NOTE PURCHASE AGREEMENT



         THIS NOTE PURCHASE AGREEMENT (this "Agreement"), dated as of October 9,

2003, is executed by and between ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES,

INC., a corporation organized under the laws of the State of Delaware (the

"Company"), and ALLSTATE INSURANCE COMPANY (the "Lender").



                                    WHEREAS:



         A.       The Lender desires to purchase, upon the terms and conditions

stated in this Agreement, Two Million Six Hundred Thousand Dollars ($2,600,000)

(the "Principal Amount") in aggregate principal amount of the Promissory Note of

the Company, in the form attached hereto as Exhibit A (the "Note").



         B.       The Note shall bear interest at the rate of nineteen and

75/100 percent (19.75%) per annum, payable April 1, 2004, and on each April 1

and October 1 thereafter.



NOW, THEREFORE, the Company and the Lender hereby agree as follows:



1.       PURCHASE AND SALE OF NOTE



         (a)      Purchase of the Note. On the Closing Date (as defined below),

subject to the satisfaction (or waiver) of the conditions set forth in Section 6

and Section 7 below, the Company shall issue and sell to Lender, and the Lender

agrees to purchase from the Company, the Note.



         (b)      Form of Payment. On the Closing Date, the Lender shall pay the

aggregate Principal Amount of the Note hereunder by wire transfer to the

Company, in accordance with the Company's written wiring instructions, against

delivery of the duly executed Note being purchased by such Lender, and the

Company shall deliver such the Note against delivery of such aggregate Principal

Amount.



         (c)      Closing Date. Subject to the satisfaction (or waiver) of the

conditions thereto set forth in Section 6 and Section 7 below, the date and time

of the issuance and sale of the Note pursuant to this Agreement (the "Closing")

shall be 12:00 noon, prevailing central time, on October 9, 2003, or such other

time as may be mutually agreed upon by the parties (the "Closing Date"). The

Closing shall occur at the offices of the Lender.



2.       LENDER'S REPRESENTATIONS AND WARRANTIES. The Lender represents and

warrants to the Company as follows:



         (a)      Investment Purpose. The Lender is purchasing the Note for the

Lender's own account for investment purposes and not with a present view towards

the public sale or



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distribution thereof, except pursuant to sales that are exempt from the

registration requirements of the Securities Act of 1933, as amended (the

"Securities Act") and sales registered under the Securities Act. The Lender

understands that the Lender must bear the economic risk of this investment

indefinitely, unless the Note is registered pursuant to the Securities Act and

any applicable state securities or blue sky laws or an exemption from such

registration is available. Notwithstanding anything in this Section 2(a) to the

contrary, by making the representations herein, the Lender does not agree to

hold the Note for any minimum or other specific term and reserves the right to

dispose of the Note at any time in accordance with or pursuant to a registration

statement or an exemption under the Securities Act.



         (b)      Accredited Investor Status. The Lender is an "Accredited

Investor" as that term is defined in Rule 501(a) of Regulation D promulgated

under the Securities Act.



         (c)      Reliance. The Lender understands that the Company is relying

upon the truth and accuracy of, and the Lender's compliance with, the

representations, warranties, agreements, acknowledgments and understandings of

the Lender set forth herein.



         (d)      Information. The Lender has been furnished all materials

relating to the business, finances and operations of the Company and materials

relating to the offer and sale of the Note which have been specifically

requested by the Lender or its counsel. The Lender has been afforded the

opportunity to ask questions of the Company and has received what the Lender

believes to be satisfactory answers to any such inquiries. Neither such

inquiries nor any other due diligence investigation conducted by the Lender or

its counsel or any of its representatives shall modify, amend or affect the

Lender's right to rely on the Company's representations and warranties contained

in Section 3 below. The Lender understands that its investment in the Note

involves a high degree of risk.



         (e)      Governmental Review. The Lender understands that no United

States federal or state agency or any other government or governmental agency

has passed upon or made any recommendation or endorsement of the Note.



         (f)      Transfer or Resale. The Lender understands that (i) the Note

has not been and is not being registered under the Securities Act or any state

securities laws, and may not be transferred unless (a) subsequently registered

thereunder, or (b) the Lender shall have delivered to the Company an opinion of

counsel (which opinion shall be in form, substance and scope customary for

opinions of counsel in comparable transactions) to the effect that the Note to

be sold or transferred may be sold or transferred under an exemption from such

registration, or (c) sold under Rule 144 promulgated under the Securities Act

(or a successor rule) ("Rule 144"), or (d) sold or transferred to an affiliate

of the Lender; and (ii) neither the Company nor any other person is under any

obligation to register such Note under the Securities Act or any state

securities laws or to comply with the terms and conditions of any exemption

thereunder.



         (g)      Legends. The Lender understands that the Note may bear a

restrictive legend in substantially the following form:



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         The security represented by this certificate has not been registered

         under the Securities Act of 1933, as amended, or the securities laws of

         any state of the United States. The security represented hereby may not

         be offered or sold in the absence of an effective registration

         statement for the Note under applicable securities laws unless offered,

         sold or transferred under an available exemption from the registration

         requirements of those laws.



         The legend set forth above shall be removed and the Company shall issue

a certificate without such legend to the holder of the Note upon which such

legend is stamped, if, unless otherwise required by state securities laws, (a)

the sale of the Note is registered under the Securities Act or (b) such holder

provides the Company with an opinion of counsel, in form, substance and scope

customary for opinions of counsel in comparable transactions, to the effect that

a public sale or transfer of the Note may be made without registration under the

Securities Act or (c) such holder provides the Company with reasonable

assurances that the Note can be sold under Rule 144.



         (h)      Authorization; Enforcement. This Agreement has been duly and

validly authorized, executed and delivered on behalf of the Lender and is a

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