Lease Agreement Date July 29, 1997

AGREEMENT
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This Agreement (hereinafter the "Agreement") is entered into this 29th day of July, 1997 by and between Dwain A. Newman and Glenda R. Newman, husband and wife (hereinafter the "Newmans," "Lessors," or "Sellers"), National Home Centers, Inc., an Arkansas corporation, its officers, directors, representatives, successors and assigns (hereinafter "National", "Lessee" or "Sublessor"), and Advanced Environmental Recycling Technologies, Inc., a Delaware corporation, its officers, directors, representatives, successors, guarantors and assigns (hereinafter, collectively, "AERT", "Sublessee," or "Purchaser").


WITNESSETH:


WHEREAS, the Newmans are the owners of a certain parcel of improved real property which is located at 801 N. Jefferson Street, Springdale, Washington County, Arkansas (hereinafter the "Subject Property"), which shall be deemed to include the real property described in "Exhibit A" attached hereto and made a part hereof, and as amended, and the improvements (building, security system and fire protection sprinkler system) thereon; and


WHEREAS, National is the lessee of the subject property from the Newmans under a certain lease dated June 1, 1992, a copy of which is attached hereto as "Exhibit B" and made a part hereof; and


WHEREAS, AERT desires to purchase the subject property from the Newmans, or, in the alternative, to sub-lease the subject property from National with the option to purchase the subject property from the Newmans during the term of the sublease; and


WHEREAS, the Newmans, National and AERT now mutually desire to enter into this Agreement whereby AERT shall either purchase the subject property from the Newmans in accordance with the terms and conditions set forth below, or AERT shall sublease the subject property from National, with an option to purchase the subject property, according to the terms and conditions set forth below.


NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows:


1. INITIAL DEPOSIT. - ---------------------


Upon the execution of this Agreement by the parties hereto, AERT shall submit to the Newmans an initial deposit of $15,000.00 (hereinafter the "Initial Deposit") to be held by the Newmans as a "security deposit" and to be used by the Newmans to pay for the erection of a fence on the subject property along the drainage ditch to the railroad tracks, then back to the building, said fence


being erected at the direction of, and for the benefit of AERT. AERT shall cause the fence to be erected on the subject property to their desired specifications and shall submit the invoice(s) to the Newmans for payment. Upon submitting invoices to the Newmans for payment, AERT shall sign the invoice which shall indicate that the labor performed and materials received to erect the fence are satisfactory to AERT and the Newmans shall then pay the invoice within three (3) business days. In the event that the cost to erect the fence is in excess of the initial deposit, AERT will deposit such additional sum with the Newmans as is necessary to completely pay for the erection of the fence. This initial deposit shall be non-refundable and shall be retained by the Newmans to the extent that the fence costs less to erect than the amount of the initial deposit, if any. Notwithstanding the preceding sentence, in the event that AERT elects to purchase the subject property from the Newmans in accordance with the terms and conditions set forth below, then the remaining portion of the initial deposit, if any, shall be applied to the purchase price of the subject property at Closing, which shall be defined as the time at which the Newmans and AERT enter into a purchase and sale transaction involving the property described in Exhibit "A" hereto, if applicable.


2. PURCHASE VS. LEASE WITH OPTION TO PURCHASE. - ------------------------------------------------


The parties hereto agree that AERT, prior to September 1, 1997, shall elect to either purchase the subject property from the Newmans in accordance with the terms and conditions set forth below, or, in the alternative, to sublease the subject property from National, with an option to purchase the subject property from the Newmans in accordance to the terms and conditions set forth below.

(a) PURCHASE OPTION. In the event that AERT elects to purchase the subject property from the Newmans, it shall be on the following terms and conditions:


(i) PURCHASE PRICE. The purchase price for the property, together
with improvements thereon, shall be $1,800,000.00, unless
discounted in strict accordance with sub-paragraph (iv), below;


(ii) PAYMENT TERMS. AERT shall pay at Closing, as a down-payment
against the purchase price, the sum of $235,000.00, and shall
execute and deliver a promissory note to the Newmans in the
principal amount of $1,565,000.00 (less the remaining amount of
the initial deposit), said principal amount bearing interest at
the rate of 9.00% per annum until maturity, and interest
thereafter at the maximum legal rate. The term of the
promissory note shall be for a period of five (5) years,


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shall be in the form of "EXHIBIT C" attached hereto and
shall be payable as follows:


(A) $12,000.00 per month for the first 6 months
of the note;
(B) $14,000.00 per month for the next 18 months
of the note;
(C) $19,000.00 per month for the remaining 36
months of the note; and
(D) a balloon payment for the remaining balance
of the note, together with accrued interest
and accrued but unpaid principal, payable on
or before the maturity date.


(iii) VALID, FIRST PRIORITY MORTGAGE, AS SECURITY. At
Closing, AERT shall execute and deliver a valid and binding first
mortgage, in the form attached hereto as "Exhibit D" hereto and made a
part hereof, said mortgage being security for payment of the
promissory note described above.


(iv) EARLY PAYOFF INCENTIVE. If AERT is able to obtain
financing and pays the balance owing on the promissory note, together
with accrued interest and principal, on or before the expiration of
one (1) year, or twelve (12) months, from Closing, then the Newmans
shall reduce the purchase price by $100,000.00, thereby effectively
reducing the purchase price from $1,800,000.00 to $1,700,000.00. This
"early payoff incentive" shall only be effective for a period of one
year, or twelve (12) months, from the date of Closing and shall only
apply to this Purchase Option, and not to the Option to Purchase under
a sublease of the subject property, as set forth in sub-paragraph
2(b)(ii)(A) below.

(b) SUBLEASE, WITH OPTION TO PURCHASE AND OPTION TO RE-LEASE.


(i) THE NEWMAN LEASE. National is the Lessee of the subject
property, pursuant to a certain Lease Agreement by and between National, as
Lessee, and Dwain A. Newman and Glenda R. Newman, as Lessors, said lease
being dated June 1, 1992, a copy of which is attached hereto as "Exhibit B"
and made a part hereof (the "Newman Lease"). If AERT elects to sublease the
subject property from National rather than purchase the subject property
from the Newmans, then AERT agrees to specifically assume the duties and
obligations of National under the Newman Lease, except to the extent and on
the terms set forth in the Sublease attached hereto as "Exhibit H" and made
a part hereof which are contrary to the terms of the Newman Lease. Of
particular importance are the following terms of the Sublease:


(A) the Sublease shall be at the lease rate of $19,000.00 per
month;


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(B) the term of the sublease shall be for sixty (60) months
starting on September 1, 1997;


(C) the first month's lease payment and the last month's lease
payment shall be due at the inception of the lease;


(D) the Sublease shall have an Option to Purchase and an
Additional Option to Purchase; and


(E) the Sublease shall have an Option to Re-Lease.


(ii) OPTION TO PURCHASE. AERT shall have the option, for the entire
term of the sublease, to purchase the subject property from the Newmans at
the purchase price of $1,800,000.00 by presenting payment in the full
amount of the purchase price.


(A) Early Purchase Incentive. The Newmans agree to offer an
"early purchase incentive" to AERT to exercise its option
to purchase the subject property during the first two (2)
years, or twenty-four (24) months, of the sublease. If
AERT is subleasing the subject property from National and
elects to exercise its option to purchase the subject
property from the Newmans, and closes the purchase
transaction within two (2) years from the inception of the
sublease, then the Newmans agree to reduce the purchase
price by $3,000.00 for each and every month that the
sublease has been in effect (e.g. if the sublease has been
in existence for 18 months at the time of the closing of a
purchase by AERT of the subject property, then AERT would
get a credit of $54,000.00 toward the purchase price).
This "early payoff incentive" from lease payments is
offered only in conjunction with the Option to Purchase
under the Sublease, shall only be effective for a period
of two (2) years from the inception of the Sublease and
shall not apply to the Purchase Option set forth in sub-
paragraph 2(a)(iv), above, or the Additional Option to
Purchase set forth in sub-paragraph 2(b)(v).


(B) Initial Deposit Credit. The remainder of the $15,000.00
initial deposit, if any, shall also be credited to the
purchase price of the subject property if AERT exercises
its option to purchase the subject property hereunder. If
AERT fails to exercise its option to purchase the subject
property, then the remainder of the initial deposit shall
be deemed forfeited by AERT to the Newmans.


(iii) OPTION TO RE-LEASE. In the event that AERT subleases the
subject property from National and elects not to exercise its
option to purchase the subject property within the term of the
sublease, then AERT shall have the option to lease the subject
property from


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the Newmans for an additional five (5) year term, upon the same
terms and conditions as the Sublease, but at an increased lease
rate of $22,000.00 per month. AERT shall have the option to
purchase the subject property from the Newmans during this
additional five (5) year term at the price of $1,800,000.00,
with no applicable early purchase incentives.


(iv) NEWMAN'S OPTION TO BUY-OUT NATIONAL'S INTEREST.
Notwithstanding any provision to this Agreement to the
contrary, the Newmans shall have the option, in their sole and
absolute ...