ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 MARCH 31, 2003

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 offices) (Zip Code)

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

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:

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of May 9, 2003, 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 28,331,312 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

PART I - FINANCIAL INFORMATION

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BALANCE SHEET

ASSETS

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

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ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BALANCE SHEET

LIABILITIES AND STOCKHOLDERS' EQUITY

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

2

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

STATEMENT OF OPERATIONS (UNAUDITED)

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

3

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 a line of composite building materials from reclaimed plastic
and wood fiber waste for certain specialized applications in the construction
industry. The Company markets this material as a substitute for wood and plastic
filler materials for standard door components, windowsills, brick mould, fascia
board, decking and heavy industrial flooring. The Company is comprised of two
manufacturing facilities located in Junction, Texas and Springdale, Arkansas.
The Company's customers primarily consist of a number of regional and national
door and window manufacturers, industrial-flooring companies and Weyerhaeuser,
the Company's primary decking customer.

NOTE 3: CURRENT OPERATIONS

On March 28, 2003, the Company had an accidental fire at the Junction
plant. The complete evaluation or estimate of the fire damage has not been
completed. However, the Company was given permission to begin demolition and the
rebuilding of a portion of the production facility on April 16, 2003. One
extrusion line in the plant, which was partially damaged, is in the process of
being repaired, and the electrical system for the production facility is being
replaced. This extrusion line is anticipated to be operational by June 15, 2003.
Concurrently, the Company is installing another extrusion line in the
Springdale, Arkansas plant. This extrusion line is also anticipated to be
operational by June 15, 2003. Once these two lines are operational, the
production capacity will be the same as before the fire. At this time there has
been minimal disruption in meeting the customers' needs. The final determination
on the rebuilding of the entire Junction facility is still being evaluated. The
Junction plant is fully insured for fire damage and business interruption.
During the period ended March 31, 2003, no business interruption insurance
proceeds had been received. There is no assurance as to the timing of the
completion of the extrusion lines and/or if both Junction extrusion lines will
be rebuilt. As of March 31, 2003, gross assets were written down by
approximately $3.8 million, along with the associated accumulated depreciation
on those assets in the amount of $3.1 million, resulting in a net book value
decrease of about $700,000.

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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, are as follows:

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

NOTE 5: SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION POLICY

The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101).
Under SAB 101, revenue is recognized when the title and risk of loss have
passed to the customer, there is persuasive evidence of an arrangement,
delivery has occurred or services have been rendered, the sales price is
determinable and collectibility is reasonably assured. The Company typically
recognizes revenue at time of shipment. Sales are recorded net of discounts,
rebates and returns.

INVENTORIES

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

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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.

STOCK-BASED COMPENSATION

The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123). The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation for the quarter
ended March 31:

NOTE 6: INCOME TAXES

No income tax provision was recorded for the three months ended March
31, 2003, due to the realization of previously unrecognized net operating loss
carryforwards.

NOTE 7: 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,

o For which discrete financial information is available.

As of March 31, 2003, 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 8: 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, 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 were a loss from continuing operations, Diluted EPS would be
computed in the same manner as Basic EPS is computed, even if an entity has net
income after adjusting for discontinued operations, an extraordinary item or the
cumulative effect of an accounting change.

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The Company has additional options and warrants that were not included
in the calculation of diluted earnings per share (EPS). Those options (1,471,000
and 925,000 for the quarters ended March 31, 2003 and 2002, respectively) and
warrants (2,333,933 and 2,334,214 for the quarters ended March 31, 2003 and
2002, respectively) were either antidilutive and/or not exercisable at March 31,
2003. 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.

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

GENERAL

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
products are marketed under the trade names LifeCycle(R), MoistureShield(R),
Weyerhaeuser ChoiceDek(R) Classic, Weyerhaeuser ChoiceDek(R) Plus and
Weyerhaeuser ChoiceDek(R) Premium.

PRODUCTS

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

o Commercial and residential decking planks and accessories such
as balusters and handrails (ChoiceDek),

o Exterior door, window and housing trim components
(MoistureShield), and

o Industrial flooring.

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 for certain uses superior to either all-wood or all-plastic
alternatives because:

o They are less subject to thermal contraction or expansion and
have greater

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dimensional stability than competing all-plastic products.

o They are engineered for superior moisture-resistance and will
not swell or expand like wood.

o Unlike wood, they do not require preservatives or treatment
with toxic chemicals such as chromated copper arsenic (CCA),
nor do they require yearly water sealing or staining.

o They can be designed and extruded through dies to a desired
shape in accordance with customer specifications, which helps
the customer to minimize waste.

o They are less subject to rotting, cracking, warping,
splintering, and insect infestation and water absorption than
conventional wood materials.

o When combined with our unique tie coat primer, the life of
exterior paint can be greatly enhanced, thus creating a
low-maintenance non-wood trim and fascia system designed to
enhance and complement fiber cement siding.

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, recycling, and warehouse
facilities:

o Our Junction, Texas facility manufactures ChoiceDek Classic
and ChoiceDek Premium decking components. On March 28, 2003,
the Company had an accidental fire at the Junction plant. The
complete evaluation or estimate of the fire damage has not
been completed. However, the Company was given permission to
begin demolition and the rebuilding of a portion of the
production facility on April 16, 2003. One extrusion line in
the plant, which was partially damaged, is in the process of
being repaired, and the electrical system for the production
facility is being replaced. This extrusion line is anticipated
to be operational by June 15, 2003. Concurrently, the Company
is installing another extrusion line in the Springdale,
Arkansas plant. This extrusion line is also anticipated to be
operational by June 15, 2003. Once these two lines are
operational, the production capacity will be the same as
before the fire.

o Our door, window and housing trim components (MoistureShield)
are manufactured at our Springdale, Arkansas facility. The
Springdale facility also manufactures the LifeCycle, ChoiceDek
Plus, and ChoiceDek Premium lines of decking product, and all
of our heavy industrial flooring. Springdale has four extruder
lines and a plastic recycling facility. We will install an
additional extrusion line at Springdale in 2003.

o In late 2002 we started up another plastics recycling facility
in Northwest Arkansas. We plan to add plastic recycling
capacity to that Northwest Arkansas facility during the first
half of 2003, and build a truck and rail "reload" facility
later in 2003 where we can store finished goods prior to
shipping them to customers.

o We operate a waste plastics receiving, testing, and storage
facility in Springdale, about two miles from the main plant.

o In 2002, we opened two warehouses in Northwest Arkansas, one
for finished goods and one for waste plastics storage. As we
grow, we anticipate adding additional warehouse space.

o During first quarter 2003, we initiated road and bridge
infrastructure work on an adjoining 18.6-acre tract, south of
the existing Springdale, Arkansas facility, adjoining the two
properties into a larger complex.

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We are constantly upgrading and improving our facilities to expand
capacities and improve efficiencies. Our expansion plans currently are
prioritized around increasing plastic recycling capacity and lowering raw
material costs. These projects will be followed by a second warehouse and
manufacturing facility in Springdale, Arkansas with plans for additional
composite extrusion capacity by early 2004. There is no assurance funds will be
available on a timely basis to prevent some construction projects from being
delayed (see Liquidity and Capital Resources).

RESULTS OF OPERATIONS

QUARTER ENDED MARCH 31, 2003 COMPARED TO QUARTER ENDED MARCH 31, 2002

Net sales increased to $11,109,782 for the quarter ended March 31,
2003, which represents an increase of $1,827,103 or 20% over net sales of
$9,282,679, for the quarter ended March 31, 2002. The first quarter 2003
composite net sales consisted of decking (ChoiceDek Classic, Plus & Premium) net
sales of $9,350,457 and MoistureShield net sales of $1,759,325. These figures
compare with first quarter 2002 decking (ChoiceDek) net sales of $7,779,273 and
MoistureShield net sales of $1,503,406. Decking sales continue to increase
primarily due to the increase in sales to Lowe's Home Improvement
Warehouses(TM). The MoistureShield net sales for the quarter ended March 31,
2003 were higher by $255,919, when compared to March 31, 2002.

The Springdale, Arkansas plant reported composite net sales of
$7,673,517 in the first quarter of 2003 compared to $6,076,513 in the first
quarter of 2002, a 26% increase. The Springdale plant produces the Company's
MoistureShield lines for the industrial OEM customers, MoistureShield CornerLoc,
ChoiceDek Plus and Premium decking and the ChoiceDek railing systems. The
Junction, Texas plant sales were $3,436,265 in the first quarter of 2003, an
increase of $230,099 from net sales of $3,206,166 in the first quarter of 2002.
However, Junction lost four days at the end of March due to the fire.

Cost of goods sold increased $1,810,455 from $6,818,927 in the quarter
ended March 31, 2002 to $8,629,382 in 2003. As a percentage of sales, cost of
goods sold increased 4.2% to 77.7% from cost of goods sold of 73.5% for the same
period ended March 31, 2002. The Springdale plant cost of goods sold as a
percentage of sales was 77.4% in the first quarter of 2003 compared to 68.2% for
the same period in 2002. The Texas plant cost of goods sold as a percentage of
sales decreased to 78.3% in the first quarter of 2003 compared to 83.4% for the
same period in 2002. The major reasons for the changes in cost of goods sold
were that manufacturing overhead decreased 1.2% as a percent of sales, however,
raw materials increased as a percentage of sales in 2003 to 27.5% from 21.9 % in
2002 (a 5.5% increase) and direct labor decreased slightly as a percent of sales
in 2003 (16.3%) from 2002 (16.4%). The increase in raw material costs was due to
price increases in the cost of polyethylene. In addition, the Company had to
supplement its internal source of plastic with higher priced outside sources.
Internal capacity should be increased by the third quarter. Prices of such raw
materials have decreased during the second quarter.

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Significant cost categories were as follows for the quarter ended March
31:

Payroll and payroll taxes were down slightly as a percent of sales due
to improved efficiencies. Depreciation was up as new equipment was put into
service during the year since the first quarter of 2002. Raw material costs
increased to 27.5% of sales as compared to 21.9% for the same period in 2002.
The increase in raw material costs was as previously discussed. Prices have
peaked and are expected to be stable or lessen in the second quarter. Other
manufacturing costs increased $229,037 to $2,123,960 in 2003, up from $1,894,923
in 2002. The increases in costs were attributable to increases in repair and
maintenance and leases and rental costs.

Selling, general and administrative expenses increased $163,028 to
$2,061,685 in the first quarter of 2003 from $1,898,657 in the comparable
quarter in 2002. This was a decrease as a percent of net sales to 18.6% in 2003
from 20.5% in 2002. This was the result of the rate of sales growing faster than
the selling, general, and administrative costs. The decrease was also
attributable to the reduction of legal expenses, and not having research and
development costs of $220,117, as was incurred in 2002, to develop a new railing
system.

The operating income for the quarter ended March 31, 2003 was $418,715,
a decrease of $146,380 (26%) when compared to $565,095 of operating income for
the quarter ended March 31, 2002. This decrease was the result of increased cost
of sales and the overall rate of sales increase being about the same as the
overall cost increases.

The net income for the quarter ended March 31, 2003 was $108,233, as
compared to a profit of $208,443 for the quarter ended March 31, 2002, a
$100,210 decrease.

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LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2003, the Company had a working capital deficit of $5.7
million compared to a working capital deficit of $6.6 million at December 31,
2002. The Company expended approximately $6.0 million on capital expansion
during the year ended 2002, primarily on improving our equipment at both
production facilities in the areas of extrusion, raw material processing and
plastic production. The reduction in the working capital deficit is primarily
attributable to the Company's improving its production processes, reducing
costs, paying down the notes payable and making a profit. The Company's
continued capital expansion for customer requirements contributed to the deficit
not being further reduced during the period. The Company expended approximately
$820,334 on capital projects during the quarter ended March 31, 2003. The $5.7
million working capital deficit reflects management's decision to enter into
short-term debt financing, while the Company has expanded, built and improved
its production and sales capacities to increase cash flows from operations. The
Company's plan was to issue short-term debt and refinance in the future, rather
than enter into what it felt would have been more expensive and dilutive equity
financing at that time. The Company generated sufficient cash flow to more than
cover debt service.

The Company closed a $16.5 million tax-exempt bond financing during the
fourth quarter of 1999, which was intended to refinance existing obligations,
shift construction and expansion related accounts payable into long-term
financing and provide additional financing of capital expenditures. The bonds
were subject to mandatory tender for purchase by the Company in

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whole on October 13, 2000 (the Reset Date), at which time the bonds were
repurchased by the bondholder and a new reset date of October 13, 2001 was
established. Just prior to that date, the tragedy of September 11, 2001
occurred, and the bond markets were unsettled. While we were seeking to remarket
the bonds, we continued to invest additional short-term funds into the Company,
and used our cash flow to continue to grow and expand our production
capabilities. The bonds are currently due to reset on July 16, 2003. The terms
and covenants of the bonds in regard to the Company's financing needs are being
reexamined and negotiated with potential buyers. The final reset date for the
issuance of the bonds is October 16, 2003. At that time, the bonds will have to
be repurchased and retired. Currently, due to the circumstances in the
Industrial Revenue Bond market, the slowing economy, low interest rates and the
uncertainty concerning Iraq and the Middle Eastern region, it is questionable if
the bonds will be rolled over past October 16, 2003, or if alternative financing
at more competitive rates can be acquired. Therefore, the bonds could be
repurchased with its escrowed funds and retired on October 16, 2003. If the
bonds are retired, we will have to take a one-time write-off of approximately
$1.09 million for costs associated with the initial marketing of the bonds and
the rollover attempts to reissue the bonds over the past four years. Because of
our increased production capacity, strong customer commitments and the ability
to generate sufficient cash flow to cover debt service, we are exploring
several financing alternatives of bond and non-bond resources to continue
our expansion and to refinance some of our short-term debt. This financing could
allow us to complete the projects that are underway in a more timely manner and
commence additional projects.

Cash increased $504,578 in the first quarter of 2003. Significant
components of that increase were: (i) cash provided by operating activities of
$550,187, which consisted of the net income for the period of $108,233,
increased by depreciation and amortization of $933,105 and reduced by other uses
of cash of $491,151; (ii) cash used in investing activities of $397,081, and
(iii) cash provided by financing activities of $351,472. Payments on notes
during the period were $204,839. At March 31, 2003, the Company had bonds and
notes payable in the amount of $24,604,899, of which $20,585,819 was current
bonds and notes payable and the current portion of long-term debt. Of the
current bonds and notes payable, $3,757,463 or 18% was payable to Marjorie S.
Brooks, a major shareholder, and other investors closely associated with the
Company. The Company intends to pay down the remaining $1.96 million in bridge
notes from cash flow and/or refinancing during 2003 and the final balance upon
successful completion of additional financing.

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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.

FORWARD-LOOKING INFORMATION

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: 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 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.

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 purchasers of the Shares should carefully consider the information
contained herein or in the documents incorporated herein by reference.

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ITEM 4. CONTROL 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 May 3, 2003. 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 May 3, 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 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Not applicable

(b) Not applicable

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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 /s/ Edward J. Lysen
- ---------------------------- -------------------------------
JOE G. BROOKS EDWARD J. LYSEN
Chairman Chief financial officer
Date: May 15, 2003 Date: May 15, 2003

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CERTIFICATIONS*

I, Joe G. Brooks, the chairman, co-chief executive officer, and president,
certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advanced
Environmental Recycling Technologies, Inc.;

2. 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;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present 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;

4. 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;

5. 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 functions):

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

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether 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.

/s/ JOE G. BROOKS
--------------------------------------
Joe G. Brooks
Chairman, Co-Chief Executive
Officer, and President

Dated: May 15, 2003

* Provide a separate certification for each principal executive officer and
principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The
required certification must be in the exact form set forth above.

17

CERTIFICATION

I, Stephen W. Brooks, the co-chief executive officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advanced
Environmental Recycling Technologies, Inc.;

2. 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;

3. 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;

4. 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;

5. 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 functions):

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

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether 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.

/s/ STEPHEN W. BROOKS
-----------------------------------------
Stephen W. Brooks
Co-Chief Executive Officer

Dated: May 15, 2003

18

CERTIFICATION

I, Edward J. Lysen, the chief financial officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advanced
Environmental Recycling Technologies, Inc.;

2. 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;

3. 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;

4. 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;

5. 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 functions):

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

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether 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.

/s/ EDWARD J. LYSEN
----------------------------------
Edward J. Lysen
Chief Financial Officer

Dated: May 15, 2003

19