----

| Delaware                                      | 71-0675758            |
|-----------------------------------------------|-----------------------|
| (State of      Incorporation)                 | (I.R.S.      Employer |
|                                          | Identification  No.)  |
|                                          |                  |
| 914 N      Jefferson Street                   |                  |
| Post Office      Box 1237                     |                  |
| Springdale,      Arkansas                     | 72764                 |
| (Address      of principal executive offices) | (Zip      Code)       |

| Title of Each      Class:            | Name of Each Exchange      on Which Registered: |
|--------------------------------------|-------------------------------------------------|
| Class A common stock, $.01 par value | NASDAQ Capital Market                           |

| Large      accelerated filer  £ | Accelerated filer  £ | Non-accelerated filer  £                 | Smaller      reporting company Q |
|-------------------------------------------|--------------------------------|----------------------------------------------------|----------------------------------|
|                                      |                           | (Do not      check if a smaller reporting company) |                             |

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|                                 |                                                                                                                    | Page   |
|--------------------------------------|-------------------------------------------------------------------------------------------------------------------------|--------|
|                                 |                                                                                                                    | No.    |
| Part      I                     |
| Item 1.                         | Business                                                                                                                | 1      |
| Item 2.                         | Properties                                                                                                              | 5      |
| Item 3.                         | Legal Proceedings                                                                                                       | 6      |
| Item 4.                         | Submission of Matters to a Vote of Security      Holders                                                                | 7      |
|                                 |                                                                                                                    |   |
| Part      II                    |
| Item 5.                         | Market for Registrant’s Common Equity, Related Stockholder      Matters and Issuer Purchases of Equity Securities | 8      |
| Item 7.                         | Management’s Discussion and Analysis of      Financial Condition and Results of Operations                        | 10     |
| Item 8.                         | Financial Statements                                                                                                    | 16     |
| Item 9.                         | Changes in and Disagreements With      Accountants on Accounting and Financial Disclosure                               | 16     |
| Item 9A.                        | Controls and Procedures                                                                                                 | 16     |
| Item 9B.                        | Other Information                                                                                                       | 17     |
|                                 |                                                                                                                    |   |
| Part      III                   |
| Item 10.                        | Directors, Executive Officers and Corporate Governance                                                                  | 18     |
| Item 11.                        | Executive Compensation                                                                                                  | 18     |
| Item 12.                        | Security Ownership of Certain Beneficial Owners and      Management and Related Stockholder Matters                     | 18     |
| Item 13.                        | Certain Relationships and Related      Transactions, and Director Independence                                          | 18     |
| Item 14.                        | Principal Accountant Fees and Services                                                                                  | 18     |
|                                 |                                                                                                                    |   |
| Part      IV                    |
| Item 15.                        | Exhibits and Financial Statement Schedules                                                                              | 18     |
| Signatures                      |                                                                                                                    | 19     |
| Index to Financial Statements   | F-1                                                                                                                     |

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- Commercial and residential decking planks and accessories such as  balusters and handrails (MoistureShield ®  and Weyerhaeuser  ChoiceDek ® ),        
- Exterior door components, and        
- Exterior housing trim (MoistureShield ® ) 

- Unlike wood, our products do not require preservatives or treatment with  toxic chemicals nor do they require yearly water sealing or staining.        
- Our products are less subject to thermal contraction or expansion and have  greater dimensional stability than competing all-plastic products.        
- Our products are engineered for superior moisture-resistance and will not  swell or expand like wood.        
- Our products can be designed and extruded through dies to a desired shape  in accordance with customer specifications, which helps the customer to  minimize waste.        
- Our products are less subject to rotting, cracking, warping, and  splintering, insect infestation and water absorption than conventional wood  materials.        
- Our products can be aesthetically enhanced to provide a wood-like or  grained surface appearance.        
- Our products can be combined with coloring agents and/or other additives  to provide various colors and aesthetics. 

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| Sales      Price Range of Class A Common Stock |   | High       |   |    | Low    |   |
|------------------------------------------------|--------|------------|--------|---------|--------|--------|
| Fiscal 2007                                    |   |       |   |    |   |   |
| First Quarter                                  | $      |  2.07 |   |  $ | 1.38   |   |
| Second Quarter                                 |   | 1.82       |   |    | 1.31   |   |
| Third Quarter                                  |   | 1.72       |   |    | 1.27   |   |
| Fourth Quarter                                 |   | 1.34       |   |    | 0.70   |   |
|                                           |   |       |   |    |   |   |
| Fiscal 2008                                    |   |       |   |    |   |   |
| First Quarter                                  |   | 1.39       |   |    | 0.72   |   |
| Second Quarter                                 |   | 0.91       |   |    | 0.50   |   |
| Third Quarter                                  |   | 0.68       |   |    | 0.27   |   |
| Fourth Quarter                                 |   | 0.44       |   |    | 0.03   |   |

----

|                                                        |   | Number of      Securities |   |   |                      |   |   |                      |   |
|-------------------------------------------------------------|--------|---------------------------|--------|--------|---------------------------|--------|--------|---------------------------|--------|
|                                                        |   | to be Issued              |   |   | WeightedAverage           |   |   |                      |   |
|                                                        |   | Upon Exerciseof           |   |   | Exercise Price    of      |   |   | Number of      Securities |   |
|                                                        |   | Outstanding      Options, |   |   | Outstanding      Options, |   |   | Remaining    Available    |   |
| Plan      Category                                          |   | Warrants and    Rights    |   |   | Warrants and    Rights    |   |   | for Future    Issuance    |   |
| Equity compensation plans approved by      security holders |   | 1,274,000                 |   | $      |  1.67                |   |   | -                         |   |
| Equity compensation plans not approved by security holders  |   | -                         |   |   | -                         |   |   | -                         |   |
| Total                                                       |   | 1,274,000                 |   | $      |  1.67                |   |   | -                         |   |

----

|                                                                        |   | 2008              |   |   | 2007             |   |   | % Change |   |
|-----------------------------------------------------------------------------|--------|-------------------|--------|--------|------------------|--------|--------|----------|--------|
| Net sales                                                                   | $      |  87,397,541  |   | $      |  84,217,088 |   |   | 3.8%     |   |
| Cost of goods sold                                                          |   | 78,316,711        |   |   | 76,347,726       |   |   | 2.6%     |   |
|    % of net sales                                                 |   | 89.6%             |   |   | 90.7%            |   |   | -1.1%    |   |
| Estimated liability for claims resolution from class action      settlement |   | 2,869,784         |   |   | -                |   |   | *        |   |
|    % of net sales                                                 |   | 3.3%              |   |   | 0.0%             |   |   | 3.3%     |   |
| Gross margin                                                                |   | 6,211,046         |   |   | 7,869,362        |   |   | -21.1%   |   |
|    % of net sales                                                 |   | 7.1%              |   |   | 9.3%             |   |   | -2.2%    |   |
| Selling and administrative costs                                            |   | 20,529,774        |   |   | 16,634,606       |   |   | 23.4%    |   |
|    % of net sales                                                 |   | 23.5%             |   |   | 19.8%            |   |   | 3.7%     |   |
| (Gain) loss from fixed asset impairment and disposition                     |   | 5,515,599         |   |   | (7,920           | )      |   | *        |   |
| Operating loss                                                              |   | (19,834,327       | )      |   | (8,757,324       | )      |   | 126.5%   |   |
|    % of net sales                                                 |   | -22.7%            |   |   | -10.4%           |   |   | -12.3%   |   |
| Other expense:                                                              |   |              |   |   |             |   |   |     |   |
|    Estimated liability from class action      settlement          |   | (1,962,775        | )      |   | -                |   |   | *        |   |
|    Late registration fees                                         |   | (682,259          | )      |   | -                |   |   | *        |   |
|    Net interest expense                                           |   | (3,780,989        | )      |   | (3,773,526       | )      |   | 0.2%     |   |
| Loss before dividends, income tax and      extraordinary item               |   | (26,260,350       | )      |   | (12,530,850      | )      |   | 109.6%   |   |
|    % of net sales                                                 |   | -30.0%            |   |   | -14.9%           |   |   | -15.1%   |   |
| Dividends on preferred stock                                                |   | (826,484          | )      |   | (1,080,795       | )      |   | -23.5%   |   |
| Loss before income tax and extraordinary item                               |   | (27,086,834       | )      |   | (13,611,645      | )      |   | 99.0%    |   |
|    % of net sales                                                 |   | -31.0%            |   |   | -16.2%           |   |   | -14.8%   |   |
| Net income tax (benefit) provision                                          |   | 8,830,845         |   |   | (3,662,082       | )      |   | *        |   |
|    % of net sales                                                 |   | 10.1%             |   |   | -4.3%            |   |   | 14.4%    |   |
| Loss before extraordinary item                                              |   | (35,917,679       | )      |   | (9,949,563       | )      |   | 261.0%   |   |
|    % of net sales                                                 |   | -41.1%            |   |   | -11.8%           |   |   | -29.3%   |   |
| Extraordinary gain due to fire (net of income tax)                          |   | -                 |   |   | 432,403          |   |   | -100.0%  |   |
| Net loss applicable to common stock                                         | $      |  (35,917,679 | )      | $      |  (9,517,160 | )      |   | 277.4%   |   |
|    % of net sales                                                 |   | -41.1%            |   |   | -11.3%           |   |   | -29.8%   |   |

----

- We recorded impairment charges for fixed assets at our Junction, Texas  facility of $3.9 million. We have suspended operations at the facility and  have no plans to resume operations there. Additionally, we recorded impairment  charges of $1.5 million for certain assets not in use at our Springdale and  Lowell facilities.        
- $0.7 million was expensed for penalties related to the late registration  of shares underlying our Series D preferred stock offering that took place in  the fourth quarter of 2007. The registration statement was declared effective  by the SEC on September 5, 2008, at which time the penalties ceased to accrue.        
- A one-time charge of $1.9 million for plaintiff attorney fees and notice  costs was recorded in connection with the class action lawsuit. An additional  $2.9 million was expensed as part of cost of goods sold (discussed previously)  for the claim resolution process. 

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|                                   | $      Millions |
|----------------------------------------|-----------------|
| Class action claims resolution         | 2.9             |
| Plaintiff attorney and notice costs    | 1.9             |
| Class action defense costs             | 0.8             |
| MoistureShield marketing campaign      | 2.0             |
| Asset impairment                       | 5.4             |
| Preferred stock registration penalties | 0.7             |
| Tax valuation allowance                | 18.5            |
|    Total                     | 32.2            |

- In 2007 we received $9.2 million in proceeds from the issuance of our  Series D preferred stock and $1.5 million in proceeds from the exercise of  stock options and warrants.        
- In 2007 we received a bridge loan of $5 million for working capital and  other purposes.        
- In 2007 we borrowed a net of $2.2 million on our line of credit, and in  2008 we paid a net of $1.7 million on our line of credit, resulting in a net  decrease of $4.0 million in cash provided by our line of credit. 

----

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|                                                                                       |   | December 31, |   |   |              |   |
|--------------------------------------------------------------------------------------------|--------|--------------|--------|--------|-------------------|--------|
|                                                                                       |   | 2008         |   |   | Compliance        |   |
| Bonds Payable and Allstate      Notes Payable Debt Covenants                               |   |         |   |   |              |   |
| Long-term debt service coverage ratio for last four      quarters of at least 2.00 to 1.00 |   | (3.72        | )      |   | No – Waived |   |
| Current ratio of not less than 1.00 to 1.00                                                |   | 0.51         |   |   | No – Waived |   |
| Debt to equity ratio of not more than 3.00 to 1.00                                         |   | (10.07       | )      |   | No – Waived |   |
| Not more than 10% of accounts payable in      excess of 75 days past invoice date          |   | 50.5%        |   |   | No – Waived |   |
| Not more than 20% of accounts receivable in excess of 90      days past invoice date       |   | 12.0%        |   |   | Yes               |   |

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| ADVANCED      ENVIRONMENTAL                     |
|-------------------------------------------------|
| RECYCLING TECHNOLOGIES, INC.                    |
|                                            |
| /s/ JOE G.      BROOKS                          |
| Joe G. Brooks,                                  |
| Chairman, Chief Executive Officer and President |
| (principal executive officer)                   |
|                                            |
| /s/ J. R. BRIAN      HANNA                      |
| J. R. Brian Hanna,                              |
| Chief      Financial Officer                    |
| (principal financial officer)                   |
|                                            |
| /s/ ERIC E.      BARNES                         |
| Eric E. Barnes,                                 |
| Chief      Accounting Officer                   |
| (principal accountingofficer)                   |

| Signature                  | Title                           | Date           |
|----------------------------|--------------------------------------|----------------|
| /s/      JOE G. BROOKS     | Chairman and Chief Executive Officer | March 30, 2009 |
| Joe G. Brooks              |                                 |           |
|                       |                                 |           |
| /s/      STEPHEN W. BROOKS | Vice Chairman, Chief Operating       | March 30, 2009 |
| Stephen W. Brooks          | Officer and Secretary                |           |
|                       |                                 |           |
| /s/      JERRY B. BURKETT  | Director                             | March 30, 2009 |
| Jerry B. Burkett           |                                 |           |
|                       |                                 |           |
| /s/      EDWARD P. CARDA   | Director                             | March 30, 2009 |
| Edward P. Carda            |                                 |           |
|                       |                                 |           |
|                       | Director                             | March 30, 2009 |
| Tim W. Kizer               |                                 |           |
|                       |                                 |           |
| /s/      SAL MIWA          | Director                             | March 30, 2009 |
| Sal Miwa                   |                                 |           |
|                       |                                 |           |
|                            | Director                             | March 30, 2009 |
| Jim Robason                |                                 |           |

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| /s/      MICHAEL M. TULL | Director | March 30, 2009 |
|--------------------------|----------|----------------|
| Michael M. Tull          |     |           |
|                     |     |           |
|                     | Director | March 30, 2009 |
| Peter S. Lau             |     |           |

----

| ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES,      INC.  |
|----------------------------------------------------------------|
|                                                           |   |
| INDEX TO FINANCIAL STATEMENTS                             |
|                                                           |   |
|                                                           | Page |
| Financial Statements:                                          |   |
| Reports of Independent Registered Public      Accounting Firm  | F-2 |
| Balance Sheets                                                 | F-3 – F-4 |
| Statements of Operations                                       | F-5 |
| Statements of Stockholders’      Equity (Deficit)        | F-6 |
| Statements of Cash Flows                                       | F-7 |
| Notes to Financial      Statements                             | F-8 – F-25 |

----

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|                                                                                                                                                         |   | December      31, |   |   | December      31, |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
|                                                                                                                                                         |   | 2008              |   |   | 2007              |   |
| Assets                                                                                                                                                  |   |              |   |   |              |   |
| Current      assets:                                                                                                                                    |   |              |   |   |              |   |
|    Cash and cash equivalents                                                                                                                  | $      |  1,238,488   |   | $      |  1,716,481   |   |
|    Restricted cash                                                                                                                            |   | 7,630,625         |   |   | 11,461,950        |   |
|    Restricted certificate of deposit                                                                                                          |   | -                 |   |   | 871,468           |   |
|    Trade accounts receivable, net of allowance of      $615,882 at December 31, 2008and $0 at December 31,      2007                     |   | 1,574,058         |   |   | 1,866,621         |   |
|    Inventories                                                                                                                                |   | 10,551,344        |   |   | 23,622,586        |   |
|    Prepaid expenses                                                                                                                           |   | 933,268           |   |   | 892,462           |   |
|             Total      current assets                                                       |   | 21,927,783        |   |   | 40,431,568        |   |
|                                                                                                                                                         |   |              |   |   |              |   |
| Land,      buildings and equipment:                                                                                                                     |   |              |   |   |              |   |
|    Land                                                                                                                                       |   | 1,988,638         |   |   | 1,988,638         |   |
|    Buildings and leasehold improvements                                                                                                       |   | 9,213,134         |   |   | 10,008,257        |   |
|    Machinery and equipment                                                                                                                    |   | 46,680,586        |   |   | 51,690,169        |   |
|    Transportation equipment                                                                                                                   |   | 1,124,681         |   |   | 1,148,046         |   |
|    Office equipment                                                                                                                           |   | 2,800,938         |   |   | 1,169,213         |   |
|    Construction in progress                                                                                                                   |   | 5,810,491         |   |   | 4,218,303         |   |
|             Total      land, buildings and equipment                                        |   | 67,618,468        |   |   | 70,222,626        |   |
| Less      accumulated depreciation                                                                                                                      |   | 33,004,057        |   |   | 31,380,005        |   |
| Net land,      buildings and equipment                                                                                                                  |   | 34,614,411        |   |   | 38,842,621        |   |
|                                                                                                                                                         |   |              |   |   |              |   |
| Other      assets:                                                                                                                                      |   |              |   |   |              |   |
|    Deferred tax asset                                                                                                                         |   | -                 |   |   | 8,851,412         |   |
|    Debt issuance costs, net of accumulated      amortization of $1,327,896at December 31, 2008 and      $1,052,949 at December 31, 2007  |   | 3,150,757         |   |   | 3,042,645         |   |
|    Debt service reserve fund                                                                                                                  |   | 2,100,599         |   |   | 3,391,500         |   |
| Other      assets, net of accumulated amortization of $449,883 atDecember 31, 2008 and $421,310 at December 31, 2007                                    |   | 371,247           |   |   | 361,557           |   |
| Total      other assets                                                                                                                                 |   | 5,622,603         |   |   | 15,647,114        |   |
| Total      assets                                                                                                                                       | $      |  62,164,797  |   | $      |  94,921,303  |   |

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|                                                                                                                                                                                          |   | December      31, |   |   | December      31, |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
|                                                                                                                                                                                          |   | 2008              |   |   | 2007              |   |
| Liabilities and      Stockholders' Equity (Deficit)                                                                                                                                      |   |              |   |   |              |   |
| Current      liabilities:                                                                                                                                                                |   |              |   |   |              |   |
|    Accounts payable – trade                                                                                                                                              | $      |  10,699,771  |   | $      |  9,274,134   |   |
|    Accounts payable – related parties                                                                                                                                    |   | 487,581           |   |   | 350,882           |   |
|    Current maturities of long-term debt                                                                                                                                        |   | 9,290,277         |   |   | 9,582,145         |   |
|    Current maturities of capital lease obligations                                                                                                                             |   | 214,579           |   |   | 224,840           |   |
|    Accruals related to expected settlement of class action      lawsuit                                                                                                        |   | 4,649,784         |   |   | -                 |   |
|    Other accrued liabilities                                                                                                                                                   |   | 6,305,039         |   |   | 6,084,345         |   |
|    Working capital line of credit                                                                                                                                              |   | 10,579,475        |   |   | 12,303,378        |   |
|    Notes payable                                                                                                                                                               |   | 366,581           |   |   | 385,229           |   |
|                   Total current      liabilities                                                                                                      |   | 42,593,087        |   |   | 38,204,953        |   |
|                                                                                                                                                                                          |   |              |   |   |              |   |
| Long-term      debt, less current maturities                                                                                                                                             |   | 23,244,236        |   |   | 25,707,959        |   |
| Capital      lease obligations, less current maturities                                                                                                                                  |   | 581,726           |   |   | 796,305           |   |
|                                                                                                                                                                                          |   | 23,825,962        |   |   | 26,504,264        |   |
|                                                                                                                                                                                          |   |              |   |   |              |   |
| Accrued      dividends on convertible preferred stock                                                                                                                                    |   | 143,280           |   |   | 136,957           |   |
|                                                                                                                                                                                          |   |              |   |   |              |   |
| Commitments and contingencies (see Note 13)                                                                                                                                              |   |              |   |   |              |   |
|                                                                                                                                                                                          |   |              |   |   |              |   |
| Stockholders' equity (deficit):                                                                                                                                                          |   |              |   |   |              |   |
|    Preferred stock, $.01 par value; 5,000,000 shares authorized,      788,182 and 757,576shares issued and outstanding at      December 31, 2008 and 2007, respectively        |   | 7,882             |   |   | 7,576             |   |
|    Class A common stock, $.01 par value; 100,000,000 shares      authorized; 47,423,680 and46,314,250 issued and      outstanding at December 31, 2008 and 2007, respectively  |   | 474,237           |   |   | 463,143           |   |
|    Class B convertible common stock, $.01 par value; 7,500,000 shares      authorized;1,465,530 shares issued and outstanding at      December 31, 2008 and 2007               |   | 14,655            |   |   | 14,655            |   |
|    Warrants outstanding; 3,787,880 at December 31, 2008 and      2007                                                                                                          |   | 1,533,578         |   |   | 1,533,578         |   |
|    Additional paid-in capital                                                                                                                                                  |   | 52,306,080        |   |   | 50,872,462        |   |
|    Accumulated deficit                                                                                                                                                         |   | (58,733,964       | )      |   | (22,816,285       | )      |
|                   Total stockholders' equity      (deficit)                                                                                           |   | (4,397,532        | )      |   | 30,075,129        |   |
| Total      liabilities and stockholders' equity (deficit)                                                                                                                                | $      |  62,164,797  |   | $      |  94,921,303  |   |

----

|                                                                                                         |   | Year Ended      December 31, |   |
|--------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                         |   | 2008                         |   |   | 2007 |   |
| Net sales                                                                                                    | $      |  87,397,541             |   | $ |  84,217,088 |   |
| Cost of goods sold                                                                                           |   | 78,316,711                   |   |   | 76,347,726 |   |
| Estimated liability for claims      resolution from class action settlement                                  |   | 2,869,784                    |   |   | - |   |
| Gross margin                                                                                                 |   | 6,211,046                    |   |   | 7,869,362 |   |
| Selling and administrative      costs                                                                        |   | 20,529,774                   |   |   | 16,634,606 |   |
| (Gain) loss from fixed asset impairment and      disposition                                                 |   | 5,515,599                    |   |   | (7,920 | ) |
| Operating loss                                                                                               |   | (19,834,327                  | )      |   | (8,757,324 | ) |
| Other income (expense):                                                                                      |   |                         |   |   |   |   |
|    Estimated      liability from expected class action settlement                                  |   | (1,962,775                   | )      |   | - |   |
|    Late registration fees                                                                          |   | (682,259                     | )      |   | - |   |
|    Interest      income                                                                            |   | 43,913                       |   |   | 183,409 |   |
|    Interest expense                                                                                |   | (3,824,902                   | )      |   | (3,956,935 | ) |
|                   Net other expense                                       |   | (6,426,023                   | )      |   | (3,773,526 | ) |
| Loss before dividends, income tax and      extraordinary item                                                |   | (26,260,350                  | )      |   | (12,530,850 | ) |
| Dividends on preferred      stock                                                                            |   | (826,484                     | )      |   | (1,080,795 | ) |
| Loss before income tax and extraordinary      item                                                           |   | (27,086,834                  | )      |   | (13,611,645 | ) |
| Income tax (benefit)      provision                                                                          |   | 8,830,845                    |   |   | (3,662,082 | ) |
| Loss before extraordinary item                                                                               |   | (35,917,679                  | )      |   | (9,949,563 | ) |
| Extraordinary gain on      involuntary conversion of non-monetaryassets due to      fire (net of income tax) |   | -                            |   |   | 432,403 |   |
| Net loss applicable to common stock                                                                          | $      |  (35,917,679            | )      | $ |  (9,517,160 | ) |
|                                                                                                         |   |                         |   |   |   |   |
| Loss per share of common stock before      extraordinary item (basic and diluted)                            | $      |  (0.75                  | )      | $ |  (0.21 | ) |
| Extraordinary gain per share      of common stock (basic and diluted)                                        |   | --                           |   | $ |  0.01 |   |
| Loss per share of common stock after      extraordinary item (basic and diluted)                             | $      |  (0.75                  | )      | $ |  (0.20 | ) |
| Weighted average number of      common shares outstanding (basic and diluted)                                |   | 47,937,520                   |   |   | 47,030,850 |   |

----

|                                                                                               |   |                 |    |   |                      |   |   |                      |   |   |                      |   |   |    |    |   |        |   |      |   |   |   |   |   |   | Additional |       |   |    |   |       |   |   |
|----------------------------------------------------------------------------------------------------|--------|----------------------|---------|--------|---------------------------|--------|--------|---------------------------|--------|--------|---------------------------|--------|--------|---------|---------|--------|-------------|--------|-----------|--------|--------|--------|--------|--------|--------|------------|------------|--------|---------|--------|------------|--------|--------|
|                                                                                               |   | Preferred      Stock |    |   | Class A Common      Stock |   |   | Class B Common      Stock |   |   | Warrants      Outstanding |   |   | Paid-in |    |   | Accumulated |   |      |   |   |
|                                                                                               |   | Shares               |    |   | Amount                    |   |   | Shares                    |   |   | Amount                    |   |   | Shares  |    |   | Amount      |   |      | Number |   |   | Value  |   |   | Capital    |       |   | Deficit |   |       | Total  |   |
|                                                                                               |   |                 |    |   |                      |   |   |                      |   |   |                      |   |   |    |    |   |        |   |      |   |   |   |   |   |   |       |       |   |    |   |       |   |   |
| Balance - December      31, 2006                                                                   |   |                 | -       |   |                      | $      | -      |                      |   |   | 43,041,164                |   |   | $       | 430,412 |   |        |   | 1,465,530 |   |   | $      | 14,655 |   |   |       | 4,606,132  |   |    | $      | 2,519,389  |   |   | $ | 37,891,274 |   |   | $ | (13,299,125 | ) |   | $ | 27,556,605 |   |
|                                                                                               |   |                 |    |   |                      |   |   |                      |   |   |                      |   |   |    |    |   |        |   |      |   |   |   |   |   |   |       |       |   |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of Series D      preferred stock                                                          |   |                 | 757,576 |   |                      |   | 7,576  |                      |   |   | -                         |   |   |    | -       |   |        |   | -         |   |   |   | -      |   |   |       | -          |   |    |   | -          |   |   |   | 9,186,044 |   |   |   | - |   |   |   | 9,193,620 |   |
| Issuance of Series W      stock warrants                                                           |   |                 | -       |   |                      |   | -      |                      |   |   | -                         |   |   |    | -       |   |        |   | -         |   |   |   | -      |   |   |       | 3,787,880  |   |    |   | 1,533,578  |   |   |   | (1,533,578 | ) |   |   | - |   |   |   | - |   |
| Issuances of      restricted stock                                                                 |   |                 | -       |   |                      |   | -      |                      |   |   | 160,641                   |   |   |    | 1,607   |   |        |   | -         |   |   |   | -      |   |   |       | -          |   |    |   | -          |   |   |   | (1,607 | ) |   |   | - |   |   |   | - |   |
| Exercise of stock      options                                                                     |   |                 | -       |   |                      |   | -      |                      |   |   | 1,333,130                 |   |   |    | 13,331  |   |        |   | -         |   |   |   | -      |   |   |       | -          |   |    |   | -          |   |   |   | 662,038 |   |   |   | - |   |   |   | 675,369 |   |
| Exercise of Series H      warrants                                                                 |   |                 | -       |   |                      |   | -      |                      |   |   | 1,771,792                 |   |   |    | 17,718  |   |        |   | -         |   |   |   | -      |   |   |       | (1,771,792 | )      |    |   | (1,142,060 | )      |   |   | 1,958,448 |   |   |   | - |   |   |   | 834,106 |   |
| Exercise of Series X      warrants                                                                 |   |                 | -       |   |                      |   | -      |                      |   |   | 7,523                     |   |   |    | 75      |   |        |   | -         |   |   |   | -      |   |   |       | (508,989   | )      |    |   | (270,251   | )      |   |   | 270,176 |   |   |   | - |   |   |   | - |   |
| Expiration of Series      X warrants                                                               |   |                 | -       |   |                      |   | -      |                      |   |   | -                         |   |   |    | -       |   |        |   | -         |   |   |   | -      |   |   |       | (1,304,082 | )      |    |   | (692,412   | )      |   |   | 692,412 |   |   |   | - |   |   |   | - |   |
| Expiration of Series      Y warrants                                                               |   |                 | -       |   |                      |   | -      |                      |   |   | -                         |   |   |    | -       |   |        |   | -         |   |   |   | -      |   |   |       | (1,021,269 | )      |    |   | (414,666   | )      |   |   | 414,666 |   |   |   | - |   |   |   | - |   |
| Deferred      equity compensation for restricted stock                                             |   |                 | -       |   |                      |   | -      |                      |   |   | -                         |   |   |    | -       |   |        |   | -         |   |   |   | -      |   |   |       | -          |   |    |   | -          |   |   |   | 388,751 |   |   |   | - |   |   |   | 388,751 |   |
| Series D preferred      stock dividends frombeneficial conversion      feature                     |   |                 | -       |   |                      |   | -      |                      |   |   | -                         |   |   |    | -       |   |        |   | -         |   |   |   | -      |   |   |       | -          |   |    |   | -          |   |   |   | 943,838 |   |   |   | - |   |   |   | 943,838 |   |
| Net loss                                                                                           |   |                 | -       |   |                      |   | -      |                      |   |   | -                         |   |   |    | -       |   |        |   | -         |   |   |   | -      |   |   |       | -          |   |    |   | -          |   |   |   | - |   |   |   | (9,517,160 | ) |   |   | (9,517,160 | ) |
| Balance - December      31, 2007                                                                   |   |                 | 757,576 |   |                      |   | 7,576  |                      |   |   | 46,314,250                |   |   |    | 463,143 |   |        |   | 1,465,530 |   |   |   | 14,655 |   |   |       | 3,787,880  |   |    |   | 1,533,578  |   |   |   | 50,872,462 |   |   |   | (22,816,285 | ) |   |   | 30,075,129 |   |
|                                                                                               |   |                 |    |   |                      |   |   |                      |   |   |                      |   |   |    |    |   |        |   |      |   |   |   |   |   |   |       |       |   |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuances of Series      D preferred stock in paymentof dividends on Series D      preferred stock |   |                 | 30,606  |   |                      |   | 306    |                      |   |   | -                         |   |   |    | -       |   |        |   | -         |   |   |   | -      |   |   |       | -          |   |    |   | -          |   |   |   | 403,694 |   |   |   | - |   |   |   | 404,000 |   |
|                                                                                               |   |                 |    |   |                      |   |   |                      |   |   |                      |   |   |    |    |   |        |   |      |   |   |   |   |   |   |       |       |   |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuances of      restricted stock                                                                 |   |                 | -       |   |                      |   | -      |                      |   |   | 50,414                    |   |   |    | 504     |   |        |   | -         |   |   |   | -      |   |   |       | -          |   |    |   | -          |   |   |   | (504 | ) |   |   | - |   |   |   | - |   |
|                                                                                               |   |                 |    |   |                      |   |   |                      |   |   |                      |   |   |    |    |   |        |   |      |   |   |   |   |   |   |       |       |   |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuances of Class A      common stock in paymentof dividends on Series D      preferred stock     |   |                 | -       |   |                      |   | -      |                      |   |   | 1,059,016                 |   |   |    | 10,590  |   |        |   | -         |   |   |   | -      |   |   |       | -          |   |    |   | -          |   |   |   | 405,570 |   |   |   | - |   |   |   | 416,160 |   |
|                                                                                               |   |                 |    |   |                      |   |   |                      |   |   |                      |   |   |    |    |   |        |   |      |   |   |   |   |   |   |       |       |   |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred equity      compensation for restricted stock                                             |   |                 | -       |   |                      |   | -      |                      |   |   | -                         |   |   |    | -       |   |        |   | -         |   |   |   | -      |   |   |       | -          |   |    |   | -          |   |   |   | 624,858 |   |   |   | - |   |   |   | 624,858 |   |
|                                                                                               |   |                 |    |   |                      |   |   |                      |   |   |                      |   |   |    |    |   |        |   |      |   |   |   |   |   |   |       |       |   |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                           |   |                 | -       |   |                      |   | -      |                      |   |   | -                         |   |   |    | -       |   |        |   | -         |   |   |   | -      |   |   |       | -          |   |    |   | -          |   |   |   | - |   |   |   | (35,917,679 | ) |   |   | (35,917,679 | ) |
|                                                                                               |   |                 |    |   |                      |   |   |                      |   |   |                      |   |   |    |    |   |        |   |      |   |   |   |   |   |   |       |       |   |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance - December 31, 2008                                                                        |   |                 | 788,182 |   |                      | $      | 7,882  |                      |   |   | 47,423,680                |   |   | $       | 474,237 |   |        |   | 1,465,530 |   |   | $      | 14,655 |   |   |       | 3,787,880  |   |    | $      | 1,533,578  |   |   | $ | 52,306,080 |   |   | $ | (58,733,964 | ) |   | $ | (4,397,532 | ) |

----

|                                                                                                |   | Year Ended      December 31, |   |
|-----------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                |   | 2008                         |   |   | 2007 |   |
| Cash flows from operating activities:                                                               |   |                         |   |   |   |   |
| Net loss applicable to common      stock                                                            | $      |  (35,917,679            | )      | $ |  (9,517,160 | ) |
| Adjustments to reconcile net loss to net cash      provided by (used in)                            |   |                         |   |   |   |   |
|    operating      activities:                                                             |   |                         |   |   |   |   |
|    Depreciation and      amortization                                                     |   | 5,981,311                    |   |   | 5,331,206 |   |
|    Dividends on      preferred stock                                                      |   | 826,484                      |   |   | 1,080,795 |   |
|    Deferred tax (benefit)      provision                                                  |   | 8,851,412                    |   |   | (3,662,082 | ) |
|    (Gain) loss from      fixed asset impairment and disposition                           |   | 5,515,599                    |   |   | (7,920 | ) |
|    Extraordinary gain on involuntary      conversion of non-monetarty assets due to fire  |   | -                            |   |   | (432,403 | ) |
|    Increase      (decrease) in accounts receivable allowance                              |   | 615,882                      |   |   | (374,894 | ) |
|    (Increase)      decrease in other assets                                               |   | 833,205                      |   |   | (1,432,889 | ) |
|    (Increase) decrease in cash      restricted for letter of credit and interest costs    |   | 997,365                      |   |   | (450,067 | ) |
|    Changes in      current assets and current liabilities                                 |   | 21,346,172                   |   |   | (3,630,170 | ) |
| Net cash provided by (used in) operating      activities                                            |   | 9,049,751                    |   |   | (13,095,584 | ) |
|                                                                                                |   |                         |   |   |   |   |
| Cash flows from investing activities:                                                               |   |                         |   |   |   |   |
|    Purchases of      land, buildings and equipment                                        |   | (6,442,305                   | )      |   | (4,526,559 | ) |
|    Insurance proceeds from      involuntary conversion of non-monetary assets due to fire |   | -                            |   |   | 700,000 |   |
|    Proceeds from      disposition of equipment                                            |   | 121,802                      |   |   | - |   |
| Net cash used in investing activities                                                               |   | (6,320,503                   | )      |   | (3,826,559 | ) |
|                                                                                                |   |                         |   |   |   |   |
| Cash flows from financing activities:                                                               |   |                         |   |   |   |   |
|    Net borrowings      (payments) on line of credit                                       |   | (1,723,903                   | )      |   | 2,243,378 |   |
|    Proceeds from issuance of notes -      related party                                   |   | -                            |   |   | 750,000 |   |
|    Proceeds from      issuance of notes - other                                           |   | -                            |   |   | 18,515,000 |   |
|    Payments on notes - related      party                                                 |   | -                            |   |   | (1,750,000 | ) |
|    Payments on notes      - other                                                         |   | (4,980,480                   | )      |   | (3,150,627 | ) |
|    Payments on capital lease      obligations                                             |   | (224,840                     | )      |   | (121,390 | ) |
|    (Increase)      decrease in cash restricted for payment of debt and construction       |   | 4,124,861                    |   |   | (10,224,692 | ) |
|    Debt acquisition costs                                                                 |   | (402,879                     | )      |   | (490,672 | ) |
|    Proceeds from      preferred stock placement, net                                      |   | -                            |   |   | 9,193,620 |   |
|    Proceeds from exercise of stock      options and warrants, net                         |   | -                            |   |   | 1,509,475 |   |
| Net cash provided by (used in)      financing activities                                            |   | (3,207,241                   | )      |   | 16,474,092 |   |
|                                                                                                |   |                         |   |   |   |   |
| Decrease in cash and cash      equivalents                                                          |   | (477,993                     | )      |   | (448,051 | ) |
| Cash and cash equivalents, beginning of      period                                                 |   | 1,716,481                    |   |   | 2,164,532 |   |
| Cash and cash equivalents, end      of period                                                       | $      |  1,238,488              |   | $ |  1,716,481 |   |

----

| 1)     | Implementing additional cost reductions:      A substantial amount of cost has already been eliminated from the      Company’s operations and additional cost reductions are being identified      and implemented.                                                                                                                                                                                                          |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2)     | Pursuing additional funding to provide liquidity while      restructuring the business: In addition to      retaining consultants to seek potential sources for asset-based loans, the      Company is pursuing a USDA loan guarantee and investigating grants for      companies that produce environmentally responsible green products, as well      as seeking less traditional debt and equity financing      opportunities.  |

----

| 3)  | Restructuring existing debt to improve short-term      liquidity: The Company’s line of credit has      been extended by Liberty Bank through June 15, 2009, and the Company plans      to seek extensions for other loans maturing in 2009. Additionally, the      Company has been granted certain loan concessions by Allstate, the holder      of the Company’s bonds, which has maintained its support by continuing to      fund the construction of the Company’s Watts plastic recycling      facility.  |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                         |   | Year Ended December 31, |   |
|------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                         |   | 2008                    |   |   | 2007 |   |
| Receivables                                                                  | $      |  (323,319          | )      | $  | 3,058,545 |   |
| Inventories                                                                  |   | 13,071,242              |   |   | (9,106,741 | ) |
| Prepaid expenses and other                                                   |   | 2,165,435               |   |   | 1,654,972 |   |
| Accounts payable — trade and related parties                           |   | 1,562,336               |   |   | (2,155,919 | ) |
| Accrued liabilities                                                          |   | 4,870,478               |   |   | 2,918,973 |   |
|                                                                         | $      |  21,346,172        |   | $  | (3,630,170 | ) |
| Cash paid for interest                                                       | $      |  4,985,302         |   | $ | 3,380,690 |   |
| Cash paid for      income taxes                                              | $      |  -                 |   | $ | - |   |
|                                                                         |   |                    |   |   |   |   |
| Supplemental Disclosures of      Non-cash Investing and Financing Activities |   |                    |   |   |   |   |
|                                                                         |   |                    |   |   |   |   |
|                                                                         |   | Year Ended December 31, |   |
|                                                                         |   | 2008                    |   |   | 2007 |   |
| Notes payable for financing of      insurance policies                       | $      |  1,447,543         |   | $ |  1,528,777 |   |
| Notes payable for equipment                                                  |   |   —          |   |   | 1,437,664 |   |
| Dividends on preferred stock      paid in stock                              |   | 820,161                 |   |   | — |   |

----

|               |   |          2008 |   |   |          2007 |   |
|--------------------|--------|----------------------------------------|--------|--------|----------------------------------------|--------|
| Parts and supplies | $      |  1,793,748                        |   | $      |  2,423,766                        |   |
| Raw materials      |   | 3,607,383                              |   |   | 7,182,551                              |   |
| Work in process    |   | 2,092,915                              |   |   | 3,906,810                              |   |
| Finished goods     |   | 3,057,298                              |   |   | 10,109,459                             |   |
|               | $      |  10,551,344                       |   | $      |  23,622,586                       |   |

----

|                |   | 2008            |   |   | 2007            |   |
|---------------------|--------|-----------------|--------|--------|-----------------|--------|
|                |   | Gross Carrying  |   |   | Accumulated     |   |   | Gross Carrying |   |   | Accumulated |   |
|                |   | Amount          |   |   | Amortization    |   |   | Amount |   |   | Amortization |   |
| Debt issuance costs | $      |  4,478,653 |   | $      |  1,327,896 |   | $ |  4,095,594 |   | $ |  1,052,949 |   |
| Patents             |   | 485,748         |   |   | 449,883         |   |   | 485,748 |   |   | 421,310 |   |
|                | $      |  4,964,401 |   | $      |  1,777,779 |   | $ |  4,581,342 |   | $ |  1,474,259 |   |

|   |   | Estimated     |   |
|--------|--------|---------------|--------|
|   |   | Amortization  |   |
| 2009   | $      |  238,624 |   |
| 2010   |   | 217,343       |   |
| 2011   |   | 210,051       |   |
| 2012   |   | 210,051       |   |
| 2013   |   | 210,051       |   |

----

|                        |   |       |   |   |          |   |   |       |   |   |       |   |   |          |   |
|-----------------------------|--------|------------|--------|--------|---------------|--------|--------|------------|--------|--------|------------|--------|--------|---------------|--------|
|                        |   | Balance at |   |   | Charged to    |   |   | Charged to |   |   |       |   |   | Balance at    |   |
|                        |   | Beginning  |   |   | Costs and     |   |   | Other      |   |   |       |   |   | End of        |   |
|                        |   | of Period  |   |   | Expenses      |   |   | Accounts   |   |   | Deductions |   |   | Period        |   |
| Allowance for sales returns |   |       |   |   |          |   |   |       |   |   |       |   |   |          |   |
| 2008                        | $      |  -    |   | $      |  615,882 |   | $      |  -    |   | $      |  -    |   | $      |  615,882 |   |
| 2007                        |   | -          |   |   | -             |   |   | -          |   |   | -          |   |   | -             |   |

|                |   |      2008              |   |   |      2007                   |   |
|---------------------|--------|---------------------------------------|--------|--------|--------------------------------------------|--------|
| Sales (in millions) | $      |  69.0                            |   | $      |  64.4                                 |   |
| % of total sales    |   |          78% |   |   |               75% |   |
|                |   |                                  |   |   |                                       |   |

----

----

----

- Sales commissions of $105,985 and $63,501 at December 31, 2008 and 2007,  respectively, owed to Tull Sales        
- Loan guarantee fees of $218,643 and $155,268 at December 31, 2008 and  2007, respectively, owed to Marjorie S. Brooks        
- Lease, contract employee and other charges of $78,996 and $95,849 at  December 31, 2008 and 2007, respectively, owed to Razorback Farms 

|                                                                                                                                                                                         |   | 2008          |   |   | 2007          |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|--------|--------|---------------|--------|
| Notes      payable consisted of the following at December 31:                                                                                                                                |   |          |   |   |          |   |
| Various notes payable to finance insurance      policies bearing interest at rates between 8.0% and 8.5% in 2008; secured      by insurance policies; principal and interest payable monthly | $      |  366,581 |   | $      |  385,229 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 2008                   |   |   | 2007             |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|--------|------------------|--------|
| Long-term      debt, less current maturities consisted of the following at December      31:                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                   |   |   |             |   |
| 8% bonds payable (2007      bonds) to Bank of Oklahoma; principal payable annually beginning December      15, 2009; interest payable semi-annually; subject to mandatory sinking      fund redemption; secured by real estate and improvements, fixed assets,      patents and trademarks, inventory, and pledged revenues; maturing on      December 15, 2023(a)                                                                                                                                                  | $      |  13,515,000  |   | $      | 13,515,000       |   |
| 7% bonds payable (2003      bonds) to Regions Bank; principal payable annually; interest payable semi-      annually; subject to mandatory sinking fund redemption; secured by real      estate and improvements, fixed assets, patents and trademarks, inventory,      pledged revenues, and a personal guarantee on $4 million of the      outstanding balance by Marjorie S. Brooks, the major stockholder;      originally maturing on October 1, 2017, refinanced by the 2008 bonds in      February 2008(a)   |   | -                      |   |   | 11,200,000       |   |
| 8% bonds payable (2008      bonds) to Bank of Oklahoma; principal payable annually beginning December      15, 2009; interest payable semi-annually; subject to mandatory sinking      fund redemption; secured by real estate and improvements, fixed assets,      patents and trademarks, inventory, and pledged revenues; maturing on      December 15, 2023(a)                                                                                                                                                  |   | 10,610,000             |   |   |                  |   |
| 10% note payable to      Allstate, secured by subordinated interest in the collateral securing the      bonds payable and a personal guarantee by Marjorie S. Brooks, our major      stockholder;  principal and interest due July 1, 2009(b)                                                                                                                                                                                                                                                                  |   | 5,758,699              |   |   | 5,000,000        |   |
| 19.75% note payable to      Allstate, secured by subordinated interest in the collateral securing the      bonds payable; interest payable semiannually; principal due on July 1,      2009                                                                                                                                                                                                                                                                                                                         |   | 800,000                |   |   | 2,600,000        |   |
| Variable rate note      payable bearing interest at the Wall Street Journal prime rate plus 1%      (4.25% at December 31, 2008); secured by certain real estate and equipment      purchased with proceeds from the note; principal and interest payable      monthly; maturing on September 28, 2009                                                                                                                                                                                                              |   | 1,817,251              |   |   | 1,900,799        |   |
| Variable rate note      payable bearing interest at LIBOR plus 3.1% (7.6% at December 31, 2007);       secured by equipment purchased with proceeds from the note;      principal and interest payable monthly; originally maturing on May 1,      2009, repaid in February 2008                                                                                                                                                                                                                               |   | -                      |   |   | 997,416          |   |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | 33,563                 |   |   | 76,889           |   |
| Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | 32,534,513             |   |   | 35,290,104       |   |
| Less current      maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | (9,290,277)            |   |   | (9,582,145)      |   |
| Long-term debt, less      current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | $      |  23,244,236       |   | $      |  25,707,959 |   |

----

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a)    | Our 2007 and 2008 bonds have the same covenants. We      were not in compliance with the debt service coverage, current ratio,      accounts payable, and debt to equity covenants as of December 31, 2008.      The bond trustee waived the debt service coverage covenant through January      1, 2009, and waived the current ratio, accounts payable and debt to equity      covenants through January 1, 2010. Our Allstate notes payable have      cross-default provisions that caused them to be in technical default at      December 31, 2008 due to our non-compliance with the loan covenants      discussed above. The covenants were waived by Allstate Investments, which      is the investor in the bonds and the holder of the Allstate loans.  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (b)    | The face amount of the note is $5,668,056 and a 5%      premium on the note is due at maturity. The effective interest rate on the      note is 16.2%. At December 31, 2008, there was $192,759 of unamortized      discount on the note.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

| Year       |   | Amount           |   |
|------------|--------|------------------|--------|
| 2009       | $      |  9,290,277  |   |
| 2010       |   | 967,863          |   |
| 2011       |   | 1,036,373        |   |
| 2012       |   | 1,115,000        |   |
| 2013       |   | 1,205,000        |   |
| Thereafter |   | 18,920,000       |   |
|       | $      |  32,534,513 |   |

----

----

----

----

|                           |   | 2008      |   |   | 2007       |   |
|--------------------------------|--------|-----------|--------|--------|------------|--------|
|                           |   |      |   |   |       |   |   | Aggregate |   |   |   |   |   |   |   |
|                           |   |      |   |   | Weighted   |   |   | Intrinsic |   |   |   |   |   | Weighted |   |
|                           |   |      |   |   | Average    |   |   | Value at |   |   |   |   |   | Average |   |
|                           |   |      |   |   | Exercise   |   |   | December |   |   |   |   |   | Exercise |   |
|                           |   | Shares    |   |   | Price      |   |   | 31, 2008 |   |   | Shares |   |   | Price |   |
| Outstanding, beginning of year |   | 1,521,500 |   | $      |  1.59 |   |   |   |   |   | 2,872,130 |   | $ |  1.09 |   |
| Granted                        |   | —   |   |   | —    |   |   |   |   |   | — |   |   | — |   |
| Exercised                      |   | —   |   |   | —    |   |   |   |   |   | (1,333,130 | ) |   | 0.49 |   |
| Forfeited                      |   | (247,500  | )      |   | 1.17       |   |   |   |   |   | (17,500 | ) |   | 1.06 |   |
| Outstanding, end of year       |   | 1,274,000 |   | $      |  1.67 |   | $ |  — |   |   | 1,521,500 |   | $ |  1.59 |   |
| Exercisable, end of year       |   | 1,274,000 |   | $      |  1.67 |   | $ |  — |   |   | 1,521,500 |   | $ |  1.59 |   |

|                     |   | Options Outstanding and      Exercisable |   |
|--------------------------|--------|------------------------------------------|--------|
|                     |   | Numberat12/31/08                         |   |   | Wtd. Avg.RemainingContract Life |   |   | Wtd. Avg.ExercisePrice |   |
| Range of Exercise Prices |
| $0.86 - $0.94            |   | 224,000                                  |   |   | 1.42 years |   | $ |  0.89 |   |
| $1.12 - $1.75            |   | 550,000                                  |   |   | 3.81 years |   |   | 1.29 |   |
| $2.25 - $2.75            |   | 500,000                                  |   |   | 2.30 years |   |   | 2.45 |   |
|                     |   | 1,274,000                                |   |   | 2.80 years |   | $ |  1.67 |   |

----

----

|                                 | Shares |      | WeightedAverageGrant DateFair Value |   |
|--------------------------------------|--------|-----------|-------------------------------------|--------|
| Non-vested at January 1, 2008        |   | 495,866   |                                | $      |  2.20 |   |
| Granted                              |   | 1,550,000 |                                |   | 0.72 |   |
| Vested                               |   | (201,671  | )                                   |   | 2.09 |   |
| Forfeited                            |   | (253,346  | )                                   |   | 1.20 |   |
| Non-vested at December 31,      2008 |   | 1,590,849 |                                | $      |  0.93 |   |

| Year                                                | CapitalLeases |          | OperatingLeases |   |
|-----------------------------------------------------|---------------|---------------|-----------------|--------|
| 2009                                                | $             |  261,330 |            | $      |  3,308,597 |   |
| 2010                                                |          | 256,161       |            |   | 2,688,726 |   |
| 2011                                                |          | 199,303       |            |   | 2,513,916 |   |
| 2012                                                |          | 182,695       |            |   | 1,856,408 |   |
| 2013                                                |          | —       |            |   | 1,510,525 |   |
| Thereafter                                          |          | —       |            |   | 1,132,715 |   |
| Total minimum payments      required                |          | 899,489       |            | $      |  13,010,887 |   |
| Less amount representing interest                   |          | 103,184       |            |   |   |   |
| Present value of future      minimum lease payments |          | 796,305       |            |   |   |   |
| Less current obligations under capital leases       |          | 214,579       |            |   |   |   |
| Long-term obligations under capital leases          | $             | 581,726       |            |   |   |   |

----

|                                    |   | Year Ended December 31, |   |
|-----------------------------------------|--------|-------------------------|--------|
|                                    |   | 2008                    |   |   |          2007 |   |
| Current:                                |   |                    |   |   |   |   |
|   Federal                          | $      |  —           |   | $ |  — |   |
|   State                            |   | —                 |   |   | — |   |
|                                    |   | —                 |   |   | — |   |
| Deferred:                               |   |                    |   |   |   |   |
|   Federal                          |   | 8,374,165               |   |   | (2,824,724 | ) |
|   State                            |   | 456,680                 |   |   | (569,761 | ) |
|                                    |   | 8,830,845               |   |   | (3,394,485 | ) |
| Net income tax provision      (benefit) | $      |  8,830,845         |   | $ |  (3,394,485 | ) |

|                                               | 2008   |             | 2007   |   |
|----------------------------------------------------|--------|------------------|--------|--------|
|                                               |   | Amount           |   |   | Percent |   |   | Amount |   |   | Percent |   |
| Income tax at the U.S. federal      statutory rate | $      |  (9,209,524 | )      |   | (34.0 | ) | $ |  (4,389,959 | ) |   | (34.0 | ) |
| State income taxes                                 |   | (822,445         | )      |   | (3.0 | ) |   | (570,834 | ) |   | (4.4 | ) |
| Dividends on preferred stock                       |   | 323,981          |   |   | 1.2 |   |   | 423,672 |   |   | 3.3 |   |
| Change in valuation allowance                      |   | 18,515,552       |   |   | 68.4 |   |   | 1,486,354 |   |   | 11.5 |   |
| Late registration      penalties                   |   | 267,446          |   |   | 1.0 |   |   | — |   |   | — |   |
| Stock option exercises                             |   | —          |   |   | — |   |   | (251,184 | ) |   | (1.9 | ) |
| Other                                              |   | (244,165         | )      |   | (1.0 | ) |   | (92,534 | ) |   | (0.7 | ) |
|                                               | $      |  8,830,845  |   |   | 32.6 |   | $ |  (3,394,485 | ) |   | (26.3 | ) |

|                                             | 2008   |            | 2007   |   |
|--------------------------------------------------|--------|-----------------|--------|--------|
|                                             |   | Current         |   |   | Long-Term |   |   | Current |   |   | Long-Term |   |
| Deferred tax assets —                      |   |            |   |   |   |   |   |   |   |   |   |   |
| Net operating loss      carryforwards            | $      |  1,339,652 |   | $      |  15,815,002 |   | $ |  146,702 |   | $ |  11,476,946 |   |
| Alternative minimum tax credit      carryforward |   | —         |   |   | 75,838 |   |   | — |   |   | 75,838 |   |
| Asset impairment                                 |   | —         |   |   | 2,118,078 |   |   | — |   |   | — |   |
| Inventory reserve                                |   | 272,965         |   |   | — |   |   | — |   |   | — |   |
| Allowance for sales returns                      |   | 241,426         |   |   | — |   |   | 455,700 |   |   | — |   |
| Accrued expenses                                 |   | 2,535,179       |   |   | — |   |   | 12,434 |   |   | 239,201 |   |
| Restricted stock                                 |   | (102,915        | )      |   | — |   |   | — |   |   | — |   |
| Deferred compensation                            |   | 394,322         |   |   | — |   |   | 150,553 |   |   | — |   |
| Charitable contribution                          |   | 51,925          |   |   | — |   |   | 47,966 |   |   | — |   |
| Inventory overhead      capitalization           |   | 41,898          |   |   | — |   |   | 107,299 |   |   | — |   |
| Valuation allowance                              |   | (4,408,611      | )      |   | (15,593,295 | ) |   | (570,809 | ) |   | (915,545 | ) |
|  Total deferred tax      assets             |   | 365,841         |   |   | 2,415,623 |   |   | 349,845 |   |   | 10,876,440 |   |
| Deferred tax liability —                   |   |            |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                     |   | —         |   |   | 2,415,623 |   |   | — |   |   | 2,025,028 |   |
| Prepaid expenses                                 |   | 365,841         |   |   | — |   |   | 349,845 |   |   | — |   |
|  Total deferred tax      liabilities        |   | 365,841         |   |   | 2,415,623 |   |   | 349,845 |   |   | 2,025,028 |   |
|  Net deferred tax                           | $      |  —   |   | $      |  — |   | $ |  — |   | $ |  8,851,412 |   |

----

----

----

| Exhibit |                                                   |
|---------|--------------------------------------------------------|
| No.     |             Description of Exhibit |

| 3.1    | Certificate of Incorporation, including Certificate of      Amendment filed on June 12, 1989 (a), and Certificate of Amendment filed      on August 22, 1989 (b), and Certificate of Amendment filed on December 29,      1999                                                                                                                     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.2    | Certificate of Designation of Class B common      stock.(a)                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.3    | Bylaws of Registrant.(a)                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.4    | Form of Class A common stock Certificate.(c)                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.5    | Certificate of Designation of Series D Preferred Stock      filed October 29, 2007(i)                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 4.2.1  | Form of Class B common stock Certificate.(a)                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.1   | Form of Right of Refusal Agreement among Class B common      stockholders.(a)                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.2   | Amended and Restated Stock Option Plan.(d)                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.3   | Non-Employee Director Stock Option Plan.(d)                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.4   | Chairman Stock Option Plan.(d)                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.5   | 2005 Key Associate and Management Equity Incentive      Plan(l)                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.6   | 2005 Non-Employee Director Equity Incentive      Plan(l)                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.7   | Indenture of Trust between City of Springdale and      Regions Bank, Trustee, as of October 1, 2003.(n)                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.8   | Mortgage and Loan Agreement between City of Springdale      and Company, as of October 1, 2003.(n)                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.9   | Assignment of Mortgage and Loan Agreement between City      of Springdale and Regions Bank.(n)                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.10  | Note Purchase Agreement between Company and Allstate      Insurance Company dated October 9, 2003.(n)                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.11  | Promissory Note made by Company dated October 9,      2003.(n)                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.12  | Wood-Plastic Composite Decking Agreement between AERT      and Weyerhaeuser Company, et al. effective October 12, 2004.* (Redacted in      accordance with confidential treatment request, as filed October 15,      2005)(q)                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.13  | Loan Agreement.(r)                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.14  | Promissory Note.(r)                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.15  | Loan Agreement.(s)                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.16  | Promissory Note.(s)                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.17  | Series D Convertible Preferred Stock Purchase Agreement      dated October 29, 2007(i)                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.17  | Form of Warrants to Purchase Common Stock issued      October 29, 2007(i)                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.17  | Registration Rights Agreement(i)                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.18  | Loan Agreement dated December 19, 2007 related to      Series 2007 8% Bonds.(j)                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.18  | Indenture of Trust dated December 19, 2007 related to      Series 2007 8% bonds.(j)                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.19  | Indenture of Trust between City of Springdale,      Arkansas, and Bank of Oklahoma, N.A., Trustee, relating to the issuance of      $10,610,000 City of Springdale, Arkansas Industrial Development Refunding      Revenue Bonds (Advanced Environmental Recycling Technologies, Inc.      Project) Series 2008; dated as of February 1, 2008.(k)  |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.19  | Loan Agreement between City of Springdale, Arkansas,      and Advanced Environmental Recycling Technologies, Inc., related to      $10,610,000 City of Springdale, Arkansas Industrial Development Refunding      Revenue Bonds (Advanced Environmental Recycling Technologies, Inc.      Project) Series 2008; dated as of February 1, 2008.(k)   |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 23.1   | Consent of Independent Registered Public Accounting      Firm.***                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 31.1   | Certification per Sarbanes-Oxley Act of 2002 (Section      302) by the Company’s chairman and chief executive officer.***                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 31.2   | Certification per Sarbanes-Oxley Act of 2002 (Section      302) by the Company’s chief financial officer.***                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 32.1   | Certification per Sarbanes-Oxley Act of 2002 (Section      906) by the Company’s chairman and chief executive officer.***                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 32.2   | Certification per Sarbanes-Oxley Act of 2002 (Section      906) by the Company’s chief financial officer.***                                                                                                                                                                                                                                 |

----

|       |                                                                                                                                                                                                                                                                                                                          |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *     | Confidential treatment was granted by the Securities and Exchange      Commission for certain portions of this agreement. The confidential      portions were filed separately with the Commission. The Registrant has no      exhibits corresponding to Exhibits 1, 2, 5, 6, 7, 8, 9, 11, through 23, or      26 through 29. |
| ***   | Filed herewith.                                                                                                                                                                                                                                                                                                               |

| (a) | Contained in Exhibits to Registration Statement on Form      S-1, No. 33-29595, filed June 28, 1989.                             |
|-----|---------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                       |
| (b) | Contained in Exhibits to Amendment No. 1 to      Registration Statement on Form S-1, No. 33-29595, filed August 24,      1989.   |
|     |                                                                                                                                       |
| (c) | Contained in Exhibits to Amendment No. 2 to      Registration Statement on Form S-1, No. 33-29595, filed November 8,      1989.  |
|     |                                                                                                                                       |
| (d) | Filed with Form 10-K for December 31, 1994.                                                                                      |
|     |                                                                                                                                       |
| (e) | Filed with Form 10-Q for September 30, 2003.                                                                                     |
|     |                                                                                                                                       |
| (f) | Filed with Form 10-Q/A for September 30, 2004.                                                                                   |
|     |                                                                                                                                       |
| (g) | Filed with Form 10-Q for September 30, 2005.                                                                                     |
|     |                                                                                                                                       |
| (h) | Filed with Form 10-Q for September 30, 2006.                                                                                     |
|     |                                                                                                                                       |
| (i) | Contained in exhibits to Form 8-K filed November 1,      2007.                                                                   |
|     |                                                                                                                                       |
| (j) | Contained in exhibits to Form 8-K filed December 21,      2007.                                                                  |
|     |                                                                                                                                       |
| (k) | Contained in exhibits to Form 8-K filed February 29,      2008.                                                                  |
|     |                                                                                                                                       |
| (l) | Contained in exhibits to DEFR14A filed July 11,      2005.                                                                       |

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