UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-K

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

For the fiscal year ended December 31, 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:

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

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

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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 superior to either all-wood or all-plastic alternatives because:

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Beginning January 1, 2004, the wood industry no longer sells chromated copper arsenic (CCA) treated-lumber for residential and construction applications. The primary replacement chemical treatment for lumber is alkaline copper quat (ACQ) and this treated-lumber is approximately 20% higher in price and will also require additional handling and fastening techniques.

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They are less subject to thermal contraction or expansion and have greater dimensional stability than competing all-plastic products.

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

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Unlike wood, they do not require preservatives or treatment with toxic chemicals such as CCA or ACQ, nor do they require yearly water sealing or staining.

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

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

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When combined with our unique tie coat primer, the life of exterior paint can be greatly enhanced, thus

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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 and recycling facilities:

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Our Junction, Texas facility manufactures ChoiceDek Classic, ChoiceDek Classic Colors, ChoiceDek Premium and ChoiceDek Premium Colors decking components. There was a fire in March 2003 at the Junction plant which caused substantial damage and temporarily shut down plant operations. One rebuilt extrusion line recommenced operations in 2003 and the second line and material transfer system are scheduled to be operational during the second quarter of 2004.

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Our door, window and housing trim components (MoistureShield) are manufactured at our Springdale, Arkansas facility. The Springdale facility also manufactures the LifeCycle, ChoiceDek Plus, ChoiceDek Premium and ChoiceDek Premium Colors lines of decking product, and all of our heavy industrial flooring. Springdale currently has three extrusion lines with a fourth line undergoing upgrades and a plastic recycling facility.

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In late 2003, we started-up a second plastics processing facility in Northwest Arkansas. We have been adding plastic recycling capacity to that plant and plan to have it fully built-out by the end of 2004. The finished facility will be used for plastic recycling and blending, a railroad loading/unloading, a truck scale and receiving station, and finished goods storage.

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The Company leased plastic recycling equipment and factory space in Alexandria, Louisiana and commenced operations there in June 2003. 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 consistency required in order to more efficiently operate our extrusion 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:

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Low density polyethylene (LDPE) poly coatings or linings from recycled bleached food-board, which are generated from the hydro-pulping process;

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High density polyethylene (HDPE) and linear low density polyethylene (LLDPE) mixed plastic grocery bags from supermarket and store collection programs;

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HDPE ground container material; and

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LLDPE stretch film from warehouses and packing waste.

     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.

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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(1)

The net income (loss) per share of common stock is based on the combined weighted average number of shares of Class A and Class B common stock outstanding during the period. See Note 2 to the financial statements for a reconciliation of basic and diluted weighted average number of shares outstanding.

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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

13

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.

14

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

     The response to this item is incorporated herein by reference to the Company’s definitive proxy statement for its 2004 annual meeting of stockholders.

Item 11. Executive Compensation

     The response to this item is incorporated herein by reference to the Company’s definitive proxy statement for its 2004 annual meeting of stockholders.

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

     The response to this item is incorporated herein by reference to the Company’s definitive proxy statement for its 2004 annual meeting of stockholders.

Item 13. Certain Relationships and Related Transactions

     The response to this item is incorporated herein by reference to the Company’s definitive proxy statement for its 2004 annual meeting of stockholders.

Item 14. Principal Accounting Fees and Services

     The response to this item is incorporated herein by reference to the Company’s definitive proxy statement for its 2004 annual meeting of stockholders.

Part IV

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

		(a1), (a2), and (d). The Financial Statements listed in the accompanying Index to Financial Statements are filed as part of this report and such Index is hereby incorporated by reference. All schedules for which provision is made in the applicable accounting regulation on the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
		(a3) and (c). The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report and such Index is hereby incorporated by reference.
		(b) On October 14, 2003, the Company filed a Current Report on Form 8-K under Item 7. Financial Statements and Exhibits and Item 12. Results of Operations and Financial Condition.

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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

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

F-7

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1: Description of the Company

          Advanced Environmental Recycling Technologies, Inc. develops, manufactures and markets composite building materials that are used in place of traditional wood products for exterior applications in building and remodeling homes. The Company’s 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. The Company’s 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. The Company is comprised of four manufacturing facilities which are located in Junction, Texas, Springdale and Lowell, Arkansas and Alexandria, Louisiana. 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 2: Summary of Significant Accounting Policies

Revenue Recognition

          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 the time of shipment. Sales are recorded net of discounts, rebates and returns.

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, 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:

F-8

Supplemental Disclosures of Non-cash Investing and Financing Activities

Cash Equivalents

          The Company considers all highly liquid investments, those with a maturity of three months or less when purchased, to be cash equivalents. At December 31, 2003, cash and cash equivalents includes $145,766 that is restricted by the bond agreement (see Note 4: Notes Payable and Long-term Debt) for payment of costs incurred to complete ongoing expansion projects, and $427,155 that is restricted for payment of the 2004 principal and interest on the bond. The cash restricted for payment of expansion costs is expected to be paid out prior to December 31, 2004.

Buildings and Equipment

          Buildings and equipment are stated at cost and depreciated over the estimated useful life of each asset using the straight-line method. Estimated useful lives are: buildings — 15 to 30 years, leasehold improvements – 2 to 6 years, transportation equipment — 3 to 5 years, office equipment — 5 to 6 years and machinery and equipment — 3 to 10 years. Depreciation expense recognized by the Company for the years ended December 31, 2003, 2002 and 2001 was approximately $3.6 million, $3.0 million and $2.8 million, respectively.

          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.

          The Company accounts for the impairment or disposal of long-lived assets in accordance with the provisions of 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 the Company’s investment in long-lived assets to be held and used in 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.

F-9

Inventories

          Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consisted of the following at December 31:

Other Assets

          Debt issuance costs are amortized over the term of the related debt. The costs for the preparation of patent applications of $178,733 and $207,306, net, are amortized using the straight-line method over 17 years. The debt service reserve fund is restricted for the life of the bonds payable (see Note 4) for payment of principal and interest on the bonds in the case the Company is unable to make those payments.

Accounts Receivable

          Accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within thirty days from the invoice date. Trade accounts 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 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

F-10

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.

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 is 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. The Company incurred a loss from continuing operations for the year ended December 31, 2003. Therefore, Basic EPS and Diluted EPS are computed in the same manner for that year.

F-11

Concentration Risk

Credit Risk

          The Company’s revenues are derived principally from a number of regional and national door and window manufacturers, industrial-flooring companies and Weyerhaeuser, the Company’s primary decking customer. The Company extends unsecured credit to its customers. This industry concentration has the potential to impact the Company’s exposure to credit risk because changes in economic or other conditions in the construction industry may similarly affect the customers. The Company derived more than 10% of its revenue from the following customer:

Cash

          The Company maintains bank accounts which are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At times, cash balances may be in excess of the FDIC insurance limit. The Company believes no significant concentrations of risk exist with respect to its cash.

Disclosure about Fair Value of Financial Instruments

          The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company:

Current assets and current liabilities — The carrying value approximates fair value due to the short maturity of these items.

Long-term debt — The fair value of the Company’s long-term debt has been estimated by the Company based upon each obligation’s characteristics, including remaining maturities, interest rate, credit rating, collateral and amortization schedule. The carrying amount approximates fair value.

Stock-Based Compensation

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

F-12

based employee compensation for the years ended December 31, 2003, 2002, and 2001.