UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2005

Advanced Environmental Recycling Technologies, Inc.

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

914 N Jefferson Street Post Office Box 1237 Springdale, Arkansas (Address of principal executive offices)		72765 (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 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: þ NO:

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 9, 2005, 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 34,126,403 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

						Page
Item 1.				Financial Statements
				Balance Sheets, June 30, 2005 (unaudited) and December 31, 2004			1-2
				Statements of Operations (unaudited) Three and Six Months Ended June 30, 2005 and 2004			3
				Statements of Cash Flows (unaudited) Six Months Ended June 30, 2005 and 2004			4
				Notes to Financial Statements			5-13
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			14-21
Item 3.				Quantitative and Qualitative Disclosure about Market Risk			22
Item 4.				Controls and Procedures			22-23
PART II — OTHER INFORMATION
Item 6.				Exhibits			23
Signatures							24
Index to Exhibits							25
Wood-Plastic Composite Decking Agreement
Certification Pursuant to Section 302 - Chairman, Co-Chief Executive Officer & President
Certification Pursuant to Section 302 - Co-Chief Executive Officer
Certification Pursuant to Section 302 - Chief Financial Officer
Certification Pursuant to Section 906 - Chairman, Co-Chief Executive Officer & President
Certification Pursuant to Section 906 - Co-Chief Executive Officer
Certification Pursuant to Section 906 - Chief Financial Officer

* Confidential treatment has been requested with respect to certain portions of the exhibit. Omitted portions have been filed with the Securities and Exchange Commission

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

Balance Sheets

ASSETS

		June 30,				December 31,
		2005				2004
		(unaudited)
Current assets:
Cash and cash equivalents		$	1,581,385			$	1,078,536
Restricted cash			1,087,234				679,635
Trade accounts receivable, net of allowance of $122,679 at June 30, 2005 and $153,536 at December 31, 2004			3,784,806				2,554,594
Inventories			6,927,756				7,392,838
Prepaid expenses			1,335,036				586,637
Total current assets			14,716,217				12,292,240
Land, buildings and equipment:
Land			1,612,243				1,612,243
Buildings and leasehold improvements			5,649,960				5,413,115
Machinery and equipment			35,047,893				33,524,077
Transportation equipment			890,299				775,669
Office equipment			753,885				755,000
Construction in progress			3,814,674				2,363,936
			47,768,954				44,444,040
Less accumulated depreciation			21,018,515				18,963,479
Net land, buildings, and equipment			26,750,439				25,480,561
Other assets:
Debt issuance costs, net of accumulated amortization of $460,471 at June 30, 2005 and $373,336 at December 31, 2004			3,124,631				3,211,766
Debt service reserve fund			2,078,826				2,057,792
Other assets, net of accumulated amortization of $349,877 at June 30, 2005 and $335,590 at December 31, 2004			212,297				298,434
Total other assets			5,415,754				5,567,992
		$	46,882,410			$	43,340,793

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

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

Balance Sheets

LIABILITIES AND STOCKHOLDERS’ EQUITY

		June 30,				December 31,
		2005				2004
		(unaudited)
Current liabilities:
Accounts payable — trade		$	8,864,287			$	8,486,792
Accounts payable — related parties			3,018,201				2,280,781
Current maturities of long-term debt			954,752				1,133,168
Accrued payroll expense			785,439				401,183
Other accrued liabilities			1,549,634				2,533,605
Notes payable — related parties			650,000				600,000
Notes payable — other			1,156,924				327,682
Total current liabilities			16,979,237				15,763,211
Long-term debt, less current maturities			15,546,700				15,571,068
Accrued premium on convertible preferred stock			138,000				276,000
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $1 par value; 5,000,000 shares authorized; 2,760 shares issued and outstanding at June 30, 2005 and December 31, 2004			2,760				2,760
Class A common stock, $.01 par value; 75,000,000 shares authorized; 34,117,832 and 32,032,123 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively			341,178				320,322
Class B convertible common stock, $.01 par value; 7,500,000 shares authorized, 1,465,530 shares issued and outstanding at June 30, 2005 and December 31, 2004			14,655				14,655
Warrants outstanding; 10,369,813 at June 30, 2005 and 14,890,867 at December 31, 2004			5,115,463				6,917,544
Additional paid-in capital			30,061,334				27,376,565
Accumulated deficit			(21,316,917	)			(22,901,332	)
Total stockholders’ equity			14,218,473				11,730,514
Total liabilities and stockholders’ equity		$	46,882,410			$	43,340,793

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

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS (UNAUDITED)

		Three months ended June 30,								Six months ended June 30,
		2005				2004				2005				2004
Net sales		$	20,954,211			$	16,162,575			$	40,897,741			$	29,383,696
Cost of goods sold			16,219,585				11,978,074				31,843,495				22,610,985
Gross margin			4,734,626				4,184,501				9,054,246				6,772,711
Selling and administrative costs			3,289,105				2,728,442				6,344,758				5,112,160
Research and development			—				—				—				95,619
			3,289,105				2,728,442				6,344,758				5,207,779
Operating income			1,445,521				1,456,059				2,709,488				1,564,932
Other income (expense):
Insurance proceeds related to lost income			—				—				—				8,720
Interest income			4,594				979				7,706				1,897
Interest expense			(462,177	)			(530,896	)			(994,779	)			(1,043,720	)
			(457,583	)			(529,917	)			(987,073	)			(1,033,103	)
Income before extraordinary item and accrued premium on preferred stock			987,938				926,142				1,722,415				531,829
Accrued premium on preferred stock			(69,000	)			(69,000	)			(138,000	)			(138,000	)
Income before extraordinary item			918,938				857,142				1,584,415				393,829
Extraordinary gain on involuntary conversion of non-monetary assets due to fire			—				—				—				173,536
Net income applicable to common stock		$	918,938			$	857,142			$	1,584,415			$	567,365
Income per share of common stock before extraordinary item (Basic)		$	0.03			$	0.03			$	0.05			$	0.01
Income per share of common stock before extraordinary item (Diluted)		$	0.02			$	0.02			$	0.04			$	0.01
Extraordinary gain per share of common stock (Basic)			—				—				—			$	0.01
Extraordinary gain per share of common stock (Diluted)			—				—				—			$	0.00
Income per share of common stock after extraordinary item (Basic)		$	0.03			$	0.03			$	0.05			$	0.02
Income per share of common stock after extraordinary item (Diluted)		$	0.02			$	0.02			$	0.04			$	0.01
Weighted average number of common shares outstanding (Basic)			35,265,550				31,618,748				34,815,069				31,359,408
Weighted average number of common shares outstanding (Diluted)			42,841,293				41,122,225				42,694,375				41,405,362

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

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS (UNAUDITED)

		Six Months Ended June 30,
		2005				2004
Cash flows from operating activities:
Net income applicable to common stock		$	1,584,415			$	567,365
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,078,298				2,032,110
Premium accrued on preferred stock			138,000				138,000
Extraordinary gain on involuntary conversion of non-monetary assets due to fire			—				(173,536	)
Decrease in other assets			137,952				45,814
Increase in cash restricted for letter of credit and interest costs			(1,869	)			(20,505	)
Changes in current assets and current liabilities			(1,863,101	)			(142,550	)
Net cash provided by operating activities			2,073,695				2,446,698
Cash flows from investing activities:
Purchases of land, buildings and equipment			(1,838,804	)			(2,871,260	)
Insurance proceeds from involuntary disposition of property and equipment			—				669,012
Net cash used in investing activities			(1,838,804	)			(2,202,248	)
Cash flows from financing activities:
Proceeds from issuance of notes			700,000				1,350,000
Payments on notes			(1,295,126	)			(1,566,729	)
Increase in cash restricted for payment of long-term debt			(405,731	)			(350,854	)
Increase in outstanding advances on factored receivables			650,246				545,469
Debt acquisition costs			—				11,100
Proceeds from exercise of stock options and warrants, net			618,569				432,070
Net cash provided by financing activities			267,958				421,056
Increase in cash and cash equivalents			502,849				665,506
Cash and cash equivalents, beginning of period			1,078,536				1,056,211
Cash and cash equivalents, end of period		$	1,581,385			$	1,721,717

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

NOTES TO FINANCIAL STATEMENTS

Note 1: Unaudited Information

     Advanced Environmental Recycling Technologies, Inc. (the Company or AERT) 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 of America 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. (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 and for certain other industrial or commercial building purposes. 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, ChoiceDek® Premium Colors and MoistureShield® outdoor decking. We operate manufacturing facilities in Springdale, Lowell, and Tontitown, Arkansas; Junction, Texas and Alexandria, Louisiana. We recently added a warehouse and reload complex in Lowell, Arkansas. Our customers are primarily regional and national door and window manufacturers, Weyerhaeuser, our primary decking customer, and various building product distributors.

Note 3: Extraordinary Items

     On March 28, 2003, there was an accidental fire at the Junction, Texas plant. The Company began demolition and partial rebuilding in April 2003. The initial restoration project, completed in May 2003, was designed and intended to get the plant back into immediate production in order to hold on to a portion of its customers, and included the rebuilding of one extrusion line that had been partially damaged, electrical system replacement, and roof replacement. The second extrusion line recommenced operations in May 2004. The Junction plant was thought to be fully insured for fire damage and business interruption, with a three tier policy of $9,575,000, as of that date.

     Our total insurance claim related to the fire was $7.8 million. We had three tiers of insurance coverage, each tier from a different insurance provider. The first two tiers paid up to the limit of their coverage, which totaled $6 million. Our third tier provider, Lloyd’s London, refused to pay any amount related to our claim (see Note 9: Commitments and Contingencies). Due to the fire, gross assets were written down by approximately $4.91 million, along with the associated accumulated depreciation on those assets in the

amount of $3.96 million, resulting in a net book value decrease in assets of about $950,000. Insurance proceeds received from our second tier insurance provider to reimburse costs incurred to reconstruct the facility resulted in a gain of $173,536 for the six months ended June 30, 2004. Additionally, the Company recorded $11,213 in business interruption insurance during the first six months of 2004, including $8,720 to replace lost income and $2,493 to cover fixed expenses. In addition, the Company had initially booked an additional receivable of approximately $864,000 and related income in the first quarter of 2004 for additional amounts we expect to collect from the insurers related to such matter. However, such claims are now being contested by the insurer and, although we intend to vigorously pursue the collection of such claims, we have, in accordance with generally accepted accounting principles, reversed any receivable and income for the first quarter of 2004 attributable to such disputed claims unless and until such claims are collected.

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 for the six months ended June 30:

		2005				2004
		(unaudited)				(unaudited)
Receivables		$	(1,230,212	)		$	(954,945	)
Inventories			465,081				(1,098,192	)
Prepaid expenses and other			523,185				470,362
Accounts payable –
Trade and related parties			(1,133,878	)			1,112,230
Accrued liabilities			(487,277	)			327,995
		$	(1,863,101	)		$	(142,550	)
Cash paid for interest		$	1,069,848			$	917,825

Supplemental Disclosures of Non-Cash Investing and Financing Activities:

		2005				2004
		(unaudited)				(unaudited)
Notes payable for financing of insurance policies		$	1,271,584			$	1,066,083
Accounts / notes payable for equipment			1,486,111				1,096,938
Accrued premium on preferred stock paid with Class A common stock			276,000				276,000

Note 5: Significant Accounting Policies

 Revenue Recognition Policy

     The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (SAB 104). Under SAB 104, 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 product is shipped or when segregated and billed under a bill and hold arrangement. The terms of this agreement qualify for revenue recognition under SAB 104. Sales are recorded net of discounts, rebates, and returns.

     Estimates of expected sales discounts are calculated by applying the appropriate sales discount rate to all unpaid invoices that are eligible for the discount. The Company’s sales prices are determinable given that the Company’s sales discount rates are fixed and given the predictability with which customers take sales discounts.

 Shipping and Handling

     In accordance with Emerging Issues Task Force (EITF) Issue 00-10, Accounting for Shipping and Handling Fees and Costs, the Company records shipping fees billed to customers in net sales and records the related expenses in cost of goods sold.

 Inventories

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

		June 30, 2005				December 31, 2004
		(unaudited)
Raw materials		$	4,792,202			$	5,479,344
Work in process			769,533				891,473
Finished goods			1,366,021				1,022,021
		$	6,927,756			$	7,392,838

 Use of 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 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 123). Beginning in 2005, the Company has modified its employee/director equity compensation policies to generally provide restricted stock awards rather than stock options. Restricted stock awards are expensed as a portion of compensation costs. The following tables illustrate the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation for the following:

		Three Months Ended June 30:
		2005				2004
Net income applicable to common stock, as reported		$	918,938			$	857,142
Deduct: Total stock-based compensation expense determined under fair value based method for all awards			5,454				103,763
Net income applicable to common stock, proforma		$	913,484			$	753,379
Net income per share of common stock:
Basic — as reported		$	0.03			$	0.03
Basic — pro forma		$	0.03			$	0.02
Diluted — as reported		$	0.02			$	0.02
Diluted — pro forma		$	0.02			$	0.02

		Six Months Ended June 30:
		2005				2004
						Before				After
						Extra-				Extra-
						ordinary				ordinary
						Item				Item
Net income applicable to common stock, as reported		$	1,584,415			$	393,829			$	567,365
Deduct: Total stock-based compensation expense determined under fair value based method for all awards			12,601				135,262				135,262
Net income applicable to common stock, proforma		$	1,571,814			$	258,567			$	432,103
Net income per share of common stock:
Basic — as reported		$	0.05			$	0.01			$	0.02
Basic — pro forma		$	0.05			$	0.01			$	0.01
Diluted — as reported		$	0.04			$	0.01			$	0.01
Diluted — pro forma		$	0.04			$	0.01			$	0.01

Recent Accounting Pronouncements

     In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, Inventory Costs, an Amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Additionally, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company is required to adopt the provisions of this statement no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company does not expect the adoption of SFAS 151 to have a material effect on the Company’s financial statements and related disclosures.

     In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R). SFAS 123R is a revision of SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions) and requires that cost to be recognized in the financial statements. In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107, which includes interpretations that express views of the SEC staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and provide the staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company is required to adopt the provisions of SFAS 123R no later than the beginning of the first interim or annual reporting period of the Company’s first fiscal year that begins on or after June 15, 2005. The Company does not expect the adoption of SFAS 123R to have a material effect on the Company’s financial statements and related disclosures, particularly since the Company during 2005 has begun to more generally issue restricted stock awards rather than stock option awards.

     In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29 (SFAS153). The guidance in APB Opinion 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS 153 amends APB Opinion 29 to eliminate an exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The Company is required to adopt the provisions of this statement no later than the beginning of the first fiscal period beginning after June 15, 2005. The Company does not expect the adoption of SFAS 153 to have any effect on the Company’s financial statements and related disclosures.

     In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes and FASB Statement 3, Reporting Accounting Changes in Interim Financial Statements. This statement changes the requirements for the accounting for and reporting of a change in accounting principle, including all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires voluntary changes in accounting principles be recognized retrospectively to prior periods’ financial statements, rather than recognition in the net income of the current period. Retrospective application requires restatements of prior period financial statements as if that accounting principle had always been used. This statement carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. The provisions of SFAS No. 154 are effective for accounting changes and corrections of errors made in fiscal beginning after December 15, 2005.

Note 6: Income Taxes

     No income tax provision was recorded for the three or six months ended June 30, 2005, due to the realization of previously unrecognized net operating loss carryforwards. The Company continues to provide a valuation allowance against the deferred tax asset resulting from 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. A reportable operating segment is defined as a component of an enterprise:

	•		That engages in business activities from which it may earn revenues and expenses,
	•		Whose operating results are regularly reviewed by the enterprise’s chief operating decision maker, and
	•		For which discrete financial information is available.

     As of June 30, 2005, 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 and neither are selected assets. Net sales segregated by product line and gross margin by plant location are as follows:

Net Sales — Three months ended June 30:		2005				2004
Commercial and residential decking surface components		$	17,626,125			$	13,140,449
Exterior door, window and housing trim components			3,328,086				3,022,126
		$	20,954,211			$	16,162,575

Net Sales — Six months ended June 30:		2005				2004
Commercial and residential decking surface components		$	34,114,487			$	24,156,811
Exterior door, window and housing trim components			6,783,254				5,226,885
		$	40,897,741			$	29,383,696

Gross Margin —
Three months ended June 30:		2005								2004
		Springdale				Junction				Springdale				Junction
Net sales		$	16,503,036			$	4,451,175			$	12,444,841			$	3,717,734
Cost of goods sold			12,570,243				3,649,342				8,515,873				3,462,201
Gross margin		$	3,932,793			$	801,833			$	3,928,968			$	255,533

Gross Margin —
Six months ended June 30:		2005								2004
		Springdale				Junction				Springdale				Junction
Net sales		$	31,754,434			$	9,143,307			$	22,647,568			$	6,736,128
Cost of goods sold			24,477,892				7,365,603				16,251,486				6,359,499
Gross margin		$	7,276,542			$	1,777,704			$	6,396,082			$	376,629

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.

		Three Months Ended June 30
		2005				2004
Net income applicable to common stock (A)		$	918,938			$	857,142
Assumed exercise of stock options and warrants			14,861,274				17,437,914
Application of assumed proceeds toward repurchase of stock at average market price			(7,285,531	)			(7,934,437	)
Net additional shares issuable			7,575,743				9,503,477
Adjustment of shares outstanding:
Weighted average common shares outstanding			35,265,550				31,618,748
Net additional shares issuable			7,575,743				9,503,477
Adjusted shares outstanding (B)			42,841,293				41,122,225

		Three Months Ended June 30:
		2005				2004
Net income per common share — Diluted (A) divided by (B)		$	0.02			$	0.02
Antidilutive and/or non-exercisable options			1,207,500				1,701,000
Antidilutive and/or non-exercisable warrants			1,021,269				4,774,598

		Six Months Ended June 30:
		2005				2004
						Before				After
						Extra-				Extra-
						ordinary				ordinary
						Item				Item
Net income applicable to common stock (A)		$	1,584,415			$	393,829			$	567,365
Assumed exercise of stock options and warrants			14,861,274				17,637,914				17,637,914
Application of assumed proceeds toward repurchase of stock at average market price			(6,981,968	)			(7,591,960	)			(7,591,960	)
Net additional shares issuable			7,879,306				10,045,954				10,045,954
Adjustment of shares outstanding:
Weighted average common shares outstanding			34,815,069				31,359,408				31,359,408
Net additional shares issuable			7,879,306				10,045,954				10,045,954
Adjusted shares outstanding (B)			42,694,375				41,405,362				41,405,362
Net income per common share — Diluted (A) divided by (B)		$	0.04			$	0.01			$	0.01
Antidilutive and/or non-exercisable options			1,207,500				1,526,000				1,526,000
Antidilutive and/or non-exercisable warrants			1,021,269				4,749,598				4,749,598

     The Company has additional options and warrants that were not included in the calculation of diluted earnings per share for the quarters and six months ended June 30, 2005 and 2004 as indicated in the tables above. Those options and warrants were antidilutive and/or not exercisable during those periods. 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. Except in the case the Company incurs a loss from continuing operations, the conversion of all series of preferred stock is assumed in calculating Diluted EPS.

Note 9: Commitments and Contingencies

     We have been sued by certain underwriters at Lloyd’s, London (“Lloyd’s”) in connection with a pending final settlement of our Junction, Texas fire claim. Our total claim was $7.8 million. We had three tiers of insurance coverage, each tier from a different insurance provider. The first two tiers paid up to the limit of their coverage, which totaled $6 million. Our third tier provider, Lloyd’s, refused to pay any amount related to our claim.

     Lloyd’s filed suit January 19, 2005 in the Circuit Court of Washington County, Arkansas seeking a declaratory judgment, declaring that they are not liable to reimburse us for certain costs of rebuilding the AERT Junction, Texas facility. Lloyd’s alleges that we did not rebuild the facility exactly as it had existed prior to the March 2003 fire and that we committed fraud in seeking reimbursement for alleged improvements made to the facility.

Lloyd’s also seeks to retroactively cancel its portion of the insurance policy. The filing was unexpected by us because we have cooperated fully with the claims underwriting process and negotiations toward a final settlement of the claim seemed to be progressing prior to the lawsuit.

     We believe the Lloyd’s lawsuit is without merit. We filed an answer to the complaint and a counterclaim on January 24, 2005 in which we denied all material allegations that we had deliberately and fraudulently submitted a claim and had wrongfully classified our losses, and are affirmatively seeking to recover actual damages of at least $1.8 million plus attorney and court fees. Our counterclaim also includes a claim against Lloyd’s for its bad faith failure to pay under the policy of insurance issued to AERT. If this bad faith claim is established and proven, it would expose Lloyd’s to punitive damages.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

          As a growing business in an expanding market, we faced many challenges over the last year, including:

	•		To fund our growth, we require increasing amounts of working capital. We have suffered from a lack of adequate working capital, the effect of which is to hold back our capital expansion and efficiency programs. A major contributor to this inadequacy was the failure of our insurance carrier to pay the full amount of our fire insurance claim on the Junction, Texas plant. This limited our ability to meet our customers’ needs by slowing the reconstruction of the Texas plant.
	•		We have been overly dependent for raw materials on outside plastic recycling companies and virgin resin producers. As some of our suppliers faced their own challenges from rapidly rising plastic scrap prices, AERT was periodically left without an adequate quantity and quality of materials for our composite board extrusion lines. This negatively affected our ability to keep up with growing customer orders. We were periodically forced to purchase alternative feedstock, such as virgin polyethylene, to keep our factories running and meet our obligations to our customers. The higher priced input materials pushed up our cost of goods sold and depressed our gross margin. Our ability to respond to the shifting market conditions was hampered by insufficient capital resources, which was partially caused by the insurance carrier’s failure to pay the fire claim.
	•		We are overly dependent on one customer. Since 1995, we have sold our decking products exclusively to Weyerhaeuser, who resold it through their distribution system. Over time, Weyerhaeuser’s business strategy has shifted and we believed that their distribution system was not allowing us to grow and adequately compete in some attractive market segments. In particular, their reluctance to take and hold independent lumber dealer inventory each year during the fourth quarter has limited our growth and tied up our working capital.
	•		Our aggressive growth objectives have increased the need for human capital and we are working to hire, train, and staff additional supervisory and management personnel.
	•		We believe that an excessive “overhang” of common stock warrants limits institutional participation in the market for our stock in the near term, which depresses our stock price and limits our access to additional equity capital.

          During 2005 and beyond, we are focused on alleviating these structural impediments to our growth and profitability. For example:

	•		We are completing the reconstruction of the Texas plant.
	•		We are investing in additional in-house plastic recycling capacity.
	•		We are further automating our manufacturing facilities.
	•		We have added a warehouse and reload complex in Lowell, Arkansas.

	•		We continue to focus on increasing gross margins through price increases and increased efficiencies.
	•		We are re-evaluating the margin and profit contribution of all our product lines.
	•		We have renegotiated the distribution arrangements with Weyerhaeuser to allow us to sell decking products to other customers, though Weyerhaeuser retains an exclusive right to purchase ChoiceDek products for re-sale to Lowe’s Home Improvement stores. Over 80% of Weyerhaeuser’s 2004 purchases from us were for re-sale to Lowe’s. The new agreement with Weyerhaeuser allows us to sell our new MoistureShield decking product to the non-home improvement segments of the market. Broadening decking distribution through a group of regional, smaller, and more product-focused decking distributors will allow us to provide better customer service and support to commercial contractors. It will also allow us to reduce our reliance on any given customer.
			The MoistureShield decking line positively addresses the commercial market segment. Although there has been only a limited regional marketing effort thus far, initial results are extremely positive. As production capacity increases, product will be available for additional markets. We believe that our previous exposure in the lumber dealer marketplace and its unparalleled product field history will provide substantial future growth for the MoistureShield line.

	•		We are in discussions with additional sources of working capital, and expect to finalize at least one new working capital arrangement in 2005. We have signed a letter of intent for a $10 million line of credit with a commercial finance company for trade receivable financing, which we expect to be in use by the end of the third quarter of 2005.
	•		We are aggressively recruiting new AERT associates for senior and middle management levels.
	•		Many of the outstanding stock warrants will expire in 2005 and 2006, with the balance expiring in 2007.
	•		In 2004, we invested $7.4 million in manufacturing infrastructure (plant and equipment) and plan to spend $10 million in 2005. Our capital expansion plan was also held back due to cash flow being diverted to rebuild the Texas plant, as the third tier insurance provider, Lloyd’s London, disputed the final claim and refused to pay. Most of the capital expansion was, and will be, funded through cashflow. (See Liquidity and Capital Resources.)
	•		We continue to build brand recognition and our reputation with the quality of our products.

          Our building program is intended to provide the capacity necessary to achieve higher sales levels, improve operating efficiency, and sustain our growth. We have added plastic recycling equipment in Lowell, which is designed to increase our internal capability of processing scrap plastic. We have completed the site work for the addition of a production facility on the property adjacent to our Springdale plant, and construction on a second raw material system to service both plants has commenced, as well as building construction, and is intended to become operational starting in phases during the first quarter of 2006.

Results of Operations

Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004

     The following table sets forth selected information from our statements of operations.

Quarterly Comparison

		Three Months Ended June 30:
		2005				% Change				2004
Net sales		$	20,954,211				29.6	%		$	16,162,575
Cost of goods sold			16,219,585				35.4	%			11,978,074
% of net sales			77.4	%			3.3	%			74.1	%
Gross margin			4,734,626				13.1	%			4,184,501
% of net sales			22.6	%			-3.3	%			25.9	%
Selling and administrative costs			3,289,105				20.5	%			2,728,442
% of net sales			15.7	%			-1.2	%			16.9	%
Operating income			1,445,521				-0.7	%			1,456,059
% of net sales			6.9	%			-2.1	%			9.0	%
Other expense:
Net interest expense			(457,583	)			-13.7	%			(529,917	)
Income before accrued premium on preferred stock			987,938				6.7	%			926,142
% of net sales			4.7	%			-1.0	%			5.7	%
Accrued premium on preferred stock			(69,000	)			—				(69,000	)
Net income applicable to common stock		$	918,938				7.2	%		$	857,142
% of net sales			4.4	%			-0.9	%			5.3	%

Net Sales

     Our net sales for the three months ended June 30, 2005 and 2004 are summarized as follows:

		Three months ended June 30:
		2005				% Change				2004
Springdale facility		$	16,503,036				32.6	%		$	12,444,841
Junction facility			4,451,175				19.7	%			3,717,734
Total net sales		$	20,954,211				29.6	%		$	16,162,575

     Compared to the second quarter of 2004, net sales for the quarter ended June 30, 2005 increased through a combination of factors, including:

	•		We implemented price increases in December 2004 and April 2005, which together accounted for approximately 40% of the increase;
	•		Increased productivity resulting from capital improvement projects and other manufacturing efficiency initiatives increased output and reduced manufacturing waste. Productivity gains accounted for approximately 60% of the increase.

     Cost of Goods Sold

          Our cost of goods sold, as a percent of sales, increased for the quarter ended June 30, 2005 compared to the same period of 2004. Labor costs were down, as a percent of sales, due to increased plant automation installed over the last year, higher factory utilization in the quarter compared to last year, efficiency improvements at the Springdale, Arkansas plant and increased capacity resulting from progress with the Junction plant reconstruction following the fire. Material costs were up significantly due to higher costs of polyethylene scrap prices. Polyethylene costs stabilized somewhat in the second quarter 2005 but we believe scrap prices remain volatile. Sustained upward price movement of our raw materials has an adverse effect on our profitability. Manufacturing overhead, as a percent of sales, also increased due to increases in employment costs, utilities, leases and rents, and other factors.

     Selling and Administrative Costs

          Selling and administrative costs decreased from 16.9% of sales in the quarter ended June 30, 2004 to 15.7% of sales in the quarter ended June 30, 2005 as we increased sales at a faster rate than overhead expenses. Employment costs, advertising and promotion, and professional fees related to Sarbanes Oxley and litigation collectively comprise 74% of sales and administrative expenses. We believe that we can continue to increase sales at a faster rate than SG&A expenses.

     Net Income

          Net income increased 7.2% over second quarter 2004, but the margin of net income to sales decreased from 5.3% in second quarter 2004 to 4.4% in second quarter 2005. Generally, higher raw material and manufacturing overhead costs outweighed the efficiency gains in labor and general overhead expenses.

Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004

     The following table sets forth selected information from our statements of operations.

		Six Months Ended June 30:
		2005				% Change				2004
Net sales		$	40,897,741				39.2	%		$	29,383,696
Cost of goods sold			31,843,495				40.8	%			22,610,985
% of net sales			77.9	%			0.9	%			77.0	%
Gross margin			9,054,246				33.7	%			6,772,711
% of net sales			22.1	%			-0.9	%			23.0	%
Selling and administrative costs			6,344,758				21.8	%			5,207,779
% of net sales			15.5	%			-2.2	%			17.7	%
Operating income			2,709,488				73.1	%			1,564,932
% of net sales			6.6	%			1.3	%			5.3	%
Other income (expense):
Insurance proceeds related to lost income			—				-100.0	%			8,720
Net interest expense			(987,073	)			-5.3	%			(1,041,823	)
Income before extraordinary item and accrued premium on preferred stock			1,722,415				223.9	%			531,829
% of net sales			4.2	%			2.4	%			1.8	%
Accrued premium on preferred stock			(138,000	)			—				(138,000	)
Income before extraordinary item			1,584,415				302.3				393,829
			3.9	%			2.6	%			1.3	%
Extraordinary gain from involuntary conversion of non-monetary assets due to fire			—				-100.0	%			173,536
Net income applicable to common stock		$	1,584,415				179.3	%		$	567,365
% of net sales			3.9	%			2.0	%			1.9	%

Net Sales

     Our net sales for the six months ended June 30, 2005 and 2004 are summarized as follows:

		Six months ended June 30:
		2005				% Change				2004
Springdale facility		$	31,754,434				40.2	%		$	22,647,568
Junction facility			9,143,307				35.7	%			6,736,128
Total net sales		$	40,897,741				39.2	%		$	29,383,696

          Net sales for the six months ended June 30, 2005 increased versus the first six months of 2004 through a combination of factors, including:

	•		Product mix consisted of a higher percentage of value added products, including the new ChoiceDek Premium Embossed and MoistureShield embossed decking. This accounted for approximately 10% of the increase;
	•		We implemented a price increase in December 2004, which accounted for approximately 31% of the increase;
	•		Progress towards restoration of the Junction plant to its pre-fire capacity accounted for approximately 7% of the increase; and
	•		Increased productivity resulting from capital improvement projects increased output and reduced manufacturing waste. Productivity gains account for approximately 52% of the increase.

     Cost of Goods Sold

          Our cost of goods sold, as a percent of sales, increased for the six months ended June 30, 2005 compared to the same period of 2004. The gross profit margin for the six months decreased to 22.1% from 23.0% in the same period last year. Labor costs were down, as a percent of sales, due to increased plant automation installed over the last year, higher factory utilization in the quarter compared to last year, efficiency improvements at the Springdale, Arkansas plant and increased capacity resulting from progress with the Junction plant reconstruction following the fire. Material costs were up significantly due to higher costs of polyethylene scrap prices. Polyethylene costs stabilized somewhat in the second quarter 2005 but we believe they remain volatile and are projected to further increase. Sustained upward price movement for our raw materials has an adverse effect on our profitability. Manufacturing overhead, as a percent of sales, also increased due to increases in employment costs, utilities, leases and rents, and other factors.

     Selling and Administrative Costs

          Selling and administrative costs decreased from 17.7% of sales in the half year ended June 30, 2004 to 15.5% of sales in the half year ended June 30, 2005 as we increased sales at a faster rate than overhead expenses. Employment costs, advertising and promotion, sales commissions, travel and entertainment, and professional fees related to Sarbanes Oxley and litigation collectively comprised 74% of all sales and administrative expenses. We believe that we can continue to increase sales at a faster rate than SG&A expenses.

     Extraordinary Item

          The extraordinary gain in the first six months of 2004 was due to the major fire at the Junction facility in March 2003. The Junction facility was, and is, fully insured. Insurance proceeds received from the second tier insurance provider to reimburse costs incurred to reconstruct the facility resulted in a gain of $173,536 for the six months ended June 30, 2004. In addition, we recognized a total gain of approximately $2.96 million in 2003 attributable to such insurance proceeds as the facility and equipment damaged had been nearly fully depreciated. There were no extraordinary gains in 2005.

     Net Income

          Net income for the first half of 2005 increased about $1 million, or 179%, over the first half year of 2004. The margin of net income to sales increased to 3.9% from last year’s first half margin of 1.9% as efficiency gains in sales and administration combined with product price increases offset the effect of higher raw material costs. While raw material costs will continue to be volatile, we are working to improve efficiencies by carefully managing overhead costs, in conjunction with further automation.

Liquidity and Capital Resources

          At June 30, 2005, we had a working capital deficit of $2.3 million compared to a working capital deficit of $3.5 million at December 31, 2004. The working capital deficit included total current liabilities of approximately $17.0 million, of which $2.3 million was for accrued payroll expense and other accrued liabilities, $11.9 million was in payables and $2.8 million was a combination of short-term notes payable and the current portion of long-term debt. The working capital deficit reflects management’s decision to pay for its capital expansion using cash generated from operations and also reflects delays and difficulties in obtaining reimbursement by the insurance carrier for rebuilding the Junction plant from fire damage. Additionally, pursuant to our bond agreement, we are required to maintain a debt service reserve fund in the amount of approximately $2.1 million, which is classified as a non-current asset in our balance sheet. We spent approximately $3.3 million on capital expansion during the first six months of 2005. Expenditures were primarily for construction at our second Springdale manufacturing site and machinery at our existing Springdale manufacturing facility.

          Unrestricted cash increased by $502,849 to $1,581,385 at June 30, 2005 from December 31, 2004. Significant components of that increase were: (i) cash provided by operating activities of $2,073,695, which consisted of the net income for the period of $1,584,415 increased by depreciation and amortization of $2,078,298 and decreased by other uses of cash of $1,589,018; (ii) cash used in investing activities of $1,838,804; and (iii) cash provided by financing activities of approximately $267,959. Payments on notes during the period were $1,295,126, including $650,000 to Brooks Investment Company, a related party. Proceeds from the issuances of notes amounted to $700,000, which was completely comprised of amounts received from Brooks Investment Company. At June 30, 2005, we had bonds and notes payable in the amount of $18.3 million, of which $2.8 million was current notes payable and the current portion of long-term debt.

          We believe that funds generated from operations will be adequate for us to pay operating expenses and meet our fixed obligations for the balance of 2005 and into the future. New capital projects have been funded

primarily from cash flow available after meeting our operating and fixed obligations, so there has not been any assurance as to when, or if, funds will be available to complete our planned capital projects. Our capital improvement budget for 2005 is currently estimated at $10 million, of which we believe we can finance up to $4 million through long-term debt and operating leases; the balance of required funds must come from cash flow. We have no commitment from long-term debt or leasing sources and there is no assurance that such funding will be available. If we are unable to complete our 2005 capital expansion program as planned, it could affect our ability to grow sales and profit margins in 2005 and future years.

     We have signed a letter of intent for a $10 million line of credit with a commercial finance company for trade receivable financing. We expect this financing to be in use by the end of the third quarter of 2005.

     We have proceeded with reconstruction of the fire-damaged Junction, Texas facility despite a dispute with our third tier insurance carrier, Lloyds of London, and have been required to invest $1.4 million from cash flow. We have filed a claim seeking $1.8 million from Lloyds (see Legal Proceedings).

     Under the 2003 bond agreement, AERT covenants that it will maintain certain financial ratios. If we fail to comply with the covenants, or to secure a waiver therefrom, the bond trustee would have the option of demanding immediate repayment of the bonds. In such an event, it could be difficult for us to refinance the bonds, which would give the bond trustee the option to take us into bankruptcy.

     We were not in compliance with two of the quarterly covenants as of June 30, 2005. The bond trustee has waived these covenants as of December 31, 2004 through, and including, December 31, 2005. We expect to be in compliance with all bond covenants by December 31, 2005.

Bonds payable and Allstate Notes Payable Debt Covenants		June 30, 2005				Compliance
Long-term debt service coverage ratio for last four quarters of at least 2.00 to 1.00			2.89			Yes
Current ratio of not less than 1.00 to 1.00 (as adjusted1)			0.99			No—Waived
Not more than 10% of accounts payable in excess of 75 days past invoice date			16.3	%		No—Waived
Not more than 20% of accounts receivable in excess of 90 days past invoice date			0.7	%		Yes

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, significant price increases of plastic raw materials, decline in demand for our products, business or industry changes, critical accounting policies, government rules and regulations, environmental concerns, litigation, new products / product transition, product obsolescence, competition, acts of war, terrorism, public health issues, concentration of customer base, loss of a significant customer, 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 3. Quantitative and Qualitative Disclosure About Market Risk.

     We have no material exposures relating to our long-term debt because all of our long-term debt bears interest at fixed rates. 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. We are continuing to recycle and process more plastic materials in-house to partially offset plastic price increases.

Forward-Looking Information

     An investment in our 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-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 our 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 our 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 us, our suppliers’ or their 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 our products are marketed; adverse rulings, judgments, or settlements in litigation or other legal matters. We undertake 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 4. Controls and Procedures.

     Each of our Co-Chief Executive Officers, Joe G. Brooks and Stephen W. Brooks, and our Chief Financial Officer, Edward J. Lysen, have reviewed and evaluated the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that we have in place as of June 30, 2005 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 quarterly report on Form 10-Q. Based upon their review, these executive officers have concluded that, as of June 30, 2005, 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. During the quarter ended June 30, 2005, there have been no changes in our internal controls over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits

     The exhibits listed in the accompanying Index to Exhibits are filed and incorporated by reference as part of this report.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		ADVANCED ENVIRONMENTAL
		RECYCLING TECHNOLOGIES, INC.
		By: /s/ JOE G. BROOKS
		Joe G. Brooks,
		Chairman, Co-Chief Executive Officer and President
		/s/ STEPHEN W. BROOKS
		Stephen W. Brooks,
		Co-Chief Executive Officer
		/s/ EDWARD J. LYSEN
		Edward J. Lysen,
		Senior Vice President and Chief Financial Officer

Date: August 15, 2005

Index to Exhibits

Exhibit
Number		Description
10.46.1		Wood-Plastic Composite Decking Agreement between AERT and Weyerhaeuser Company et al, effective October 12, 2004 *
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, by the Company’s chairman, co-chief executive officer and president
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, by the Company’s co-chief executive officer
31.3		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, by the Company’s chief financial officer
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, by the Company’s chairman, co-chief executive officer and president
32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, by the Company’s co-chief executive officer
32.3		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, by the Company’s chief financial officer

* Confidential treatment has been requested with respect to certain portions of the exhibit. Omitted portions have been filed with the Securities and Exchange Commission