principal amount of
Series 1999 industrial development revenue bonds. The bonds are private activity
bonds issued for a limited number of purposes, including solid waste disposal
projects. The bonds were originally closed into escrow, and cash deposits
sufficient to retire the debt currently secure the bonds. The Company is now
attempting to remarket the bonds on terms that it finds acceptable. If the bonds
are not remarketed by October 16, 2003, the Company will be required to buy them
back. If the Company is unsuccessful in remarketing the bonds, and if
alternative expansion financing is also not available, it could slow the
Company's expansion plans and limit its ability to increase decking production
to meet customer demand.

Cash and cash equivalents increased $114,011 in the nine months ended
September 30, 2002. Significant components of that increase were: (i) cash
provided by operating activities of

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$2,919,681, which consisted of the net income for the period of $1,492,329
increased by depreciation and amortization of $2,235,604 and reduced by other
uses of cash of $808,252; (ii) cash used in investing activities of $3,257,540,
and (iii) cash provided by financing activities of $451,870. Cash payments on
notes during the period were $557,421, and proceeds from the issuances of notes
amounted to $250,000. At September 30, 2002, the Company had bonds and notes
payable in the amount of $23,776,423, of which $19,630,264 was current bonds and
notes payable and the current portion of long-term debt. Of the current bonds
and notes payable, $2,657,463 or 13.5% was payable to Marjorie S. Brooks, a
major shareholder, and other investors closely associated with the Company. The
Company intends to pay down or refinance the remaining $2.1 million in bridge
notes during 2002 and will in either case pay off the final balance upon
successful completion of the bond financing.

FORWARD-LOOKING INFORMATION

An investment in the Company'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
analyzing this Company. In addition, this Form 10-Q 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 the
Company'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 investors in 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 the Company's current judgment regarding the
direction of its 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 Company's 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: success in remarking its $16.5 million
principal amount of bonds without further escrow requirement; success in
refinancing its other short-term debt; market, political or other forces
affecting the pricing and availability of plastics and other raw materials;
accidents or other unscheduled shutdowns affecting the Company's, 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 the Company's control;
execution of planned capital projects; weather conditions affecting the
Company's operations or the areas in which the Company's products are marketed;
adverse rulings, judgments, or settlements in litigation or other legal matters.
The Company undertakes

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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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The Company has no material exposures relating to its long-term debt,
due to virtually all of the Company's long-term debt bearing interest at fixed
rates. The Company depends on the market for favorable long-term mortgage rates
to help generate sales of its product to its customers for use in the
residential construction industry. Should mortgage rates increase substantially,
the Company could be impacted by a reduction in the residential construction
industry. Important raw materials purchased by the Company are recycled plastic
and wood fiber, which are subject to price fluctuations. The Company attempts to
limit the impact of price increases on these materials by negotiating with each
of its suppliers on a term basis.

ITEM 4. 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 that we have in place with
respect to the accumulation and communication of information to management and
the recording, processing, summarizing and recording thereof for the purpose of
preparing and filing this Quarterly Report on Form 10-Q. Such review was
conducted during the week ended November 8, 2002. Based upon their review, these
executive officers have concluded that we have an effective system of internal
controls and an effective means for timely communication of information required
to be disclosed in this Report. Since November 8, 2002, there have been no
significant changes in our internal controls or in other factors that could
significantly affect such controls.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The Company was sued in May 2000 by Three H Enterprises, LLC (3-H) an
Illinois investment company seeking royalties allegedly owed but unpaid from a
1987 settlement of prior litigation against a predecessor entity and two members
of the Brooks family. 3-H acquired its rights in the cause of action from
parties to the prior litigation. In July 2002, the court rendered judgment
against the Company for $820,000 in past royalties on production from the
Junction, Texas plant, plus $240,000 in prejudgment interest and post-judgment
interest until paid. In October 2002, the court entered a judgment against the
Company for an additional $754,074 in attorney fees, plus post-judgment interest
until paid. The Company has appealed both judgments to the Fifth Circuit Court
of Appeals and posted a $1.87 million bond pending a decision in the appeal.
Although the trial court declined to grant 3-H's post-trial request for an order
requiring royalty payments for future production from the Junction plant, there
is no assurance that 3-H will not pursue such royalties in subsequent
litigation. There is also no assurance that the Company will be successful upon
appeal. The Company believes these actions are without merit and will continue
to defend itself appropriately.

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ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The Company held its annual meeting of stockholders on Friday, July
26, 2002.

(b) The following sets forth information regarding each matter voted
upon at the annual meeting. There were 28,008,685 shares of Class A
common stock, 1,465,530 shares of Class B common stock and 900 shares
of Series B preferred stock, voting together as a single class,
outstanding as of the record date for, and entitled to vote at the 2002
annual meeting.

Item 1. The reelection of Joe G. Brooks, Sal Miwa, Stephen W. Brooks,
Marjorie S. Brooks, Jerry B. Burkett, Michael M. Tull, Samuel L. Milbank,
Delbert Allen and Melinda Davis to the board of directors. The tabulation of
votes on this proposal follows:

Item 2. The stockholders approved a proposal to the ratification of
appointment of independent auditors, Tullius Taylor Sartain & Sartain. The
tabulation of votes on this proposal follows:

Votes For..................... 33,095,854
Votes Against................. 229,496
Abstentions................... 73,383

18

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) The following exhibits are filed as part of this report:

99.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 by
the Company's Chairman, Co-chief executive officer
and President,

99.2 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 by
the Company's Co-chief executive officer, and

99.3 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 by
the Company's chief financial officer.

(b) No reports on Form 8-K were filed during the third quarter
2002

19

SIGNATURES

Pursuant to the requirements 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.

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

By: /s/ Joe G. Brooks By: /s/ Edward J. Lysen
------------------------------------- ---------------------------
Joe G. Brooks Edward J. Lysen
Chairman, Co-chief executive officer, Chief financial officer
and President

Date: November 14, 2002 Date: November 14, 2002

20

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joe G. Brooks, the chairman, co-chief executive officer, and president of
Advanced Environmental Recycling Technologies, Inc., certify that:

(i) I have reviewed this quarterly report on Form 10-Q of the
Issuer;

(ii) Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

(iii) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly represent in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

(iv) The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c. Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

(v) The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):

21

a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize, and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

(vi) The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Dated: November 14, 2002
/s/ Joe G. Brooks
------------------------
Joe G. Brooks
Chairman, Co-chief
Executive Officer, and
President

22

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen W. Brooks, the co-chief executive officer of Advanced Environmental
Recycling Technologies, Inc., certify that:

(i) I have reviewed this quarterly report on Form 10-Q of the
Issuer;

(ii) Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

(iii) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly represent in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

(iv) The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c. Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

(v) The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):

23

a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize, and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

(vi) The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Dated: November 14, 2002
/s/ Stephen W. Brooks
--------------------------
Stephen W. Brooks
Co-chief Executive Officer

24

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Edward J. Lysen, the chief financial officer of Advanced Environmental
Recycling Technologies, Inc., certify that:

(i) I have reviewed this quarterly report on Form 10-Q of the
Issuer;

(ii) Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

(iii) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly represent in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

(iv) The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c. Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

(v) The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):

25

a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize, and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

(vi) The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Dated: November 14, 2002
/s/ Edward J. Lysen
-----------------------
Edward J. Lysen
Chief Financial Officer

26

INDEX TO EXHIBITS