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<SEC-DOCUMENT>0000897101-03-000213.txt : 20030321
<SEC-HEADER>0000897101-03-000213.hdr.sgml : 20030321
<ACCEPTANCE-DATETIME>20030321110050
ACCESSION NUMBER:		0000897101-03-000213
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		6
CONFORMED PERIOD OF REPORT:	20021228
FILED AS OF DATE:		20030321

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			APPLIANCE RECYCLING CENTERS OF AMERICA INC /MN
		CENTRAL INDEX KEY:			0000862861
		STANDARD INDUSTRIAL CLASSIFICATION:	RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700]
		IRS NUMBER:				411454591
		STATE OF INCORPORATION:			MN
		FISCAL YEAR END:			0103

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-19621
		FILM NUMBER:		03611508

	BUSINESS ADDRESS:	
		STREET 1:		7400 EXCELSIOR BLVD
		CITY:			MINNEAPOLIS
		STATE:			MN
		ZIP:			55426-4502
		BUSINESS PHONE:		6129309000

	MAIL ADDRESS:	
		STREET 1:		7400 EXCELSIOR BLVD
		CITY:			NINNEAPOLIS
		STATE:			MN
		ZIP:			554264517
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>arca031327_10k.txt
<DESCRIPTION>ARCA FORM 10-K 12-28-2002
<TEXT>
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 28, 2002
                                       OR
              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                           Commission File No. 0-19621

                  APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
             (Exact name of registrant as specified in its charter)

         MINNESOTA                                              41-1454591
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

7400 EXCELSIOR BOULEVARD, MINNEAPOLIS, MINNESOTA                    55426-4517
  (Address of principal executive offices)                          (Zip Code)

Registrant's telephone number, including area code: 952-930-9000

Securities registered pursuant to Section 12(b) of the Act:  NONE
Securities registered pursuant to Section 12(g) of the Act:  COMMON STOCK,
                                                             WITHOUT PAR VALUE
                                                             (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of March 7, 2003, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, computed by reference to the average of the
high and low prices on such date as reported by the OTC Bulletin Board, was
$1,563,602.

As of March 7, 2003, there were outstanding 2,343,890 shares of the registrant's
Common Stock, without par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement dated March 21, 2003,
are incorporated by reference into Part III hereof.


<PAGE>


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                   PAGE
                                                                                                   ----
                                     PART I
<S>        <C>
Item 1.    Business  ..........................................................................      3
                  General......................................................................      3
                  Industry Background..........................................................      3
                  Company Background...........................................................      4
                  Customers and Source of Supply...............................................      6
                  Company Operations...........................................................      7
                  Principal Product and Services...............................................      8
                  Sales and Marketing..........................................................      8
                  Seasonality..................................................................      8
                  Competition..................................................................      9
                  Government Regulation........................................................      9
                  Employees....................................................................     10
Item 2.    Properties..........................................................................     10
Item 3.    Legal Proceedings...................................................................     10
Item 4.    Submission of Matters to a Vote of Security Holders.................................     10

                                     PART II

Item 5.    Market for the Company's Common Equity and Related Shareholder Matters..............     11
Item 6.    Selected Financial Data.............................................................     12
Item 7.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations...............................................................     13
Item 7A.   Quantitative and Qualitative Disclosure About Market Risk...........................     22
Item 8.    Financial Statements and Supplementary Data.........................................     23
Item 9.    Changes in and Disagreements With Accountants on Accounting and
           Financial Disclosure................................................................     36

                                    PART III

Item 10.   Directors and Executive Officers of the Company.....................................     36
Item 11.   Executive Compensation..............................................................     36
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related
           Stockholder Matters.................................................................     36
Item 13.   Certain Relationships and Related Transactions......................................     36
Item 14.   Controls and Procedures.............................................................     36

                                     PART IV

Item 15.   Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................     37

SIGNATURES        .............................................................................     39
INDEX TO EXHIBITS .............................................................................     40
</TABLE>

                                       2
<PAGE>


                                     PART I

ITEM 1. BUSINESS

GENERAL

         Appliance Recycling Centers of America, Inc., together with its
operating subsidiaries ("ARCA" or the "Company"), is a leading provider of
reverse logistics, energy efficiency and appliance recycling services for
appliance manufacturers and retailers, utility companies, waste management
businesses, vending machine companies, property managers, local governments and
the general public. The Company generates revenues from the retail sale of
appliances through a chain of Company-owned retail stores under the name
ApplianceSmart(R), fees charged for the collection and environmentally sound
recycling of unwanted appliances, and sales of byproduct materials generated
from processed appliances.

         The Company was incorporated in Minnesota in 1983, although through its
predecessors it commenced the appliance retail and recycling business in 1976.
The Company's principal office is located at 7400 Excelsior Boulevard,
Minneapolis, Minnesota 55426-4517. References herein to the Company include its
operating subsidiaries. (See Exhibit 21.1.)

INDUSTRY BACKGROUND

         There are more than 500 million major household appliances, such as
refrigerators, freezers, ranges, dishwashers, microwaves, washers, dryers, room
air conditioners, water heaters and dehumidifiers, currently in use in the
United States. It is estimated by the Steel Recycling Institute that in 2001, 39
million major household appliances were taken out of use in the United States.
The disposal of these appliances is a serious problem as a result of a number of
factors including: (i) decreasing landfill capacity in many parts of the
country; (ii) the inability of incinerators, composting facilities and other
landfill alternatives to process appliances; and (iii) the presence in
appliances of certain hazardous and other environmentally harmful materials that
require special processing.

         Legislation affecting appliance disposal has been adopted in more than
30 states. This legislation includes landfill restrictions, disposal bans,
advance disposal fees and other types of regulations. As a result, appliances
must be dealt with outside the ordinary municipal solid waste system.

         Landfill restrictions arise in part because some appliance components
contain certain hazardous and other environmentally harmful materials, including
polychlorinated biphenyls (PCBs), mercury, refrigerants such as
chlorofluorocarbons (CFCs) and sulfur dioxide, and oils. PCBs are suspected as
carcinogens, are resistant to degradation when deposited in landfills and can
cause groundwater contamination. The production of PCBs was banned by the EPA in
1979, although businesses were allowed to continue using remaining inventories
of components that contained PCBs. Mercury is toxic to humans and can enter the
body through inhalation, skin absorption or ingestion, and it vaporizes at high
temperatures, forming extremely toxic fumes. CFCs are believed to cause
long-term damage to the earth's stratospheric ozone layer and may contribute to
global warming when released into the atmosphere. The 1990 Amendments to the
Clean Air Act prohibit the venting of CFCs and since July 1, 1992 have required
the recovery of CFC refrigerants during the service, repair and disposal of
appliances. See "Government Regulation" below.

         In addition to these solid waste management and environmental issues,
utility companies, motivated by economic and environmental factors to control
energy consumption, sponsor various programs to encourage and assist residential
consumers to conserve energy, including programs for turning in surplus,
energy-inefficient appliances. Many residential consumers own and operate room
air conditioners, freezers or


                                       3
<PAGE>


more than one refrigerator, contributing significantly to residential energy use
and peak energy demand. In addition, many of the refrigerators manufactured in
the 1960s and early 1970s consume up to 1,750 kilowatt-hours of electricity each
year. The 1987 National Appliance Energy Conservation Act requires that new
refrigerators use less than half of the energy as refrigerators built twelve
years ago. As more efficient appliances become available, utility companies have
begun to encourage the use of newer models and the disposal of older, less
efficient models.

         The Federal Energy Policy Act of 1992 gives individual states the
option of deregulating their electric utility industry. The potential of
deregulation has caused uncertainty about the future and form of energy
conservation programs sponsored by electric utilities. The Company believes,
however, that energy conservation and efficiency programs will remain a
long-term component of the nation's electric utility industry. See "Government
Regulation" below.

COMPANY BACKGROUND

         The Company began business in 1976 as a retailer of reconditioned
appliances. Initially, the Company contracted with national and regional
retailers of appliances such as Sears, Roebuck & Company, Inc. ("Sears") and
Montgomery Ward & Co. ("Montgomery Ward") to collect major appliances in
Minneapolis/Saint Paul and two other metropolitan areas. As part of their new
appliance sales efforts, these retailers arranged for the removal of old
appliances from consumers' residences. The Company collected old appliances on
behalf of its customers, reconditioned and sold suitable used appliances through
its own retail stores and sold the remaining appliances to scrap metal
processors.

         In the late 1980s, in response to stricter environmental protection
laws, the Company developed and marketed programs to process and dispose of
appliances in an environmentally sound manner. These programs were offered to
new appliance manufacturers and retailers, waste management companies, property
management companies and the general public. See "Customers and Source of
Supply" below.

         In 1989, the Company expanded its appliance recycling concept to the
electric utility industry when it established an appliance processing center in
Milwaukee, Wisconsin, pursuant to a contract with a utility company. From 1989
to 1994, the Company focused its resources on the expansion of its business with
electric utility companies. During this time period the Company opened nine
centers throughout the U.S. and Canada, primarily serving seventeen electric
utility customers. The Company's electric utility business has been negatively
impacted by the potential of electric utility industry deregulation. The
potential of deregulation has caused electric utilities to decrease their
sponsorship of energy conservation programs such as the one the Company offers.

         During fiscal year 2002, there were two major electric utility
customers. Southern California Edison Company ("Edison") accounted for
approximately 13% or $5.9 million of the Company's total revenues and the
California Public Utilities Commission accounted for approximately 12% or $5.4
million of the Company's total revenues. Plans for a 2003 statewide recycling
program that would be administered by Edison are currently being reviewed by
California regulatory authorities.

         In October 2000, the Company signed a contract with Edison to implement
a recycling program ("Summer Initiative") in the service areas of Pacific Gas &
Electric (the San Francisco Bay area) and San Diego Gas & Electric. This
contract was in accordance with a ruling issued by the California Public
Utilities Commission ("CPUC"). Under this contract, the Company recycled
approximately 36,000 units. The Company began the Summer Initiative in September
of 2000 which was completed in the third quarter of 2001. The Company was
responsible for advertising the Summer Initiative.


                                       4
<PAGE>


         In June 2001, the Company began the Appliance Early Retirement and
Recycling Program for refrigerators, freezers and air conditioners that operated
in San Diego and surrounding areas, a six county region in California's Central
Valley, including the cities of Fresno and Stockton and the seven county Bay
Area, including San Francisco. The program was completed in August 2002. The
Company was responsible for advertising the program.

         The Company also is aggressively pursuing new and potentially
significant appliance recycling programs in other states, reflecting growing
national interest in residential energy conservation programs. Nevertheless, the
Company's ability to project recycling revenue for 2003 continues to be limited.

         In response to the decrease in demand for services from electric
utilities, the Company increased its marketing of services to appliance
manufacturers and retailers, waste management companies and property management
companies. The Company also had increased its focus on the sale of
used/refurbished appliances. In 1995, under the name Encore(R) Recycled
Appliances, the Company began operating a chain of Company-owned retail stores.
In 1998, the Company began using the name ApplianceSmart(R) for its retail
stores. The retail stores now offer special buy appliances to value-conscious
individuals and property managers.

         A developing market for the Company is in providing fully integrated
reverse logistics services-- the handling of product that does not fit into a
company's normal distribution channels--for appliance manufacturers and
retailers. Manufacturers traditionally disposed of these "special buy"
appliances, including manufacturer closeouts, factory over-runs, floor samples,
returned or exchanged items, and scratch and dent appliances, through their
small dealer network. Large retailers have not wanted to handle these types of
appliances because the merchandise is often out of carton, requiring special
handling and pricing. In addition, this product often requires some repair or
recycling; a function major retailers are unwilling or unable to perform. As
small dealers are struggling to compete with large appliance chains (the top 10
retailers control 80 percent of the appliance sales market), manufacturers are
seeing their traditional channel for these distressed appliances shrink. It is
anticipated that small appliance retailers will also be negatively affected by
manufacturers' direct sale of appliances to consumers via the Internet.

         In 1997, the Company entered into pilot program agreements with
Whirlpool Corporation, the nation's largest manufacturer of major household
appliances, to develop a program for handling Whirlpool's returned appliances
and new appliances that cannot be handled through the manufacturer's normal
distribution channels. Through a subsequent 1998 contract with Whirlpool, the
Company purchases these appliances from Whirlpool's distribution centers serving
the Midwest and certain western states. This merchandise, which includes
manufacturer closeouts, factory over-runs, floor samples, returned or exchanged
items, and scratch and dent appliances, is sold through the Company's network of
ApplianceSmart retail stores. ApplianceSmart is an authorized factory outlet for
Whirlpool, and specializes in the Whirlpool, KitchenAid and Roper brands. With
an increased supply of product, the Company began to focus on opening larger
factory outlet facilities to offer consumers a wider selection of appliances and
began to close its smaller stores. The Company has also decided not to expand
its used/refurbished appliance business.

         In the latter part of 1998, the Company scaled back its agreement with
Whirlpool to a level consistent with its financial resources and purchased
inventory mainly from Whirlpool's Ohio distribution center. The Whirlpool
agreement for 2003 does not provide for any required or minimum number of units
to be offered for sale to the Company. The Whirlpool agreement may be terminated
by either party upon thirty (30) days prior written notice. In addition, the
Company has agreed to indemnify Whirlpool for certain claims, allegations or
losses with respect to Whirlpool appliances sold by the Company. Currently, the
Company purchases inventory mainly from Whirlpool's St. Louis, Missouri
distribution center.


                                       5
<PAGE>


         In October 2001, the Company entered into an agreement with Maytag
Corporation for the acquisition of distressed appliances ("Maytag Agreement").
Under the Maytag Agreement, there are no minimum purchase requirements. The
Maytag Agreement may be terminated by either party upon 60 days' written notice
or may be terminated immediately if a default is not cured within ten (10) days
after notice of default. In addition, the Company has agreed to indemnify Maytag
for all claims, losses, liability and expenses with respect to Maytag appliances
sold by the Company. The Agreement is expected to supply the Company's retail
stores with a significant supply of Maytag appliances.

         In December 2001, the Company announced that all retail stores would be
carrying a full line of Frigidaire household appliances.

         In January 2003, the Company announced that it had entered into a
contract with GE Consumer Products to purchase from GE and sell to consumers
special buy GE appliances.

         The Company believes purchases from these four manufacturers will
provide an adequate supply of high-quality appliances for its retail outlets.
There are no set number of units to be sold to the Company from any of the four
manufacturers.

         In 2000, the Company closed a smaller store in the Minneapolis/Saint
Paul market and opened a 33,000 square foot store in the Dayton, Ohio market. In
January 2001, the Company opened a 24,000 square foot store in the
Minneapolis/Saint Paul market. The Company opened another 42,000 square foot
store in the Dayton, Ohio market in March 2001. In addition, the Company closed
a smaller store and opened a 32,000 square foot store in the Columbus, Ohio
market in May 2001. The Company opened a 49,000 square foot store in the
Minneapolis/Saint Paul market in October 2001. In March 2002, the Company opened
another 30,000 square foot store in Columbus, Ohio. In December 2002, the
Company closed an under performing store in the Dayton, Ohio market. In February
2003, the Company closed a smaller store and opened a 33,000 square foot store
in the Minneapolis/Saint Paul market. In March 2003, the Company closed an
underperforming store in the Dayton, Ohio market. The Company currently has
three recycling centers, located in Columbus, Ohio; Minneapolis, Minnesota; and
Los Angeles, California. Also, the Company currently has eight retail stores:
four in Minneapolis/Saint Paul, one in Los Angeles and three in Columbus.

CUSTOMERS AND SOURCE OF SUPPLY

         The Company offers its services to entities that, as part of their
operations, become responsible for disposing of large quantities of new,
distressed and unwanted appliances. These entities include new appliance
manufacturers and retailers, waste management businesses, vending machine
companies, property management companies and utility companies.

         NEW APPLIANCE MANUFACTURERS AND RETAILERS. The Company began its
business by offering appliance recycling programs to Sears, Montgomery Ward and
other new appliance retailers by collecting appliances from either the
retailers' facilities or from their customers. Recently the Company has focused
its marketing efforts on new appliance manufacturers, including Whirlpool
Corporation, Maytag Corporation, Frigidaire and GE, the primary sources of
products sold in the Company's stores.

         The Company believes its current sources for appliances are adequate to
supply its retail stores and allow the Company to grow its retail sales; however
there is a risk that one or more of these sources could be lost.


                                       6
<PAGE>


         WASTE MANAGEMENT COMPANIES. The Company provides services to waste
management companies and the general public for the collection and recycling of
appliances for specified fees.

         VENDING MACHINE COMPANIES. The Company provides services to vending
machine companies for the recycling of vending machines for specified fees.

         PROPERTY MANAGEMENT COMPANIES. The Company provides comprehensive
appliance exchange and recycling services for property managers of apartment
complexes as well as local housing authorities.

         UTILITY COMPANIES. The Company contracts with utility companies to
provide comprehensive appliance recycling services tailored to the needs of the
particular utility. The contracts historically have had terms of one to four
years, with provisions for renewal at the option of the utility company. Under
some contracts the utility retains the Company to manage all aspects of its
appliance recycling program, while under other contracts the Company provides
only specified services. Pricing for the Company's services is on a
per-appliance basis and depends upon several factors, including the total number
of appliances processed, the length of the contract term and the specific
services selected by the utility. Contracts with electric utility customers
require that the Company does not recondition for resale appliances received
from utility company energy conservation programs. Plans for a 2003 statewide
recycling program that would be administered by a major electric utility
customer are currently being reviewed by California regulatory authorities.

COMPANY OPERATIONS

         The Company provides an integrated range of reverse logistics, energy
efficiency and appliance recycling services. Appliances are acquired from a wide
range of sources, including appliance manufacturers and retailers, utility
companies, waste management businesses, vending machine companies, property
managers, local governments and the general public.

         Appliances deemed suitable for sale are repaired, if necessary, before
being tested and distributed to the Company's ApplianceSmart retail outlets.
Every appliance is under warranty and carries a 100 percent money-back
guarantee. The Company also offers consumers extended warranties, delivery,
factory-trained technician service and recycling of old appliances.

         Appliances that do not meet quality standards for the Company's retail
operations and appliances collected through utility customers' energy
conservation programs are processed and recycled in an environmentally sound
manner. Appliances are inspected and categorized according to the types of
hazardous materials they may contain, and processed according to all applicable
federal, state and local regulations by company-trained technicians. When
processing at the Company's recycling center is complete and the appliances are
free of all environmentally hazardous substances, the appliances are delivered
to a local metal processing facility for shredding. The shredded materials are
then sold to steel mini-mills or other metal recovery facilities for reuse.

         Management believes that the uncertainties in the electric utility
industry regarding deregulation will persist at least through 2003. The reaction
to deregulation among states and utilities has been varied. The Company
believes, however, that energy conservation and efficiency programs will remain
a long-term component of the nation's electric utility industry.

         In 2002, the Company focused on a carefully managed growth plan of
opening showroom outlet stores, located in heavily trafficked, conveniently
located retail malls. The Company believes that the growth of its retail
business in the near future will likely occur primarily through the expansion of
revenues from the Company's current and proposed retail stores.


                                       7
<PAGE>


PRINCIPAL PRODUCTS AND SERVICES

         The Company generates revenues from three sources: retailing, recycling
and byproduct. The table below reflects the percentage of total revenues from
each source. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Revenues:                              2002           2001         2000
- ---------                              ----           ----         ----
         Retail                        65.4%          50.3%        57.6%
         Recycling                     32.0%          46.8%        37.9%
         Byproduct                      2.6%           2.9%         4.5%
                                      -----          -----        -----
                                      100.0%         100.0%       100.0%
                                      =====          =====        =====

         Although the Company has two main sources of revenues, management
believes that the Company has only one operating segment. That is, even though
certain separate financial information by retail store or retail store and
recycling center is available to management, the Company is managed as a single
unit. Specifically, the Company does not measure profit or loss or maintain
asset information separately for its revenue sources. Recycling and byproduct
revenues are the result of both retail revenues and recycling contracts. Retail
includes the free removal and recycling of the customer's existing appliance.
Recycling includes the recycling of appliances per a contract or agreement.

SALES AND MARKETING

         The Company uses various means to promote awareness of its products and
services and believes it is recognized as a leader in the retailing of
appliances on a reverse logistics basis and in the recycling industry.

         ApplianceSmart's outlet store concept includes establishing large
factory showrooms in convenient metropolitan locations to offer consumers a
selection of hundreds of appliances. In keeping with ApplianceSmart's branding,
both the exterior and interior of ApplianceSmart's stores display Whirlpool,
Maytag, Frigidaire and GE signage along with custom-designed ApplianceSmart
materials. In every market, the Company actively promotes its stores through
various forms of print advertising, including daily classified ads in major
newspapers, telephone yellow pages ads and direct mail. In addition, the Company
uses radio and television advertisements in some markets, along with other types
of promotions. Through the Company's website at www.ApplianceSmart.com,
consumers can also access appliance-specific and general Company information.

SEASONALITY

         The Company experiences seasonal fluctuations in operating results,
with revenues generally higher during the second and third calendar quarters
than in the first and fourth calendar quarters. The lower levels in the first
and fourth quarters reflect consumer purchasing cycles, which result in lower
sales of major household appliances during such quarters and corresponding
reductions in the demand for appliance recycling services. Furthermore, utility
companies that sponsor appliance turn-in programs generally reduce their
promotional efforts for such programs during the first and fourth calendar
quarters. The Company expects that it will continue to experience lower revenues
in the first and fourth quarters of future years as compared to the second and
third quarters of such years.


                                       8
<PAGE>


COMPETITION

         Competition for the Company's retail stores comes from new appliance
manufacturers and retailers and other special buy retailers. Each retail
location will compete not only with local and national chains of new appliance
retailers, many of whom have been in business longer than the Company and may
have significantly greater assets than the Company, but will also compete with
numerous independently owned retailers of new and special buy appliances.

         Many factors, including existing and proposed governmental regulation,
may affect competition in the waste management and environmental services
industry. The Company generally competes with two or three other companies which
are based in the geographic area to be served under appliance recycling
contracts and which generally offer only some of the services provided by the
Company.

         The Company expects its primary competition for appliance recycling
contracts with existing or new customers to come from entrepreneurs entering the
appliance recycling business, energy management consultants, current recycling
companies, major waste hauling companies and scrap metal processors. In
addition, customers such as utility companies and local governments may operate
appliance recycling programs internally rather than contracting with the Company
or other third parties. There can be no assurance that the Company will be able
to compete profitably in any of its chosen markets.

GOVERNMENT REGULATION

         The business of recycling major appliances is subject to certain
governmental laws and regulations. These laws and regulations include landfill
disposal restrictions, hazardous waste management requirements and air quality
standards, as well as special permit and license conditions for the recycling of
appliances. In some instances, there are bonding, insurance and other conditions
for bidding on appliance recycling contracts.

         The Company's appliance recycling centers are subject to various
federal, state and local laws, regulations and licensing requirements relating
to the collection, processing and recycling of household appliances.
Requirements for registrations, permits and licenses vary among the Company's
market areas. The Company's centers are registered with the EPA as hazardous
waste generators and are licensed, where required, by appropriate state and
local authorities. The Company has agreements with approved and licensed
hazardous waste companies for transportation and disposal of PCBs from its
centers.

         The 1990 Amendments to the Clean Air Act provide for the phaseout of
the production of CFCs over a period of years. Effective July 1, 1992, the act
prohibited the venting of CFCs in the course of maintaining, servicing,
repairing or disposing of an appliance. The act also requires the recovery of
CFC refrigerants from appliances prior to their disposal or delivery for
recycling. In 1995, the venting of CFC substitute refrigerants was also
prohibited.

         In 1992, Congress adopted the Energy Policy Act of 1992 to encourage
energy efficiency. Requirements under this act establish, among other things,
mandatory energy performance standards that affect the manufacture and sale of
major household appliances. Another component of this act allows for
deregulation of the nation's energy providers, including the electric utility
industry. The ultimate impact of deregulation on the electric utility industry
is yet unknown; therefore, there can be no assurance that the Company will be
able to continue certain of its current operations in a deregulated environment.

         Company management believes that further government regulation of the
appliance recycling industry could have a positive effect on the Company's
business; however, there can be no assurance what course


                                       9
<PAGE>


future regulation may have. Under some circumstances, further regulation could
materially increase the costs of the Company's operations and have an adverse
effect on the Company's business. In addition, as is the case with all companies
handling hazardous materials, under some circumstances the Company may be
subject to contingent liabilities.

EMPLOYEES

         At March 1, 2003, the Company had 230 full-time employees,
approximately 49% of who were involved in the collection, transportation and
processing of appliances at the Company's centers and approximately 51% of whom
were in sales, administration and management. The Company has not experienced
any work stoppages and believes its employee relations are good.

ITEM 2. PROPERTIES

         The Company's executive offices are located in Minneapolis, Minnesota,
in a Company-owned facility that includes approximately 11 acres of land. The
building contains approximately 122,000 square feet, including 27,000 square
feet of office space, 24,000 square feet of retail space and 71,000 square feet
of operations and processing space. The southern California center building,
which also is owned by the Company, is located in Compton, California, and
consists of 46,000 square feet: 6,000 square feet of office space and 40,000
square feet of warehouse space. All properties and equipment owned by the
Company currently secure outstanding loans of the Company.

         The Company generally leases the other facilities it operates. The
Company usually attempts to negotiate lease terms for a recycling center that
correspond to the term of the principal contract or contracts in connection with
which the center is to be operated. The Company's recycling centers typically
range in size from 25,000 to 40,000 square feet. The Company usually attempts to
negotiate lease terms of two to five years for retail stores with 25,000 to
35,000 square feet. However, the retail stores may be larger depending on
favorable demographics, availability and other business factors.

         The Company believes that the facilities and equipment at each of its
centers are adequate to meet its anticipated needs for the near term and that
alternate facilities will readily be available to the Company to meet its future
needs.

ITEM 3. LEGAL PROCEEDINGS

         The Company and its subsidiaries are involved in various legal
proceedings arising in the normal course of business, none of which is expected
to result in any material loss to the Company or any of its subsidiaries.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         The Company did not submit any matters to a vote of security holders
during the last quarter of the fiscal year covered by this report.


                                       10
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

MARKET FOR COMMON STOCK

         The Common Stock trades under the symbol "ARCI." The Company's Common
Stock began trading on the OTC Bulletin Board on September 8, 1998. Prior to
that time, the Common Stock traded as follows: on the Nasdaq SmallCap Market
from February 26, 1997 to September 7, 1998; on the Nasdaq National Market from
January 8, 1993 to February 25, 1997; on the Nasdaq SmallCap Market from January
7, 1991 to January 7, 1993; and on the local over-the-counter market prior
thereto. The following table sets forth, for the periods indicated, the high and
low closing bid quotations for the Common Stock, as reported by the OTC Bulletin
Board.

                                                  High            Low
                                                  ----            ---
         2001

                 First Quarter.............     $  2.38          $ 1.00
                 Second Quarter............        2.80            1.13
                 Third Quarter.............        3.55            2.40
                 Fourth Quarter............        5.70            2.75

         2002

                 First Quarter.............     $  5.30          $ 3.70
                 Second Quarter............        4.35            3.60
                 Third Quarter.............        3.90            2.30
                 Fourth Quarter............        2.65            1.63

         On March 7, 2003, the last reported sale price of the Common Stock on
the OTC Bulletin Board was $1.20 per share. As of March 7, 2003, there were
approximately 960 beneficial holders of the Company's Common Stock.

         The Company's line of credit limits the Company's ability to pay
dividends.

         During 1999, the Company privately placed 1,050,000 unregistered shares
and 138,000 warrants to purchase shares. In 2000, the Company registered
1,030,000 of such shares for resale by the holders.

         In February 1999, the Company sold in a private placement 1,030,000
shares of Common Stock at a price of $0.50 per share. The sale represented
approximately 45% of the Common Stock outstanding after such sale. The Company
paid $31,500 of the proceeds and issued warrants to purchase 83,000 shares of
Common Stock at $0.50 per share, subject to adjustment, to an investment banker
as a placement fee. The remaining proceeds were used to repay certain
indebtedness, to purchase inventory and for other general corporate purposes.


                                       11
<PAGE>


         In March 1999, the Company issued to a board member at that time, as
payment for certain consulting services, 5,000 warrants to purchase the
Company's Common Stock at $0.625 per share, the market value of the Company's
stock at the date of grant. The warrants are currently exercisable and expire
March 1, 2009.

         In April 1999, the Company issued to a vendor 50,000 warrants to
purchase the Company's Common Stock at $0.625 per share. The warrants expire
March 31, 2004.

ITEM 6.  SELECTED FINANCIAL DATA

          The selected financial information set forth below should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 8. Financial Statements and
Supplementary Data."

<TABLE>
<CAPTION>
Fiscal Years Ended                     2002             2001             2000              1999             1998
- ----------------------------------------------------------------------------------------------------------------
   (In thousands, except
   per share data)
<S>                              <C>              <C>              <C>              <C>               <C>
STATEMENT OF OPERATIONS
Total revenues                   $   45,720       $   43,810       $   21,479       $    15,582       $   13,612
- ----------------------------------------------------------------------------------------------------------------
Gross profit                     $   15,774       $   17,329       $    8,921       $     6,666       $    3,981
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss)          $    1,742       $    4,749       $    1,963       $     1,139       $   (2,744)
- -----------------------------------------------------------------------------------------------------------------
Net income (loss)                $      332       $    2,646       $      927       $       505       $   (3,056)
- -----------------------------------------------------------------------------------------------------------------
Basic earnings (loss)
per common share                 $     0.14       $    1.15        $     0.41       $      0.24       $    (2.55)
- ------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss)
per common share                 $     0.11       $    0.86        $     0.32       $      0.22       $    (2.55)
- -----------------------------------------------------------------------------------------------------------------
Basic weighted average
number of common
shares outstanding                    2,320            2,291            2,287             2,142            1,200
- ----------------------------------------------------------------------------------------------------------------
Diluted weighted average
number of common -
shares outstanding                    3,025            3,068            2,889             2,274            1,200
- ----------------------------------------------------------------------------------------------------------------

BALANCE SHEET
Working capital (deficit)        $    5,003       $    3,188       $    1,183       $       545       $     (471)
- -----------------------------------------------------------------------------------------------------------------
Total assets                     $   20,239       $   18,936       $   12,651       $     9,517       $    8,843
- ----------------------------------------------------------------------------------------------------------------
Long-term liabilities            $    5,797       $    4,348       $    4,431       $     4,831       $    4,965
- ----------------------------------------------------------------------------------------------------------------
Shareholders' equity             $    5,737       $    5,397       $    2,751       $     1,809       $      816
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

                                       12
<PAGE>


QUARTERLY FINANCIAL DATA

        The following table sets forth certain unaudited quarterly financial
data for the eight quarters ended December 28, 2002. In the Company's opinion,
the unaudited information set forth below has been prepared on the same basis as
the audited information and includes all adjustments necessary to present fairly
the information set forth herein. The operating results for any quarter are not
indicative of results for any future period. All data is in thousands except per
common share data.

<TABLE>
<CAPTION>
                                                                             Fiscal 2002
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
                                                   1st Quarter       2nd Quarter     3rd Quarter     4th Quarter
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
<S>                                                <C>               <C>             <C>             <C>
Total revenues                                     $      11,699     $     11,734    $      13,079   $      9,208
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Net income (loss)                                  $         238     $        537    $         274   $       (717)
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Basic income (loss) per common share               $        0.10     $       0.23    $        0.12   $      (0.31)
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Diluted income (loss) per common share             $        0.07     $       0.16    $        0.09   $      (0.31)
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Basic weighted average number of
common shares outstanding                                  2,311            2,320            2,324          2,324
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Diluted weighted average number of
common shares outstanding                                  3,310            3,291            3,176          2,324
- -------------------------------------------------- ----------------- --------------- --------------- ---------------

                                                                             Fiscal 2001
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
                                                   1st Quarter       2nd Quarter     3rd Quarter     4th Quarter
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Total revenues                                     $       7,764     $     10,095    $      13,645   $     12,306
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Net income                                         $         316     $        393    $       1,577   $        360
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Basic income per common share                      $        0.14     $       0.17    $        0.69   $       0.16
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Diluted income per common share                    $        0.11     $       0.13    $        0.50   $       0.11
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Basic weighted average number of
common shares outstanding                                  2,287            2,287            2,292          2,297
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Diluted weighted average number of
common shares outstanding                                  2,863            2,957            3,147          3,307
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS FOR THE FISCAL YEARS 2002, 2001 AND 2000

OVERVIEW

         The Company's 2002 fiscal year (2002) ended December 28, 2002, its 2001
fiscal year (2001) ended December 29, 2001 and its 2000 fiscal year (2000) ended
December 30, 2000.

         The Company generates revenues from three sources: retail, recycling
and byproduct. Retail revenues are sales of appliances, warranty and service
revenue and delivery fees. Recycling revenues are fees charged for the disposal
of appliances. Byproduct revenues are sales of scrap metal and reclaimed
chlorofluorocarbons ("CFCs") generated from processed appliances. The Company
experiences seasonal fluctuations in operating results, with revenues generally
higher during the second and third calendar quarters than in the first and
fourth quarters. The lower levels in the first and fourth quarters reflect
consumer purchasing cycles, which result in lower demand for appliances and
recycling services.

         In 2002, the Company focused on a carefully managed growth plan of
opening large showroom outlet stores, located in heavily trafficked,
conveniently located retail malls. During 2002, the Company opened one retail
store in the Columbus, Ohio market. The Company also closed an underperforming
retail store in the Dayton, Ohio market. Retail revenues accounted for 65.4% of
total revenues in 2002.


                                       13
<PAGE>


CRITICAL ACCOUNTING POLICIES

         The Company's significant accounting policies are summarized in the
footnotes to the financial statements. Some of the most critical policies are
also discussed below.

         REVENUE RECOGNITION: The Company recognizes revenue from appliance
sales in the period the appliances are sold. Revenue from appliance recycling is
recognized when a unit is collected and processed. Byproduct revenue is
recognized upon shipment.

         The Company defers revenue under certain appliance extended warranty
arrangements it services and recognizes the revenue over the related terms of
the warranty contracts. On extended warranty arrangements sold by the Company
but serviced by others for a fixed portion of the warranty sales price, the
Company recognizes revenue for the net amount retained at the time of sale.

         Shipping and handling charges to customers are included in the
revenues. Shipping and handling costs incurred by the Company are included in
cost of revenues.

         PRODUCT WARRANTY: The Company provides a warranty for the replacement
or repair of certain defective units. The Company's standard warranty policy
requires the Company to repair or replace certain defective units at no cost to
its customers. The Company estimates the costs that may be incurred under its
warranty and records a liability in the amount of such costs at the time product
revenue is recognized. Factors that affect the Company's warranty liability for
covered units include the number of units sold, historical and anticipated rates
of warranty claims on these units, and the cost of these claims. The Company
periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary. The Company believes the warranty liability of
$82,000 is adequate.

         TRADE RECEIVABLES: Trade receivables are carried at original invoice
amount less an estimate made for doubtful receivables based on a review of all
outstanding amounts on a monthly basis. Management determines the allowance for
doubtful accounts by regularly evaluating individual customer receivables and
considering a customer's financial condition, credit history, and current
economic conditions. Trade receivables are written off when deemed
uncollectible. Recoveries of trade receivables previously written off are
recorded when received. A trade receivable is considered to be past due if any
portion of the receivable balance is outstanding for more than 90 days. The
reserve for doubtful accounts of $26,000 should be adequate for any exposure to
loss in the Company's December 28, 2002 accounts receivable.

         INVENTORIES: Inventories, consisting principally of appliances, are
stated at the lower of cost, first-in, first-out (FIFO), or market. The Company
provides estimated reserves for the realizability of its appliance inventories,
including adjustments to market, based on various factors including the age of
such inventory and management's assessment of the need for such allowances.
Management looks at historical inventory agings and margin analysis in
determining its reserve estimate. The Company believes the reserve of $548,000
is adequate.

         PROPERTY AND EQUIPMENT: Depreciation is computed using straight-line
and accelerated methods over the following estimated useful lives:

                                      Years
         Buildings and improvements      18 - 30
         Equipment                        3 - 8

The Company did not identify any items that were impaired as of December 28,
2002.


                                       14
<PAGE>


         INCOME TAXES: Deferred taxes are provided on an asset and liability
method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment. Realization of deferred tax assets is
dependent upon sufficient future taxable income during the periods when
deductible temporary differences and carryforwards are expected to be available
to reduce taxable income. The valuation allowance at December 28, 2002
principally relates to net operating loss and tax credit carryforwards whose use
is limited under Section 382 of the Internal Revenue Code.

         STOCK-BASED COMPENSATION: The Company regularly grants options to its
employees under various plans as described in Note 8 to the financial
statements. As permitted under accounting principles generally accepted in the
United States of America, these grants are accounted for following APB Opinion
No. 25 and related interpretations. Accordingly, compensation cost would be
recognized for those grants whose exercise price is less than the fair market
value of the stock on the date of grant. There was no compensation expense
recorded for employee grants for the fiscal years of 2002, 2001 and 2000.

         The Company also grants options and warrants to nonemployees for goods
and services and in conjunction with certain agreements. These grants are
accounted for under FASB Statement No. 123 based on the grant date fair values.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

           In June 2002, the Financial Accounting Standards Board ("FASB")
issued Statement No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES. This statement requires the recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred
versus the date the Company commits to an exit plan. In addition, this statement
states the liability should be initially measured at fair value. The statement
is effective for exit or disposal activities that are initiated after December
31, 2002. The Company does not believe that the adoption of this pronouncement
will have a material effect on its consolidated financial statements.

         In January 2003, the FASB issued Statement No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE. This statement provides
alternative methods of transition for a voluntary change to the fair value-based
method of accounting for stock-based employee compensation. In addition, this
statement also amends the disclosure requirements of SFAS No. 123 to require
more prominent and frequent disclosures in the financial statements about the
effects of stock-based compensation. The transitional guidance and annual
disclosure provisions of this statement are effective for the December 28, 2002,
consolidated financial statements. The interim reporting disclosure requirements
will be effective for the Company's March 29, 2003, 10-Q. Because the Company
continues to account for employee stock-based compensation under APB Opinion No.
25, the transitional guidance of Statement No. 148 had no effect on the
Company's consolidated financial statements. However, the December 28, 2002,
consolidated financial statements have incorporated the enhanced disclosure
requirements of Statement No. 148.

         In January 2003, the FASB issued Interpretation No. 45 ("FIN 45"),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN 45 clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing certain guarantees. It also
elaborates on the disclosures in FASB Statement No. 5, ACCOUNTING FOR
CONTINGENCIES, which are to be made by a guarantor in its interim


                                       15
<PAGE>


and annual financial statements about its obligations under certain guarantees
that it has issued, even when the likelihood of making any payments under the
guarantees is remote. The December 28, 2002, consolidated financial statements
have incorporated the enhanced disclosure requirements of FIN 45, as presented
in Note 1 to the financial statements under the caption "Product warranty."

         In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. This interpretation establishes
standards for identifying a variable interest entity and for determining under
what circumstances a variable interest entity should be consolidated with its
primary beneficiary. Until now, a company generally has included another entity
in its consolidated financial statements only if it controlled the entity
through voting interests. FIN 46 changes that by requiring a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or is
entitled to receive a majority of the entity's residual returns or both. The
disclosure requirements of FIN 46 currently apply to the Company and the balance
of the requirements will apply to the Company as of the 3rd Quarter of 2003. The
Company does not believe that the adoption of this pronouncement will have a
material effect on its consolidated financial statements.

REVENUES

         The Company's total revenues for 2002 were $45,720,000 compared to
$43,810,000 in 2001.

         Retail revenues increased to $29,893,000 in 2002 from $22,037,000 in
2001, an increase of 35.6%. Same-store sales for 2002 (a sales comparison of
five stores open the full year in both 2002 and 2001) increased 12%. The
increase in retail revenues was primarily due to an increase in sales of new in
the box product due to additional purchases of new product and an increase in
special buy sales as a result of operating three additional stores during 2002
compared to the same period in the previous year. Special buy appliances include
manufacturer closeouts, factory over-runs, floor samples, returned or exchanged
items and scratch and dent appliances. The Company continues to purchase
appliances from Whirlpool Corporation, Maytag Corporation and Frigidaire. The
agreements with these manufacturers do not provide for any required or minimum
number of units to be sold to the Company.

        In October 2001, the Company entered into an agreement with Maytag
Corporation for the acquisition of distressed appliances ("Maytag Agreement").
Under the Maytag Agreement, there are no minimum purchase requirements. The
Maytag Agreement may be terminated by either party upon 60 days' written notice
or may be terminated immediately if a default is not cured within ten (10) days
after notice of default. In addition, the Company has agreed to indemnify Maytag
for all claims, losses, product liability and expenses with respect to Maytag
appliances sold by the Company.

         In December 2001, the Company announced that it will be purchasing
appliances from Frigidaire. There are no minimum purchase requirements.

         In January 2003, the Company announced that it had entered into a
contract with GE Consumer Products to purchase from GE and sell to consumers
special buy GE appliances. There are no minimum purchase requirements.

         The Company believes purchases from these four manufacturers will
provide an adequate supply of high-quality appliances for its retail outlets;
however there is a risk that one or more of these sources could be lost.

         The Company operated nine retail stores at the end of the current
fiscal year and at the end of the previous fiscal year. During the first quarter
of 2001, the Company opened a 24,000 square foot store in


                                       16
<PAGE>


the Minneapolis/Saint Paul market and a 42,000 square foot store in the Dayton,
Ohio market. In the second quarter of 2001, the Company closed a smaller store
and opened a 32,000 square foot store in the Columbus, Ohio market. In the
fourth quarter of 2001, the Company opened a 49,000 square foot store in the
Minneapolis/Saint Paul market. In March 2002, the Company opened a 30,000 square
foot store in the Columbus, Ohio market. In December 2002, the Company closed an
underperforming store in the Dayton, Ohio market. In February 2003, the Company
closed a smaller store and opened a 33,000 square foot store in the
Minneapolis/Saint Paul market. In March 2003, the Company closed an
underperforming store in the Dayton, Ohio market.

         Recycling revenues decreased to $14,625,000 in 2002 from $20,506,000 in
2001. The decrease was primarily due to an overall decrease in total recycling
volumes from all the various recycling contracts in California. Southern
California Edison Company ("Edison") accounted for approximately 13% of the
Company's total revenues for 2002 and 29% for 2001. In the first quarter of
2002, the Company recycled appliances for Edison under an extension of Edison's
2001 Residential Recycling Program. In July 2002, the Company signed a contract
in support of California's Statewide Residential Recycling Program for 2002 to
be administered by Edison. This contract was effective April 1, 2002 and ended
December 31, 2002. Recycling services for this statewide program included
customers of Edison, Pacific Gas and Electric ("PG&E") and San Diego Gas and
Electric ("SDG&E"). The Company was responsible for advertising in the PG&E and
SDG&E areas only. Edison was responsible for advertising in the Edison area.
Plans for a 2003 statewide recycling program that would be administered by
Edison are currently being reviewed by California regulatory authorities. The
Company is also aggressively pursuing new and potentially significant appliance
recycling programs in other states. Nevertheless, the Company's ability to
project recycling revenue for 2003 continues to be limited.

         In June 2001, the Company signed a contract ("the Appliance Early
Retirement and Recycling Program") with the California Public Utilities
Commission ("CPUC") to operate a refrigerator/freezer/room air conditioner
recycling program in San Diego and surrounding areas; a six-county region in
California's Central Valley, including the cities of Fresno and Stockton; and
the seven-county Bay Area, including the city of San Francisco. The Company
started taking customer orders for the Appliance Early Retirement and Recycling
Program in San Diego in June 2001. The CPUC budgeted $14 million to fund the
recycling program. The budget allocation included $50 incentive payments to
participants for refrigerators and freezers and $25 incentive payments for room
air conditioners. The program was completed August 31, 2002. The CPUC accounted
for approximately 12% of the Company's total revenues in 2002 and 9% in 2001.

         Byproduct revenues decreased to $1,202,000 in 2002 from $1,267,000 in
2001. The decrease was primarily due to a decrease in the volume and price of
CFCs offset by an increase in scrap metal revenues.

         The Company's total revenues for 2001 were $43,810,000 compared to
$21,479,000 in 2000.

         Retail revenues increased to $22,037,000 in 2001 from $12,379,000 in
2000, an increase of 78.0%. The increase in retail revenues was primarily due to
an increase in special buy appliance sales offset by a slight decrease in
reconditioned appliance sales. Same-store retail sales for 2001 increased 25% (a
sales comparison of four stores open for full years in both 2001 and 2000). The
increase in special buy appliance sales was primarily due to three additional
stores operating in 2001. The Company purchased a majority of the special buy
appliances sold from Whirlpool Corporation. The Company operated nine retail
stores at the end of 2001 compared to six retail stores at the end of 2000.
However, during the second quarter of 2000, the Company closed a smaller store
in the Minneapolis/Saint Paul market and opened a 33,000 square foot store in
the Dayton, Ohio market.


                                       17
<PAGE>


         Recycling revenues increased to $20,506,000 in 2001 from $8,140,000 in
2000. The increase was primarily due to increases in refrigerator recycling
volumes principally related to both of the contracts with Edison. Edison
accounted for approximately 29% of the Company's total revenues for 2001 and 30%
for 2000. In June 2000, the Company signed a two-year contract with Edison to
continue its refrigerator recycling program through December 30, 2001. The
two-year contract did not provide for a minimum number of refrigerators to be
recycled in either 2000 or 2001. The Company recycled approximately 36,000 units
in 2000 and approximately 50,000 units in 2001. The timing and amount of
revenues was dependent on advertising by Edison.

         The Company had another contract with Edison, ("Summer Initiative"), a
recycling program in the service areas of Pacific Gas & Electric (the San
Francisco Bay area) and San Diego Gas & Electric. Under this contract, the
Company recycled approximately 36,000 units. The Company began the Summer
Initiative in September of 2000 and it was completed in the third quarter of
2001. The Company was responsible for advertising the Summer Initiative.

         Byproduct revenues increased to $1,267,000 in 2001 from $960,000 in
2000. The increase was primarily due to an increase in the volume of CFCs and
scrap revenue resulting from the increased volume of Edison contracts.

GROSS PROFIT

         The Company's overall gross profit decreased to 34.5% in 2002 from
39.6% in 2001. The decrease was primarily due to lower recycling revenues and
higher recycling costs related to the recycling programs offset by slightly
improved gross margins in sales of special buy appliances. Gross profit as a
percentage of total revenues for future periods can be affected favorably or
unfavorably by numerous factors included the mix of retail products sold during
the period, the volume of appliances recycled from the expected Statewide
contract and the price and volume of byproduct revenues. The Company expects
gross profit percentages to decrease slightly as retail revenues continue to
become a higher percentage of total revenues.

         The Company's overall gross profit decreased slightly to 39.6% in 2001
from 41.5% in 2000. The decrease was primarily due to higher sales of special
buy appliances that have a lower margin than reconditioned appliances, offset by
higher recycling revenues from the initial Edison contract and the Summer
Initiative contract without a corresponding increase in expenses.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses were 30.7% of total
revenues in 2002 compared to 28.7% in 2001. Selling, general and administrative
expenses increased to $14,032,000 in 2002 from $12,580,000 in 2001, an 11.5%
increase. Selling expenses increased to $8,007,000 in 2002 from $5,959,000 in
2001. The increase was primarily due to the expenses of opening an additional
retail store during 2002 and operating three additional stores in 2002 compared
to the previous year, which also increased advertising by $273,000 and
commissions by $201,000. General and administrative expenses decreased to
$6,025,000 in 2002 from $6,621,000 in 2001. The decrease was primarily due to a
decrease in administrative costs as a result of an overall decrease in recycling
volumes and a decrease in bad debt expense.

         Selling, general and administrative expenses were 28.7% of total
revenues in 2001 compared to 32.4% in 2000. Selling, general and administrative
expenses increased to $12,580,000 in 2001 from $6,958,000 in 2000, an 80.8%
increase. Selling expenses increased to $5,959,000 in 2001 from $2,858,000 in
2000. The increase was primarily due to opening three additional retail stores
during 2001 which


                                       18
<PAGE>


increased advertising by $598,000 and commission by $271,000. General and
administrative expenses increased to $6,621,000 in 2001 from $4,100,000 in 2000.
The increase was primarily due to an increase in personnel costs as a result of
Company growth and an increase in bad debt expense.

INTEREST EXPENSE

         Interest expense increased to $1,236,000 in 2002 from $1,074,000 in
2001. The increase was primarily due to a one-time write-off of deferred
financing fees and debt discount related to a pay down of long-term debt and a
higher effective interest rate as a result of a higher minimum interest amount
on the line of credit offset by a lower average borrowed amount.

         Interest expense increased to $1,074,000 in 2001 from $841,000 in 2000.
The increase was primarily due to a higher average borrowed amount in 2001
compared to 2000 offset by a decrease in the effective interest rate on the line
of credit.

INCOME TAXES AND NET OPERATING LOSSES

         The Company recorded a provision for income taxes of $221,000 for 2002
compared to $1,117,000 in 2001. The decrease was due to less pre-tax income. A
lower effective tax rate in 2001 resulted from a reduction of $370,000 in the
deferred tax valuation allowance, net of effect of a net operating loss (NOL)
attribute reduction during 2001 resulting from the determination that certain
deferred tax assets were more likely than not to be realized.

         The Company has NOL carryovers of approximately $7 million at December
28, 2002, which may be available to reduce taxable income and in turn income
taxes payable in future years. However, future utilization of these loss and
credit carryforwards is subject to certain significant limitations under
provisions of the Internal Revenue Code including limitations subject to Section
382, which relate to a 50 percent change in control over a three-year period,
and are further dependent upon the Company maintaining profitable operations.
The Company believes that the issuance of Common Stock during 1999 resulted in
an "ownership change" under Section 382. Accordingly, the Company's ability to
use net operating loss carryforwards generated prior to February 1999 may be
limited to approximately $56,000 per year, or less than $1 million through 2018.

         As of its 2002 and 2001 year-ends, the Company had recorded cumulative
valuation allowances of $2,998,000 against its net deferred tax assets due to
the uncertainty of their realization. The reduction in the valuation allowance
during 2001 was due to the aforementioned determination that certain deferred
tax assets are more likely than not to be realized and to the effect of an NOL
attribute reduction. The realization of deferred tax assets is dependent upon
sufficient future taxable income during the periods when deductible temporary
differences and carryforwards are expected to be available to reduce taxable
income. At December 28, 2002, the remaining valuation allowance is principally
due to the Section 382 limitation of its NOL's and tax credits.


                                       19
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

         At December 28, 2002, the Company had working capital of $5,003,000
compared to $3,188,000 at December 29, 2001. Cash and cash equivalents increased
to $2,802,000 at December 28, 2002 from $506,000 at December 29, 2001. Net cash
provided by operating activities was $3,307,000 in 2002 compared to net cash
used in operating activities of $1,124,000 in 2001. The cash provided by
operating activities was primarily due to a decrease in receivables, an increase
in accounts payable, and net income plus non-cash expenses offset by an increase
in inventories. During 2002, inventories increased by $1,568,000 principally due
to more and larger stores and receivables decreased $3,246,000 principally due
to the overall decrease in volume related to the California recycling contracts.

         Net cash used in investing activities was $498,000 in 2002 compared to
$910,000 in 2001. The cash used in investing activities in 2002 was primarily
related to leasehold improvements for new stores offset by the proceeds of
disposal of certain equipment. The cash used in investing activities in 2001 was
primarily due to the continued upgrade of computer systems and the purchase of
equipment related to the refrigerator recycling program. The Company did not
have any material purchase commitments for assets as of December 28, 2002.

         Net cash used in financing activities was $513,000 in 2002 compared to
net cash provided by financing activities of $2,238,000 in 2001. The cash used
in financing activities was primarily due to decreased borrowings under the line
of credit in 2002 and payments on long-term liabilities offset by proceeds from
long-term obligations.

         As of December 28, 2002, the Company had a $10,000,000 line of credit
with a lender. The interest rate as of December 28, 2002 was 5.50%. The amount
of borrowings available under the line of credit is based on a formula using
receivables and inventories. The line of credit has a stated maturity date of
August 30, 2004 and provides that the lender may demand payment in full of the
entire outstanding balance of the loan at any time. The line of credit is
secured by substantially all the Company's assets and requires minimum monthly
interest payments of $37,500 regardless of the outstanding principal balance.
The lender also has an inventory repurchase agreement with Whirlpool Corporation
for purchases from Whirlpool only that secures the line of credit. The line
requires that the Company meet certain financial covenants, provides payment
penalties for noncompliance and prepayment, limits the amount of other debt the
Company can incur, limits the amount of spending on fixed assets and limits
payments of dividends. The Company's unused borrowing capacity was $367,000 at
December 28, 2002 and $193,000 at February 28, 2003.


                                       20
<PAGE>


         A summary of the Company's contractual cash obligations at December 28,
2002 is as follows:

<TABLE>
<CAPTION>
                   ---------------------------------------------------------------------------------------------------------
                                                         CASH PAYMENTS DUE BY PERIOD
- ------------------ --------------- --------------- --------------- --------------- ------------- ------------ --------------
CONTRACTUAL CASH
OBLIGATIONS                                                                                                          2008 AND
                            TOTAL            2003            2004            2005          2006          2007      THEREAFTER
- ------------------ --------------- --------------- --------------- --------------- ------------- ------------ --------------
<S>                   <C>               <C>             <C>             <C>           <C>           <C>          <C>
Long-term debt,       $ 8,135,000       $ 502,000       $ 502,000       $ 546,000     $ 451,000     $448,000     $5,686,000
including
interest
- ------------------ --------------- --------------- --------------- --------------- ------------- ------------ --------------
Operating leases      $ 6,127,000      $1,813,000      $1,529,000      $1,478,000     $ 795,000     $405,000       $107,000
- ------------------ --------------- --------------- --------------- --------------- ------------- ------------ --------------
Total                 $14,262,000      $2,315,000      $2,031,000      $2,024,000    $1,246,000     $853,000     $5,793,000
contractual cash
obligations
- ------------------ --------------- --------------- --------------- --------------- ------------- ------------ --------------

<CAPTION>
         We also have a commercial commitment as described below:

- ------------------------------- ----------------------------- ------------------------------ -------------------------------
       OTHER COMMERCIAL                 TOTAL AMOUNT
          COMMITMENT                     COMMITTED               OUTSTANDING AT 12/28/02           DATE OF EXPIRATION
- ------------------------------- ----------------------------- ------------------------------ -------------------------------
<S>                                     <C>                            <C>                          <C>
        Line of credit                  $10,000,000                    $3,515,000                   August 30, 2004
- ------------------------------- ----------------------------- ------------------------------ -------------------------------
</TABLE>

         We believe that the Company's cash balance, availability under the
Company's line of credit, if needed, and anticipated cash flows from operations
will be adequate to fund the Company's cash requirements for fiscal 2003.

         During 2000, the Company recognized a gain of $275,000 from the sale of
the ApplianceSmart outlet property in Saint Paul, Minnesota and recognized the
remaining deferred gain of $60,000 in 2001 when the original lease expired. The
Company operated this outlet under an operating lease until February 2003.

        In June 2001, the Company signed a contract ("the Appliance Early
Retirement and Recycling Program") with the California Public Utilities
Commission ("CPUC") to operate a refrigerator/freezer/room air conditioner
recycling program in San Diego and surrounding areas; a six-county region in
California's Central Valley, including the cities of Fresno and Stockton; and
the seven-county Bay Area, including the city of San Francisco. The Company
started taking customer orders for the Appliance Early Retirement and Recycling
Program in San Diego in June. The CPUC budgeted $14 million to fund the
recycling program. The budget allocation included $50 incentive payments to
participants for refrigerators and freezers and $25 incentive payments for room
air conditioners. The program was completed August 31, 2002.

         In July 2002, the Company signed a contract in support of California's
Statewide Residential Recycling Program for 2002 to be administered by Edison.
This contract was effective April 1, 2002 and continued until December 31, 2002.
Recycling services for this statewide program included customers of Edison,
Pacific Gas and Electric ("PG&E") and San Diego Gas and Electric ("SDG&E"). The
Company was responsible for advertising in the PG&E and SDG&E areas only. Edison
was responsible for advertising in the Edison area.

         In September 2002, the Company refinanced its building in St. Louis
Park, Minnesota and used the proceeds to pay down long-term debt. The new
long-term debt is for $3,470,000. The terms include a 20


                                       21
<PAGE>


year amortization, a 10 year balloon and a variable interest rate based on
30-day LIBOR. The interest rate as of December 28, 2002 was 4.5191%.

         In December 2002, the Company refinanced its building in Compton,
California. Currently, the proceeds are included in the cash and cash
equivalents. The new long-term debt is for $2,000,000. The terms include a 20
year amortization, a 10 year balloon and an interest rate of 6.85%.

         The Company believes, based on the anticipated revenues from the
expected Statewide Residential Recycling Program contract, the anticipated sales
per retail store and its anticipated gross profit, that its cash balance,
anticipated funds generated from operations and its current line of credit will
be sufficient to finance its operations and capital expenditures through
December 2003. The Company's total capital requirements for 2003 will depend
upon, among other things as discussed below, the recycling volumes generated
from the expected Statewide Residential Recycling Program in 2003 and the number
and size of retail stores operating during the fiscal year. Currently, the
Company has three centers and eight stores in operation. If revenues are lower
than anticipated or expenses are higher than anticipated, the Company may
require additional capital to finance operations. Sources of additional
financing, if needed in the future, may include further debt financing or the
sale of equity (common or preferred stock) or other securities. There can be no
assurance that such additional sources of financing will be available on terms
satisfactory to the Company or permitted by the Company's current lender.

FORWARD-LOOKING STATEMENTS

         Statements contained in this annual report regarding the Company's
future operations, performance and results, and anticipated liquidity discussed
herein are forward-looking and therefore are subject to certain risks and
uncertainties, including, but not limited to, those discussed herein. Any
forward-looking information regarding the operations of the Company will be
affected primarily by the Company's continued ability to purchase product from
Whirlpool, Maytag, Frigidaire and GE at acceptable prices and the ability and
timing of Edison to deliver units under the expected Statewide Residential
Recycling Program contract, currently being reviewed by California regulatory
authorities, with the Company. In addition, any forward-looking information will
also be affected by the ability of individual retail stores to meet planned
revenue levels, the rate of sustainable growth in the number of retail stores,
the speed at which individual retail stores reach profitability, costs and
expenses being realized at higher than expected levels, the Company's ability to
secure an adequate supply of special buy appliances for resale and the continued
availability of the Company's current line of credit.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

MARKET RISK AND IMPACT OF INFLATION

         The Company does not believe there is any significant risk related to
interest rate fluctuations on the long-term debt with fixed rates. However,
there is interest rate risk on the line of credit since its interest rate floats
with the prime rate and on approximately $3,500,000 in long-term debt entered
into in September 2002 since its interest rate is based on LIBOR. Also, the
Company believes that inflation has not had a material impact on the results of
operations for each of the fiscal years in the three-year period ended December
28, 2002. However, there can be no assurances that future inflation will not
have an adverse impact on the Company's operating results and financial
conditions.


                                       22
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
         Description                                                                                   Page
         -----------                                                                                   ----
<S>                                                                                                    <C>
         Independent Auditor's Report...................................................................24
         Consolidated Balance Sheet as of December 28, 2002
              and December 29, 2001.....................................................................25
         Consolidated Statement of Operations for the three years
              ended December 28, 2002...................................................................26
         Consolidated Statement of Shareholders' Equity for the three years
              ended December 28, 2002...................................................................27
         Consolidated Statement of Cash Flows for the three years
              ended December 28, 2002...................................................................28
         Notes to Consolidated Financial Statements.....................................................29
</TABLE>





                                       23
<PAGE>


                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Shareholders
Appliance Recycling Centers of America, Inc.
Minneapolis, Minnesota

We have audited the accompanying consolidated balance sheet of Appliance
Recycling Centers of America, Inc. and Subsidiaries as of December 28, 2002 and
December 29, 2001, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three year
period ended December 28, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Appliance Recycling
Centers of America, Inc. and Subsidiaries as of December 28, 2002 and December
29, 2001, and the results of their operations and their cash flows for each of
the years in the three year period ended December 28, 2002, in conformity with
accounting principles generally accepted in the United States of America.


McGLADREY & PULLEN, LLP


Minneapolis, Minnesota
February 17, 2003




                                       24
<PAGE>


 APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                          DECEMBER 28,    December 29,
                                                                  2002            2001
- --------------------------------------------------------------------------------------
<S>                                                       <C>             <C>
ASSETS  (NOTE 3)

CURRENT ASSETS
Cash and cash equivalents                                 $  2,802,000    $    506,000
Accounts receivable, net of allowances of
  $26,000 and $100,000, respectively (Note 9)                1,129,000       4,375,000
Inventories, net of reserves of $548,000
  and $464,000, respectively                                 8,316,000       6,748,000
Refundable income taxes                                        523,000              --
Deferred income taxes (Note 7)                                 490,000         576,000
Other current assets                                           448,000         174,000
                                                          ------------    ------------
  Total current assets                                      13,708,000      12,379,000
                                                          ------------    ------------
PROPERTY AND EQUIPMENT, at cost (Notes 2 and 4)
Land                                                         2,050,000       2,050,000
Buildings and improvements                                   3,945,000       3,779,000
Equipment                                                    4,979,000       4,689,000
                                                          ------------    ------------
                                                            10,974,000      10,518,000
Less accumulated depreciation                                4,763,000       4,291,000
                                                          ------------    ------------
  Net property and equipment                                 6,211,000       6,227,000
                                                          ------------    ------------
OTHER ASSETS                                                   320,000         330,000
                                                          ------------    ------------
  Total assets                                            $ 20,239,000    $ 18,936,000
                                                          ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Line of credit (Note 3)                                   $  3,515,000    $  4,708,000
Current maturities of long-term obligations                    259,000         401,000
Accounts payable                                             2,929,000       1,960,000
Accrued expenses (Note 5)                                    1,273,000       1,365,000
Income taxes payable                                           729,000         757,000
                                                          ------------    ------------
  Total current liabilities                                  8,705,000       9,191,000
LONG-TERM OBLIGATIONS, less current maturities (Note 4)      5,424,000       4,280,000
DEFERRED INCOME TAX LIABILITIES (Note 7)                       373,000          68,000
                                                          ------------    ------------
  Total liabilities                                         14,502,000      13,539,000
                                                          ------------    ------------
COMMITMENTS (Note 6)
SHAREHOLDERS' EQUITY (Notes 3 and 8)
Common Stock, no par value; authorized 10,000,000
  shares; issued and outstanding 2,324,000 and
  2,297,000 shares in 2002 and 2001, respectively           11,368,000      11,360,000
Accumulated deficit                                         (5,631,000)     (5,963,000)
                                                          ------------    ------------
  Total shareholders' equity                                 5,737,000       5,397,000
                                                          ------------    ------------
  Total liabilities and shareholders' equity              $ 20,239,000    $ 18,936,000
                                                          ============    ============
</TABLE>

 See Notes to Consolidated Financial Statements.


                                       25
<PAGE>


APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 For the fiscal year ended
- ----------------------------------------------------------------------------------------------------
                                                        DECEMBER 28,    December 29,    December 30,
                                                                2002            2001            2000
                                                        --------------------------------------------
<S>                                                     <C>             <C>             <C>
REVENUES (Note 9)
  Retail                                                $ 29,893,000    $ 22,037,000    $ 12,379,000
  Recycling                                               14,625,000      20,506,000       8,140,000
  Byproduct                                                1,202,000       1,267,000         960,000
                                                        ------------    ------------    ------------

  Total revenues                                          45,720,000      43,810,000      21,479,000

COST OF REVENUES (Note 9)                                 29,946,000      26,481,000      12,558,000
                                                        ------------    ------------    ------------

  Gross profit                                            15,774,000      17,329,000       8,921,000

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 2)     14,032,000      12,580,000       6,958,000
                                                        ------------    ------------    ------------

  Operating income                                         1,742,000       4,749,000       1,963,000

OTHER INCOME (EXPENSE)
  Other income                                                47,000          88,000         385,000
  Interest expense                                        (1,236,000)     (1,074,000)       (841,000)
                                                        ------------    ------------    ------------

  Income before provision for
     income taxes                                            553,000       3,763,000       1,507,000

PROVISION FOR INCOME TAXES (Note 7)                          221,000       1,117,000         580,000
                                                        ------------    ------------    ------------

  Net income                                            $    332,000    $  2,646,000    $    927,000
                                                        ============    ============    ============

BASIC EARNINGS PER COMMON SHARE                         $       0.14    $       1.15    $       0.41
                                                        ============    ============    ============

DILUTED EARNINGS PER COMMON SHARE                       $       0.11    $       0.86    $       0.32
                                                        ============    ============    ============

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
  Basic                                                    2,320,000       2,291,000       2,287,000
                                                        ============    ============    ============
  Diluted                                                  3,025,000       3,068,000       2,889,000
                                                        ============    ============    ============
</TABLE>

See Notes to Consolidated Financial Statements


                                       26
<PAGE>


APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                         Accumulated
                                                         Common Stock       Deficit            Total
                                                         ------------       -------            -----
<S>                                                       <C>             <C>                <C>
BALANCE, JANUARY 1, 2000                                  $11,345,000     $(9,536,000)       $1,809,000
  Warrants issued to vendor (Note 8)                           15,000               -            15,000
  Net income                                                        -         927,000           927,000
- -------------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 30, 2000                                 11,360,000      (8,609,000)        2,751,000
  Net income                                                        -       2,646,000         2,646,000
- -------------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 29, 2001                                 11,360,000      (5,963,000)        5,397,000
  Exercise of stock options (Note 8)                            8,000               -             8,000
  Net income                                                        -         332,000           332,000
- -------------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 28, 2002                                $11,368,000     $(5,631,000)       $5,737,000
=======================================================================================================
</TABLE>

See Notes to Consolidated Financial Statements.




                                       27
<PAGE>


APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                     For the fiscal year ended
- -------------------------------------------------------------------------------------------------------
                                                             DECEMBER 28,   December 29,   December 30,
                                                                     2002           2001           2000
                                                              -----------------------------------------
<S>                                                           <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                 $   332,000    $ 2,646,000    $   927,000
   Adjustments to reconcile net income to net
      cash provided by (used in) operating activities:
   Depreciation and amortization                                  507,000        483,000        385,000
   Write-off of deferred financing fees and debt discount         258,000             --             --
   (Gain) loss on sale of property and equipment                    7,000        (60,000)      (271,000)
   Accretion of long-term debt discount                            46,000         43,000         39,000
   Deferred income taxes                                          391,000       (400,000)       (33,000)
   Change in current assets and liabilities:
      Receivables                                               3,246,000     (2,644,000)      (279,000)
      Inventories                                              (1,568,000)    (2,515,000)    (2,647,000)
      Other assets                                               (238,000)       (27,000)      (189,000)
      Accounts payable and accrued expenses                       877,000      1,110,000        436,000
      Current Income taxes                                       (551,000)       240,000        442,000
                                                              -----------    -----------    -----------
        Net cash provided by (used in) operating activities     3,307,000     (1,124,000)    (1,190,000)
                                                              -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of property and equipment                           (598,000)      (910,000)      (609,000)
   Proceeds from disposals of property and equipment              100,000             --        667,000
                                                              -----------    -----------    -----------
        Net cash provided by (used in) investing activities      (498,000)      (910,000)        58,000
                                                              -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net borrowings (payments) under line of credit              (1,193,000)     2,306,000      1,514,000
   Payments on long-term obligations                           (4,648,000)      (350,000)      (377,000)
   Proceeds from long-term obligations                          5,470,000        282,000         77,000
   Payments of deferred financing fees                           (150,000)            --             --
   Proceeds from issuance of common stock                           8,000             --             --
                                                              -----------    -----------    -----------
        Net cash provided by (used in) financing activities      (513,000)     2,238,000      1,214,000
                                                              -----------    -----------    -----------

   Increase in cash and cash equivalents                        2,296,000        204,000         82,000

CASH AND CASH EQUIVALENTS
   Beginning                                                      506,000        302,000        220,000
                                                              -----------    -----------    -----------
   Ending                                                     $ 2,802,000    $   506,000    $   302,000
                                                              ===========    ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
   Interest                                                   $ 1,056,000    $ 1,031,000    $   802,000
   Income taxes, net                                              439,000        279,000        177,000
                                                              ===========    ===========    ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       28
<PAGE>


APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT
        ACCOUNTING POLICIES

NATURE OF BUSINESS: Appliance Recycling Centers of America, Inc. and
subsidiaries (the "Company") are in the business of providing reverse logistics,
energy conservation and recycling services for major household appliances. The
Company sells appliances through a chain of Company-owned factory outlet stores
under the name ApplianceSmart(R). The Company provides recycling services on a
credit basis to appliance retailers, electric utilities, waste management
companies and local governments.

A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Appliance Recycling Centers of America, Inc. and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.

FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions are
used to estimate the fair value of each class of financial instrument:

       CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: Due to their
       nature and short-term maturities, the carrying amounts approximate fair
       value.

       SHORT- AND LONG-TERM DEBT: The fair value of short- and long-term debt
       has been estimated based on discounted cash flows using interest rates
       being offered for similar debt having the same or similar remaining
       maturities and collateral requirements.

No separate comparison of fair values versus carrying values is presented for
the aforementioned financial instruments since their fair values are not
significantly different than their balance sheet carrying amounts. In addition,
the aggregate fair values of the financial instruments would not represent the
underlying value of the Company.

FISCAL YEAR: The Company uses a 52-53 week fiscal year. The Company's 2002
fiscal year (2002) ended December 28, 2002, its 2001 fiscal year (2001) ended
December 29, 2001 and its 2000 fiscal year (2000) ended December 30, 2000. All
such fiscal years contain 52 weeks.

REVENUE RECOGNITION: The Company recognizes revenue from appliance sales in the
period the appliances are sold. Revenue from appliance recycling is recognized
when a unit is collected and processed. Byproduct revenue is recognized upon
shipment.

The Company defers revenue under certain appliance extended warranty
arrangements it services and recognizes the revenue over the related terms of
the warranty contracts. On extended warranty arrangements sold by the Company
but serviced by others for a fixed portion of the warranty sales price, the
Company recognizes revenue for the net amount retained at the time of sale.

Shipping and handling charges to customers are included in the revenues.
Shipping and handling costs incurred by the Company are included in cost of
revenues.

PRODUCT WARRANTY: The Company provides a warranty for the replacement or repair
of certain defective units. The Company's standard warranty policy requires the
Company to repair or replace certain defective units at no cost to its
customers. The Company estimates the costs that may be incurred under its
warranty and records a liability in the amount of such costs at the time product
revenue is recognized. Factors that affect the Company's warranty liability for
covered units include the number of units sold, historical and anticipated rates
of warranty claims on these units, and the cost of these claims. The Company
periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary.

Changes in the Company's warranty liability are as follows:

                             2002           2001          2000
- --------------------------------------------------------------------------------
Balance, beginning         $187,000       $106,000      $ 57,000
   Standard accrual
     based on units sold    203,000        301,000       197,000
   Actual costs incurred   (134,000)      (253,000)     (167,000)
   Periodic accrual
     adjustments           (174,000)        33,000        19,000
                           --------       --------      --------
Balance, ending            $ 82,000       $187,000      $106,000
                           ========       ========      ========

TRADE RECEIVABLES: Trade receivables are carried at original invoice amount less
an estimate made for doubtful receivables based on a review of all outstanding
amounts on a monthly basis. Management determines the allowance for doubtful
accounts by regularly evaluating individual customer receivables and considering
a customer's financial condition, credit history, and current economic
conditions. Trade receivables are written off when deemed uncollectible.
Recoveries of trade receivables previously written off are


                                       29
<PAGE>


recorded when received. A trade receivable is considered to be past due if any
portion of the receivable balance is outstanding for more than 90 days.

CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all cash and money-market funds with an initial maturity of three
months or less to be cash equivalents. The Company maintains its cash in bank
deposit and money-market accounts which, at times, exceed federally insured
limits. The Company has not experienced any losses in such accounts.

INVENTORIES: Inventories, consisting principally of appliances, are stated at
the lower of cost, first-in, first-out (FIFO), or market and consist of:

                                2002               2001
- -------------------------------------------------------
Finished goods            $8,596,000         $6,957,000
Work-in-process-
unrefurbished units          268,000            255,000
Less reserves               (548,000)          (464,000)
                          ----------         ----------
                          $8,316,000         $6,748,000

The Company provides estimated reserves for the realizability of its appliance
inventories, including adjustments to market, based on various factors including
the age of such inventory and management's assessment of the need for such
allowances.

DEFERRED GAIN: In the third quarter of 2000, the Company sold its
ApplianceSmart(R) outlet property in Saint Paul, Minnesota. The Company operated
this outlet until February 2003 under this lease. The Company recognized
$275,000 of the gain on this transaction in 2000 and the remaining $60,000 gain
in 2001 when the original lease term expired.

PROPERTY AND EQUIPMENT: Depreciation is computed using straight-line and
accelerated methods over the following estimated useful lives:

                                      Years
    Buildings and improvements       18 - 30
    Equipment                          3 - 8

SOFTWARE DEVELOPMENT COSTS: The Company capitalizes software developed for
internal use in accordance with Statement of Position 98-1 and is amortizing
such costs over their estimated useful life of five years. Costs capitalized
were $221,000, $225,000, and $215,000 for the fiscal years of 2002, 2001 and
2000, respectively.

ACCOUNTING FOR LONG-LIVED ASSETS: The Company reviews its property, equipment
and goodwill periodically to determine potential impairment by comparing the
carrying value of the long-lived assets with the estimated future net
undiscounted cash flows expected to result from the use of the assets, including
cash flows from disposition. Should the sum of the expected future net cash
flows be less than the carrying value, the Company recognizes an impairment loss
at that time. An impairment loss is measured by comparing the amount by which
the carrying value exceeds the fair value (estimated discounted future cash
flows or appraisal of assets) of the long-lived assets. Also see Note 2.

DEFERRED FINANCING FEES: Deferred financing fees are presented in the
consolidated balance sheet as a component of other assets and are reported net
of accumulated amortization. Amortization expense is determined on a
straight-line basis over the term of the underlying debt.

ADVERTISING EXPENSE: Advertising is expensed as incurred, and was $1,823,000,
$1,487,000 and $884,000 for the fiscal years of 2002, 2001 and 2000,
respectively.

INCOME TAXES: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.

BASIC AND DILUTED NET EARNINGS PER SHARE: Basic per-share amounts are computed,
generally, by dividing net income or loss by the weighted-average number of
common shares outstanding. Diluted per-share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless their
effect is antidilutive, thereby reducing the loss or increasing the income per
common share.

In arriving at diluted weighted-average shares and per share amounts, options
and warrants (see Note 8) with exercise prices below average market prices, for
the respective fiscal quarters in which they were dilutive, were included using
the treasury stock method. The number of additional shares is calculated by
assuming the outstanding stock options and warrants were exercised and that the
proceeds from such exercises were used to acquire common stock at the average
market price during the year. The dilutive effect of these additional shares for
the fiscal years of 2002, 2001 and 2000 was to increase the weighted average
shares outstanding by 705,000, 777,000 and 602,000, respectively.


                                       30
<PAGE>


STOCK-BASED COMPENSATION: The Company regularly grants options to its employees
under various plans as described in Note 8. As permitted under accounting
principles generally accepted in the United States of America, these grants are
accounted for following APB Opinion No. 25 and related interpretations.
Accordingly, compensation cost would be recognized for those grants whose
exercise price is less than the fair market value of the stock on the date of
grant. There was no compensation expense recorded for employee grants for the
fiscal years of 2002, 2001 and 2000.

The Company also grants options and warrants to nonemployees for goods and
services and in conjunction with certain agreements. These grants are accounted
for under FASB Statement No. 123 based on the grant date fair values.

Had compensation cost for all of the employee stock-based compensation grants
and warrants issued been determined based on the fair values at the grant date
consistent with the provisions of Statement No. 123, the Company's net income
and net income per basic and diluted common share would have been as indicated
below.

                               2002              2001             2000
- --------------------------------------------------------------------------------
Net income:
   As reported            $     332,000    $   2,646,000    $     927,000
   Deduct pro forma
     stock-based
     compensation,
     net of the related
     tax effects                (80,000)         (58,000)         (68,000)
                          -------------    -------------    -------------
   Pro forma              $     252,000    $   2,588,000    $     859,000
                          =============    =============    =============
Basic earnings
  per share:
   As reported            $        0.14    $        1.15    $        0.41
   Pro forma              $        0.11    $        1.13    $        0.38
Diluted earnings
  per share:
   As reported            $        0.11    $        0.86    $        0.32
   Pro forma              $        0.08    $        0.84    $        0.30

The above pro forma effects on net income and net income per basic and diluted
common share are not likely to be representative of the effects on reported net
income or net income per common share for future years because options vest over
several years and additional awards generally are made each year.

COMPREHENSIVE INCOME: Comprehensive income is equivalent to net income in the
statement of operations.

SEGMENT INFORMATION: The Company has one operating segment. Although certain
separate financial information by retail store, or retail store and recycling
center, is available to management, the Company is managed as a unit.
Specifically, the Company does not measure profit or loss or maintain assets
separately for its products or revenue sources (retail appliance sales,
appliance recycling including recycling services for utilities, and byproduct
sales).

ESTIMATES: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED: The following items represent
accounting standards that have been recently issued but not yet adopted by the
Company.

In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This
statement requires the recognition of a liability for a cost associated with an
exit or disposal activity when the liability is incurred versus the date the
Company commits to an exit plan. In addition, this statement states the
liability should be initially measured at fair value. The statement is effective
for exit or disposal activities that are initiated after December 31, 2002. The
Company does not believe that the adoption of this pronouncement will have a
material effect on its consolidated financial statements.

In January 2003, the FASB issued Statement No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE. This statement provides alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. In addition, this statement
also amends the disclosure requirements of Statement No. 123 to require more
prominent and frequent disclosures in the financial statements about the effects
of stock-based compensation. The transitional guidance and annual disclosure
provisions of this statement are effective for the December 28, 2002,
consolidated financial statements. The interim reporting disclosure requirements
will be effective for the Company's March 29, 2003, 10-Q. Because the Company
continues to account for employee stock-based compensation under APB Opinion No.
25, the transitional guidance of Statement No. 148 had no effect on the
Company's consolidated financial statements. However, the December 28, 2002,
consolidated financial statements have incorporated the enhanced disclosure
requirements of Statement No. 148.

In January 2003, the FASB issued Interpretation No. 45 ("FIN 45"), GUARANTOR'S
ACCOUNTING AND DISCLOSURE


                                       31
<PAGE>


REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS. FIN 45 clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing certain guarantees. It also elaborates on the disclosures
in FASB Statement No. 5, ACCOUNTING FOR CONTINGENCIES, which are to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued, even when the likelihood of making
any payments under the guarantees is remote. The December 28, 2002, consolidated
financial statements have incorporated the enhanced disclosure requirements of
FIN 45, as presented in Note 1 to the financial statements under the caption
"Product warranty."

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), CONSOLIDATION
OF VARIABLE INTEREST ENTITIES. This interpretation establishes standards for
identifying a variable interest entity and for determining under what
circumstances a variable interest entity should be consolidated with its primary
beneficiary. Until now, a company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 changes that by requiring a variable interest entity to
be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or is entitled to
receive a majority of the entity's residual returns or both. The disclosure
requirements of FIN 46 currently apply to the Company and the balance of the
requirements will apply to the Company as of the 3rd Quarter of 2003. The
Company does not believe that the adoption of this pronouncement will have a
material effect on its consolidated financial statements.

NOTE 2. MARKET CLOSINGS AND LOSS ON IMPAIRED ASSETS

In April 2000, the Company closed a retail store in the Minneapolis market. In
connection therewith, the Company wrote off leasehold improvements of
approximately $71,000.

In December 2002, the Company closed a retail store in the Dayton, Ohio market
and incurred expenses of $108,000 for the remaining lease payments and write off
of leasehold improvements.

In February 2003, the Company closed a retail store in the Minneapolis market
which resulted in no closing costs.

NOTE 3. LINE OF CREDIT

At December 28, 2002, the Company had a $10 million line of credit with a
lender. The interest rate as of December 28, 2002 was 5.50%. The amount of
borrowings available under the line of credit is based on a formula using
receivables and inventories. The line of credit has a stated maturity date of
August 30, 2004, if not renewed, and provides that the lender may demand payment
in full of the entire outstanding balance of the loan at any time. The line of
credit is secured by substantially all the Company's assets, and requires
minimum monthly interest payments of $37,500 regardless of the outstanding
principal balance. The lender is also secured by an inventory repurchase
agreement with Whirlpool Corporation for purchases from Whirlpool only. The loan
requires that the Company meet certain covenants, provides payment penalties for
noncompliance, limits the amount of other debt the Company can incur, limits the
amount of spending on fixed assets and limits payments of dividends. At December
28, 2002 the Company's unused borrowing capacity under this line was $367,000.

NOTE 4. LONG-TERM OBLIGATIONS

Long-term obligations consisted of the following:
                                                      2002              2001
- ------------------------------------------------------------------------------
13.00% note payable,
   due in monthly
   interest payments of $541
   with balance due
   September 2005,
   secured by equipment                           $   50,000        $3,072,000

Adjustable rate mortgage
   based on a 30 day LIBOR
   rate plus 2.7%, adjusted
   yearly, monthly payments
   include interest and principal,
   and are based on a 20 year
   amortization, due October
   2012, secured  by land
   and building                                    3,452,000                 -

6.85% mortgage, due in monthly
   installments of $15,326,
   including interest, due January
   2013, secured by land and
   building                                        2,000,000                 -

Other                                                181,000         1,609,000
                                                  ----------        ----------
                                                   5,683,000         4,681,000
Less current maturities                              259,000           401,000
                                                  ----------        ----------
                                                  $5,424,000        $4,280,000
                                                  ==========        ==========


                                       32
<PAGE>


The future annual maturities of long-term obligations are as follows:

Fiscal year
2003                                             $   259,000
2004                                                 216,000
2005                                                 206,000
2006                                                 238,000
2007                                                 196,000
2008 and thereafter                                4,568,000
                                                 -----------
                                                 $ 5,683,000
                                                 ===========

NOTE 5. ACCRUED EXPENSES

Accrued expenses were as follows:

                                       2002           2001
- ------------------------------------------------------------
Compensation and benefits          $  813,000     $  936,000
Warranty expense                       82,000        187,000
Other                                 378,000        242,000
                                   ----------     ----------
                                   $1,273,000     $1,365,000
                                  ===========     ==========

NOTE 6. COMMITMENTS

OPERATING LEASES: The Company leases certain of its retail stores and recycling
center facilities and equipment under noncancelable operating leases. The leases
require the payment of taxes, maintenance, utilities and insurance.

Minimum future rental commitments under noncancelable operating leases as of
December 28, 2002 are as follows:

Fiscal Year
2003                                             $ 1,813,000
2004                                               1,529,000
2005                                               1,478,000
2006                                                 795,000
2007                                                 405,000
2008 and thereafter                                  107,000
                                                 -----------
                                                 $ 6,127,000
                                                 ===========

Rent expense for fiscal years of 2002, 2001 and 2000 was $1,973,000, $1,519,000
and $420,000, respectively.

CONTRACTS: The Company has entered into contracts with three of its appliance
vendors. Under the agreements there are no minimum purchase commitments,
however, the Company has agreed to indemnify the vendors for certain claims,
allegations or losses with respect to appliances sold by the Company. Also see
Note 9.

NOTE 7. INCOME TAXES

The provision for income taxes consisted of the following:

                        2002           2001           2000
- ------------------------------------------------------------
Current:
  Federal           $ (170,000)    $1,289,000       $496,000
  State                      -        228,000        117,000
Deferred               391,000       (400,000)       (33,000)
                    ----------     ----------       --------
                    $  221,000     $1,117,000       $580,000
                    ==========     ==========       ========

A reconciliation of the Company's income tax expense with the federal statutory
tax rate is shown below:

                        2002           2001           2000
- ------------------------------------------------------------
Income tax
  expense at
  statutory rate     $ 188,000    $ 1,278,000      $ 511,000
State taxes net
  of federal
  tax effect            25,000        189,000         99,000
Permanent
  differences
  and other              8,000         20,000         33,000
Change in
  valuation
  allowance, net
  of effect of
  NOL attribute
  reduction                  -       (370,000)       (63,000)
                     ---------    -----------      ---------
                     $ 221,000    $ 1,117,000      $ 580,000
                     =========    ===========      =========

The components of net deferred tax assets are as follows:

                                      2002           2001
- ------------------------------------------------------------
Deferred tax assets:
  Net operating loss
    carryforwards                 $ 2,834,000    $ 2,834,000
  Federal and state tax credits       199,000        199,000
  Reserves                            362,000        409,000
  Accrued expenses                     93,000        132,000
                                  -----------    -----------
    Gross deferred tax assets     $ 3,488,000    $ 3,574,000
Valuation allowance                (2,998,000)    (2,998,000)
                                  -----------   ------------
                                  $   490,000    $   576,000
                                  ===========    ===========

Deferred tax liabilities:
  Property and equipment          $   373,000    $    68,000
                                  ===========    ===========

At December 28, 2002, the Company had a valuation allowance against deferred tax
assets to reduce the total to an amount management believes is appropriate.
Realization of deferred tax assets is dependent upon sufficient future taxable
income during the periods when deductible temporary differences and
carryforwards are expected to be available to reduce taxable income. The
reduction in the valuation allowance during 2001 was due to the determination
that certain deferred tax assets are more likely than not to be realized and to
the effect of an NOL attribute reduction.


                                       33
<PAGE>

At December 28, 2002, the Company had net operating loss ("NOL") carryforwards
expiring as follows:

Expiration                           Amount
- ----------                           ------
2011                               $3,296,000
2012                               $1,144,000
2018                               $2,645,000

Future utilization of NOL and tax credit carryforwards is subject to certain
limitations under provisions of Section 382 of the Internal Revenue Code. This
Section relates to a 50 percent change in control over a three-year period. The
Company believes that the issuance of common stock during 1999 resulted in an
"ownership change" under Section 382. Accordingly, the Company's ability to use
NOL and tax credit carryforwards generated prior to February 1999 may be limited
to approximately $56,000 per year.

NOTE 8. SHAREHOLDERS' EQUITY

STOCK OPTIONS: The Company has two Stock Option Plans (the "Plans") that permit
the granting of "incentive stock options" meeting the requirements of Section
422 of the Internal Revenue Code of 1986, as amended, and nonqualified options
that do not meet the requirements of Section 422. The Plans have 150,000 and
600,000 shares, respectively, available for grant. The options that have been
granted under the Plans are exercisable for a period of five to ten years from
the date of grant and vest over a period of six months to five years from the
date of grant.

The pro forma fair value of each option grant as presented in Note 1 to the
financial statements is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions:

                                         2002      2001     2000
- --------------------------------------------------------------------------------
Expected dividend yield                     -         -        -
Expected stock price volatility          79.7%     82.3%    79.7%
Risk-free interest rate                   1.4%      6.2%     6.0%
Expected life of options (years)            3          3       3
- --------------------------------------------------------------------------------

Additional information relating to all outstanding options is as follows:

                                          Weighted Average
                           Shares         Exercise Price
- --------------------------------------------------------------------------------
Outstanding at
  January 1, 2000         237,000             $  3.36
  Granted                 180,000             $  2.22
  Cancelled               (44,000)            $  5.20
- --------------------------------------------------------------------------------
Outstanding at
  December 30, 2000       373,000             $  2.59
  Granted                  56,000             $  1.82
  Cancelled               (21,000)            $ 17.52
- --------------------------------------------------------------------------------
Outstanding at
  December 29, 2001       408,000             $  1.98
  Granted                  57,000             $  3.77
  Exercised                (8,000)            $  0.96
  Cancelled               (20,000)            $  3.60
- --------------------------------------------------------------------------------
Outstanding at
  December 28, 2002       437,000             $  2.16
- --------------------------------------------------------------------------------

The weighted average fair value per option of options granted during fiscal
years 2002, 2001 and 2000 was $1.65, $0.86 and $0.90, respectively.

The following tables summarize information about stock options outstanding as of
December 28, 2002:

                             OPTIONS OUTSTANDING
                                       Weighted
                                        Average
                                      Remaining     Weighted
Range of                Number of   Contractual      Average
Exercise                  Options       Life in     Exercise
Prices                Outstanding         Years        Price
- ------------------------------------------------------------
$10.52                      8,000           0.5       $10.52
$4.05 to $4.30             39,000           8.0        $4.15
$2.38 to $3.50             48,000           4.1        $2.55
$0.75 to $2.20            259,000           3.5        $1.93
$0.59 to $0.65             83,000           3.4        $0.63
                          -------
                          437,000                      $2.13
                          =======

                             OPTIONS EXERCISABLE
Range of                   Number of            Weighted
Exercise                     Options             Average
Prices                   Exercisable      Exercise Price
- --------------------------------------------------------
$10.52                      8,000              $10.52
$4.05 to $4.30             23,000               $4.05
$2.38 to $3.50             48,000               $2.55
$0.75 to $2.20            163,000               $1.78
$0.59 to $0.65             83,000               $0.62
                          -------
                          325,000               $2.01
                          =======

                                       34
<PAGE>


The following table summarizes options exercisable for stock options outstanding
as of December 29, 2001 and December 30, 2000:

                      December 29,        December 30,
                             2001                2000
- -----------------------------------------------------
Number of options
  exercisable             275,000             188,000
Weighted average
  exercise price            $1.77               $3.34

WARRANTS: The Company has adopted the provisions of SFAS No. 123 in accounting
for its warrants issued for financing or services. Accordingly, the expense, if
any, applicable to the value of such warrants is recognized as of the date of
grant. Such warrants are generally issued to non-employees.

In September 1998, the Company entered into a loan agreement with a lender
resulting in gross proceeds to the Company of $3.5 million. In connection with
this loan, the Company issued the lender a warrant to purchase 700,000 shares of
Common Stock at an adjustable exercise price, which is currently $0.60 per
share. The Company also issued to an investment banker associated with this
transaction a warrant to purchase 125,000 shares of Common Stock at $2.50 per
share. The portion of the gross loan proceeds ascribed to the aforementioned
warrants issued in conjunction with this debt financing was $307,000 as
determined using the Black-Scholes method. During 2002, 32,136 warrants were
exercised resulting in the issuance of 14,872 shares of common stock.

During 2001, 53,750 warrants related to a 1998 financing transaction were
exercised resulting in the issuance of 9,768 shares of common stock and 15,000
of warrants from the same financing transaction expired.

In February 1999, in connection with a private placement, the Company issued
warrants to purchase 83,000 shares of Common stock at $0.50 per share, subject
to adjustment. During 2002, 4,000 warrants were exercised resulting in the
issuance of 3,506 shares of Common Stock.

In March 1999, the Company issued to a board member at that time, 5,000 warrants
to purchase the Company's Common Stock at $0.625 per share, the market value of
the Company's stock at the date of grant.

In April 1999, the Company issued to a vendor 50,000 warrants to purchase common
stock at $0.625 per share. In February 2003, 20,000 warrants were exercised
resulting in the issuance of 20,000 shares of Common Stock.

All issued warrants are exercisable and expire as follows: 92,874 in 2003;
129,000 in 2004; 700,000 in 2007 and 5,000 in 2009.

PREFERRED STOCK: The Company's amended Articles of Incorporation authorize two
million shares of Preferred Stock of the Company ("Preferred Stock") which may
be issued from time to time in one or more series having such rights, powers,
preferences and designations as the Board of Directors may determine. To date no
such preferred shares have been issued.

NOTE 9.  MAJOR CUSTOMERS AND SUPPLIERS

Revenues from two major recycling customers as a percentage of total revenues
are as follows:

                           2002       2001           2000
- ---------------------------------------------------------
Revenue percentage:
    Customer A              13%        29%            30%
    Customer B              12%         9%             -

As of December 28, 2002, the Company had a receivable from Customer A of
$399,000 and Customer B of $49,000.

During the three year period ended December 28, 2002, the Company purchased a
vast majority of appliances for resale from three suppliers. The Company has and
is continuing to secure other vendors from which to purchase appliances.
However, the loss of one of these suppliers or any appliance supplier could
adversely affect Company's operations.


                                       35
<PAGE>


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

         No changes in or disagreements with accountants have occurred within
the two-year period ended December 28, 2002 that required reporting on Form 8-K.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         Information regarding directors and executive officers of the Company
is set forth under the headings "Nominees and Information Concerning Officers
and Key Employees who are not Directors" and "Section 16 (a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
its 2003 Annual Meeting of Shareholders to be held April 24, 2003, and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

         Information regarding Executive Compensation is set forth under the
heading "Executive Compensation and Stock Options Granted and Exercised in Last
Fiscal Year" in the Company's definitive Proxy Statement for its 2003 Annual
Meeting of Shareholders to be held April 24, 2003, and is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED SHAREHOLDER MATTERS

         Information regarding security ownership of certain beneficial owners
and management is set forth under the heading "Common Stock Ownership" in the
Company's definitive Proxy Statement for its 2003 Annual Meeting of Shareholders
to be held April 24, 2003, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information regarding certain relationships and related transactions is
set forth under the heading "Nominees and Information Concerning Officers and
Key Employees who are not Directors" in the Company's definitive Proxy Statement
for its 2003 Annual Meeting of Shareholders to be held April 24, 2003, and is
incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

         Within 90 days prior to the date of this annual report, the Company
carried out an evaluation, under the supervision and participation of
management, including the chief executive office and chief financial officer, of
the effectiveness of the design and operation of disclosure controls and
procedures. Based upon the evaluation, the chief executive officer and chief
financial officer concluded that the disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in periodic SEC filings. There were no significant changes to internal
controls or in other factors that could significantly affect such internal
controls subsequent to the date that the evaluation was conducted.


                                       36
<PAGE>


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS

         1.       FINANCIAL STATEMENTS

                  See Index to Financial Statements under Item 8 of this report.

         2.       FINANCIAL STATEMENT SCHEDULE

                  To the Board of Directors
                  Appliance Recycling Centers of America, Inc.
                  Minneapolis, Minnesota

                           Our audits were made for the purpose of forming an
                  opinion on the basic consolidated financial statements of
                  Appliance Recycling Centers of America, Inc. and Subsidiaries
                  taken as a whole. The supplemental Schedule II is presented
                  for purposes of complying with the Securities and Exchange
                  Commission's rules and is not a part of the basic consolidated
                  financial statements. This schedule has been subjected to the
                  auditing procedures applied in our audits of the basic
                  consolidated financial statements and in our opinion, is
                  fairly stated in all material respects in relation to the
                  basic consolidated financial statements taken as a whole.

                                                         McGLADREY & PULLEN, LLP

                  Minneapolis, Minnesota
                  February 17, 2003

                  Schedule II - Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                             Accounts Receivable       Inventory
                                                                       Allowance       Allowance
                  ------------------------------------------------------------------------------
<S>                                                               <C>                <C>
                  Balance, January 1, 2000                        $    25,000        $   275,000
                     Additional allowance/adjustments                  (5,000)           205,000
                     Write-offs                                             -           (105,000)
                  -------------------------------------------------------------------------------
                  Balance, December 30, 2000                      $    20,000        $   375,000
                     Additional allowance/adjustments                 578,000            359,000
                     Write-offs                                      (498,000)          (270,000)
                  -------------------------------------------------------------------------------
                  Balance, December 29, 2001                      $   100,000        $   464,000
                     Additional allowance/adjustments                 (35,000)           265,000
                     Write-offs                                       (39,000)          (181,000)
                  -------------------------------------------------------------------------------
                  BALANCE, DECEMBER 28, 2002                      $    26,000        $   548,000
                  ===============================================================================
</TABLE>

         3.       EXHIBITS

                  See Index to Exhibits on page 40 of this report.


                                       37
<PAGE>


(b)      REPORTS ON FORM 8-K

         The Company filed Form 8-K on November 7, 2002 announcing its third
quarter 2002 results.

         The Company filed Form 8-K on December 19, 2002 announcing that it had
         been awarded two, three-year appliance recycling contracts by the
         Department of Water and Power of the City of Los Angeles.












                                       38
<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.

Dated:  March 18, 2003              APPLIANCE RECYCLING CENTERS OF
                                    AMERICA, INC.
                                    (Registrant)


                                    By     /s/  Edward R. Cameron
                                           -------------------------------------
                                           Edward R. Cameron
                                           President and Chief Executive Officer


                                    By     /s/  Linda A. Koenig
                                           -------------------------------------
                                           Linda A. Koenig
                                           Vice President of Finance

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

SIGNATURE                                   TITLE                             DATE
- ---------                                   -----                             ----

<S>                           <C>                                         <C>
/s/  Edward R. Cameron        Chairman of the Board, President and        March 18, 2003
- ---------------------------   Chief Executive Officer
Edward R. Cameron


/s/  Linda A. Koenig          Vice President of Finance                   March 18, 2003
- ---------------------------
Linda A. Koenig


/s/  Duane S. Carlson         Director                                    March 18, 2003
- ---------------------------
Duane S. Carlson


/s/  Harry W. Spell           Director                                    March 18, 2003
- ---------------------------
Harry W. Spell
</TABLE>

                                       39
<PAGE>


                                INDEX TO EXHIBITS

  Exhibit
    No.       Description
  -------     -----------

       3.1    Restated Articles of Incorporation of Appliance Recycling Centers
              of America, Inc. [filed as Exhibit 3.1 to the Company's Form 10-K
              for the year ended January 2, 1999 (File No. 0-19621) and
              incorporated herein by reference].

       3.2    Amended and Restated Bylaws of Appliance Recycling Centers of
              America, Inc. [filed as Exhibit 3.2 to the Company's Form 10-K for
              the year ended January 2, 1999 (File No. 0-19621) and incorporated
              herein by reference].

     *10.1    Amended Appliance Recycling Centers of America, Inc. Restated 1989
              Stock Option Plan [filed as Exhibit 19.3 to the Company's Form
              10-Q for the quarter ended June 30, 1993 (File No. 0-19621) and
              incorporated herein by reference].

      10.2    Agreement dated December 17, 1992, between Appliance Recycling
              Centers of America, Inc. and TCF Savings Bank [filed with the
              Company's Form 8-K, dated December 17, 1992 (File No. 0-19621) and
              incorporated herein by reference]. This agreement has been paid in
              full. Debt replaced with Exhibit 10.31 in this report.

      10.3    Agreement dated January 19, 1994, between Appliance Recycling
              Centers of America, Inc. and Standard Insurance Corporation [filed
              as Exhibit 10.29 to the Company's Form 10-K for the year ended
              December 31, 1993 (File No.0-19621) and incorporated herein by
              reference]. This agreement has been paid in full. Debt replaced
              with Exhibit 10.33 in this report.

      10.4    Line of credit dated August 30, 1996, between Appliance Recycling
              Centers of America, Inc. and Spectrum Commercial Services, a
              division of Lyons Financial Services, Inc. [filed as exhibit 10.15
              to the Company's Form 10-Q for the quarter ended September 28,
              1996 (File No. 0-19621) and incorporated herein by reference].

      10.5    Amended line of credit dated November 8, 1996, between Appliance
              Recycling Centers of America, Inc. and Spectrum Commercial
              Services, a division of Lyons Financial Services, Inc. [filed as
              exhibit 10.16 to the Company's Form 10-Q for the quarter ended
              September 28, 1996 (File No. 0-19621) and incorporated herein by
              reference].

     *10.6    1997 Stock Option Plan and Amendment [filed as Exhibits 28.1 and
              28.2 to the Company's Registration Statement on Form S-8
              (Registration No. 333-28571) and incorporated herein by
              reference].

      10.7    Amended line of credit dated February 12, 1998 between Appliance
              Recycling Centers of America, Inc. and Spectrum Commercial
              Services, a division of Lyons Financial Services, Inc., Amended
              Revolving Note and Amended Guarantor Acknowledgments [filed as
              Exhibit 10.10 to the Company's Form 10-K for year ended January 3,
              1998 (File No. 0-19621) and incorporated herein by reference].


                                       40
<PAGE>


     *10.8    Amendment, effective April 24, 1997, to 1989 Stock Option Plan
              [filed as Exhibit 28.2 to the Company's Post-Effective Amendment
              No. 1 (June 5, 1997) to Registration Statement on Form S-8
              (Registration No. 33-68890) and incorporated herein by reference].

      10.9    Reverse Logistics Master Service Agreement between Whirlpool
              Corporation and Appliance Recycling Centers of America, Inc.
              [filed as Exhibit 10 to the Company's Form 10-Q for the quarter
              ended July 4, 1998 (File No. 0-19621) and incorporated herein by
              reference].

     10.10    Loan Agreement between Medallion Capital, Inc. and Appliance
              Recycling Centers of America, Inc. dated September 10, 1998 [filed
              as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
              October 3, 1998 (File No. 0-19621) and incorporated herein by
              reference].

     10.11    Promissory note of the Company to Medallion Capital, Inc. in the
              principal amount of $3,500,000 due September 30, 2005 [filed as
              Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
              October 3, 1998 (File No. 0-19621) and incorporated herein by
              reference].

     10.12    Security Agreement of the Company [filed as Exhibit 10.3 to the
              Company's Form 10-Q for the quarter ended October 3, 1998 (File
              No. 0-19621) and incorporated herein by reference].

     10.13    Warrant of the Company in favor of Medallion Capital, Inc. for
              700,000 shares of the Company's Stock [corrected copy]. [filed as
              Exhibit 10.14 to the Company's Form 10-K for the year ended
              January 2, 1999 (File No. 0-19621) and incorporated herein by
              reference].

     10.14    Amendment to the line of credit dated September 10, 1998 between
              Appliance Recycling Centers of America, Inc. and Spectrum
              Commercial Services, a division of Lyons Financial Services, Inc.,
              Amendment to General Credit and Security Agreement and Amended
              Guarantor Acknowledgement. [filed as Exhibit 10.15 to the
              Company's Form 10-K for the year ended January 2, 1999 (File No.
              0-19621) and incorporated herein by reference].

     10.15    Amendment to the line of credit dated September 17, 1998 between
              Appliance Recycling Centers of America, Inc. and Spectrum
              Commercial Services, a division of Lyons Financial Services, Inc.,
              Amendment to General Credit and Security Agreement, Amended
              Guarantor Acknowledgement and Amended and Restated Revolving Note.
              [filed as Exhibit 10.16 to the Company's Form 10-K for the year
              ended January 2, 1999 (File No. 0-19621) and incorporated herein
              by reference].

    *10.16    Amendment effective April 29, 1999 to 1997 Stock Option Plan
              [filed as Exhibit 10 to the Company's Form 10-Q for the quarter
              ended July 3, 1999 (File No. 0-19621) and incorporated herein by
              reference].

     10.17    Agreement dated June 12, 2000 between Southern California Edison
              Company and Appliance Recycling Centers of America, Inc. [filed as
              Exhibit 10 to the Company's Form 10-Q for the quarter ended July
              1, 2000 (File No. 0-19621) and incorporated herein by reference].

     10.18    Agreement dated August 21, 2000 between Southern California Edison
              Company and Appliance Recycling Centers of America, Inc. [filed as
              Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
              September 30, 2000 (File No. 0-19621) and incorporated herein by
              reference].

     10.19    Amendment to the line of credit dated August 30, 2000 between
              Appliance Recycling Centers of America, Inc. and Spectrum
              Commercial Services, a division of Lyons Financial Services, Inc.,
              Amendment to General Credit and Security Agreement and Amended and
              Restated Revolving Note.


                                       41
<PAGE>


              [filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter
              ended September 30, 2000 (File No. 0-19621) and incorporated
              herein by reference].

     10.20    Updated contract dated January 1, 2001 between Southern California
              Edison Company and Appliance Recycling Centers of America, Inc.
              [filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter
              ended March 31, 2001 (File No. 0-19621) and incorporated herein by
              reference].

    *10.21    Amendment effective April 26, 2001 to 1997 Stock Option Plan
              [filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter
              ended March 31, 2001 (File No. 0-19621) and incorporated herein by
              reference].

     10.22    Agreement dated June 12, 2001 between the California Public
              Utilities Commission and Appliance Recycling Centers of America,
              Inc. [filed as Exhibit 10.1 to the Company Form 10-Q for the
              quarter ended June 30, 2001 (File No. 0-19621) and incorporated
              herein by reference].

     10.23    Agreement dated June 18, 2001 between Spectrum Commercial Services
              Company and Appliance Recycling Centers of America, Inc. [filed as
              Exhibit 10.2 to the Company's Form 10-Q for the quarter ended June
              30, 2001 (File No. 0-19621) and incorporated herein by reference].

     10.24    Agreement dated July 26, 2001 between Spectrum Commercial Services
              Company and Appliance Recycling Centers of America, Inc. [filed as
              Exhibit 10.3 to the Company's Form 10-Q for the quarter ended June
              30, 2001 (File No. 0-19621) and incorporated herein by reference].

     10.25    Amendment to the line of credit dated August 24, 2001 between
              Appliance Recycling Centers of America, Inc. and Spectrum
              Commercial Services, Amendment to General Credit and Security
              Agreement and Amended and Restated Revolving Note [files as
              Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
              September 29, 2001 (File No. 0-19621) and incorporated herein by
              reference].

     10.26    Retail Dealer Sales Agreement dated October 12, 2001 between
              Appliance Recycling Centers of America, Inc. and Maytag
              Corporation [filed as Exhibit 10.2 to the Company's Form 10-Q for
              the quarter ended September 29, 2001 (File No. 0-19621) and
              incorporated herein by reference].

     10.27    Amendment dated March 7, 2002 to the Agreement between the
              California Public Utilities Commission and Appliance Recycling
              Centers of America, Inc. [filed as Exhibit 10.29 to the Company's
              Form 10-K for the year ended December 20, 2001 (File No. 0-19621)
              and incorporated herein by reference].

     10.28    Amendment to the line of credit dated April 11, 2002 between
              Appliance Recycling Centers of America, Inc. and Spectrum
              Commercial Services, Amendment to General Credit and Security
              Agreement and Amended Guarantor Acknowledgement. [filed as Exhibit
              10.1 to the Company's Form 10-Q for the quarter ended March 30,
              2002 (File No. 0-19621) and incorporated herein by reference].

    *10.29    Amendment effective April 25, 2002 to 1997 Stock Option Plan
              [filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter
              ended March 30, 2002 (File No. 0-19621) and incorporated herein by
              reference].

     10.30    Agreement dated June 18, 2002 between Southern California Edison
              Company and Appliance Recycling Centers of America, Inc. [filed as
              Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June
              29, 2002 (File No. 0-19621) and incorporated herein by reference].


                                       42
<PAGE>


     10.31    Loan agreement dated September 19, 2002 between Appliance
              Recycling Centers of America, Inc. and General Electric Capital
              Business Asset Funding Corp. [filed as Exhibit 10.1 to the
              Company's Form 10-Q for the quarter ended September 28, 2002 (File
              No. 0-19621) and incorporated herein by reference].

    +10.32    Agreements dated September 24, 2002 between Appliance Recycling
              Centers of America, Inc. and the Department of Water and Power of
              the City of Los Angeles.

    +10.33    Loan agreement dated December 28, 2002 between Appliance Recycling
              Centers of America, Inc. and General Electric Capital Business
              Asset Funding Corp.

    +10.34    Amendment to the line of credit dated January 23, 2003 between
              Appliance Recycling Centers of America, Inc. and Spectrum
              Commercial Services, Amendment to General Credit and Security
              Agreements.

     +21.1    Subsidiaries of Appliance Recycling Centers of America, Inc.

     +23.1    Consent of McGladrey & Pullen, LLP, Independent Public
              Accountants.


*    Items that are management contracts or compensatory plans or arrangements
     required to be filed as an exhibit pursuant to Item 14(a)3 of this Form
     10-K.
+    Filed herewith.


                                       43
<PAGE>


                           FORM 10-K CEO CERTIFICATION

CERTIFICATIONS:

I, Edward R. Cameron, certify that:

1.     I have reviewed this annual report on Form 10-K of Appliance Recycling
       Centers of America, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
       statement of a material fact or omit to state a material fact necessary
       to make the statements made, in light of the circumstances under which
       such statements are made, not misleading with respect to the period
       covered by this annual report;

3.     Based on my knowledge, the financial statements, and other financial
       information included in this annual report, fairly present in all
       material respects the financial condition, results of operations and cash
       flows of the registrant as of, and for, the periods presented in this
       annual report;

4.     The registrant's other certifying officers and I are responsible for
       establishing and maintaining disclosure controls and procedures (as
       defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
       we have:

       (a)    designed such disclosure controls and procedures to ensure that
              material information relating to the registrant, including its
              consolidated subsidiaries, is made known to us by others within
              those entities, particularly during the period in which this
              annual report is being prepared;

       (b)    evaluated the effectiveness of the registrant's disclosure
              controls and procedures as of a date within 90 days prior to the
              filing date of this annual report (the "Evaluation Date"); and

       (c)    presented in this annual report our conclusions about the
              effectiveness of the disclosure controls and procedures based on
              our evaluation as of the Evaluation Date;

5.     The registrant's other certifying officers and I have disclosed, based on
       our most recent evaluation, to the registrant's auditors and the audit
       committee of registrant's board of directors (or persons performing the
       equivalent function):

       (a)    all significant deficiencies in the design or operation of
              internal controls which could adversely affect the registrant's
              ability to record, process, summarize and report financial data
              and have identified for the registrant's auditors any material
              weaknesses in internal controls; and

       (b)    any fraud, whether or not material, that involves management or
              other employees who have a significant role in the registrant's
              internal controls; and

6.     The registrant's other certifying officers and I have indicated in this
       annual report whether or not there were significant changes in internal
       controls or in other factors that could significantly affect internal
       controls subsequent to the date of our most recent evaluation, including
       any corrective actions with regard to significant deficiencies and
       material weaknesses.

       Date:    March 18, 2003              By:  /s/ Edward R. Cameron
                --------------                   ----------------------------
                                                 Edward R. Cameron, President


                                       44
<PAGE>


                           FORM 10-K CFO CERTIFICATION

CERTIFICATIONS:

I, Linda Koenig, certify that:

1.     I have reviewed this annual report on Form 10-K of Appliance Recycling
       Centers of America, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
       statement of a material fact or omit to state a material fact necessary
       to make the statements made, in light of the circumstances under which
       such statements are made, not misleading with respect to the period
       covered by this annual report;

3.     Based on my knowledge, the financial statements, and other financial
       information included in this annual report, fairly present in all
       material respects the financial condition, results of operations and cash
       flows of the registrant as of, and for, the periods presented in this
       annual report;

4.     The registrant's other certifying officers and I are responsible for
       establishing and maintaining disclosure controls and procedures (as
       defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
       we have:

       (a)    designed such disclosure controls and procedures to ensure that
              material information relating to the registrant, including its
              consolidated subsidiaries, is made known to us by others within
              those entities, particularly during the period in which this
              annual report is being prepared;

       (b)    evaluated the effectiveness of the registrant's disclosure
              controls and procedures as of a date within 90 days prior to the
              filing date of this annual report (the "Evaluation Date"); and

       (c)    presented in this annual report our conclusions about the
              effectiveness of the disclosure controls and procedures based on
              our evaluation as of the Evaluation Date;

5.     The registrant's other certifying officers and I have disclosed, based on
       our most recent evaluation, to the registrant's auditors and the audit
       committee of registrant's board of directors (or persons performing the
       equivalent function):

       (a)    all significant deficiencies in the design or operation of
              internal controls which could adversely affect the registrant's
              ability to record, process, summarize and report financial data
              and have identified for the registrant's auditors any material
              weaknesses in internal controls; and

       (b)    any fraud, whether or not material, that involves management or
              other employees who have a significant role in the registrant's
              internal controls; and

6.     The registrant's other certifying officers and I have indicated in this
       annual report whether or not there were significant changes in internal
       controls or in other factors that could significantly affect internal
       controls subsequent to the date of our most recent evaluation, including
       any corrective actions with regard to significant deficiencies and
       material weaknesses.

       Date:    March 18, 2003      By:  /s/ Linda Koenig
                --------------           ---------------------------------------
                                         Linda Koenig, Vice President of Finance


                                       45

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.32
<SEQUENCE>4
<FILENAME>arca031327_ex10-32.txt
<DESCRIPTION>CONTRACT
<TEXT>
                                                                   Exhibit 10.32

                             AGREEMENT NO. 47189-3




                                    BETWEEN




                       THE DEPARTMENT OF WATER AND POWER
                           OF THE CITY OF LOS ANGELES




                                      AND




                              APPLIANCE RECYCLING
                      CENTERS OF AMERICA - CALIFORNIA INC.




                               SEPTEMBER 24, 2002

<PAGE>


                          APPLIANCE RECYCLING AGREEMENT
                          -----------------------------


                               Table of Contents
                               -----------------

Section  Title                                                        Page
- -------  -----                                                        ----
1.0      AGREEMENT.....................................................2
2.0      RECITALS......................................................2
3.0      DEFINITIONS...................................................3
4.0      STATEMENT OF WORK.............................................5
5.0      GENERAL CONDITIONS............................................8
6.0      COMPENSATION..................................................14
7.0      BUSINESS POLICIES.............................................15
8.0      INSURANCE REQUIREMENTS........................................19
9.0      INVOICES......................................................23
10.0     CONFLICTS.....................................................24
11.0     MONITORING OF WORK............................................24
12.0     TITLE TO WORK.................................................25
13.0     SECTION HEADINGS..............................................27
14.0     SIGNATURE OF AUTHORIZING AGREEMENT............................28




<PAGE>


                          APPLIANCE RECYCLING AGREEMENT

1.0      AGREEMENT

1.1      PARTIES

                  This Agreement is made and entered into by and between
                  APPLIANCE RECYCLING CENTERS OF AMERICA - CALIFORNIA (ARCA),
                  INC. 1920 Acadia Avenue, Compton, California 90020,
                  (hereinafter referred to as "Contractor") and the Department
                  of Water and Power of the City of Los Angeles (hereinafter
                  referred to as "Department"); Contractor and the Department
                  are sometimes hereinafter referred to individually as "Party"
                  and collectively as "Parties'.

2.0      RECITALS

         The Agreement is entered into with reference to the following facts,
         among others:

         2.1      The Department desires to promote energy efficient
                  refrigerators to its customers through its Low Income
                  Refrigerator Exchange Program (LIREP), which provides free
                  super efficient refrigerators (New Refrigerators) to
                  qualifying customers in exchange for their older, working
                  refrigerators, which will be recycled.

         2.2      The Department also desires to remove older working
                  inefficient second Refrigerators and Freezers (Second
                  Refrigerators and Freezers) through its Refrigerator Turn-In
                  and Recycling Program (RETIRE) that qualifying Customers
                  turn-in for recycling and disposal.

         2.3      The Department envisions implementing the LIREP and RETIRE
                  Programs for the purpose of saving energy, reducing peak
                  demand, lowering Department customers' energy bills,
                  transforming the market for energy-efficient appliances and
                  providing additional public environmental benefits.

         2.4      The Department desires that the Contractor provide services to
                  ensure the safe, effective, and lawful recovery and recycling
                  or lawful disposal, as necessary, of HCFC/CFC refrigerants,
                  CFC-11 foam insulation blowing agent, PCBs, mercury, used oils
                  and any other Hazardous Materials found in older inefficient
                  Refrigerators and Freezers, as well as the recycling of all
                  scrap metals.

         2.5      The Department has solicited responses from potentially
                  qualified vendors through a Request for Proposals and has
                  determined that the Contractor is the party best qualified to
                  provide the Department with the required appliance recycling
                  services in support of the above programs and is qualified to
                  provide other related services described in this agreement.




                                       2


<PAGE>


3.0      DEFINITIONS

         The following terms, whether in the singular or in the plural, when
         used in this Agreement, shall have the meanings specified:

         3.1      Agreement: This document, the terms and condition contained in
                  this agreement as may be amended and supplemented.

         3.2      Appliance Delivery and Removal Contractor: The entity
                  contracted by the Department to deliver New Refrigerators and
                  pick-up replaced Primary or Second Refrigerators and Freezers
                  from Program Participants.

         3.3      Approved Customers: Those entities approved to participate in
                  the LIREP or RETIRE programs based on established eligibility
                  criteria set by the Department. Such entities may include
                  residential, multi-family residential and low-income customers
                  of the Department.

         3.4      CFCs/HCFCs: Chlorofluorocarbon and Hydrochlorofluorocarbon
                  refrigerants found in Refrigerator and Freezer cooling
                  systems.

         3.5      CFC-ll: Chlorofluorcarbons contained in Refrigerator and
                  Freezer insulating foam.

         3.6      Change Order: document issued by the Department to Contractor
                  to change the Agreement.

         3.7      Contract Administrator: The Department's authorized
                  representative for this Agreement as specified in Section 5.5.

         3.8      Contract Period: The period beginning with the time of
                  effectiveness date as defined in Section 5.1.4, and extending
                  through October 31, 2005, or as extended by mutual agreement
                  of the Parties.

         3.9      Documentation: Specifications, procedures, instructions,
                  reports, test results, analyses, calculations, manuals, and
                  other data specified in this Agreement, and any amendment to
                  this Agreement, as required by any legal entity having
                  jurisdiction over the Work.

         3.10     Freezer: A freezer which provides supplementary cold storage
                  to a primary freezer or to the freezer section located within
                  the Primary Refrigerator in a residential household.

         3.11     Hazardous Materials: Any substance or material which has been
                  designated as hazardous or toxic by the U.S. Environmental
                  Protection Agency or the California Department of Toxic
                  Substances Control now or hereinafter authorized to regulate
                  materials in the environment, including, but not limited to
                  "Materials which require special handling," as defined in
                  California Public Resources Code and the California Health and
                  Safety Code, which is contained in or is derived from the
                  Refrigerators or Freezers.





                                        3


<PAGE>


         3.12     "Low-Income Refrigerator Exchange Program": Department Program
                  that is supported by Work covered by this Agreement, also
                  referred to as LIREP Program.

         3.13     Mercury: Mercury-containing Components such as lid
                  tilt-switches found in Freezers.

         3.14     PCBs: Polychlorinated Biphenyls.

         3.15     Primary Freezer: Freezer utilized by the Customer as the
                  principal means of storing frozen foods in the residence.

         3.16     Primary Refrigerator: Refrigerator utilized as the principal
                  means of storing frozen foods in the residence.

         3.17     Programs: Incentive Programs such as the LIREP and RETIRE
                  Programs or other Programs that may be implemented by the
                  Department for the purpose of promoting energy efficient
                  appliances to its customers and the removal and
                  environmentally sound recycling of replaced older, inefficient
                  appliances from the Department Customers' residences.

         3.18     Program Participants: Approved Customers selected by the
                  Department to participate in the Program who agree to turn in
                  old Primary Refrigerators and/or Second Refrigerators or
                  Freezers.

         3.19     Recycling Center: The site at which Refrigerators and Freezers
                  are processed in an environmentally sound manner to legally
                  remove, dispose of and/or recycle CFCs, CFC Foam Insulation,
                  HCFCs, CFC 11, PCBs, mercury, used oils, and other Hazardous
                  Materials.

         3.20     Refrigerator Turn-In and Recycling Program (RETIRE):
                  Department Program that is supported by Work covered by this
                  Agreement, also referred to as RETIRE Program.

         3.21     Second Freezer: Surplus or spare freezer utilized by Approved
                  Customer concurrently with primary refrigerator and/or
                  freezer.

         3.22     Second Refrigerator: Surplus or spare refrigerator utilized by
                  Approved Customer concurrently with primary refrigerator.

         3.23     Subcontractor: An entity contracting directly with Contractor
                  to furnish services or materials as part of, or directly
                  related to, the Work.

         3.24     Work: Any and all obligations of Contractor to be performed
                  pursuant to this Agreement which includes but is not limited
                  to: (1) Proper removal


                                       4


<PAGE>


                  and management of CFC/HCFC refrigerants, CFC-ll found in foam
                  insulation blowing agent, PCBs, mercury, and used oils from
                  collected Refrigerators and Freezers; 2) handling, storage and
                  legal disposal of removed Hazardous Materials; 3) recycling of
                  metals, CFCs,/HCFCs, CFC 11, mercury, used oils and all other
                  materials that can be recycled and 4) proper disposal of all
                  materials that cannot be recycled in an environmentally sound
                  manner and in accordance with all applicable laws.

4.0      STATEMENT OF WORK

         4.1      Services to be Performed

                  The Contractor hereby agrees to provide the following services
                  to the Department pursuant to the terms and conditions of this
                  Agreement:

                  4.1.1    Assist the Department in developing and implementing
                           Program protocols, procedures and coordination
                           activities for: 1) Contractor's employees and
                           subcontractors and 2) Department employees and
                           subcontractors;

                  4.1.2    Receive from the Department's Appliance Delivery and
                           Removal Contractor Primary Refrigerators and/or
                           Second Refrigerator or Freezers turned-in by Program
                           Participants for recycling and/or disposal;

                  4.1.3    Recycle all removed Refrigerators and Freezers
                           including: 1) Proper removal and management of
                           CFC/HCFC refrigerants, CFC-11 found in foam
                           insulation blowing agent, PCBs, mercury, and used
                           oils from collected Refrigerators and Freezers; 2)
                           handling, storage and legal disposal of removed
                           Hazardous Materials; 3) recycling of metals,
                           CFCs,/HCFCs, CFC 11, mercury, used oils and all other
                           materials that can be recycled and 4) proper disposal
                           of all materials that cannot be recycled in an
                           environmentally sound manner and in accordance with
                           all applicable laws; and

4.1.4    Provide reporting to the Department as specified herein.

         4.2      Program Mechanics

                  4.2.1    The Department's Appliance Delivery and Removal
                           Contractor shall collect and transport to the
                           Recycling Center all Primary and Second Refrigerators
                           and Freezers turned-in by Program Participants.

                  4.2.2    The Contractor shall receive and accept all Primary
                           Refrigerators and/or Second Refrigerator or Freezers
                           turned-in for proper disposal and/or recycling as
                           specified in this Agreement.


                                        5


<PAGE>


                  4.2.3    Documentation and records of all refrigerators and
                           freezers received, services provided and work
                           performed shall be maintained by the contractor and
                           included in the monthly reports to the Department as
                           specified herein.

         4.3      Contractor's Responsibilities

                  4.3.1    Warranty

                           Contractor warrants to the Department that the Work
                           shall be performed in a competent manner, in
                           accordance with this Agreement, and that the that the
                           handling, storage, recycling, and disposal of the
                           Primary/Second Refrigerators and Freezers and
                           Hazardous Materials shall be in accordance with (a)
                           the requirements of this Agreement and (b) applicable
                           local, state, and federal laws and regulations in
                           effect at the time the work is performed.

                  4.3.2    Contractor shall be solely responsible for all
                           methods, techniques, sequences, and procedures for
                           the recovery, storage and disposal and/or recycling
                           of all CFCs/HCFCs, CFC-11, PCBs, mercury, used oil,
                           scrap metals, and hazardous materials found in
                           Refrigerators and Freezers turned-in by Program
                           Participants.

                  4.3.3    Contractor shall document and maintain records for
                           services under this Agreement as follows:

                           a)       A monthly Reporting System for recording,
                                    documenting and reconciling
                                    Refrigerator/Freezer deliveries made by the
                                    Department's Appliance Delivery and Removal
                                    Contractor.

                           b)       Program Work Order Form to collect data such
                                    as:

                                    i)      Primary/Second Refrigerator or
                                            Freezer manufacturer's name and
                                            quantities;

                                    ii)     Primary/Second Refrigerator or
                                            Freezer style, defrost type, size
                                            and estimated age;

                                    iii)    Identification of Primary/Second
                                            Refrigerators and Freezers
                                            containing CFC-11 foam insulation;

                  4.3.4    Compilation of data in Section 4.3.3 shall be in
                           electronic mode, employing the Contractor's Database
                           software program with online and real-time access
                           capability. Data shall be provided to



                                        6


<PAGE>


                           the Department in both hard copy and electronic
                           format (e.g. Microsoft Excel) acceptable to the
                           Department.

         4.4      Reporting Requirements

                  Contractor shall provide the Department with reports for the
                  services performed under this Agreement as follows:

                  4.4.1    A monthly report, provided no later than the fifteen
                           (15) days following the end of the previous month,
                           listing the number of Primary and Second
                           Refrigerators or Freezers processed through the
                           Recycling Center during the previous month and
                           containing size in cubic feet, year of manufacture,
                           style, age and defrost type of each Primary/Second
                           Refrigerator or Freezer.

                  4.4.2    A quarterly report, presented within fifteen (15)
                           days of the new quarter, which shall include, but not
                           limited to:

                           a)       An estimated breakdown of the amount of
                                    refrigerant recovered (in pounds by type);

                           b)       An estimated breakdown of the number of
                                    pounds of capacitors recovered;

                           c)       A breakdown of the number and size of
                                    polyurethane- foam containing refrigerators
                                    or freezers which were processed for CFC-11
                                    recovery (in pounds of CFC-11 recovered);

                           d)       An estimated weight of metals and recyclable
                                    materials;

                           e)       An estimate of the Monthly subtotal and
                                    cumulative annual energy consumption for all
                                    refrigerators recycled under this Contract
                                    to date; and

                  4.4.3    Program summary reports provided no later than
                           fifteen (15) working days following the end of a
                           twelve month period specified by the Department,
                           covering all the activities requested in the monthly
                           reports plus information from any incomplete month.

                  4.4.4    Special and Non-recurring Reports

                           Upon reasonable written request from an authorized
                           representative of the Department, Contractor may be
                           asked to prepare special and nonrecurring reports
                           during course of the Program. Such report content may
                           be developed by the parties in anticipation of
                           requests from the Board, internal Department audits,
                           or compilation of data relevant to program
                           activities.



                                        7


<PAGE>


5.0      GENERAL CONDITIONS

         5.1      Integrated Agreement
                  This Agreement sets forth all of the rights and duties of the
                  parties with respect to the subject matter hereof, and
                  replaces any and all previous agreements, or understandings,
                  whether written or oral, relating thereto.
                  This Agreement may be amended only as provided for in
                  paragraph 5.1.1 hereof.

                  5.1.1    Amendment. All amendments hereto shall be in writing
                           and signed by the persons authorized to bind the
                           parties thereto.

                  5.1.2    Prohibition Against Assignment or Delegation

                           The Contractor may not, unless it has first obtained
                           the written permission of the Department, which may
                           be withheld for any reason:

                           a)       assign or otherwise alienate any of its
                                    rights hereunder, including the right to
                                    payment, or

                           b)       delegate, subcontract, or otherwise transfer
                                    any of its duties hereunder.

                  5.1.3    Non-Waiver of Agreement

                           The Department's failure to enforce any provision of
                           this Agreement or the waiver thereof in a particular
                           instance shall not be construed as a general waiver
                           of any part of such provision. The provision shall
                           remain in full force and effect.

                  5.1.4    Time of Effectiveness

                           Unless otherwise provided, this Agreement shall take
                           effect when all the following events have occurred:

                           a)       this Agreement has been signed on behalf of
                                    the Contractor by the person(s) authorized
                                    to bind the Contractor hereto;

                           b)       this Agreement has been signed on behalf of
                                    the Department by the person designated by
                                    the Board, officer or employee authorized to
                                    enter into this Agreement;

                           c)       the Office of the City Attorney has
                                    indicated in writing its approval of this
                                    Agreement as to form and legality; and


                                        8


<PAGE>


                           d)       this Agreement has been approved by the
                                    City's Councilor by the Board, officer, or
                                    employee authorized to give such approval.

                  5.1.5    Independent Contractor

                           The Contractor is acting hereunder as an independent
                           contractor and not as an agent or employee of the
                           Department. The Contractor shall not represent or
                           otherwise hold out itself or any of its directors,
                           officers, partners, employees, or agents to be an
                           agent or employee of the Department.

                  5.1.6    Applicable Law, Interpretation, Enforcement and
                           Severability.

                           Each party's performance hereunder shall comply with
                           all applicable laws of the United States of America,
                           the State of California, and the City of Los Angeles.
                           This Agreement shall be enforced and interpreted
                           under the laws of the State of California and the
                           City of Los Angeles with venue for any litigation in
                           Los Angeles, California.

                           If any part, term or provision of this Agreement
                           shall be held void, illegal, unenforceable, or in
                           conflict with any law of a Federal, State, or Local
                           Government having jurisdiction over this Agreement,
                           the validity of the remaining portions or provisions
                           shall not be affected thereby.

         5.2      Personnel

                  5.2.1    Staff Size

                           The size of the staff employed by the contractor in
                           the performance of the services shall be kept
                           consistent with the services and schedules as
                           described in this Agreement.

                  5.2.2    Identification of Key Personnel

                           The Contractor shall furnish the Department the
                           names, titles, and qualifications of its key project
                           personnel.

                  5.2.3    Approval of Key Personnel

                           The Contract
                           Administrator will have the right to interview and
                           approve personnel. Resumes of individual personnel
                           will be reviewed and approved by the Department's
                           Contract Administrator before the individual can be
                           assigned work.

                  5.2.4    Changes in Key Personnel

                                        9


<PAGE>


                           The Contractor shall minimize changes to key project
                           personnel. The Department shall have the right to
                           request key personnel changes and to review and
                           approve key project personnel changes proposed by the
                           Contractor. The Department's approval of key
                           personnel assignments and changes shall not be
                           unreasonably withheld.

         5.3      Subcontractors

                  5.3.1    Subcontracts/Joint Participation Agreement

                           With prior approval of the Department, the Contractor
                           may enter into subcontracts and joint participation
                           agreements with others for the performance of
                           portions of this Agreement. The Contractor shall at
                           all times be responsible for the acts and errors or
                           omissions of its subcontractors or joint participants
                           and persons directly or indirectly employed by them.
                           Nothing in this Agreement shall constitute any
                           contractual relationship between any others and the
                           Department or any obligation on the part of the
                           Department to pay, or to be responsible for the
                           payment of, any sums to any subcontractors.

                  5.3.2    Copies of Subcontractor Agreement

                           Upon written request from the Contract Administrator,
                           the contractor shall supply the Department with all
                           subcontractor agreements.

                  5.3.3    Provisions Binding on Subcontractors

                           The provisions of this Agreement shall apply to all
                           Subcontractors providing service in connection with
                           the Work to be bound by general terms and conditions
                           protecting the Department which are equivalent to the
                           terms and conditions of this Agreement. In particular
                           the Department will not pay, even indirectly, the
                           fees and expenses of a subcontractor which do not
                           conform to the limitations and documentation
                           requirements of this Agreement.

         5.4      Contractor's Quality Assurance Program

                  The Contractor shall perform the work in accordance with the
                  Contractor's Quality Assurance Program, which shall be subject
                  to review, approval, and audit by the Department. The
                  Contractor's work shall reflect competent professional
                  knowledge, judgment, and accepted industry practice. The
                  Contractor shall promptly correct, or remedy any work, errors
                  or omissions, at its sole expense, which do not conform to the
                  provisions of this Agreement.

                                       10


<PAGE>


         5.5      Representatives and Notices

                  Any notice, demand, or request directed to the Department
                  shall be delivered to:

                           DEPARTMENT OF WATER AND POWER
                           CITY OF LOS ANGELES
                           Reynaldo D. Reyes
                           Contract Administrator
                           111 North Hope Street, Room 1063
                           Los Angeles, California 90012-2194

                  Any notice, demand, or request directed to the Contractor
                  shall be delivered to:

                           APPLIANCE RECYCLING CENTERS OF AMERICA -
                           CALIFORNIA, INC.
                           Jim Kirwan
                           General Manager - ARCA California
                           1920 Acacia Avenue
                           Compton, CA 90220

                  Such correspondence shall be in writing, except as specified
                  elsewhere in this Agreement. General correspondence will be
                  deemed complete upon receipt.

                  5.5.1    Change of Address or Representatives

                           Either party, by written notice, may designate
                           different or additional person(s) or different
                           addresses.

                  5.5.2    Excusable Delays

                           In the event that performance on the part of any
                           party hereto shall be delayed or suspended as a
                           result of circumstances beyond the reasonable control
                           and without the fault and negligence of said party,
                           none of the parties shall incur any liability to the
                           other parties as a result of such delay or
                           suspension. Circumstances deemed to be beyond the
                           control of the parties hereunder shall include, but
                           not be limited to acts of God or the public enemy;
                           insurrection; acts of the Federal Government or any
                           unit of State or Local Government in either sovereign
                           or contractual capacity; earthquakes, fires; floods;
                           epidemics; quarantine restrictions; strikes; freight
                           embargoes or delays in transportation; to the extent
                           that they are not caused by the party's willful or
                           negligent acts or omissions, and to the extent that
                           they are beyond the party's reasonable control.



                                       11


<PAGE>


                  5.5.3    Breach

                           Except for excusable delays, if any party fails to
                           perform, in whole or in part, any promise, covenant,
                           or agreement set forth herein, or should any
                           representation made by it to be untrue, any aggrieved
                           party may avail itself of all rights and remedies, at
                           law or equity, in the courts of law. Said rights and
                           remedies are cumulative of those provided for herein
                           except that in no event shall any party recover more
                           than once, suffer a penalty or forfeiture, or be
                           unjustly compensated.

         5.6      Permits, Codes, And Statutes

                  5.6.1    Contractor shall perform the Work set forth in this
                           Agreement in accordance with all applicable Federal,
                           state, and local laws, rules, and/or ordinances.
                           Prior to performance of any services, Contractor
                           shall, at its own cost, have obtained, and shall have
                           required all Subcontractors to obtain, all licenses
                           and permits required by law, rule, regulations, and
                           ordinance, or any of them, to engage in the
                           activities required in connection with this
                           transaction.

                  5.6.2    Contractor shall comply with all applicable local,
                           state, and federal safety and health laws in effect
                           in the date of this agreement, including, but not
                           limited to EPA, California EPA, RCRA, the
                           Occupational Safety and Health Act of 1970 (OSHA),
                           and all standards, rules, regulations, and orders
                           issued pursuant to such local, state, and federal
                           safety and health laws. Should any such law, rule, or
                           regulation be enacted or promulgated subsequent to
                           the date of this Agreement, which renders
                           Contractor's performance impractical, Contractor and
                           the Department shall amend this Agreement to
                           reasonably compensate Contractor for its additional
                           costs.

5.7      Suspension and Termination

                  5.7.1    Suspension of Work

                           The Contract Administrator may orally direct the
                           Contractor to suspend, and to subsequently resume
                           performance of all or any part of the work. Such
                           direction shall be confirmed by a Change Order or a
                           revision to a task assignment if such suspension
                           impacts the cost of the work and/or work completion
                           schedule. The Department shall complete the payments
                           due for the suspended work up to the effective date
                           of suspension notice and shall resume payments
                           effective as of the work resumption date.



                                       12


<PAGE>


                  5.7.2    Termination of Agreement

                           5.7.2.1  Cancellation Without Cause

                                    This Agreement may be canceled by the
                                    Department, without cause, on 30 calendar
                                    days' written notice or at any time by
                                    mutual agreement of the parties. Said
                                    notice, on the Department's behalf, will be
                                    given by the Contract Administrator. Upon
                                    receipt of such notice, the Contractor shall
                                    immediately stop all work under this
                                    agreement. The Contractor shall be entitled
                                    to payment for all services performed to
                                    date of cancellation and shall be
                                    compensated at the established rates for
                                    completing all task assignments and work in
                                    progress as of the date of receipt of the
                                    written cancellation notice. The Contractor
                                    shall then deliver to the Department, in an
                                    organized and usable form, all work done
                                    prior to the date of cancellation.

                           5.7.2.2  Termination Due to Expenditure Limit

                                    This Agreement will automatically terminate
                                    if expenditures reach the limit of
                                    $1,750,000.00

                           5.7.2.3  Expiration of Agreement

                                    Unless amended by mutual agreement of the
                                    Parties, this Agreement expires on October
                                    31, 2005.

                           5.7.2.4  Termination of the Services of any Person.

                                    If the Department no longer requires the
                                    services of a particular person(s) supplied
                                    by the Contractor, the Department may
                                    terminate the services immediately upon
                                    written notice to the contractor.

         5.8      Patents, Copyrights and Trademarks

                  The Contractor shall fully indemnify the Department against
                  any and all liability whatsoever by reason of any alleged
                  infringement of any patent, copyright, or trademark on any
                  hardware, software, firmware, equipment or instrumentation
                  used by the Contractor in the construction of the work, or by
                  reason of any intended use under these specifications by the
                  Department of any hardware, software, firmware, equipment or
                  instrumentation furnished under this contract; provided,
                  however, that the contractor shall have no liability to the
                  Department under any provision of this Article with respect to
                  any claim of patent, copyright, or trademark infringement
                  which is based upon the combination or utilization of the
                  Contractor's hardware, software, firmware, equipment or
                  instrumentation

                                       13


<PAGE>


                  with hardware, software, firmware, equipment or
                  instrumentation not made by the Contractor; or the
                  modification by the Department of hardware, software,
                  firmware, equipment or instrumentation furnished hereunder.

                  The Contractor shall have the sole control of the defense and
                  all negotiations for settlement or compromise of any action or
                  claim of any alleged infringement of any patent, copyright, or
                  trademark on hardware, software, firmware, equipment or
                  instrumentation used by the Contractor in the designing,
                  fabrication, and delivery of the deliverables as specified
                  herein to the extent that such control is not consistent with
                  the provisions of Article IV, Section 42 of the Los Angeles
                  City Charter, but in any event the Contractor shall have the
                  right to participate fully in such defense. The Department and
                  the Contractor shall mutually agree to any settlement or
                  compromise of such action.

         5.9      Express Warranty Provision

                  Contractor warrants that the software furnished hereunder
                  shall be free from significant programming errors and form
                  defects in workmanship and materials and shall operate in
                  conformity with the performance capabilities, specifications,
                  functions and other descriptions and standards applicable
                  thereto as set forth in this Agreement; and that the software
                  shall conform to standards generally observed in the industry
                  for similar software (including source code) so long as
                  Contractor can discharge any warranty obligations
                  notwithstanding such modifications or following their removal
                  by the Department.

6.0      COMPENSATION

         6.1      Specific Rates of Compensation

                  Upon satisfactory performance of the services required herein,
                  the Department agrees to pay and the contractor agrees to
                  accept in full satisfaction thereof the actual cost of
                  services rendered payable at the rates set forth. The prices
                  shall remain in effect through October 31, 2005, unless
                  amended by mutual agreement of the Parties.

         6.2      Payment - Additional Services

                  Payment for additional services and expenses not identified
                  but related to and required in the implementation of the
                  Programs, shall be negotiated between the parties and
                  implemented by an amendment to the Agreement.


                                       14


<PAGE>


         6.3      Expenditure Limits

                  The total amount of this Agreement shall not exceed $
                  1,750,000.00 without further appropriation to this Agreement
                  by the Board of Water and Power Commissioners of the City of
                  Los Angeles.

7.0      BUSINESS POLICIES

         7.1      LADWP Recycling Policy

                  LADWP supports the use of recycled-content products of all
                  types. Recycled-content products help conserve natural
                  resources, including water and energy, and reduce demands upon
                  landfills.

                  The Contractor shall submit all written documents on paper
                  with a minimum of 30 percent post-consumer recycled content.
                  Existing company/corporate letterhead/stationery that
                  accompanies these documents is exempt from this requirement.
                  Documents of two or more pages in length shall be
                  duplex-copied (double-sided pages). Neon or fluorescent paper
                  shall not be used in any written documents submitted to the
                  Department.

         7.2      Affirmative Action

                  During the performance of any contract, the Contractor shall
                  not discriminate in its employment practices against any
                  employee or applicant for employment because of race,
                  religion, national origin, ancestry, sex, age or physical
                  handicap. All subcontracts awarded under such contract shall
                  contain a like nondiscrimination provision. The applicable
                  provisions of Executive Order NO. 11246 of September 24. 1965;
                  Part 60-741 of 41 CFR pertaining to handicapped workers,
                  including 60-741.4 Affirmative Action Clause; and Section 10.8
                  to 10.13 of the Los Angeles Administrative Code pertaining to
                  nondiscrimination in employment in the performance of City
                  contracts are incorporated herein by reference and made a part
                  hereof as if they were fully set forth herein.

         7.3      Minority and Women Business Enterprise (MBE/WBE) Outreach
                  Program

                  It is the policy of the Department to provide Minority
                  Business Enterprises (MBEs), Women Business Enterprises (WBEs)
                  and all other business enterprises an equal opportunity to
                  participate in the performance of all Department contracts.
                  The Contractor shall assist the Department in implementing
                  this policy and shall use its best effort to attain MBE and
                  WBE participation of 15 percent and 7 percent, respectively,
                  and to ensure that all available business enterprises,
                  including MBEs and WBEs, have an equal opportunity to compete
                  for and participate in the work of this agreement.

                                       15


<PAGE>


                  7.3.1    MBE/WBE Defined

                           "Minority Business Enterprise" (MBE) or "Women
                           Business Enterprise" (WBE), as used herein means a
                           business enterprise that meets both of the following
                           criteria:

                           a)       A business that is at least 51 percent owned
                                    by one or more minority person(s) or women
                                    or, in the case of any business whose stock
                                    is publicly held, at least 51 percent of the
                                    stock is owned by one or more minority
                                    person(s) or women.

                           b)       A business whose management and daily
                                    business operations are controlled by one or
                                    more minority person(s) or women.

                  7.3.2    Efforts to Obtain Participation

                           Efforts to obtain participation of MBEs, WBEs, and
                           other business enterprises could reasonably be
                           expected to produce a level of participation by
                           interested subcontractors, including 15 percent MBEs
                           and 7 percent WBEs. Good faith efforts to reach out
                           to MBEs, WBEs, and all other business enterprises
                           shall be determined by the following factors:

                           1.       Meetings with MBEs, WBEs, associations
                                    representing MBEs, WBEs and other groups.

                           2.       Identification of selected portions of the
                                    work to be performed by subcontractors in
                                    order to provide participation by MBEs,
                                    WBEs, and other business enterprises. The
                                    contractor shall, when economically
                                    feasible, divide total contract requirements
                                    into small portions or quantities to permit
                                    maximum participation of MBEs, WBEs, and
                                    other business enterprises.

                           3.       Requests for proposals from interested
                                    business enterprises or proposals in
                                    newspapers, trade association publications,
                                    minority or trade-oriented publications,
                                    trade journals, or other appropriate media.

                           4.       Providing written notice to those business
                                    enterprises, including MBEs and WBEs, having
                                    an interest in participating in this
                                    Agreement. The contractor shall document
                                    that invitations were sent to available
                                    MBEs, WBEs, and other business enterprises
                                    for each portion of the work.

                           5.       Documenting efforts to follow up initial
                                    solicitations of interest by contacting the
                                    business enterprises to determine



                                       16


<PAGE>


                                    whether the enterprises are interested in
                                    participating in the work.

                           6.       Providing interested enterprises with
                                    information about the plans, specifications,
                                    and requirements for the selected
                                    subcontracting work.

                           7.       Requesting assistance from organizations
                                    that provide assistance in the recruitment
                                    and placement of MBEs, WBEs, and other
                                    business enterprises.

                           8.       Negotiating in good faith with interested
                                    MBEs, WBEs, and other business enterprises
                                    and not unjustifiably rejecting proposals
                                    prepared by any enterprise. As
                                    documentation, the bidder shall submit a
                                    list of all documentation, the bidder shall
                                    submit a list of all sub bidders for each
                                    portion of potential work for MBEs, WBEs,
                                    and other business enterprises.

                           9.       Documenting efforts to advise and assist
                                    interested MBEs, WBEs and other business
                                    enterprises in obtaining bonds, lines of
                                    credit, or required insurance.

         7.3.3    Program Documentation

                  The Contractor shall submit quarterly reports to the Contract
                  Administrator demonstrating compliance with the Department's
                  Outreach Program, and make related records available to the
                  Department upon request. The Reports shall be submitted on
                  Department forms which can be obtained from the Contract
                  Administrator, and show the following:

                  a)       the name of each participating subcontractor;

                  b)       description of the work each subcontractor has
                           contracted to perform;

                  c)       the percentage of completion for the work under each
                           subcontract;

                  d)       the compensation contracted to be paid to each
                           subcontractor (attach a copy of subcontractor's
                           invoice);

                  e)       the cumulative compensation earned by each
                           subcontractor; and

                  f)       the cumulative compensation paid to each
                           subcontractor.




                                       17


<PAGE>


         7.4      Service Contract Worker Retention and Living Wage Policy

                  7.4.1    General Provisions

                           This contract is subject to the Service Contract
                           Worker Retention Ordinance (SCWRO), Section 10.36 et
                           seq, and the Living Wage Ordinance (LWO), Section
                           10.37 et seq of the Los Angeles Administrative Code.
                           The Ordinances require that, unless specific
                           exemptions apply, all employers who are awarded
                           service contracts that involve expenditures in excess
                           of $25,000 and have a duration of at least three
                           months; and any persons who receive City financial
                           assistance of one million dollars or more in any 12
                           -month period, shall comply with the following
                           provisions of the ordinance:

                           (a)      Retention for a 90-day transition period,
                                    the employees who were employed for the
                                    preceding 12 months or more by the
                                    terminated contractor or subcontractor, if
                                    any, as provided for in the SCWRO;

                           (b)      Payment of a minimum initial wage rate to
                                    employees as defined in the LWO, of $7.99
                                    per hour, with health benefits of at least
                                    $1.25 per hour, or otherwise $9.24 per hour
                                    without benefits.

                  7.4.2    Termination Provisions

                           Under the provisions of Section 10.36.3 (c) and
                           Section 10.37.5 (c) of the Los Angeles Administrative
                           Code, the Department of Water and Power, shall have
                           the authority, under appropriate circumstances, to
                           terminate this contract and otherwise pursue legal
                           remedies that may be available, if the Department of
                           Water and Power determines that the subject
                           Contractor or financial assistance recipient violated
                           the provisions of the referenced Code Section.

                  7.4.3    Invoice Provisions

                           All invoices related to SCWRO and LWO Contracts shall
                           contain the following statement:

                           "The Contractor fully complies with Section 10.36 et.
                           seq. And Section 10.37 et. seq., SCWRO and LWO,
                           respectively, of the Los Angeles Administrative
                           Code."

         7.5      Child Support Policy

                  The Contractor and any Subcontractor(s) must fully comply with
                  all applicable State and Federal employment reporting
                  requirements for



                                       18


<PAGE>


                  the Contractor's and any Subcontractor(s)' employees. The
                  contractor and any Subcontractor(s) must fully comply with all
                  lawfully served Wage and Earnings Assignment Orders and
                  Notices of Assignment in accordance with the California Family
                  Code. The Contractor and any Subcontractor(s) must certify
                  that the principal owner(s) thereof (any person who owns an
                  interest of 10 percent or more) are in compliance with any
                  Wage and Earnings Assignment Orders or Notices of Assignment
                  applicable to them personally. The Contractor and any
                  Subcontractor(s) must certify that such compliance will be
                  maintained throughout the term of the Contract.

                  Failure of the Contractor and/or any Subcontractor(s) to fully
                  comply with all applicable reporting requirements or to
                  implement lawfully served Wage and Earnings Assignments or
                  Notices of Assignment or failure of the principal owner(s) to
                  comply with any Wage and Earnings Assignments or Notices of
                  Assignment applicable to them personally shall constitute a
                  default under the Contract. Failure of the Contractor and/or
                  any Subcontractor(s) or principal owner(s) thereof to cure the
                  default within 90 days of notice of such default by the City
                  shall subject the Contract to termination.

8.0      INSURANCE REQUIREMENTS

         8.l      General Insurance Coverage

                  Prior to the start of work, but not later than 30 days after
                  the date of award of contract, the Contractor shall furnish
                  the Department evidence of coverage from insurers acceptable
                  to the Department and in a form acceptable to the Risk
                  Management Section and the Office of the City Attorney. Such
                  insurance shall be maintained by the Contractor at the
                  Contractor's sole cost and expense.

                  Such insurance shall not limit or qualify the liabilities and
                  obligations of the Contractor assumed under the contract. The
                  Department shall not by reason of its inclusion under these
                  policies incur liability to the insurance carrier for payment
                  of premium for these policies.

                  Any insurance carried by the Department which may be
                  applicable shall be deemed to be excess insurance and the
                  Contractor's insurance is primary for all purposes despite any
                  conflicting provision in the Contractor's policies to the
                  contrary.

                  Said evidence of insurance shall contain a provision that the
                  policy cannot be canceled or reduced in coverage or amount
                  without first giving 30 calendar days' notice thereof (10 days
                  for non-payment of premium) by registered mail to The Office
                  of the City Attorney, Water and Power Division, Post Office
                  Box 51111, JFB Room 340, Los Angeles, California 90051-0100.

                                       19


<PAGE>


                  Should any portion of the required insurance be on a "Claims
                  Made" policy, the Contractor shall, at the policy expiration
                  date following completion of work, provide evidence that the
                  "Claims Made" policy has bee renewed or replaced with the same
                  limits, terms and conditions of the expiring policy, or that
                  an extended discovery period has been purchased on the
                  expiring policy at least for the contract under which the work
                  was performed.

                  Failure to maintain and provide acceptable evidence of the
                  required insurance for the required period of coverage shall
                  constitute a breach of contract, upon which the Department may
                  immediately terminate or suspend the agreement.

                  Contractor shall be responsible for all subcontractors'
                  compliance with the insurance requirements.

         8.2      Specific Coverage

                  8.2.1    Workers' Compensation Insurance

                           The Contractor shall provide Workers' Compensation
                           insurance covering all of the Contractor's employees
                           in accordance with the laws of any state in which the
                           work is to be performed and including Employer's
                           Liability insurance and a Waiver of Subrogation in
                           favor the Department of Water and Power. The limit
                           for Employer's Liability coverage shall be not less
                           than $2,000,000.00 each accident and shall be a
                           separate policy if not included with Workers'
                           Compensation coverage. Evidence of such insurance
                           shall be in the form of a special endorsement of
                           insurance. Workers' Compensation/Employer's Liability
                           exposure may be self-insured provided that the
                           Department is furnished with a copy of the
                           certificate issued by the state authorizing the
                           Contractor to self-insure. Contractor shall notify
                           the Risk Management Section by receipted delivery as
                           soon as possible of the state withdrawing authority
                           to self-insure.

                  8.2.2    Commercial General Liability Insurance

                           The Contractor shall provide Commercial General
                           Liability insurance with Blanket Contractual
                           Liability, Independent Contractors, Broad Form
                           Property Damage, Premises and Operations, Products
                           and Completed Operations, and Personal Injury
                           coverages included. Such insurance shall provide
                           coverage for total limits actually arranged by the
                           contractor, but not less than $3,000,000.00 combined
                           single limit per occurrence. Should the policy have
                           an aggregate limit, such aggregate limits should not
                           be less than double the Combined Single Limit and be
                           specific for this contract. Umbrella or Excess
                           Liability coverages may be used to supplement primary
                           coverages to meet the required limits.



                                       20


<PAGE>


                           Evidence of such coverage shall be on the
                           Department's additional insured endorsement form or
                           on an endorsement to the policy acceptable to the
                           Risk Management Section and provide for the
                           following:

                           1)       Include the Department and its officers,
                                    agents, and employees as additional insureds
                                    with the Named Insured for the activities
                                    and operations under the contract.

                           2)       Severability-of-Interest or Cross-Liability
                                    Clause such as: "The policy to which this
                                    endorsement is attached shall apply
                                    separately to each insured against whom a
                                    claim is made or suit is brought, except
                                    with respect to the limits of the company's
                                    liability."

                           3)       A description of the coverages included
                                    under the policy. 8.2.3 Commercial
                                    Automobile Liability Insurance

                           The Contractor shall provide Commercial Automobile
                           Liability insurance which shall include coverage's
                           for liability arising out of the use of owned,
                           non-owned, and hired vehicles for performance of the
                           work as required to be licensed under the California
                           or any other applicable state vehicle code. The
                           Commercial Automobile Liability insurance shall have
                           not less than $2,000,000.00 combined single limit per
                           occurrence and shall apply to all operations of the
                           Contractor.

                           The Commercial Automobile Liability policy shall name
                           the City of Los Angeles, the Board of Water and Power
                           Commissioners of the City of Los Angeles, the
                           Department of Water and Power of the City of Los
                           Angeles, and their officers, agents, and employees
                           while acting within the scope of their employment, as
                           additional insureds with the Contractor, and shall
                           insure against liability for death, bodily injury, or
                           property damage resulting from the performance of
                           this Agreement.

         8.3      Excess Liability

                  The Contractor may use an Umbrella or Excess Liability
                  Coverage to meet coverage limits specified in the contract.
                  Evidence of Excess Liability shall be in the form of the
                  Department's Excess Liability-Additional Insured Endorsement
                  form or equivalent. The Contractor shall require the carrier
                  for Excess Liability to properly schedule and to identify the
                  underlying policies as provided for on the Additional Insured
                  Endorsement form, including, as appropriate, Commercial
                  General

                                       21


<PAGE>


                  Liability, Commercial Automobile Liability, Employer's
                  Liability, or other applicable insurance coverages.

         8.4      Pollution Legal Liability

                  Pollution Legal Liability insurance with minimum limits of
                  $3,000,000 per occurrence shall be furnished by the
                  Contractor, and shall provide coverage for death, bodily
                  injury, or property damage to third parties, as well as for
                  environmental remediation of sites damaged by pollution
                  resulting directly or indirectly form the Contractor's
                  operations under this Agreement. Such policy shall be
                  maintained for not less than (3) years after the date of final
                  acceptance and completion of the work performed under this
                  Agreement. The Department of Water and Power General Liability
                  endorsement form is the preferred means of submitting evidence
                  of insurance for this coverage.

                  If the Contractor will subcontract out hazardous waste
                  treatment, storage, and/or disposal work, Contractor shall
                  identify to the Department, the name of subcontractor(s), and
                  require the subcontractor(s) to procure insurance, and provide
                  evidence of insurance, with all terms and conditions as
                  specified above, naming he City of Los Angeles, the Board of
                  Water and Power Commissioners of the City of Los Angeles, and
                  their officers, agents, and employees and the Contractor, as
                  additional insureds.

         8.5      Professional Liability Insurance

                  The Contractor shall provide Professional Liability insurance
                  covering liability arising from errors and omissions made
                  during the executing of this contract for the total limits
                  actually arranged by the contractor, but not less than
                  $1,000,000.00, per occurrence. The coverage shall include
                  Contractual Liability, and should the policy be of a
                  claims-made form, such policy shall be maintained for not less
                  than three (3) years after the date of final acceptance of
                  completion of all work performed under this agreement.

         8.6      Indemnification Clause

                  The Contractor undertakes and agrees to indemnify and hold
                  harmless the City of Los Angeles, the Department of Water and
                  Power, the Board of Water and Power Commissioners of the City
                  of Los Angeles, the Department, and their officers, agents,
                  representatives, employees, assigns and successors in interest
                  from and against any and all suits and causes of action,
                  claims, charges, damages, demands, judgments, civil fines and
                  penalties, or losses of any kind or nature whatsoever for
                  death, bodily injury or personal injury to any person,
                  including Contractor's employees and agents, or damage or
                  destruction to any property of either party hereto, or third
                  person in any manner arising by reason of negligent acts,
                  errors,

                                       22

<PAGE>


                  omissions or willful misconduct incident to the performance of
                  this contract on the part of the Contractor, or the
                  Contractor's officers, agents, employees, or subcontractors of
                  any tier, except for the sole negligence or willful misconduct
                  of the Department, its Board, officers, agents,
                  representatives or employees.

9.0      INVOICES

         The Contractor shall be authorized to submit an itemized payment
         request for services performed on a monthly basis. Such request shall
         be submitted to:

                  Los Angeles Department of Water and Power
                  Mr. Reynaldo D. Reyes
                  Contract Administrator
                  P.O. Box 51111, Room 1063
                  Los Angeles, CA 90051-0100

         9.1      Invoice Detail

                  The invoice shall be submitted by the Contractor in the form
                  of one original and three copies. The detailed invoice shall
                  include itemized charges for Contractor services that have
                  been pre-approved by the Department and completed during the
                  invoice period.

                  The Payment Request will be certified, audited, and paid by
                  the Department within 45 days following receipt of a complete
                  and accurate invoice. Invoice payments will not be made if the
                  invoice is received more than six months after the billing
                  period.

                  Each invoice shall show the contract/purchase order number,
                  the vendor code number, the City of Los Angeles Business Tax
                  Registration Certificate Number, and the identification of
                  services covered by the invoices.

         9.2      Current Los Angeles City Business Tax Registration Certificate
                  Required

                  The Contractor shall obtain and keep in full force and effect
                  during the term of the contract all Business Tax Registration
                  Certificates required by the City of Los Angeles Business Tax
                  Ordinance, Article 1, Chapter II, Section 21.00 and following,
                  of the Los Angeles Municipal Code.

         9.3      Taxpayer Identification Number (TIN)

                  Contractor declares that its authorized TIN is 36-3893973. No
                  payment will be made under this agreement without a valid TIN
                  number.


                                       23


<PAGE>


10.0     CONFLICTS

         10.1     Errors and Omissions

                  The contractor will be responsible for correcting or remedying
                  any errors or omissions which occur in performance of the
                  services under this Agreement and which are the result of the
                  contractor's negligence or action. The cost of correcting or
                  remedying any error or omission shall be borne by the
                  contractor. Revising contractor-prepared documents at the
                  request of the Department to incorporate comments by the
                  public or by agencies having jurisdiction in matters of the
                  particular task assignment is not considered to be a remedy of
                  errors or omissions, but is considered an integral part of
                  document preparation which may be called for by a task
                  assignment.

         10.2     Priority of Documents

                  In the event of any conflicting provisions between the
                  documents referenced or included in this Agreement, the
                  priority shall be as follows:

                      a.    Amendments to the Agreement, incorporating change
                            orders, in chronological order from the most recent
                            to the earliest.

                      b.    Written Change Orders to the Agreement in
                            chronological order from most recent to earliest.

                      c.    Agreement.

                      d.    Task Assignments.

                      e.    Other Referenced Documents.

                  Each party shall notify the other immediately upon the
                  determination of any such conflict or inconsistency.

11.0     MONITORING OF WORK

         11.1     Records and Audits

                  The Contractor shall maintain records and books of accounts
                  showing all costs and expenses incurred by the Contractor for
                  this Agreement. The Department shall have the right, upon
                  reasonable notice, to audit the books, records, documents, and
                  other evidence and the accounting procedures and practices,
                  where needed, to verify the costs and expenses claimed. The
                  Department retains this right for at least three years after
                  final payment and until all disputes, appeals, litigation, or
                  claims have been resolved. This right to audit shall also
                  include inspection at



                                       24

<PAGE>


                  reasonable times of the Contractor's office or facilities
                  which are engaged in the performance of the Agreement. In
                  addition, the Contractor shall, at no expense to the
                  Department, furnish reasonable facilities and assistance for
                  such an audit. Upon request, Contractor shall also provide
                  copies of documents applicable to this Agreement. The audit
                  findings shall, to the extent allowed by law, be treated by
                  the Department as confidential.

         11.2     Right to Review Services, Facilities, and Records

                  The Department reserves the right to review any portion of the
                  services performed by the contractor under this Agreement, and
                  the contractor agrees to cooperate to the fullest extent
                  possible. Contractor shall furnish to the Department such
                  reports, statistical data, and other information pertaining to
                  the contractor's services as shall be reasonably required by
                  the Department to carry out its rights and responsibilities
                  under its agreements with its bondholders or noteholders and
                  any other agreement relating to the development of the
                  project(s) and in connection with the issuance of its official
                  statements and other prospectuses with respect to the
                  offering, sale, and issuance of its bond and other
                  obligations.

                  The right of the Department to review or approve drawings,
                  specifications, procedures, instructions, reports, test
                  results, calculations, schedules, or other data that are
                  developed by the contractor shall not relieve the contractor
                  of any obligation set forth herein.

         11.3     Department's Quality Assurance Program

                  Work performed under this agreement will be subject to review
                  by the Department's personnel.

12.0     TITLE TO WORK

         12.1     Confidentiality of Department Information

                  All information disclosed by the Department during meetings or
                  negotiations with regard to the Program, and any information
                  contained in drawings, specification, technical reports, and
                  data provided by the Department to Contractor during
                  performance of this Agreement shall be held in confidence by
                  Contractor and used only for the performance of the Work
                  pursuant to this Agreement.

                  Contractor, its employees, and any subcontractors shall not
                  disclose any program or customer information to any person
                  other than the Department's personnel, or the Department's
                  designated agent, either during the term of this Agreement or
                  after its completion, without Contractor having obtained the
                  prior written consent of the Department, except as provided by
                  lawful court order or subpoena and provided contractor gives
                  the Department advance written notice of such order or
                  subpoena.
                                       25


<PAGE>


                  12.1.1   Department Property

                           The Contractor shall not copy any drawing,
                           specification, technical report, or data provided by
                           the Department. The Contractor shall return all
                           materials provided by the Department. All materials
                           shall be returned no later than the closing date of
                           the Agreement.

         12.2     Right to Documentation Developed by Contractor

                  All information, material, and documents prepared or caused to
                  be prepared under this Agreement by Contractor shall become
                  the property of the Department. Such information, or
                  derivative information, materials, and documents, shall be
                  used by Contractor only for work done directly for the
                  Department and shall neither be disclosed nor revealed in any
                  way to a third party without the prior express consent of the
                  Department.

                  12.2.1   Nondisclosure

                           The contractor shall not disclose to others any
                           information developed by contractor under this
                           Agreement without prior written approval by the
                           Contract Administrator.

         12.3     Confidentiality of Contractor Information

                  The Department, its employees and any agents or subcontractors
                  of the Department shall not disclose any confidential or
                  proprietary information of Contractor ("Contractor's
                  Confidential Information") to any person other than
                  Contractor's personnel, either during the term of the
                  Agreement, or after its completion, without having obtained
                  their prior written consent of Contractor. By way of example,
                  Contractor's Confidential Information shall include, without
                  limitation, Contractor's system for oil degassing, CFC/HCFC
                  recovery, CFC-l1 Recovery and Contractor's computer software.

                  12.3.1   The Department agrees that, without the prior written
                           consent of Contractor, it will not, during the term
                           or after termination of this Agreement, directly or
                           indirectly, disclose to any individual, corporation,
                           or other entity, or use for its own or such other's
                           benefit, any of Contractor's Confidential
                           Information, whether reduced to written or other
                           tangible form, which:

                           a)       Is not generally known to the public or in
                                    the industry;

                           b)       Has been treated by Contractor or any of its
                                    subsidiaries as confidential or proprietary;
                                    and



                                       26


<PAGE>


                           c)       Is of a competitive advantage to Contractor
                                    or any of its subsidiaries and in the
                                    Confidentiality of which Contractor or any
                                    of its subsidiaries has a legally
                                    protectable interest.

                  12.3.2   Contractor's Confidential Information which becomes
                           generally known to the public or in the industry, or,
                           in the confidentiality of which, Contractor and its
                           subsidiaries cease to have a legally protectable
                           interest, shall cease to be subject to the
                           restrictions of this Paragraph.

         12.4     Title of Collected Refrigerators and Freezers

                  12.4.1   Title to the Hazardous Material shall pass to
                           Contractor when Contractor receives Primary or Second
                           Refrigerator and Freezers from the Appliance Delivery
                           and Removal Contractor.

                  12.4.2   Title of received Primary or Second Refrigerators and
                           Freezers shall pass to Contractor.

13.0     SECTION HEADINGS

         Section headings appearing in this Agreement are for convenience only
         and shall not be construed as interpretations of text.



                                       27

<PAGE>





14.0     SIGNATURE OF AUTHORIZING AGREEMENT

         Each party was represented by counsel in the negotiations and execution
         of this agreement.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
         executed by their authorized representatives on the day and year
         written below.

                  APPLIANCE RECYCLING CENTERS OF AMERICA- CALIFORNIA, INC.

                  By:               /s/ Jack Cameron
                           -----------------------------------------------------

                  Title:            President
                           -----------------------------------------------------

                  Dated:            9/26/02
                           -----------------------------------------------------



                          DEPARTMENT OF WATER AND POWER
                           OF THE CITY OF LOS ANGELES
                                       BY
                     BOARD OF WATER AND POWER COMMISSIONERS
                           OF THE CITY OF LOS ANGELES





                  By:               /s/David H. Wiggs, General Manager
                           -----------------------------------------------------

                  And               /s/Secretary
                           -----------------------------------------------------






                                        APPROVED AS TO FORM AND LEGALITY
                                        ROCHARD J. DELGABILLO, CITY ATTORNEY
                                                 OCT 08 2002
                                        BY MARCIA HABER KAMINE
                                        Assistant City Attorney







                                       28



<PAGE>








                              AGREEMENT NO. 47190-3






                                     BETWEEN






                        THE DEPARTMENT OF WATER AND POWER
                           OF THE CITY OF LOS ANGELES






                                       AND






                               APPLIANCE RECYCLING
                      CENTERS OF AMERICA - CALIFORNIA INC.






                               SEPTEMBER 24, 2002

<PAGE>



                      APPLIANCE DELIVERY SERVICES AGREEMENT
                      -------------------------------------

                                Table of Contents
                                -----------------

Section                            Title                                 Page
- -------                            -----                                 ----

1.0      AGREEMENT........................................................2

2.0      RECITALS ........................................................2

3.0      DEFINITIONS .....................................................2

4.0      STATEMENT OF WORK ...............................................5

5.0      CUSTOMER AND REFRIGERATOR/FREEZER QUALIFICATION.................13

6.0      GENERAL CONDITIONS .............................................14

7.0      COMPENSATION....................................................20

8.0      BUSINESS POLICIES...............................................21

9.0      INSURANCE REQUIREMENTS..........................................25

10.0     INVOICES .......................................................29

11.0     CONFLICTS ......................................................30

12.0     MONITORING OF WORK. ............................................30

13.0     TITLE TO WORK ..................................................31

14.0     SECTION HEADINGS................................................33

15.0     SIGNATURE OF AUTHORIZING AGREEMENT..............................34









<PAGE>


                      APPLIANCE DELIVERY SERVICES AGREEMENT

1.0      AGREEMENT

         1.1      PARTIES

                  This Agreement is made and entered into by and between
                  APPLIANCE RECYCLING CENTERS OF AMERICA - CALIFORNIA (ARCA),
                  INC. 1920 Acadia Avenue, Compton, California 90020,
                  (hereinafter referred to as "Contractor") and the Department
                  of Water and Power of the City of Los Angeles (hereinafter
                  referred to as "Department"); Contractor and the Department
                  are sometimes hereinafter referred to individually as "Party"
                  and collectively as "Parties'.

2.0      RECITALS

         The Agreement is entered into with reference to the following facts,
         among others:

         2.1      The Department desires to promote energy efficient
                  refrigerators to its customers through its Low Income
                  Refrigerator Exchange Program (LIREP), which provides free
                  super efficient refrigerators (New Refrigerators) to
                  qualifying customers in exchange for their older, working
                  refrigerators, which will be recycled.

         2.2      The Department also desires to remove older working
                  inefficient second Refrigerators and Freezers (Second
                  Refrigerators and Freezers) through its Refrigerator Turn-In
                  and Recycling Program (RETIRE) that qualifying Customers
                  turn-in for recycling and disposal.

         2.3      The Department envisions implementing the LIREP and RETIRE
                  Programs for the purpose of saving energy, reducing peak
                  demand, lowering Department customers' energy bills,
                  transforming the market for energy-efficient appliances and
                  providing additional public environmental benefits.

         2.4      The Department has solicited responses from potentially
                  qualified vendors through a Request for Proposals and has
                  determined that the Contractor is the party best qualified to
                  provide the Department with the required appliance delivery
                  services in support of the above programs and is qualified to
                  provide other related services described in this agreement.

3.0      DEFINITIONS

         The following terms, whether in the singular or in the plural, when
         used in this Agreement, shall have the meanings specified:

         3.1      Agreement: This document, the terms and conditions contained
                  in this agreement as may be amended and supplemented.

                                        2


<PAGE>



         3.2      Appliance Delivery Warehouse: The site at which Contractor
                  will store New Refrigerators prior to delivery to Program
                  Participants or location that may be utilized for temporary
                  storage of Refrigerators and Freezers Eligible for Recycling
                  that are collected from Program Participants.

         3.3      Approved Customers: Those entities approved by the Department
                  to participate in the LIREP or RETIRE programs based on
                  established eligibility criteria described in this agreement.
                  Such entities may include residential, multi-family
                  residential and low-income customers of the Department. The
                  solicitation, evaluation and approval of such customers for
                  participation in the programs shall be conducted based upon
                  guidelines established by the Department.

         3.4      Change Order: document issued by the Department to Contractor
                  to change the Agreement.

         3.5      Contract Administrator: The Department's authorized
                  representative for this Agreement as specified in Section 6.5.

         3.6      Contract Period: The period beginning with the time of
                  effectiveness date as defined in Section 6.1.4, and extending
                  through October 31, 2005, or as extended by mutual agreement
                  of the Parties.

         3.7      Documentation: Specifications, procedures, instructions,
                  reports, test results, analyses, calculations, manuals, and
                  other data specified in this Agreement, and any amendment to
                  this Agreement, as required by any legal entity having
                  jurisdiction over the Work.

         3.8      Freezer: A freezer which provides supplementary cold storage
                  to a primary freezer or to the freezer section located within
                  the Primary Refrigerator in a residential household.

         3.9      Freezers Eligible for Recycling: Freezers that meet the
                  Program appliance eligibility criteria as referenced in
                  Section 5.

         3.10     Incentives: Customer giveaways in the form of cash, monetary
                  amounts and/or products such as compact fluorescent lamps as
                  inducement to Department customers to participate in the
                  Programs.

         3.11     "Low-Income Refrigerator Exchange Program": Department Program
                  that is supported by Work covered by this Agreement, also
                  referred to as LIREP Program.

         3.12     New Refrigerator: Energy efficient Refrigerator, purchased by
                  the Department which replaces the Primary Refrigerator
                  utilized by the Customer prior to the installation of a New
                  Refrigerator.

                                        3

<PAGE>


         3.13     Primary Freezer: Freezer utilized by the Customer as the
                  principal means of storing frozen foods in the residence.

         3.14     Primary Refrigerator: Refrigerator utilized by the Customer as
                  the principal means of storing frozen foods in the residence.

         3.15     Programs: Incentive Programs such as the LIREP and RETIRE
                  Programs or other Programs that may be implemented by the
                  Department for the purpose of promoting energy efficient
                  appliances to its customers and the removal and
                  environmentally sound recycling of replaced older, inefficient
                  appliances from the Department Customers' residences.

         3.16     Program Participants: Approved Customers as determined by the
                  Department, who participate in the Programs and agree to the
                  installation of New Refrigerators and, if applicable, turn in
                  old Primary/Second Refrigerators or Freezers.

         3.17     Recycling Center: The site at which Refrigerators and Freezers
                  are processed in an environmentally sound manner to legally
                  remove, dispose of and/or recycle CFCs, CFC Foam Insulation,
                  HCFCs, CFC 11, PCBs, mercury, used oils, and other Hazardous
                  Materials.

         3.18     Refrigerator Turn-In and Recycling Program (RETIRE):
                  Department Program that is supported by Work covered by this
                  Agreement, also referred to as RETIRE Program.

         3.19     Refrigerators Eligible for Recycling: Refrigerators that meet
                  the Program appliance eligibility criteria as referenced in
                  Section 5.

         3.20     Second Freezer: Surplus or spare freezer utilized by approved
                  customer concurrently with Primary Refrigerator and/ or
                  Freezer.

         3.21     Second Refrigerator: Surplus or spare refrigerator utilized by
                  Approved Customer concurrently with Primary Refrigerator.

         3.22     Subcontractor: An entity contracting directly with Contractor
                  to furnish services or materials as part of, or directly
                  related to, the Work.

         3.23     Suitable for Replacement: An approved customer's Primary
                  Refrigerator which the Department has determined is eligible,
                  as referenced in Section 5 and where a properly working
                  grounded electrical outlet, sound flooring, access and
                  adequate clearance will allow the installation of a New
                  Refrigerator.

                                        4

<PAGE>


         3.24     Task Assignment: Duly authorized request for contractor
                  services submitted either in written form or through
                  electronic media for the sole purpose of performing specific
                  Work for the Department.

         3.25     Work: Any and all obligations of Contractor to be performed
                  pursuant to this Agreement, which includes but is not limited
                  to the following: a) New Refrigerator warehouse/ inventory
                  services; b) New Refrigerator
                  delivery/uncrate/setup/installation services; c) Customer
                  Services; d) Primary or Second Refrigerator or Freezer
                  removal/pick-up and delivery to Recycling Center; d)
                  Documentation, Report preparation, Program tracking and
                  Database administration.

4.0      STATEMENT OF WORK

         4.1      Services to be Performed

                  The Contractor hereby agrees to provide the following services
                  to the Department pursuant to the terms and conditions of this
                  Agreement:

                  4.1.1    Assisting the Department in developing and
                           implementing Program protocols, procedures and
                           coordination activities for: 1) Contractor's
                           employees and subcontractors and 2) Department
                           employees and its subcontractors;

                  4.1.2    Assisting the Department in developing and
                           implementing Program protocols, and procedures
                           pertaining to issuance of Incentives to Program
                           Participants as determined by the Department;

                  4.1.3    Providing Customer Services as applicable in support
                           of Programs implemented by the Department. Such
                           Customer Services shall include but not limited to
                           the following:

                           (a)      Providing a toll-free telephone number
                                    dedicated exclusively for Department
                                    customers with incoming lines adequate for
                                    receiving inquiries and application requests
                                    for the Department Programs;

                           (b)      Providing adequate staff to receive and
                                    answer customer calls made on the toll-free
                                    lines as follows: Monday through Friday
                                    (except Department holidays): 8:00 a.m. to
                                    8:00 p.m. (pacific Standard Time) and 8:00
                                    a.m. to 6:00 p.m. (pacific Standard Time) on
                                    Saturdays; At all other times, the
                                    Contractor shall provide a recorded message
                                    with pertinent Program information and the
                                    capability for the customer to leave a
                                    message for call back by the Contractor.
                                    Such messages shall be returned the next
                                    business day and daily thereafter until
                                    customer has been contacted. All contacts


                                        5


<PAGE>

                                    and contact attempts shall be recorded in
                                    the Contractor's Internet-based program
                                    database and will be made available to the
                                    Department for review on a real time basis.

                           (c)      Providing all necessary training to Program
                                    staff that will directly respond to and
                                    handle routine customer service issues as
                                    described in this Agreement;

                           (d)      Responding to general telephone inquiries
                                    about the Programs as necessary and
                                    resolving problems with customers to the
                                    satisfaction of the Department. If there are
                                    any reported damages to a customer's home or
                                    property as a result of appliance delivery
                                    and/or removal services, the Contractor
                                    shall inspect the damages incurred within
                                    five (5) working days and will be
                                    satisfactorily repaired or adjustments made
                                    within three weeks. Repairs will be made at
                                    no charge to the customer or the Department.
                                    The Department reserves the right to be the
                                    final arbiter in dispute resolution;

                           (e)      Receiving customer calls and checking
                                    customer eligibility and other program
                                    requirements specified by the Department,
                                    scheduling appointments and dispatching New
                                    Refrigerator deliveries, Primary/Second
                                    Refrigerator and Freezer pick-ups for
                                    Approved Customers;

                           (f)      Sending written notices three (3) days in
                                    advance of actual Primary/Second
                                    Refrigerator and Freezer pick-ups for
                                    Approved Customers informing them of Program
                                    requirements as specified in section 5.2.5.;

                           (g)      Making 24-hour ahead reminder calls to
                                    customers with appointments and reminding
                                    them of the Program requirements to
                                    facilitate delivery of New Refrigerators and
                                    removal of Second Refrigerators and Freezers
                                    as applicable;

                           (h)      Responding to customer inquiries regarding
                                    status of applications and requests for
                                    services;

                           (i)      Maintaining appropriate records (electronic
                                    and hard copy) on all customer calls,
                                    applications and inquiries and forwarding
                                    those records to the LADWP on an
                                    as-requested basis;

                           (j)      Working with the Department to ensure
                                    exemplary customer service by conducting
                                    Quality Assurance surveys and customer
                                    follow-ups.



                                        6



<PAGE>


                  4.1.4    Receiving, warehousing and inventorying the
                           Department's stock of New Refrigerators as required
                           in the implementation of the LIREP program;

                  4.1.5    Making deliveries, uncrating, setting up and
                           installing New Refrigerators at Approved Customers'
                           residences;

                  4.1.6    Providing Customers with New Refrigerator
                           manufacturers' ownership/operation manual, warranty
                           registration information and other required
                           documentation;

                  4.1.7    Removing, disabling, collecting and transporting or
                           warehousing and transporting replaced Primary and any
                           Second Refrigerators or Freezers turned-in by the
                           Department's customers, directly to the Recycling
                           Center;

                  4.1.8    Removing and transporting all New Refrigerator crates
                           and packing materials from the Customers' residence
                           for disposal and/or recycling;

                  4.1.9    Provide reporting, Documentation and program tracking
                           information to the Department as specified herein.

         4.2      Program Mechanics - LIREP Program

                  The Department and the Contractor hereby agree to the
                  following program specific provisions, pursuant to the terms
                  and conditions of this Agreement. Contractor shall provide
                  services under the LIREP Program as follows:

                  4.2.1    The Department will provide the Contractor, in
                           writing, or through electronic media authorized task
                           assignments for specific LIREP Program services to be
                           performed. Such authorizations shall be forwarded to
                           the Contractor from time to time on an as needed
                           basis, and shall include specific information as to
                           the approved customers address, phone number,
                           specific services to be provided, and the desired
                           time frame for performance of said services. Task
                           assignments may include one or multiple customers,
                           based on actual Program requirements.
                           Under no circumstances shall the Contractor engage in
                           any work related to this Contract without the prior
                           authorized task assignment issued by the Department.

                  4.2.2    Upon receipt and acceptance of an authorized task
                           assignment, the Contractor shall contact the Approved
                           Customer and make arrangements for the performance of
                           the specified services within five (5) working days.

                  4.2.3    Records of all services provided and work performed
                           shall be maintained by the contractor and included in
                           the monthly reports to the Department as specified
                           herein.


                                        7

<PAGE>


                  The Department shall manage the following aspects of the LIREP
                  Program:

                  4.2.4    Marketing and advertising the Program to potentially
                           eligible and qualified customers and participants;

                  4.2.5    Assisting customers and other potential participants
                           in requesting applications for the Program services;

                  4.2.6    Determining customer and participant eligibility
                           (low-income and other criteria) and suitability for
                           refrigerator replacement and/or removal services;

                  4.2.7    Submitting, to the Contractor, Task Assignments
                           authorizing the performance of specific services;

                  4.2.8    Reviewing and approving invoices and reports; and

                  4.2.9    Developing and implementing Program protocols,
                           procedures, training and coordination activities
                           between the Department and Contractor as maybe
                           necessary.

         4.3      Program Mechanics - RETIRE Program

                  Contractor shall provide services under the RETIRE Program as
                  follows:

                  4.3.1    The Contractor will manage and administer the
                           Department's RETIRE Program in accordance with
                           guidelines approved by the Department. Such
                           guidelines and any other Program guidelines,
                           protocols and procedures not identified in this
                           Agreement and subsequently developed between the
                           Department and the Contractor shall be incorporated
                           into this Agreement through amendment provisions as
                           referenced in Section 6.1.1. The RETIRE Program is
                           available to all eligible Department customers. The
                           Contractor will be responsible for the determination
                           of eligibility, issuance of Program Incentives as
                           specified by the Department, customer service and
                           program database management. These tasks will be
                           performed as specified in Section 4.1 under Statement
                           of Work.

                  4.3.2    The Contractor shall provide, develop and maintain a
                           pro gram database as required in the implementation
                           of the RETIRE Program. On-line database access shall
                           be made available to the Department in real-time.
                           Contractor shall also provide and turn- over the
                           complete Program database in a single-user format to
                           the Department at the termination of this Agreement.



                                        8


<PAGE>


                           The Department shall provide monthly updates of its
                           residential customer database to the Contractor in
                           ASCII format. The Contractor shall use this data to
                           confirm applicant eligibility and will update the
                           Program database within five days of receipt of the
                           Department data. The Contractor shall be responsible
                           for maintaining the Program database, and ensuring
                           data integrity/security and nightly database back up.

                  4.3.3    Records of all services provided and work performed
                           shall be maintained by the contractor and included in
                           the monthly reports to the Department as specified
                           herein.

         4.4      Contractor's Responsibilities

                  4.4.1    Warranty

                           Contractor warrants to the Department that the Work
                           shall be performed in a competent manner acceptable
                           to the Department, in accordance with this Agreement,
                           and that the acceptance, removal collection,
                           warehousing, inventorying, delivery, uncrating, set
                           up and installation of all New and Second
                           Refrigerators and Freezers, as applicable, shall be
                           in accordance with (a) the requirements of this
                           Agreement and (b) applicable local, state, and
                           federal laws and regulations in effect at the time
                           the work is performed.

                  4.4.2    Contractor shall be responsible for:

                           a)       Receiving, maintaining and executing task
                                    assignments issued to the Contractor by the
                                    Department;

                           b)       Contractor services as specified in Section
                                    4.1 and all other Program services performed
                                    in the Approved Customer's premises in
                                    connection with either the RETIRE or LIREP
                                    programs;

                           c)       Complete accounting of all New Refrigerator
                                    deliveries and Primary and/or Second
                                    Refrigerators and Freezers collected and
                                    delivered to the Department's Recycling
                                    Center;

                           d)       Issuance, inventory, computerized
                                    tracking/monitoring and real-time reporting
                                    of Incentives given to Program Participants
                                    as required in the implementation of the
                                    RETIRE program;

                           e)       Determining and ensuring that the best
                                    methods and practices will be used in
                                    appliance delivery, removal and collection
                                    services as required in the implementation
                                    of the

                                        9


<PAGE>


                                    Department Programs to avoid damage to
                                    Department and customer's property and to
                                    prevent personal injury;

                           e)       Producing required Documentation, reports
                                    and other necessary program implementation
                                    documents;

                           f)       Providing uniforms and photo-identification
                                    badges, approved by the Department to all
                                    Program representatives authorized to visit
                                    customer homes and property or Department
                                    facilities;

                           g)       Verifying and certifying on a monthly basis
                                    that all delivery/pick-up personnel have
                                    valid California driver's licenses and auto
                                    insurance as required by law.

                  4.4.3    Contractor shall be solely responsible for all
                           methods, techniques, sequences, and procedures for
                           the:

                           a)       Warehousing and inventory of New
                                    Refrigerators;

                           b)       Delivery, uncrating, setup and installation
                                    of New Refrigerators in accordance with the
                                    manufacturer's specifications;

                           c)       Removal and immediate disabling by cutting
                                    the electrical supply cord of replaced
                                    Primary and Second Refrigerators and
                                    Freezers turned-in by Program Participants
                                    and transporting or warehousing and
                                    transporting of said refrigerators and
                                    freezers to the Recycling Center; and

                           d)       Recycling of Refrigerator corrugated
                                    cardboard packaging.

                  4.4.4    Contractor shall document and maintain records for
                           services under this Agreement as follows:

                           a)       A bi-weekly Customer Comment Tracking Report
                                    for customer inquires, complaints,
                                    resolution of complaints, problems and
                                    positive feedback.

                           b)       Provisions to collect and report data such
                                    as:

                                    i)       Date of each contact with customer;

                                    ii)      Customer name, address, home and
                                             work phone numbers;

                                    iii)     Department customer account number;

                                       10


<PAGE>


                                    iv)      New Refrigerator, model serial
                                             number and size;

                                    v)       Any incentives given to customer;

                                    vi)      Scheduled delivery and/or
                                             collection date and any reschedules
                                             or cancellations;

                                    vii)     Primary/Second Refrigerator or
                                             Freezer manufacturer's name;

                                    viii)    Primary/Second Refrigerator or
                                             Freezer style, defrost type, size
                                             and estimated age;

                                    ix)      Location of Primary/Second
                                             Refrigerator or Freezer within the
                                             residence;

                                    x)       Primary/Second Refrigerator or
                                             Freezer final disposition code
                                             (which indicates operating
                                             condition of the Primary/Second
                                             Refrigerator or Freezer);

                                    xi)      Special instructions (if
                                             applicable); and

                                    xii)     Signature of Customer following
                                             Customer certification that
                                             Customer owns the removed
                                             Primary/Second Refrigerator or
                                             Freezer, or has the owner's written
                                             permission (for example, multi-
                                             family property owner/manager),
                                             that the New Refrigerator has been
                                             properly installed and meets with
                                             the Customers' satisfaction.

                  4.4.5    Compilation of data in Section 4.4.4 shall be in
                           electronic mode, employing the Contractor's Database
                           software program. Data shall be provided to the
                           Department in both hard copy and electronic format
                           (e.g. Microsoft Excel) acceptable to the Department
                           and available for review on a real-time basis through
                           an Internet-based database program.

         4.5      Reporting Requirements

                  Contractor shall provide the Department with reports for the
                  services performed under this Agreement as follows:

                  4.4.1    A monthly report provided no later than the fifteen
                           (15) working days following the end of the previous
                           month, listing the number of New Refrigerators
                           installed, the number of Primary Refrigerators
                           removed and the number of Second Refrigerators or
                           Freezers removed and delivered to

                                       11


<PAGE>


                           the Recycling Center during the previous month and
                           containing size in cubic feet, year of manufacture,
                           style, and defrost type of each Primary/Second
                           Refrigerator or Freezer, any Incentives given to
                           Approved Customers and corresponding ending balances
                           and/or remaining inventory as applicable.

                  4.5.2    Program summary reports provided no later than
                           fifteen (15) working days following the end of a
                           twelve month period specified by the Department,
                           covering all the activities requested in the monthly
                           reports plus information from any incomplete month.

                  4.5.3    Special and Non-recurring Reports

                           4.5.3.1      Upon written request from an authorized
                                        representative of the Department,
                                        Contractor may be asked to prepare
                                        special and nonrecurring reports during
                                        course of the Program. Such report
                                        content may be developed by the parties
                                        in anticipation of requests from the
                                        Board, internal Department audits, or
                                        compilation of data relevant to program
                                        activities.

         4.6      New Refrigerator Inspection, Handling and Accounting

                  4.6.1    Upon uncrating, setting up and installing each New
                           Refrigerator at the Approved Customer's residence,
                           Contractor shall inspect the unit for any defects.
                           Contractor shall notify the Department of any
                           defective units and, upon instruction from the
                           Department, return any defective units directly to
                           the manufacturer for a replacement. The Department
                           shall pay the contractor a handling charge for the
                           return of any such defective Refrigerators.

                  4.6.2    On a monthly and/or on an as needed basis, Contractor
                           shall provide the Department with an unaudited
                           accounting of New Refrigerators remaining in
                           Contractor's inventory.

                  4.6.3    On a quarterly basis, Contractor shall complete and
                           provide the Department with reconciliation to account
                           for the New Refrigerators that were defective,
                           damaged, or stolen. Contractor shall reimburse the
                           Department for any and all New Refrigerators that are
                           either stolen from the Contractor or damaged by the
                           Contractor, the Contractor's employees or
                           subcontractors of the Contractor. For each unit
                           stolen or so damaged, reimbursement shall be the
                           Department's purchase price, subject to the
                           provisions of Section 4.6.4.

                  4.6.4    Should the total cumulative number of units stolen
                           from, or damaged by, the Contractor, as stipulated in
                           Section 4.6.3, exceed 2% of the total cumulative
                           number of units accepted into inventory by the
                           Contractor, reimbursement shall be the Department's

                                       12

<PAGE>

                           purchase price plus $75 for each such unit in excess
                           of the stated 2% threshold.

                  4.6.5    If, after a New Refrigerator is delivered by
                           Contractor, any Program Participant alleges that the
                           Refrigerator is damaged or defective, the Department
                           shall inspect the Refrigerator and, at its discretion
                           authorize replacement of such defective and/or
                           damaged Refrigerator by Contractor. If the damage to
                           a Refrigerator is the result of any action by
                           Contractor, the Department shall be relieved of any
                           obligation to pay Contractor a Delivery/Installation
                           Charge for the damaged Refrigerator, and the
                           Contractor shall submit payment to the Department for
                           the damaged refrigerator in accordance with paragraph
                           4.6.3 herein. If a refrigerator has been determined
                           to contain a manufacturer defect, the customer will
                           be advised to call the appropriate phone number per
                           manufacturer warranty.

5.0      CUSTOMER AND REFRIGERATOR/FREEZER QUALIFICATION

         5.1      The Department shall perform Customer qualification in
                  connection with the LIREP Program implementation. After a
                  customer has been approved for participation, the Department
                  will forward a task assignment authorizing the Contractor to
                  carry out the specified services contained within said task
                  assignment. Under no circumstances shall the contractor engage
                  in any work related to the LIREP Program Work without the
                  prior authorized task assignment issued by the Department.

         5.2      The Department intends to execute the Retire Program subject
                  to the following conditions:

                  5.2.1    Customer owns the Eligible Refrigerator or Freezer or
                           possesses written consent from the Refrigerator or
                           Freezer owner to turn in a Primary or Second
                           Refrigerator or Freezer.

                  5.2.2    Primary or Second Refrigerator or Freezer must be
                           capable of cooling or freezing, or both, as
                           applicable, at time of collection.

                  5.2.3    Primary or Second Refrigerator or Freezer minimum
                           size is 10 cubic feet and maximum size is 25 cubic
                           feet.

                  5.2.4    Primary or Second Refrigerator or Freezer is
                           certified by the customer to have been in use as
                           such.

                  5.2.5    Customer will properly prepare the Primary
                           Refrigerator or Freezer for Removal by:

                           a) boxing/bagging food items;


                                       13


<PAGE>



                           b)       clearing a path for safe removal;

                           c)       disconnecting the water supply if the
                                    Primary/Second Refrigerator or Freezer
                                    contains an icemaker;

                  5.2.6    Commercial refrigerators, ammonia-containing gas
                           refrigerators, commercial freezers, and room air
                           conditioner do not qualify for the Program.

6.0      GENERAL CONDITIONS

         6.1      Integrated Agreement

                  This Agreement sets forth all of the rights and duties of the
                  parties with respect to the subject matter hereof, and
                  replaces any and all previous agreements, or understandings,
                  whether written or oral, relating thereto. This Agreement may
                  be amended only as provided for in paragraph 6.1.1 hereof.

                  6.1.1    Amendment. All amendments hereto shall be in writing
                           and signed by the persons authorized to bind the
                           parties thereto.

                  6.1.2    Prohibition Against Assignment or Delegation

                           The Contractor may not, unless it has first obtained
                           the written permission of the Department, which may
                           be withheld for any reason:

                           a)       assign or otherwise alienate any of its
                                    rights hereunder, including the right to
                                    payment, or

                           b)       delegate, subcontract, or otherwise transfer
                                    any of its duties hereunder.

                  6.1.3    Non-Waiver of Agreement

                           The Department's failure to enforce any provision of
                           this Agreement or the waiver thereof in a particular
                           instance shall not be construed as a general waiver
                           of any part of such provision. The provision shall
                           remain in full force and effect.

                  6.1.4    Time of Effectiveness

                           Unless otherwise provided, this Agreement shall take
                           effect when all the following events have occurred:

                           a)       this Agreement has been signed on behalf of
                                    the Contractor by the person(s) authorized
                                    to bind the Contractor hereto;


                                       14


<PAGE>


                           b)       this Agreement has been signed on behalf of
                                    the Department by the person designated by
                                    the Board, officer or employee authorized to
                                    enter into this Agreement;

                           c)       the Office of the City Attorney has
                                    indicated in writing its approval of this
                                    Agreement as to form and legality; and

                           d)       this Agreement has been approved by the
                                    City's Councilor by the Board, officer, or
                                    employee authorized to give such approval.

                  6.1.5    Independent Contractor

                           The Contractor is acting hereunder as an independent
                           contractor and not as an agent or employee of the
                           Department. The Contractor shall not represent or
                           otherwise hold out itself or any of its directors,
                           officers, partners, employees, or agents to be an
                           agent or employee of the Department.

                  6.1.6    Applicable Law, Interpretation, Enforcement and
                           Severability.

                           Each party's performance hereunder shall comply with
                           all applicable laws of the United States of America,
                           the State of California, and the City of Los Angeles.
                           This Agreement shall be enforced and interpreted
                           under the laws of the State of California and the
                           City of Los Angeles with venue for any litigation in
                           Los Angeles, California.

                           If any part, term or provision of this Agreement
                           shall be held void, illegal, unenforceable, or in
                           conflict with any law of a Federal, State, or Local
                           Government having jurisdiction over this Agreement,
                           the validity of the remaining portions or provisions
                           shall not be affected thereby.

         6.2      Personnel

                  6.2.1    Staff Size

                           The size of the staff employed by the contractor in
                           the performance of the services shall be kept
                           consistent with the services and schedules as
                           described in this Agreement.

                  6.2.2    Identification of Key Personnel

                           The Contractor shall furnish the Department the
                           names, titles, and qualifications of its key project
                           personnel.



                                       15


<PAGE>


                  6.2.3    Approval of Key Personnel

                           The Contract Administrator will have the right to
                           interview and approve personnel. Resumes of
                           individual personnel will be reviewed and approved by
                           the Department's Contract Administrator before the
                           individual can be assigned work.

                  6.2.4    Changes in Key Personnel

                           The Contractor shall minimize changes to key project
                           personnel. The Department shall have the right to
                           request key personnel changes and to review and
                           approve key project personnel changes proposed by the
                           Contractor. The Department's approval of key
                           personnel assignments and changes shall not be
                           unreasonably withheld.

         6.3      Subcontractors

                  6.3.1    Subcontracts/Joint Participation Agreement

                           With prior approval of the Department, the Contractor
                           may enter into subcontracts and joint participation
                           agreements with others for the performance of
                           portions of this Agreement. The Contractor shall at
                           all times be responsible for the acts and errors or
                           omissions of its subcontractors or joint participants
                           and persons directly or indirectly employed by them.
                           Nothing in this Agreement shall constitute any
                           contractual relationship between any others and the
                           Department or any obligation on the part of the
                           Department to pay, or to be responsible for the
                           payment of, any sums to any subcontractors.

                  6.3.2    Copies of Subcontractor Agreement

                           Upon written request from the Contract Administrator,
                           the contractor shall supply the Department with all
                           subcontractor agreements.

                  6.3.3    Provisions Binding on Subcontractors

                           The provisions of this Agreement shall apply to all
                           Subcontractors providing service in connection with
                           the Work to be bound by general terms and conditions
                           protecting the Department which are equivalent to the
                           terms and conditions of this Agreement. In particular
                           the Department will not pay, even indirectly, the
                           fees and expenses of a subcontractor which do not
                           conform to the limitations and documentation
                           requirements of this Agreement.




                                       16


<PAGE>


         6.4      Contractor's Quality Assurance Program

                  The Contractor shall perform the work in accordance with the
                  Contractor's Quality Assurance Program, which shall be subject
                  to review, approval, and audit by the Department. The
                  Contractor's work shall reflect competent professional
                  knowledge, judgment, and accepted industry practice. The
                  Contractor shall promptly correct, or remedy any work, errors
                  or omissions, at its sole expense, which do not conform to the
                  provisions of this Agreement.

         6.5      Representatives and Notices

                  Any notice, demand, or request directed to the Department
                  shall be delivered to:

                           DEPARTMENT OF WATER AND POWER
                           CITY OF LOS ANGELES
                           Reynaldo D. Reyes
                           Contract Administrator
                           111 North Hope Street, Room 1063
                           Los Angeles, California 90012-2194

                  Any notice, demand, or request directed to the Contractor
                  shall be delivered to:

                           APPLIANCE RECYCLING CENTERS OF AMERICA -
                           CALIFORNIA, INC.
                           Jim Kirwan
                           General Manager - ARCA California
                           1920 Acacia Avenue
                           Compton, CA 90220

                  Such correspondence shall be in writing, except as specified
                  elsewhere in this Agreement. General correspondence will be
                  deemed complete upon receipt.

                  6.5.1    Change of Address or Representatives

                           Either party, by written notice, may designate
                           different or additional person(s) or different
                           addresses.

                  6.5.2    Excusable Delays

                           In the event that performance on the part of any
                           party hereto shall be delayed or suspended as a
                           result of circumstances beyond the reasonable control
                           and without the fault and negligence of said party,
                           none of the parties shall incur any liability to the
                           other parties as a result of such delay or
                           suspension. Circumstances deemed to be beyond the
                           control of the parties hereunder shall


                                       17


<PAGE>


                           include, but not be limited to acts of God or the
                           public enemy; insurrection; acts of the Federal
                           Government or any unit of State or Local Government
                           in either sovereign or contractual capacity;
                           earthquakes, fires; floods; epidemics; quarantine
                           restrictions; strikes; freight embargoes or delays in
                           transportation; to the extent that they are not
                           caused by the party's willful or negligent acts or
                           omissions, and to the extent that they are beyond the
                           party's reasonable control.

                  6.5.3    Breach

                           Except for excusable delays, if any party fails to
                           perform, in whole or in part, any promise, covenant,
                           or agreement set forth herein, or should any
                           representation made by it to be untrue, any aggrieved
                           party may avail itself of all rights and remedies, at
                           law or equity, in the courts of law. Said rights and
                           remedies are cumulative of those provided for herein
                           except that in no event shall any party recover more
                           than once, suffer a penalty or forfeiture, or be
                           unjustly compensated.

         6.6      Permits, Codes, And Statutes

                  6.6.1    Contractor shall perform the Work set forth in this
                           Agreement in accordance with all applicable Federal,
                           state, and local laws, rules, and/or ordinances.
                           Prior to performance of any services, Contractor
                           shall, at its own cost, have obtained, and shall have
                           required all Subcontractors to obtain, all licenses
                           and permits required by law, rule, regulations, and
                           ordinance, or any of them, to engage in the
                           activities required in connection with this
                           transaction.

                  6.6.2    Contractor shall comply with all applicable local,
                           state, and federal safety and health laws in effect
                           in the date of this agreement, including, but not
                           limited to EPA, California EPA, RCRA, the
                           Occupational Safety and Health Act of 1970 (OSHA),
                           and all standards, rules, regulations, and orders
                           issued pursuant to such local, state, and federal
                           safety and health laws. Should any such law, rule, or
                           regulation be enacted or promulgated subsequent to
                           the date of this Agreement, which renders
                           Contractor's performance impractical, Contractor and
                           the Department shall amend this Agreement to
                           reasonably compensate Contractor for its additional
                           costs.

         6.7      Suspension and Termination

                  6.7.1    Suspension of Work

                           The Contract Administrator may orally direct the
                           Contractor to suspend, and to subsequently resume
                           performance of all or any



                                       18


<PAGE>


                           part of the work. Such direction shall be confirmed
                           by a Change Order or a revision to a task assignment
                           if such suspension impacts the cost of the work
                           and/or work completion schedule. The Department shall
                           complete the payments due for the suspended work up
                           to the effective date of suspension notice and shall
                           resume payments effective as of the work resumption
                           date.

                  6.7.2    Termination of Agreement

                           6.7.2.1  Cancellation Without Cause

                                    This Agreement may be canceled by the
                                    Department, without cause, on 30 calendar
                                    days' written notice or at any time by
                                    mutual agreement of the parties. Said
                                    notice, on the Department's behalf, will be
                                    given by the Contract Administrator. Upon
                                    receipt of such notice, the Contractor shall
                                    immediately stop all work under this
                                    agreement. The Contractor shall be entitled
                                    to payment for all services performed to
                                    date of cancellation and shall be
                                    compensated at the established rates for
                                    completing all task assignments and work in
                                    progress as of the date of receipt of the
                                    written cancellation notice. The Contractor
                                    shall then deliver to the Department, in an
                                    organized and usable form, all work done
                                    prior to the date of cancellation.

                           6.7.2.2  Termination Due to Expenditure Limit

                                    This Agreement will automatically terminate
                                    if expenditures reach the limit of
                                    $2,100,000.00

                           6.7.2.3  Expiration of Agreement

                                    Unless amended by mutual agreement of the
                                    Parties, this Agreement expires on October
                                    31, 2005.

                           6.7.2.4  Termination of the Services of any Person.

                                    If the Department no longer requires the
                                    services of a particular person(s) supplied
                                    by the Contractor, the Department may
                                    terminate the services immediately upon
                                    written notice to the contractor.

         6.8      Patents, Copyrights and Trademarks

                  The Contractor shall fully indemnify the Department against
                  any and all liability whatsoever by reason of any alleged
                  infringement of any patent, copyright, or trademark on any
                  hardware, software, firmware, equipment or instrumentation
                  used by the Contractor in the construction of the work, or by
                  reason of any



                                       19



<PAGE>

                  intended use under these specifications by the Department of
                  any hardware, software, firmware, equipment or instrumentation
                  furnished under this contract; provided, however, that the
                  contractor shall have no liability to the Department under any
                  provision of this Article with respect to any claim of patent,
                  copyright, or trademark infringement which is based upon the
                  combination or utilization of the Contractor's hardware,
                  software, firmware, equipment or instrumentation with
                  hardware, software, firmware, equipment or instrumentation not
                  made by the Contractor; or the modification by the Department
                  of hardware, software, firmware, equipment or instrumentation
                  furnished hereunder.

                  The Contractor shall have the sole control of the defense and
                  all negotiations for settlement or compromise of any action or
                  claim of any alleged infringement of any patent, copyright, or
                  trademark on hardware, software, firmware, equipment or
                  instrumentation used by the Contractor in the designing,
                  fabrication, and delivery of the deliverables as specified
                  herein to the extent that such control is not consistent with
                  the provisions of Article IV, Section 42 of the Los Angeles
                  City Charter, but in any event the Contractor shall have the
                  right to participate fully in such defense. The Department and
                  the Contractor shall mutually agree to any settlement or
                  compromise of such action.

         6.9      Express Warranty Provision

                  Contractor warrants that the software furnished hereunder
                  shall be free from significant programming errors and form
                  defects in workmanship and materials and shall operate in
                  conformity with the performance capabilities, specifications,
                  functions and other descriptions and standards applicable
                  thereto as set forth in this Agreement; and that the software
                  shall conform to standards generally observed in the industry
                  for similar software (including source code) so long as
                  Contractor can discharge any warranty obligations
                  notwithstanding such modifications or following their removal
                  by the Department.

7.0      COMPENSATION

         7.1      Specific Rates of Compensation

                  Upon satisfactory performance of the services required herein,
                  the Department agrees to pay and the contractor agrees to
                  accept in full satisfaction thereof the actual cost of
                  services rendered payable. The prices shall remain in effect
                  through October 31, 2005, unless amended by mutual agreement
                  of the Parties.




                                       20


<PAGE>


         7.2      Payment - Additional Services

                  Payment for additional services and expenses but related to
                  and required in the implementation of the Programs, shall be
                  negotiated between the parties and implemented by an amendment
                  to the Agreement.

         7.3      Expenditure Limits

                  The total amount of this Agreement shall not exceed $2,100,000
                  without further appropriation to this Agreement by the Board
                  of Water and Power Commissioners of the City of Los Angeles.

8.0      BUSINESS POLICIES

         8.1      LADWP Recycling Policy

                  LADWP supports the use of recycled-content products of all
                  types. Recycled-content products help conserve natural
                  resources, including water and energy, and reduce demands upon
                  landfills.

                  The Contractor shall submit all written documents on paper
                  with a minimum of 30 percent post-consumer recycled content.
                  Existing company/corporate letterhead/stationery that
                  accompanies these documents is exempt from this requirement.
                  Documents of two or more pages in length shall be duplex
                  -copied (double-sided pages). Neon or fluorescent paper shall
                  not be used in any written documents submitted to the
                  Department.

         8.2      Affirmative Action

                  During the performance of any contract, the Contractor shall
                  not discriminate in its employment practices against any
                  employee or applicant for employment because of race,
                  religion, national origin, ancestry, sex, age or physical
                  handicap. All subcontracts awarded under such contract shall
                  contain a like nondiscrimination provision. The applicable
                  provisions of Executive Order NO. 11246 of September 24. 1965;
                  Part 60-741 of 41 CFR pertaining to handicapped workers,
                  including 60-741.4 Affirmative Action Clause; and Section 10.8
                  to 10.13 of the Los Angeles Administrative Code pertaining to
                  nondiscrimination in employment in the performance of City
                  contracts are incorporated herein by reference and made a part
                  hereof as if they were fully set forth herein.

         8.3      Minority and Women Business Enterprise (MBE/WBE) Outreach
                  Program

                  It is the policy of the Department to provide Minority
                  Business Enterprises (MBEs), Women Business Enterprises (WBEs)
                  and all other business enterprises an equal opportunity to
                  participate in the performance of all Department contracts.


                                       21

<PAGE>


                  The Contractor shall assist the Department in implementing
                  this policy and shall use its best effort to attain MBE and
                  WBE participation of 15 percent and 7 percent, respectively,
                  and to ensure that all available business enterprises,
                  including MBEs and WBEs, have an equal opportunity to compete
                  for and participate in the work of this agreement.

                  8.3.1    MBE/WBE Defined

                           "Minority Business Enterprise" (MBE) or "Women
                           Business Enterprise" (WBE), as used herein means a
                           business enterprise that meets both of the following
                           criteria:

                           a)       A business that is at least 51 percent owned
                                    by one or more minority person(s) or women
                                    or, in the case of any business whose stock
                                    is publicly held, at least 51 percent of the
                                    stock is owned by one or more minority
                                    person(s) or women.
                           b)       A business whose management and daily
                                    business operations are controlled by one or
                                    more minority person(s) or women.

                  8.3.2    Efforts to Obtain Participation

                           Efforts to obtain participation of MBEs, WBEs, and
                           other business enterprises could reasonably be
                           expected to produce a level of participation by
                           interested subcontractors, including 15 percent MBEs
                           and 7 percent WBEs. Good faith efforts to reach out
                           to MBEs, WBEs, and all other business enterprises
                           shall be determined by the following factors:

                           1.       Meetings with MBEs, WBEs, associations
                                    representing MBEs, WBEs and other groups.

                           2.       Identification of selected portions of the
                                    work to be performed by subcontractors in
                                    order to provide participation by MBEs,
                                    WBEs, and other business enterprises. The
                                    contractor shall, when economically
                                    feasible, divide total contract requirements
                                    into small portions or quantities to permit
                                    maximum participation of MBEs, WBEs, and
                                    other business enterprises.

                           3.       Requests for proposals from interested
                                    business enterprises or proposals in
                                    newspapers, trade association publications,
                                    minority or trade-oriented publications,
                                    trade journals, or other appropriate media.

                           4.       Providing written notice to those business
                                    enterprises, including MBEs and WBEs, having
                                    an interest in participating in this
                                    Agreement. The contractor shall document
                                    that invitations were sent to available
                                    MBEs, WBEs, and other business enterprises
                                    for each portion of the work.


                                       22

<PAGE>

                           5.       Documenting efforts to follow up initial
                                    solicitations of interest by contacting the
                                    business enterprises to determine whether
                                    the enterprises are interested in
                                    participating in the work.

                           6.       Providing interested enterprises with
                                    information about the plans, specifications,
                                    and requirements for the selected
                                    subcontracting work.

                           7.       Requesting assistance from organizations
                                    that provide assistance in the recruitment
                                    and placement of MBEs, WBEs, and other
                                    business enterprises.

                           8.       Negotiating in good faith with interested
                                    MBEs, WBEs, and other business enterprises
                                    and not unjustifiably rejecting proposals
                                    prepared by any enterprise. As
                                    documentation, the bidder shall submit a
                                    list of all documentation, the bidder shall
                                    submit a list of all sub bidders for each
                                    portion of potential work for MBEs, WBEs,
                                    and other business enterprises.

                           9.       Documenting efforts to advise and assist
                                    interested MBEs, WBEs and other business
                                    enterprises in obtaining bonds, lines of
                                    credit, or required insurance.

                  8.3.3    Program Documentation

                           The Contractor shall submit quarterly reports to the
                           Contract Administrator demonstrating compliance with
                           the Department's Outreach Program, and make related
                           records available to the Department upon request. The
                           Reports shall be submitted on Department forms which
                           can be obtained from the Contract Administrator, and
                           show the following:

                           a)       the name of each participating
                                    subcontractor;

                           b)       description of the work each subcontractor
                                    has contracted to perform;

                           c)       the percentage of completion for the work
                                    under each subcontract;

                           d)       the compensation contracted to be paid to
                                    each subcontractor (attach a copy of
                                    subcontractor's invoice);

                           e)       the cumulative compensation earned by each
                                    subcontractor; and

                           f)       the cumulative compensation paid to each
                                    subcontractor.



                                       23

<PAGE>


         8.4      Service Contract Worker Retention and Living Wage Policy

                  8.4.1    General Provisions

                           This contract is subject to the Service Contract
                           Worker Retention Ordinance (SCWRO), Section 10.36 et
                           seq, and the Living Wage Ordinance (LWO), Section
                           10.37 et seq of the Los Angeles Administrative Code.
                           The Ordinances require that, unless specific
                           exemptions apply, all employers who are awarded
                           service contracts that involve expenditures in excess
                           of $25,000 and have a duration of at least three
                           months; and any persons who receive City financial
                           assistance of one million dollars or more in any 12
                           -month period, shall comply with the following
                           provisions of the ordinance:

                           (a)      Retention for a 90-day transition period,
                                    the employees who were employed for the
                                    preceding 12 months or more by the
                                    terminated contractor or subcontractor, if
                                    any, as provided for in the SCWRO;

                           (b)      Payment of a minimum initial wage rate to
                                    employees as defined in the LWO, of $7.99
                                    per hour, with health benefits of at least
                                    $1.25 per hour, or otherwise $9.24 per hour
                                    without benefits.

                  8.4.2    Termination Provisions

                           Under the provisions of Section 10.36.3 (c) and
                           Section 10.37.5 (c) of the Los Angeles Administrative
                           Code, the Department of Water and Power, shall have
                           the authority, under appropriate circumstances, to
                           terminate this contract and otherwise pursue legal
                           remedies that may be available, if the Department of
                           Water and Power determines that the subject
                           Contractor or financial assistance recipient violated
                           the provisions of the referenced Code Section.

                  8.4.3    Invoice Provisions

                           All invoices related to SCWRO and LWO Contracts shall
                           contain the following statement:

                           "The Contractor fully complies with Section 10.36 et.
                           seq. And Section 10.37 et. seq., SCWRO and LWO,
                           respectively, of the Los Angeles Administrative
                           Code."

         8.5      Child Support Policy

                  The Contractor and any Subcontractor(s) must fully comply with
                  all applicable State and Federal employment reporting
                  requirements for


                                       24


<PAGE>


                  the Contractor's and any Subcontractor(s)' employees. The
                  contractor and any Subcontractor(s) must fully comply with all
                  lawfully served Wage and Earnings Assignment Orders and
                  Notices of Assignment in accordance with the California Family
                  Code. The Contractor and any Subcontractor(s) must certify
                  that the principal owner(s) thereof (any person who owns an
                  interest of 10 percent or more) are in compliance with any
                  Wage and Earnings Assignment Orders or Notices of Assignment
                  applicable to them personally. The Contractor and any
                  Subcontractor(s) must certify that such compliance will be
                  maintained throughout the term of the Contract.

                  Failure of the Contractor and/or any Subcontractor(s) to fully
                  comply with all applicable reporting requirements or to
                  implement lawfully served Wage and Earnings Assignments or
                  Notices of Assignment or failure of the principal owner(s) to
                  comply with any Wage and Earnings Assignments or Notices of
                  Assignment applicable to them personally shall constitute a
                  default under the Contract. Failure of the Contractor and/or
                  any Subcontractor(s) or principal owner(s) thereof to cure the
                  default within 90 days of notice of such default by the City
                  shall subject the Contract to termination.

9.0      INSURANCE REQUIREMENTS

         9.1      General Insurance Coverage

                  Prior to the start of work, but no latter that 30 days after
                  date of award of contract, the Contractor shall furnish the
                  Department, evidence of coverage either on Department forms or
                  in a form which is acceptable to the Department and the Office
                  of the City Attorney for the kinds of insurance as specified
                  herein. Such insurance shall be maintained by the Contractor
                  at he Contractor's sole cost and expense.

                  Such insurance shall not limit or qualify the liabilities and
                  obligations of the Contractor assumed under the contract. The
                  Department shall not by reason of its inclusion under these
                  policies incur liability to the insurance carrier for payment
                  of premium for these policies.

                  Any insurance carried by the Department which may be
                  applicable shall be deemed to be excess insurance and the
                  Contractor's insurance is primary for all purposes despite any
                  conflicting provision in the Contractor's policies to the
                  contrary.

                  Said evidence or endorsement shall contain a provision that
                  the policy cannot be canceled or reduced in coverage or amount
                  without first giving 30 calendar days' notice thereof (10 days
                  for nonpayment of premium) by registered mail to the Office of
                  the City Attorney, Water and Power Division, Post Office Box
                  51111, 111 N. Hope St., Los Angeles, California 90051-0100.


                                       25


<PAGE>


                  Such evidence shall be subject to the approval of the Risk
                  Management Section and the Office of the City Attorney.
                  Department forms will be supplied at the time of award of
                  contract along with instructions for completion, execution,
                  and submission to the Department.

                  Should any portion of the required insurance be on a "Claims
                  Made" policy, the Contractor shall, at the policy expiration
                  date following completion of work, provide evidence that the
                  "Claims Made" policy has been renewed or replaced with the
                  same limits, terms and conditions of the expiring policy, or
                  that an extended discovery period has been purchased on the
                  expiring policy at least for the contract under which the work
                  was performed.

                  Failure to maintain and provide acceptable evidence of the
                  required insurance for the required period of coverage shall
                  constitute a breach of contract, upon which the Department may
                  immediately terminate or suspend the agreement.

                  Contractor shall be responsible for all subcontractors'
                  compliance with the insurance requirements.

         9.2      Specific Coverage

                  9.2.1    Workers' Compensation Insurance

                           The Contractor shall provide Workers' Compensation
                           insurance covering all of the Contractor's employees
                           in accordance with the laws of any state in which the
                           work is to be performed and including Employer's
                           Liability insurance and a Waiver of Subrogation in
                           favor the Department of Water and Power. The limit
                           for Employer's Liability coverage shall be not less
                           than $2,000,000.00 each accident and shall be a
                           separate policy if not included with Workers'
                           Compensation coverage. Evidence of such insurance
                           shall be in the form of a special endorsement of
                           insurance. Workers' Compensation/Employer's Liability
                           exposure may be self-insured provided that the
                           Department is furnished with a copy of the
                           certificate issued by the state authorizing the
                           Contractor to self-insure. Contractor shall notify
                           the Risk Management Section by receipted delivery as
                           soon as possible of the state withdrawing authority
                           to self-insure.

                  9.2.2    Commercial General Liability Insurance

                           The Contractor shall provide Commercial General
                           Liability insurance with Blanket Contractual
                           Liability, Independent Contractors, Broad Form
                           Property Damage, Premises and Operations, Products
                           and Completed Operations, and Personal Injury
                           coverages included. Such insurance shall provide
                           coverage for total limits actually arranged by the
                           contractor, but


                                       26

<PAGE>

                           not less than $3,000,000.00 combined single limit per
                           occurrence. Should the policy have an aggregate
                           limit, such aggregate limits should not be less than
                           double the Combined Single Limit and be specific for
                           this contract. Umbrella or Excess Liability coverages
                           may be used to supplement primary coverages to meet
                           the required limits.

                           Evidence of such coverage shall be on the
                           Department's additional insured endorsement form or
                           on an endorsement to the policy acceptable to the
                           Risk Management Section and provide for the
                           following:

                           1)       Include the Department and its officers,
                                    agents, and employees as additional insureds
                                    with the Named Insured for the activities
                                    and operations under the contract.

                           2)       Severability-of-Interest or Cross-Liability
                                    Clause such as: "The policy to which this
                                    endorsement is attached shall apply
                                    separately to each insured against whom a
                                    claim is made or suit is brought, except
                                    with respect to the limits of the company's
                                    liability."

                           3)       A description of the coverages included
                                    under the policy.

                  9.2.3    Commercial Automobile Liability Insurance

                           The Contractor shall provide Commercial Automobile
                           Liability insurance which shall include coverage's
                           for liability arising out of the use of owned,
                           non-owned, and hired vehicles for performance of the
                           work as required to be licensed under the California
                           or any other applicable state vehicle code. The
                           Commercial Automobile Liability insurance shall have
                           not less than $2,000,000.00 combined single limit per
                           occurrence and shall apply to all operations of the
                           Contractor.

                           The Commercial Automobile Liability policy shall name
                           the City of Los Angeles, the Board of Water and Power
                           Commissioners of the City of Los Angeles, the
                           Department of Water and Power of the City of Los
                           Angeles, and their officers, agents, and employees
                           while acting within the scope of their employment, as
                           additional insureds with the Contractor, and shall
                           insure against liability for death, bodily injury, or
                           property damage resulting from the performance of
                           this Agreement.

         9.3      Excess Liability

                           The Contractor may use an Umbrella or Excess
                           Liability Coverage to meet coverage limits specified
                           in the contract. Evidence of Excess Liability shall
                           be in the form of the Department's Excess
                           Liability-Additional Insured Endorsement form or
                           equivalent. The Contractor shall require the carrier
                           for Excess Liability to properly schedule and to
                           identify the underlying policies as provided for on
                           the Additional Insured



                                       27


<PAGE>


                           Endorsement form, including, as appropriate,
                           Commercial General Liability, Commercial Automobile
                           Liability, Employer's Liability, or other applicable
                           insurance coverages.

         9.4      Fidelity Bond

                  The contractor shall maintain a fidelity bond covering
                  Employee dishonesty in an amount arranged by the Contractor,
                  but not less than $1,000,000 aggregate, and shall apply to any
                  and all work performed on behalf of the Department. Said bond
                  shall name the City of Los Angeles, the Board of Water and
                  Power Commissioners of the City of Los Angeles, the
                  Department, and their officers, agents and employees, as
                  additional insureds with the Contractor individually and
                  jointly, and shall insure against liability resulting from the
                  Contractor's employees' dishonesty in the performance of this
                  contract. Said bond shall contain a provision that the bond
                  cannot be cancelled, terminated or altered without first
                  giving 30 calendar days' written notice of such cancellation,
                  termination or alteration as previously described under
                  General Insurance Coverage. Evidence of such bond shall be
                  provided to the Department in a form acceptable to the office
                  of the City Attorney.

         9.5      Professional Liability Insurance

                  The Contractor shall provide Professional Liability insurance
                  covering liability arising from errors and omissions made
                  during the execution of this contract for the total limits
                  actually arranged by the contractor, but not less than$
                  1,000,000.00 per occurrence. The coverage shall include
                  Contractual liability, and should the policy be of a
                  claims-made form, such policy shall be maintained for not less
                  than three (3) years after the date of final acceptance or
                  completion of all work performed under this agreement.

         9.6      Indemnification Clause

                  The Contractor undertakes and agrees to indemnify and hold
                  harmless the City of Los Angeles, the Department of Water and
                  Power, the Board of Water and Power Commissioners of the City
                  of Los Angeles, the Department, and their officers, agents,
                  representatives, employees, assigns and successors in interest
                  from and against any and all suits and causes of action,
                  claims, charges, damages, demands, judgments, civil fines and
                  penalties, or losses of any kind or nature whatsoever for
                  death, bodily injury or personal injury to any person,
                  including Contractor's employees and agents, or damage or
                  destruction to any property of either party hereto, or third
                  person in any manner arising by reason of negligent acts,
                  errors, omissions or willful misconduct incident to the
                  performance of this contract on the part of the Contractor, or
                  the Contractor's officers, agents, employees, or
                  subcontractors of any tier, except for the sole negligence or
                  willful misconduct of the Department, its Board, officers,
                  agents, representatives or employees.


                                       28

<PAGE>



10.0     INVOICES

         The Contractor shall be authorized to submit an itemized payment
         request for services performed on a monthly basis. Such request shall
         be submitted to:

                  Los Angeles Department of Water and Power
                  Mr. Reynaldo D. Reyes
                  Contract Administrator
                  P.O. Box 51111, Room 1063
                  Los Angeles, CA 90051-0100

         10.1     Invoice Detail

                  The invoice shall be submitted by the Contractor in the form
                  of one original and three copies. The detailed invoice shall
                  include the following information:

                  (a)      Itemized charges, for Contractor services that have
                           been pre-approved by the Department and completed
                           during the invoice period; and

                  (b)      Itemized charges for task assignments and services as
                           requested by the Department and completed during the
                           invoice period. Charges shall be in accordance with
                           the respective task assignment and price schedule.

                  The Payment Request will be certified, audited, and paid by
                  the Department within 45 days following receipt of a complete
                  and accurate invoice. Invoice payments will not be made if the
                  invoice is received more than six months after the billing
                  period.

                  Each invoice shall show the contract/purchase order number,
                  the vendor code number, the City of Los Angeles Business Tax
                  Registration Certificate Number, and the identification of
                  services covered by the invoices.

         10.2     Current Los Angeles City Business Tax Registration Certificate
                  Required

                  The Contractor shall obtain and keep in full force and effect
                  during the term of the contract all Business Tax Registration
                  Certificates required by the City of Los Angeles Business Tax
                  Ordinance, Article 1, Chapter II, Section 21.00 and following,
                  of the Los Angeles Municipal Code.





                                       29

<PAGE>


         10.3     Taxpayer Identification Number (TIN)

                  Contractor declares that its authorized TIN is 36-3893973. No
                  payment will be made under this agreement without a valid TIN
                  number.

11.0     CONFLICTS

         11.1     Errors and Omissions

                  The contractor will be responsible for correcting or remedying
                  any errors or omissions which occur in performance of the
                  services under this Agreement and which are the result of the
                  contractor's negligence or action. The cost of correcting or
                  remedying any error or omission shall be borne by the
                  contractor. Revising contractor-prepared documents at the
                  request of the Department to incorporate comments by the
                  public or by agencies having jurisdiction in matters of the
                  particular task assignment is not considered to be a remedy of
                  errors or omissions, but is considered an integral part of
                  document preparation which may be called for by a task
                  assignment.

         11.2     Priority of Documents

                  In the event of any conflicting provisions between the
                  documents referenced or included in this Agreement, the
                  priority shall be as follows:

                  a.       Amendments to the Agreement, incorporating change
                           orders, in chronological order from the most recent
                           to the earliest.

                  b.       Written Change Orders to the Agreement in
                           chronological order from most recent to earliest.

                  c.       Agreement.

                  d.       Task Assignments.

                  e.       Other Referenced Documents.

                  Each party shall notify the other immediately upon the
                  determination of any such conflict or inconsistency.

12.0     MONITORING OF WORK

         12.1     Records and Audits

                  The Contractor shall maintain records and books of accounts
                  showing all costs and expenses incurred by the Contractor for
                  this Agreement. The Department


                                       30


<PAGE>


                  shall have the right, upon reasonable notice, to audit the
                  books, records, documents, and other evidence and the
                  accounting procedures and practices, where needed, to verify
                  the costs and expenses claimed. The Department retains this
                  right for at least three years after final payment and until
                  all disputes, appeals, litigation, or claims have been
                  resolved. This right to audit shall also include inspection at
                  reasonable times of the Contractor's office or facilities
                  which are engaged in the performance of the Agreement. In
                  addition, the Contractor shall, at no expense to the
                  Department, furnish reasonable facilities and assistance for
                  such an audit. Upon request, Contractor shall also provide
                  copies of documents applicable to this Agreement. The audit
                  findings shall, to the extent allowed by law, be treated by
                  the Department as confidential.

         12.2     Right to Review Services, Facilities, and Records

                  The Department reserves the right to review any portion of the
                  services performed by the contractor under this Agreement, and
                  the contractor agrees to cooperate to the fullest extent
                  possible. Contractor shall furnish to the Department such
                  reports, statistical data, and other information pertaining to
                  the contractor's services as shall be reasonably required by
                  the Department to carry out its rights and responsibilities
                  under its agreements with its bondholders or noteholders and
                  any other agreement relating to the development of the
                  project(s) and in connection with the issuance of its official
                  statements and other prospectuses with respect to the
                  offering, sale, and issuance of its bond and other
                  obligations.

                  The right of the Department to review or approve drawings,
                  specifications, procedures, instructions, reports, test
                  results, calculations, schedules, or other data that are
                  developed by the contractor shall not relieve the contractor
                  of any obligation set forth herein.

         12.3     Department's Quality Assurance Program

                  Work performed under this agreement will be subject to review
                  by the Department's personnel.

13.0     TITLE TO WORK

         13.1     Confidentiality of Department Information

                  All data and information, including that supplied by the
                  Department to the Contractor, that obtained by the Contractor
                  from the Department's customers, and that developed by the
                  Contractor in the course of providing Program management and
                  administration services to the Department shall be held in
                  strict confidence and shall be used solely for the performance
                  of the Work pursuant to this Agreement.

                  Contractor, its employees, and any subcontractors shall not
                  disclose any Program or customer information to any person
                  other than the



                                       31

<PAGE>


                  Department's personnel, or the Department's designated agent,
                  either during the term of this Agreement or after its
                  completion, without Contractor having obtained the prior
                  written consent of the Department, except as provided by
                  lawful court order or subpoena and provided contractor gives
                  the Department advance written notice of such order or
                  subpoena.

                  13.1.2   Department Property

                           The Contractor shall not copy any drawing,
                           specification, technical report, or data provided by
                           the Department. The Contractor shall return all
                           materials provided by the Department. All materials
                           shall be returned no later than the closing date of
                           the Agreement.

         13.2     Right to Documentation Developed by Contractor

                  Documentation, including all reports, drawings, documents,
                  field notes, specifications, and data developed by the
                  contractor and its subcontractors, shall be the property of
                  the Department, and may be used; revised, and distributed by
                  the Department in any manner.

                  13.2.1   Nondisclosure

                           The contractor shall not disclose to others any
                           information developed by contractor under this
                           Agreement without prior written approval by the
                           Contract Administrator.

                  13.2.2   Attorney Fees and Costs

                           The Parties agree that in any action to enforce the
                           terms of this Agreement that each Party shall be
                           responsible for its own attorney fees and costs.

         13.3     Confidentiality of Contractor Information

                  The Department, its employees and any agents or subcontractors
                  of the Department shall not disclose any confidential or
                  proprietary information of Contractor ("Contractor's
                  Confidential Information") to any person other than
                  Contractor's personnel, either during the term of the
                  Agreement, or after its completion, without having obtained
                  their prior written consent of Contractor

                  13.3.1   The Department agrees that, without the prior written
                           consent of Contractor, it will not, during the term
                           or after termination of this Agreement, directly or
                           indirectly, disclose to any individual, corporation,
                           or other entity, or use for its own or such other's
                           benefit, any of Contractor's Confidential
                           Information, whether reduced to written or other
                           tangible form, which:


                                       32

<PAGE>


                           a)       Is not generally known to the public or in
                                    the industry;

                           b)       Has been treated by Contractor or any of its
                                    subsidiaries as confidential or proprietary;
                                    and

                           c)       Is of a competitive advantage to Contractor
                                    or any of its subsidiaries and in the
                                    Confidentiality of which Contractor or any
                                    of its subsidiaries has a legally
                                    protectable interest.

                  13.3.2   Contractor's Confidential Information which becomes
                           generally known to the public or in the industry, or,
                           in the confidentiality of which, Contractor and its
                           subsidiaries cease to have a legally protectable
                           interest, shall cease to be subject to the
                           restrictions of this Paragraph.

         13.4     Title of Collected Refrigerators and Freezers

                  13.4.1   Title to the Hazardous Material shall pass to
                           Contractor when Contractor collects Primary or Second
                           Refrigerator and Freezers from customers and said
                           Title shall be held by the Contractor until the
                           Primary or Second Refrigerators and Freezers are
                           transported to the Department's Recycling Center.
                           Subsequently the Title to the Hazardous Material
                           shall pass to the Recycling Contractor.

                  13.4.2   Title to collected Primary or Second Refrigerators
                           and Freezers shall pass to Contractor until the
                           Primary or Second Refrigerators and Freezers are
                           transported to the Department's Recycling Center.
                           Subsequently, the Title to the collected Primary or
                           Second Refrigerators and Freezers shall pass to the
                           Recycling Contractor.

14.0     SECTION HEADING

         Section headings appearing in this Agreement are for convenience only
         and shall not be constructed as interpretations of text.












                                       33


<PAGE>



15       SIGNATURE OF AUTHORIZING AGREEMENT

         Each party was represented by counsel in the negotiations and execution
of this agreement.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their authorized representatives on the day and year written below.

                  APPLIANCE RECYCLING CENTERS OF AMERICA- CALIFORNIA, INC.

                  By:               /s/ Jack Cameron
                           -----------------------------------------------------

                  Title:            President
                           -----------------------------------------------------

                  Dated:            9/26/02
                           -----------------------------------------------------



                          DEPARTMENT OF WATER AND POWER
                           OF THE CITY OF LOS ANGELES
                                       BY
                     BOARD OF WATER AND POWER COMMISSIONERS
                           OF THE CITY OF LOS ANGELES





                  By:               /s/David H. Wiggs, General Manager
                           -----------------------------------------------------

                  And               /s/Secretary
                           -----------------------------------------------------





                                          APPROVED AS TO FORM AND LEGALITY
                                          ROCHARD J. DELGABILLO, CITY ATTORNEY
                                                   OCT 08 2002
                                          BY MARCIA HABER KAMINE
                                          Assistant City Attorney





                                       34


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.33
<SEQUENCE>5
<FILENAME>arca031327_ex10-33.txt
<DESCRIPTION>CONTRACT
<TEXT>
General Electric Capital Business                                  Exhibit 10.33
Asset Funding Corporation
Loan No. 001-0010771-001

                            BALLOON PROMISSORY NOTE

         (1920 Acacia Avenue, Compton, Los Angeles County, California)
$2,000,000.00                                                 December 27 , 2002

     FOR VALUE RECEIVED, APPLIANCE RECYCLING CENTERS OF AMERICA, INC., a
Minnesota corporation ("Borrower"), promises to pay to the order of GENERAL
ELECTRIC CAPITAL BUSINESS ASSET FUNDING CORPORATION ("Payee"; Payee and any
subsequent holder of this Note being referred to herein as "Holder") at Payee's
office at 10900 NE 4th Street, Suite 500, Bellevue, Washington 98004, attention:
Real Estate Department, or at such other address as Holder may from time to time
designate in writing, the principal sum of Two Million and no hundredths Dollars
($2,000,000.00) together with interest from the date the proceeds of the loan
(the "LOAN") evidenced by this Promissory Note (this "NOTE") are initially
disbursed (including, without limitation, disbursement into an escrow for the
benefit of Borrower) until maturity on the principal balance from time to time
remaining unpaid hereon at the rate of six and eighty-five hundredths percent
(6.85%) per annum (computed on the basis of a 360-day year of twelve (12)
consecutive thirty (30)-day months) in installments as follows: (i) interest
only in advance at the rate of $380.56 per day shall be due and payable on the
date the proceeds of the Loan are initially disbursed to or for the benefit of
Borrower (including, without limitation, disbursement into an escrow for the
benefit of Borrower) for the period beginning on the date of such disbursement
and ending on the last day of the month during which such disbursement occurs;
and (ii) 119 installments of principal and interest in the amount of $15,326.42
each shall be payable commencing on the first day of the second month following
the month in which the proceeds of the loan evidenced by this Note are initially
disbursed and continuing on the first day of each and every succeeding month
until January 1, 2013 ("Maturity"), at which time all then unpaid principal and
interest hereon shall be due and payable. A substantial payment will be due at
Maturity, as the monthly payment of principal and interest set forth herein
represents an amount which would amortize the principal face amount of this Note
in full at the interest rate set forth herein over a period of 240 months.

     If any payment shall not be received by Holder within ten (10) days after
its due date, Borrower shall pay an additional charge equal to five percent
(5.00%) of the delinquent payment or the highest additional charge permitted by
law, whichever is less.

     Upon not less than fifteen (15) days' advance written notice to Holder and
upon payment of a prepayment premium as set forth below (the "Prepayment
Premium"), Borrower shall have the right to prepay all, but not less than all,
of the outstanding balance of this Note on any regularly scheduled principal and
interest payment date. The "Prepayment Premium" shall be equal to the sum of the
Base Premium (defined below) and the Variable Premium (defined below).



<PAGE>



     The "Base Premium" shall be determined by multiplying the following
described applicable base premium factor (the "Base Premium Factor") by the
principal balance to be prepaid. The "Variable Premium" shall be determined by
(i) calculating the decrease (expressed in basis points) in the current weekly
average yield of Ten (10)-Year U.S. Dollar Interest Rate Swaps (as published in
Federal Reserve Statistical Release H.15 [519]) (the "Index") from Friday,
November 15, 2002, to the Friday immediately preceding the week in which the
prepayment is made, (ii) dividing the decrease by 100, (iii) multiplying the
result by the following described applicable variable premium factor (the
"Variable Premium Factor"), and (iv) multiplying the product by the principal
balance to be prepaid. If the Index is unchanged or has increased from Friday,
November 15, 2002, to the Friday immediately preceding the prepayment date, the
Variable Premium Factor shall be equal to Zero Dollars ($0.00). The Base Premium
Factor and the Variable Premium Factor shall be the amounts shown on the
following chart for the month in which prepayment occurs:

 No. Mos.              Years            Base           Variable
Remaining            Remaining      Premium Factor  Premium Factor
- ---------            ---------      --------------  --------------


120 - 109               10              .05             .070

 108 - 97                9              .04             .065

  96 - 85                8              .03             .060

  84 - 73                7              .02             .054

  72 - 61                6              .01             .048

  60 - 49                5               0              .042

  48 - 37                4               0              .036

  36 - 25                3               0              .029

  24 - 13                2               0              .022

   12 - 1                1               0              .013

If the Federal Reserve Board ceases to publish Statistical Release H.15 [519],
then the decrease in the weekly average yield of Ten (10)-Year U.S. Dollar
Interest Rate Swaps will be determined from another source designated by Holder.

     If Holder at any time accelerates this Note after an Event of Default
(defined below), then Borrower shall be obligated to pay the Prepayment Premium
in accordance with the foregoing schedule. The Prepayment Premium shall not be
payable in the case of an assumption of the Loan (if permitted by Holder
pursuant to the terms of the Security Instrument (as hereinafter defined)), nor
with respect to condemnation awards or insurance proceeds from fire or other
casualty which Holder applies to prepayment, nor with respect to Borrower's
prepayment of the Note in full during the last three (3) months of the term of
this Note unless an Event of Default has occurred and is continuing. Borrower
expressly acknowledges that such Prepayment Premium is not a penalty but is
intended solely to compensate Holder for the loss of its bargain and the
reimbursement of internal expenses and administrative fees and expenses incurred
by Holder.

     Holder shall have full recourse against Borrower for all sums due under
this Note and for all the representations, warranties, indemnities and covenants
in the Commercial Deed of Trust,



                                       2
<PAGE>



Financing Statement, Security Agreement, Assignment of Leases and Rents and
Fixture Filing ("Security Instrument") covering the property (the "Property")
securing this Note and all other documents executed or delivered in connection
herewith (the "Loan Documents").

     Each of the following shall constitute an Event of Default ("Event of
Default") hereunder and under the Security Instrument:

          (a) Failure of Holder to receive any payment of principal, interest,
     or Prepayment Premium upon this Note when due, and such failure shall
     continue for ten (10) days after written notice is given by Holder to
     Borrower of the same; or

          (b) Failure of Borrower to observe or perform any other obligation
     under any Loan Document (other than this Note) when such observance or
     performance is due, and such failure shall continue beyond the applicable
     cure period set forth in such Loan Document, or if the default cannot be
     cured within such applicable cure period, Borrower fails within such time
     to commence and pursue curative action with reasonable diligence or fails
     at any time after expiration of such applicable cure period to continue
     with reasonable diligence all necessary curative actions.

     Upon the occurrence of any Event of Default, Holder shall have the option
to declare the entire amount of principal and interest due under this Note
immediately due and payable without notice or demand, and Holder may exercise
any of its rights under this Note and any document executed or delivered
herewith. After acceleration or maturity, Borrower shall pay interest on the
outstanding principal balance of this Note at the rate of five percent (5.00%)
per annum above the prime interest rate as quoted in the Wall Street Journal
("WSJ") in effect from time to time, or fifteen percent (15.00%) per annum,
whichever is higher, provided that such interest rate shall not exceed the
maximum interest rate permitted by law (the "Default Rate"). If the WSJ Rate is
unavailable or no longer quoted, Lender may select such replacement index as
Lender in its sole discretion determines most closely approximates the rate
quoted in the WSJ.

     All payments of the principal and interest on this Note shall be made in
coin or currency of the United States of America which at the time shall be the
legal tender for the payment of public and private debts.

     If this Note is placed in the hands of an attorney for collection, Borrower
shall pay reasonable attorneys' fees and costs incurred by Holder in connection
therewith, and in the event suit or action is instituted to enforce or interpret
this Note (including without limitation efforts to modify or vacate any
automatic stay or injunction), the prevailing party shall be entitled to recover
all expenses reasonably incurred at, before or after trial and on appeal,
whether or not taxable as costs, or in any bankruptcy proceeding, or in
connection with post-judgment collection efforts, including, without limitation,
reasonable attorneys' fees, witness fees (expert and otherwise), deposition
costs, copying charges and other expenses.

     This Note shall be governed and construed in accordance with the laws of
the State of California applicable to contracts made and to be performed therein
(excluding choice-of-law principles). Borrower hereby irrevocably submits to the
jurisdiction of any state or federal court



                                       3
<PAGE>


sitting in California in any action or proceeding brought to enforce or
otherwise arising out of or relating to this Note, and hereby waives any
objection to venue in any such court and any claim that such forum is an
inconvenient forum.

     This Note is given in a commercial transaction for business purposes.

     This Note may be declared due prior to its expressed maturity date, all in
the events, on the terms, and in the manner provided for in the Security
Instrument.

     Borrower and all sureties, endorsers, guarantors and other parties now or
hereafter liable for the payment of this Note, in whole or in part, hereby
severally (i) waive demand, notice of demand, presentment for payment, notice of
nonpayment, notice of default, protest, notice of protest, notice of intent to
accelerate, notice of acceleration and all other notices except those for which
the Loan Documents expressly provide, and further waive diligence in collecting
this Note or in enforcing any of the security for this Note; (ii) agree to any
substitution, subordination, exchange or release of any security for this Note
or the release of any party primarily or secondarily liable for the payment of
this Note; (iii) agree that Holder shall not be required to first institute suit
or exhaust its remedies hereon against Borrower or others liable or to become
liable for the payment of this Note or to enforce its rights against any
security for the payment of this Note; and (iv) consent to any extension of time
for the payment of this Note, or any installment hereof, made by agreement by
Holder with any person now or hereafter liable for the payment of this Note,
even if Borrower is not a party to such agreement.

     Borrower authorizes Holder or its agent to insert in the spaces provided
herein the appropriate interest rate and the payment amounts as of the date of
the initial advance hereunder.

     All agreements between Borrower and Holder, whether now existing or
hereafter arising and whether written or oral, are hereby limited so that in no
contingency, whether by reason of demand or acceleration of the final maturity
of this Note or otherwise, shall the interest contracted for, charged, received,
paid or agreed to be paid to Holder exceed the maximum amount permissible under
the applicable law. If, from any circumstance whatsoever, interest would
otherwise be payable to Holder in excess of the maximum amount permissible under
applicable law, the interest payable to Holder shall be reduced to the maximum
amount permissible under applicable law; and if from any circumstance Holder
shall ever receive anything of value deemed interest by applicable law in excess
of the maximum amount permissible under applicable law, an amount equal to the
excessive interest shall be applied to the outstanding principal balance hereof,
or if such excessive amount of interest exceeds the unpaid balance of principal
hereof, such excess shall be refunded to Borrower. All interest paid or agreed
to be paid to Holder shall, to the extent permitted by applicable law, be
amortized, prorated, allocated, and spread throughout the full period (including
any renewal or extension) until payment in full of the principal so that the
interest hereon for such full period shall not exceed the maximum amount
permissible under applicable law. Holder expressly disavows any intent to
contract for, charge or receive interest in an amount which exceeds the maximum
amount permissible under applicable law. This paragraph shall control all
agreements between Borrower and Holder.



                                       4
<PAGE>


     WAIVER OF JURY TRIAL. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND
INTELLIGENTLY WAIVES ANY AND ALL RIGHTS THAT EACH PARTY TO THIS NOTE MAY NOW OR
HEREAFTER HAVE UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR THE STATE OF
CALIFORNIA, TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING DIRECTLY OR
INDIRECTLY IN ANY ACTION OR PROCEEDING RELATING TO THIS NOTE, THE LOAN DOCUMENTS
OR ANY TRANSACTIONS CONTEMPLATED THEREBY OR RELATED THERETO. IT IS INTENDED THAT
THIS WAIVER SHALL APPLY TO ANY AND ALL DEFENSES, RIGHTS, CLAIMS AND/OR
COUNTERCLAIMS IN ANY SUCH ACTION OR PROCEEDING.

     BORROWER UNDERSTANDS THAT THIS WAIVER IS A WAIVER OF A CONSTITUTIONAL
SAFEGUARD, AND EACH PARTY INDIVIDUALLY BELIEVES THAT THERE ARE SUFFICIENT
ALTERNATE PROCEDURAL AND SUBSTANTIVE SAFEGUARDS, INCLUDING, A TRIAL BY AN
IMPARTIAL JUDGE, THAT ADEQUATELY OFFSET THE WAIVER CONTAINED HEREIN.

                    [REMAINDER OF PAGE INTENTIONALLY BLANK;
                            EXECUTION PAGE FOLLOWS]






















                                       5
<PAGE>


     IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ
CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR
ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED.
YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.

                         TIME IS OF THE ESSENCE HEREOF.

BORROWER HEREBY EXPRESSLY (1) WAIVES ANY RIGHTS IT MAY HAVE UNDER CALIFORNIA
CIVIL CODE SECTION 2954.10 TO PREPAY THIS NOTE, IN WHOLE OR IN PART, WITHOUT
PENALTY, UPON ACCELERATION OF THE MATURITY DATE OF THIS NOTE, AND (2) AGREES
THAT IF, FOR ANY REASON, A PREPAYMENT OF ANY OR ALL OF THIS NOTE IS MADE,
WHETHER VOLUNTARY OR UPON OR FOLLOWING ANY ACCELERATION OF THE MATURITY DATE OF
THIS NOTE BY HOLDER ON ACCOUNT OF ANY DEFAULT BY BORROWER UNDER THIS NOTE, THE
DEED OF TRUST OR ANY OTHER DOCUMENT EVIDENCING OR SECURING THE LOAN, INCLUDING,
BUT NOT LIMITED TO, ANY TRANSFER OR DISPOSITION AS PROHIBITED OR RESTRICTED BY
THE PROVISIONS OF THE DEED OF TRUST, THEN BORROWER SHALL BE OBLIGATED TO PAY,
CONCURRENTLY THEREWITH, THE PREPAYMENT PREMIUM. BY SIGNING THIS PROVISION IN THE
SPACE PROVIDED BELOW, BORROWER AGREES THAT HOLDER'S AGREEMENT TO MAKE THE LOAN
EVIDENCED BY THIS NOTE AT THE INTEREST RATE AND FOR THE TERM SET FORTH IN THIS
NOTE CONSTITUTES ADEQUATE CONSIDERATION, GIVEN INDIVIDUAL WEIGHT BY BORROWER FOR
THIS WAIVER AND AGREEMENT.

                                   BORROWER: / s / E d w a r d R . C a m e r o n

     IN WITNESS WHEREOF, Borrower has executed or caused this Note to be
executed by its duly authorized representative as of the year and day first
written above.

                                        BORROWER:

                                        APPLIANCE RECYCLING CENTERS OF
                                        AMERICA, INC., a Minnesota corporation

                                        By: /s/Edward R. Cameron
                                        Print: Edward R. Cameron
                                        Its: President


                      [EXECUTION PAGE OF PROMISSORY NOTE]



                                       6
<PAGE>


THIS SECURITY INSTRUMENT WAS
PREPARED BY, AND UPON RECORDING
SHOULD BE RETURNED TO:

Beth M. Ascher, Esq.
Kutak Rock LLP
1650 Farnam St.
Omaha, NE 68102-2186

Index this document as
(1) deed of trust and
(2) fixture filing
ASSESSOR'S PARCEL NO. 7318-013-033

- --------------------------------------------------------------------------------
                     (SPACE ABOVE LINE FOR RECORDER'S USE)


                           COMMERCIAL DEED OF TRUST,
                    FINANCING STATEMENT, SECURITY AGREEMENT,
                         ASSIGNMENT OF LEASES AND RENTS
                               AND FIXTURE FILING

                 APPLIANCE RECYCLING CENTERS OF AMERICA, INC.,
                            a Minnesota corporation

                                   (Grantor)

                                       to

                            COMMONWEALTH LAND TITLE

                                   (Trustee)

                                  in favor of

          GENERAL ELECTRIC CAPITAL BUSINESS ASSET FUNDING CORPORATION,
                             a Delaware corporation

                                 (Beneficiary)

                            Dated: December 27, 2002

         (1920 Acacia Avenue, Compton, Los Angeles County, California)







<PAGE>



NOTICE: DO NOT DESTROY THIS DEED OF TRUST OR THE NOTE (IF IT IS IN YOUR
POSSESSION) WHICH IT SECURES AS THESE MUST BE PRESENTED TO THE TRUSTEE FOR
CANCELLATION IN ORDER TO OBTAIN A RECONVEYANCE. THE RECONVEYANCE MUST BE
RECORDED IN THE OFFICE OF THE COUNTY RECORDER.

     THIS DEED OF TRUST (herein "INSTRUMENT") is made as of December 2 7, 2002,
among the Grantor, APPLIANCE RECYCLING CENTERS OF AMERICA, INC., a Minnesota
corporation, whose address is 7400 Excelsior Boulevard, St. Louis Park,
Minnesota 55426 (herein "BORROWER"), in favor of COMMONWEALTH LAND TITLE, whose
address is 655 North Central Avenue Suite 2200, Glendale, California 91203
(herein "TRUSTEE"), for the benefit of the Beneficiary, GENERAL ELECTRIC CAPITAL
BUSINESS ASSET FUNDING CORPORATION, a Delaware corporation, whose address is
Real Estate Department, 10900 NE 4th Street, Suite 500, Bellevue, Washington,
98004 (herein "GE CAPITAL").

     THIS INSTRUMENT COVERS REAL PROPERTY AND PERSONAL PROPERTY AND GOODS WHICH
ARE OR ARE TO BECOME FIXTURES ON THE REAL PROPERTY DESCRIBED HEREIN AND IS TO BE
FILED FOR RECORD IN THE RECORDS WHERE DEEDS OF TRUST ON REAL ESTATE ARE
RECORDED. IN ADDITION, THIS INSTRUMENT SHOULD BE APPROPRIATELY INDEXED NOT ONLY
AS A DEED OF TRUST, BUT ALSO AS A FINANCING STATEMENT COVERING PERSONAL PROPERTY
AND GOODS THAT ARE TO BECOME FIXTURES ON THE REAL PROPERTY DESCRIBED HEREIN. THE
MAILING ADDRESS OF THE GRANTOR (DEBTOR) AND BENEFICIARY (SECURED PARTY) ARE SET
FORTH IN THIS INSTRUMENT.

     Borrower, in consideration of the indebtedness herein recited and the trust
herein created, irrevocably grants, conveys and assigns to Trustee, in trust,
WITH POWER OF SALE, all of Borrower's estate, right, title and interest, now
owned or hereafter acquired, including any reversion or remainder interest, in
the real property located in the City of Compton, County of Los Angeles, State
of California, commonly known as 1920 Acacia Avenue and more particularly
described on Exhibit A attached hereto and incorporated herein including all
heretofore or hereafter vacated alleys and streets abutting the property, and
all easements, rights, appurtenances, tenements, hereditaments, rents,
royalties, mineral, oil and gas rights and profits, water, water rights, and
water stock appurtenant to the property (collectively "PREMISES");

     TOGETHER with all of Borrower's estate, right, title and interest, now
owned or hereafter acquired, in:

          (a) all buildings, structures, improvements, parking areas,
     landscaping, equipment, fixtures and articles of property now or hereafter
     erected on, attached to, or used or adapted for use in the operation of the
     Premises; including but without being limited to, all heating, air
     conditioning and incinerating apparatus and equipment; all


                                       2
<PAGE>


     boilers, engines, motors, dynamos, generating equipment, piping and
     plumbing fixtures, water heaters, ranges, cooking apparatus and mechanical
     kitchen equipment, refrigerators, freezers, cooling, ventilating,
     sprinkling and vacuum cleaning systems, fire extinguishing apparatus, gas
     and electric fixtures, carpeting, floor coverings, underpadding, elevators,
     escalators, partitions, mantels, built-in mirrors, window shades, blinds,
     draperies, screens, storm sash, awnings, signs, furnishings of public
     spaces, halls and lobbies, and shrubbery and plants, and including also all
     interest of any owner of the Premises in any of such items hereafter at any
     time acquired under conditional sale contract, chattel mortgage or other
     title retaining or security instrument, all of which property mentioned in
     this clause (a) shall be deemed part of the realty covered by this
     Instrument and not severable wholly or in part without material injury to
     the freehold of the Premises (all of the foregoing together with
     replacements and additions thereto are referred to herein as
     "IMPROVEMENTS");

          (b) all compensation, awards, damages, rights of action and proceeds,
     including interest thereon and/or the proceeds of any policies of insurance
     therefor, arising out of or relating to a (i) taking or damaging of the
     Premises or Improvements thereon by reason of any public or private
     improvement, condemnation proceeding (including change of grade), sale or
     transfer in lieu of condemnation, or fire, earthquake or other casualty, or
     (ii) any injury to or decrease in the value of the Premises or the
     Improvements for any reason whatsoever;

          (c) return premiums or other payments upon any insurance any time
     provided with respect to the Premises, Improvements, and other collateral
     described herein for the benefit of or naming GE Capital, and refunds or
     rebates of taxes or assessments on the Premises;

          (d) all written and oral leases and rental agreements (including
     extensions, renewals and subleases; all of the foregoing shall be referred
     to collectively herein as the "LEASES") now or hereafter affecting the
     Premises including, without limitation, all rents, issues, income, profits
     and other revenues and income therefrom and from the renting, leasing or
     bailment of Improvements and equipment ("RENTS"), all guaranties of
     tenants' performance under the Leases, and all rights and claims of any
     kind that Borrower may have against any tenant under the Leases or in
     connection with the termination or rejection of the Leases in a bankruptcy
     or insolvency proceeding;

          (e) plans, specifications, contracts and agreements relating to the
     design or construction of the Improvements; Borrower's rights under any
     payment, performance, or other bond in connection with the design or
     construction of the Improvements; all landscaping and construction
     materials, supplies, and equipment used or to be used or consumed in
     connection with construction of the Improvements, whether stored on the
     Premises or at some other location; and contracts, agreements, and purchase
     orders with contractors, subcontractors, suppliers, and materialmen
     incidental to the design or construction of the Improvements;



                                       3
<PAGE>


          (f) all contracts, accounts, rights, claims or causes of action
     pertaining to or affecting the Premises or the Improvements, including,
     without limitation, all options or contracts to acquire other property for
     use in connection with operation or development of the Premises or
     Improvements, management contracts, service or supply contracts, deposits,
     bank accounts, general intangibles (including without limitation
     trademarks, trade names and symbols), permits, licenses, franchises and
     certificates, and all commitments or agreements, now or hereafter in
     existence, intended by the obligor thereof to provide Borrower with
     proceeds to satisfy the loan evidenced hereby or improve the Premises or
     Improvements, and the right to receive all proceeds due under such
     commitments or agreements including refundable deposits and fees;

          (g) all books, records, surveys, reports and other documents related
     to the Premises, the Improvements, the Leases, or other items of collateral
     described herein; and

          (h) all additions, accessions, replacements, substitutions, proceeds
     and products of the real and personal property, tangible and intangible,
     described herein. All of the foregoing described collateral is exclusive of
     any equipment, inventory, furniture, furnishings or trade fixtures owned
     and supplied by tenants of the Premises. The Premises, the Improvements,
     the Leases and all of the rest of the foregoing property are herein
     referred to as the "PROPERTY." TO HAVE AND TO HOLD the Property and all
     parts, rights, members and appurtenances thereof to the use, benefit and
     behoof of GE Capital and its successors and assigns in fee simple forever.

     TO SECURE TO GE Capital (a) the repayment of the indebtedness evidenced by
Borrower's Balloon Promissory Note dated of even date herewith in the principal
sum of Two Million and no hundredths Dollars ($2,000,000.00), with interest
thereon as set forth therein, and having a final scheduled maturity date of
January 1, 2013, and all renewals, extensions and modifications thereof (herein
"NOTE"); (b) the repayment of any future advances, with interest thereon, made
by GE Capital to Borrower pursuant to Section 30 hereof (herein "FUTURE
ADVANCES"); (c) the payment of all other sums, with interest thereon, advanced
in accordance herewith to protect the security of this Instrument or to fulfill
any of Borrower's obligations hereunder or under the other Loan Documents (as
defined below); (d) the performance of the covenants and agreements of Borrower
contained herein or in the other Loan Documents; and (e) the repayment of all
sums now or hereafter owing to GE Capital by Borrower pursuant to any instrument
which recites that it is secured hereby. The indebtedness and obligations
described in clauses (a)-(e) above are collectively referred to herein as the
"INDEBTEDNESS". The Note, this Instrument, and all other documents evidencing,
securing or guaranteeing the Indebtedness, including, without limitation that
certain Environmental Indemnity Agreement being executed as of the date hereof,
as the same may be modified or amended from time to time, are referred to herein
as the "LOAN DOCUMENTS". The terms of the Note secured hereby may provide that
the interest rate or payment terms or balance due may be indexed, adjusted,
renewed, or renegotiated from time to time, and this Instrument shall continue
to secure the Note notwithstanding any such indexing, adjustment, renewal or
renegotiation.



                                       4
<PAGE>



     PROVIDED, ALWAYS, that if Borrower shall pay unto GE Capital the
Indebtedness and if Borrower shall duly, promptly and fully perform, discharge,
execute, effect, complete and comply with and abide by each and every of the
stipulations, agreements, conditions and covenants of the Note and this
Instrument, then this Instrument and all assignments contained herein and liens
created hereby shall cease and be null and void; otherwise to remain in full
force and effect.

     Borrower represents and warrants that Borrower has good, marketable and
insurable title to, and has the right to grant, convey and assign an
indefeasible fee simple estate in, the Premises, Improvements, Rents and Leases,
and the right to convey the other Property, that the Property is unencumbered
except as disclosed in writing to and approved by GE Capital prior to the date
hereof, and that Borrower will warrant and forever defend unto Trustee the title
to the Property against all claims and demands, subject only to the permitted
exceptions set forth in Schedule 1 attached hereto.

     Borrower represents, warrants, covenants and agrees for the benefit of GE
Capital as follows:

     SECTION 1. PAYMENT OF PRINCIPAL AND INTEREST. Borrower shall promptly pay
when due the principal of and interest on the Indebtedness, any prepayment and
other charges provided in the Loan Documents and all other sums secured by this
Instrument.

     SECTION 2. FUNDS FOR TAXES, INSURANCE AND OTHER CHARGES. Except as is
hereinafter provided with respect to the impounding of such payments by GE
Capital following the occurrence of an Event of Default, Borrower shall pay or
cause to be paid when due, prior to delinquency, all annual real estate taxes,
insurance premiums, assessments, water and sewer rates, ground rents and other
charges (herein "IMPOSITIONS") payable with respect to the Property. Upon the
occurrence of an Event of Default (hereinafter defined), and at GE Capital's
sole option at any time thereafter, Borrower shall pay in addition to each
monthly payment on the Note, one-twelfth of the annual Impositions (as estimated
by GE Capital in its sole discretion), to be held by GE Capital without interest
to Borrower, for the payment of such Impositions.

     If the amount of such additional payments held by GE Capital ("FUNDS") at
the time of the annual accounting thereof shall exceed the amount deemed
necessary by GE Capital to provide for the payment of Impositions as they fall
due, such excess shall be at Borrower's option, either repaid to Borrower or
credited to Borrower on the next monthly installment or installments of Funds
due. If at any time the amount of the Funds held by GE Capital shall be less
than the amount deemed necessary by GE Capital to pay Impositions as they fall
due, Borrower shall pay to GE Capital any amount necessary to make up the
deficiency within thirty (30) days after notice from GE Capital to Borrower
requesting payment thereof.

     GE Capital may apply, in any amount and in any order as GE Capital shall
determine in GE Capital's sole discretion, any Funds held by GE Capital at the
time of application (i) to pay Impositions which are now or will hereafter
become due, or (ii) as a credit against sums secured



                                       5
<PAGE>


by this Instrument. Upon payment in full of all sums secured by this Instrument,
GE Capital shall refund to Borrower any Funds held by GE Capital.

     SECTION 3. APPLICATION OF PAYMENTS. Unless applicable law provides
otherwise, each complete installment payment received by GE Capital from
Borrower under the Note or this Instrument shall be applied by GE Capital first
in payment of amounts payable to GE Capital by Borrower under Section 2 hereof,
then to interest payable on the Note, then to principal of the Note, then to
interest and principal on any Future Advances in such order as GE Capital, at GE
Capital's sole discretion, shall determine. Upon the occurrence of an Event of
Default, GE Capital may apply, in any amount and in any order as GE Capital
shall determine in GE Capital's sole discretion, any payments received by GE
Capital under the Note or this Instrument. Any partial payment received by GE
Capital shall, at GE Capital's option, be held in a non-interest bearing account
until GE Capital receives funds sufficient to equal a complete installment
payment. If requested by GE Capital, Borrower shall promptly furnish to GE
Capital all notices of Impositions which become due under this Section 4, and in
the event Borrower shall make payment directly, Borrower shall promptly furnish
to GE Capital receipts evidencing such payments.

     SECTION 4. CHARGES, LIENS. Borrower shall promptly discharge or bond off
any lien which has, or may have, priority over or equality with, the lien of
this Instrument, and Borrower shall pay, when due, the claims of all persons
supplying labor or materials to or in connection with the Property. Without GE
Capital's prior written permission, Borrower shall not allow any lien inferior
to this Instrument to be perfected against the Property. If any lien inferior to
this Instrument is filed against the Property without GE Capital's prior written
permission and without the consent of Borrower, Borrower shall, within thirty
(30) days after receiving notice of the filing of such lien, cause such lien to
be released of record or bonded off and deliver evidence of such release or
bonding to GE Capital. Borrower may contest any such lien by appropriate
proceedings in good faith, timely filed, provided that enforcement of the lien
is stayed pending such contest. Mortgage may require that Borrower post security
for payment of such lien.

     SECTION 5. INSURANCE. Borrower shall obtain and maintain the following
types of insurance upon and relating to the Property:

          (a) "All Risk" property and fire insurance (with extended coverage
     endorsement including malicious mischief and vandalism) in an amount not
     less than the full replacement value of the Property (with a deductible not
     to exceed $10,000), naming GE Capital under a lender's loss payable
     endorsement (form 438BFU or equivalent) naming GE Capital as mortgagee and
     loss payee and including agreed amount, inflation guard, replacement cost
     and waiver of subrogation endorsements;

          (b) Commercial general liability insurance in an amount not less than
     $2,000,000 per occurrence and on an occurrence basis, insuring against
     personal injury, death and property damage and naming GE Capital as
     additional insured;



                                       6
<PAGE>



          (c) Business interruption insurance or rent-loss insurance, as
     applicable, covering loss of rental or other income (including all expenses
     payable by tenants) for up to twelve (12) months;

          (d) Boiler and machinery coverage for mechanical and electrical
     failure;

          (e) Flood hazard insurance if the Property is located in an area
     designated by the Federal Emergency Management Act if and to the extent
     that the Property is located within an area that has been or is hereafter
     designated or identified as an area having special flood hazards by the
     Department of Housing and Urban Development or such other official as shall
     from time to time be authorized by federal or state law to make such
     designation pursuant to any national or state program of flood insurance,
     Borrower shall carry flood insurance with respect to the Property in
     amounts not less than the maximum limit of coverage then available with
     respect to the Property or the amount of the Indebtedness, whichever is
     less; and

          (f) Such other types of insurance or endorsements to existing
     insurance as may be required from time to time by GE Capital in accordance
     with its standard commercial lending practices.

     Upon the request of GE Capital, Borrower shall increase the coverages under
any of the insurance policies required to be maintained hereunder or otherwise
modify such policies in accordance with GE Capital's standard commercial lending
practices. All of the insurance policies required hereunder shall be issued by
corporate insurers licensed to do business in the state in which the Property is
located and rated A:VIII or better by A.M. Best Company, and shall be in form
acceptable to GE Capital. Certificates of all insurance required to be
maintained hereunder shall be delivered to GE Capital, along with evidence of
payment in full of all premiums required thereunder, contemporaneously with
Borrower's execution of this Instrument. All such certificates shall be in form
acceptable to GE Capital and shall require the insurance company to give to GE
Capital at least thirty (30) days' prior written notice before canceling the
policy for any reason or materially amending it. Certificates evidencing all
renewal and substitute policies of insurance shall be delivered to GE Capital,
along with evidence of the payment in full of all premiums required thereunder,
at least fifteen (15) days before termination of the policies being renewed or
substituted. If any loss shall occur at any time when Borrower shall be in
default hereunder, GE Capital shall be entitled to the benefit of all insurance
policies held or maintained by Borrower, to the same extent as if same had been
made payable to GE Capital, and upon foreclosure hereunder, GE Capital shall
become the owner thereof. GE Capital shall have the right, but not the
obligation, to make premium payments, at Borrower's expense, to prevent any
cancellation, endorsement, alteration or reissuance of any policy of insurance
maintained by Borrower, and such payments shall be accepted by the insurer to
prevent same.

     If any act or occurrence of any kind or nature (including any casualty for
which insurance was not obtained or obtainable) shall result in damage to or
destruction of the Property (such event being called a "LOSS"), Borrower will
give prompt written notice thereof to GE Capital. If the insurance proceeds paid
or payable in connection with any Loss are reasonably expected to



                                       7
<PAGE>


exceed $10,000 and if an Event of Default has not occurred hereunder and is not
continuing, GE Capital shall apply all such insurance proceeds to the
restoration, replacement and rebuilding of the damaged portion of the Property,
and such restoration, replacement and rebuilding shall be accomplished, upon
satisfaction of each and all of the following conditions: (i) except as provided
in (ii)below, GE Capital shall be satisfied that by the expenditure of such
insurance proceeds the Property will be fully restored within a reasonable
period of time to its value immediately preceding the loss or damage, free and
clear of all liens, except the lien of this Instrument, the permitted exceptions
set forth in Schedule 1 attached hereto, and such other liens as are
specifically approved by GE Capital in writing under this Instrument; (ii) in
the event such proceeds shall be insufficient to restore or rebuild the
Property, Borrower shall deposit promptly with GE Capital funds which, together
with the insurance proceeds, shall be sufficient in GE Capital's judgment to
restore and rebuild the Property; (iii) Borrower shall make reasonable efforts
to obtain a waiver of the right of subrogation from any insurer under such
policies of insurance who, at that time, claims that no liability exists as to
Borrower or the then owner or the assured under such policies; (iv) the excess
of such insurance proceeds above the amount necessary to complete such
restoration and compensate Borrower for all other insured losses shall be
applied on account of the Indebtedness (first to interest, then to expenses
reimbursable to GE Capital and then to principal amounts falling due under the
Note without prepayment premium); (v) GE Capital reviews and approves in writing
the plans and specifications for the restoration work and GE Capital receives
written evidence satisfactory to GE Capital that the same have been approved by
all governmental authorities having jurisdiction; (vi) Borrower shall have
furnished to GE Capital, for GE Capital's approval, a detailed budget and cost
breakdown for said restoration work signed by Borrower and describing the nature
and type of expenses and amounts thereof estimated by Borrower for said
restoration work including, but not limited to, the cost of material and
supplies, architect and designer fees, general contractor's fees, and the
anticipated monthly disbursement schedule, and GE Capital shall have given to
Borrower written approval of such budget and cost breakdown (if Borrower
determines at any time that its actual expenses differ or will differ from its
estimated budget, it will so advise GE Capital promptly); (vii) Borrower has
delivered to GE Capital evidence satisfactory to GE Capital that all Leases
existing at the time of the Loss will remain in full force and effect subject
only to abatement of rent in accordance with the terms of the Leases until
completion of such repair and restoration; and (viii) in GE Capital's reasonable
judgment, such restoration work can be completed at least six (6) months prior
to the maturity of the Note.

     In the event any of such conditions are not or cannot be satisfied, then
all of the insurance proceeds payable with respect to such Loss will be applied
to the payment of the Indebtedness in such order as GE Capital may elect.

     Under no circumstances shall GE Capital become obligated to take any action
to restore the Property; all proceeds released or applied by GE Capital to the
restoration of the Property pursuant to the provisions of this Section 5 shall
be released and/or applied to the cost of restoration (including within the term
"RESTORATION" any repair, reconstruction or alteration) as such restoration
progresses, in amounts which shall equal ninety percent (90%) of the amounts
from time to time certified by an architect approved by GE Capital to have been
incurred in such restoration of any and all of the Property (i.e., 90% of the
total amount expended by the contractor for the project under a contract
approved by GE Capital and billed by the contractor to



                                       8
<PAGE>


Borrower) and performed by a contractor reasonably satisfactory to GE Capital
and who shall furnish such corporate surety bond, if any, as may be reasonably
required by GE Capital in accordance with the plans and specifications therefor
approved by GE Capital and the remaining ten percent (10%) upon completion of
such restoration and delivery to GE Capital of evidence reasonably satisfactory
to GE Capital that no mechanics' lien exists with respect to the work of such
restoration; that the restoration work has been completed and fully paid for in
accordance with plans and specifications for said work approved by GE Capital;
and that all Leases existing at the time the Loss occurred are in full force and
effect with all tenants in possession and paying full Lease rental; and that all
governmental approvals required for the completion of said restoration work and
occupancy of the Property have been obtained and the same are in form and
substance satisfactory to GE Capital.

     If within a reasonable period of time after the occurrence of any Loss,
Borrower shall not have submitted to GE Capital and received GE Capital's
approval of plans and specifications for the repair, restoration or rebuilding
of such Loss or shall not have obtained approval of such plans and
specifications from all governmental authorities whose approval is required, or
if, after such plans and specifications are approved by GE Capital and by all
such governmental authorities, Borrower shall fail to commence promptly such
repair, restoration or rebuilding, or if thereafter Borrower fails to carry out
diligently such repair, restoration or rebuilding or is delinquent in the
payment to mechanics, materialmen or others of the costs incurred in connection
with such work, or if any other condition of this Section 5 is not satisfied
within a reasonable period of time after the occurrence of any such Loss, then
GE Capital may, in addition to all other rights herein set forth, at GE
Capital's option, (A) declare that an Event of Default has occurred and/or apply
all of the insurance proceeds payable with respect to such Loss to the payment
of the Indebtedness in such order as GE Capital may elect, and/or (B) GE
Capital, or any lawfully appointed receiver of the Property may at their
respective options, perform or cause to be performed such repair, restoration or
rebuilding, and may take such other steps as they deem advisable to carry out
such repair, restoration or rebuilding, and may enter upon the Property for any
of the foregoing purposes, and Borrower hereby waives, for itself and all others
holding under it, any claim against GE Capital and such receiver (other than a
claim based upon the alleged gross negligence or intentional misconduct of GE
Capital or any such receiver) arising out of anything done by them or any of
them pursuant to this Section 5 and GE Capital may in its discretion apply any
proceeds held by it to reimburse itself and/or such receiver for all amounts
expended or incurred by it in connection with the performance of such work,
including attorneys' fees, and any excess costs shall be paid by Borrower to GE
Capital and Borrower's obligation to pay such excess costs shall be secured by
the lien of this Instrument and shall bear interest at the default rate set
forth in the Note, until paid.

     Nothing herein, and no authority given to Borrower to repair, rebuild or
restore the Property or any portion thereof, shall be deemed to constitute
Borrower the agent of GE Capital for any purpose, or to create, either expressly
or by implication, any liens or claims or rights on behalf of laborers,
mechanics, materialmen or other lien holders which could in any way be superior
to the lien or claim of GE Capital, or which could be construed as creating any
third party rights of any kind or nature to the insurance funds. At reasonable
times during the work of restoration, and upon reasonable notice, GE Capital,
either personally or by duly authorized agents, shall have the right to enter
upon the Property for inspection of the work. Borrower



                                       9
<PAGE>



expressly assumes all risk of loss, including a decrease in the use, enjoyment
or value of the Property from any casualty whatsoever, whether or not insurable
or insured against.

     SECTION 6. PRESERVATION AND MAINTENANCE OF PROPERTY; LEASEHOLDS. Borrower
(a) shall not commit waste or permit impairment or deterioration of the
Property, (b) shall not abandon the Property, (c) shall restore or repair
promptly and in a good and workmanlike manner all or any part of the Property to
the equivalent of its original condition, or such other condition as GE Capital
may approve in writing, in the event of any damage, injury or loss thereto,
whether or not insurance proceeds are available to cover in whole or in part the
costs of such restoration or repair, (d) shall keep the Property, including all
Improvements thereon, in good repair and shall replace fixtures, equipment,
machinery and appliances on the Property when necessary to keep such items in
good repair, (e) shall comply with all laws, ordinances, regulations and
requirements of any governmental body applicable to the Property, (f) if all or
part of the Property is for rent or lease, then GE Capital, at its option after
the occurrence of an Event of Default, may require Borrower to provide for
professional management of the Property by a property manager satisfactory to GE
Capital pursuant to a contract approved by GE Capital in writing, unless such
requirement shall be waived by GE Capital in writing, (g) shall give notice in
writing to GE Capital of and, unless otherwise directed in writing by GE
Capital, appear in and defend any action or proceeding purporting to affect the
Property, the security of this Instrument or the rights or powers of GE Capital
hereunder. Neither Borrower nor any tenant or other person, without the written
approval of GE Capital, shall remove, demolish or alter any Improvement now
existing or hereafter erected on the Premises or any Property except when
incident to the replacement of fixtures, equipment, machinery and appliances
with items of like kind.

     Borrower represents, warrants and covenants that the Property is and shall
be in substantial compliance with the Americans with Disabilities Act of 1990
and all of the regulations promulgated thereunder, as the same may be amended
from time to time.

     SECTION 7. USE OF PROPERTY. Unless required by applicable law or unless GE
Capital has otherwise agreed in writing, Borrower shall not allow changes in the
use for which all or any part of the Property was intended at the time this
Instrument was executed. Borrower shall not, without GE Capital's prior written
consent, (i) initiate or acquiesce in a change in the zoning classification
(including any variance under any existing zoning ordinance applicable to the
Property), (ii) permit the use of the Property to become a non-conforming use
under applicable zoning ordinances, (iii) file any subdivision or parcel map
affecting the Property, or (iv) amend, modify or consent to any easement or
covenants, conditions and restrictions pertaining to the Property.

     SECTION 8. PROTECTION OF GE CAPITAL'S SECURITY. If Borrower fails to
perform any of the covenants and agreements contained in this Instrument, or if
any action or proceeding is commenced which affects the Property or title
thereto or the interest of GE Capital therein, including, but not limited to,
eminent domain, insolvency, code enforcement, or arrangements or proceedings
involving a bankrupt or decedent, then GE Capital at GE Capital's option may
make such appearances, disburse such sums and take such action as GE Capital
deems necessary, in its sole discretion, to protect GE Capital's interest,
including, but not limited to, (i) disbursement of



                                       10
<PAGE>



attorneys' fees, (ii) entry upon the Property to make repairs, (iii) procurement
of satisfactory insurance as provided in Section 5 hereof, and (iv) if this
Instrument is on a leasehold, exercise of any option to renew or extend the
Ground Lease on behalf of Borrower and the curing of any default of Borrower in
the terms and conditions of the Ground Lease.

     Any amounts disbursed by GE Capital pursuant to this Section 8, with
interest thereon, shall become additional Indebtedness of Borrower secured by
this Instrument. Unless Borrower and GE Capital agree to other terms of payment,
such amounts shall be immediately due and payable and shall bear interest from
the date of disbursement at the Default Rate (as defined in the Note). Borrower
hereby covenants and agrees that GE Capital shall be subrogated to the lien of
any mortgage or other lien discharged, in whole or in part, by the Indebtedness.
Nothing contained in this Section 8 shall require GE Capital to incur any
expense or take any action hereunder.

     SECTION 9. INSPECTION. GE Capital may make or cause to be made reasonable
entries upon the Property to inspect the interior and exterior thereof. Except
in case of emergency, such inspection shall be with reasonable prior notice and
shall in any case be with due regard to rights of tenants.

     SECTION 10. FINANCIAL DATA. Borrower will furnish to GE Capital and will
cause any guarantor of the Indebtedness to furnish GE Capital on request, within
ninety (90) days after the close of its fiscal year (i) annual balance sheet and
profit and loss statements prepared in accordance with generally accepted
accounting principles and practices consistently applied and, if GE Capital so
requires, accompanied by the annual audit report of an independent certified
public accountant reasonably acceptable to GE Capital, (ii) an annual operating
statement, together with a complete rent roll and other supporting data
reflecting all material information with respect to the operation of the
Property and Improvements, and (iii) all other financial information and reports
that GE Capital may from time to time reasonably request, including, if GE
Capital so requires, income tax returns of Borrower and any guarantor of any
portion of the Indebtedness, and financial statements of any tenants designated
by GE Capital.

     SECTION 11. CONDEMNATION. If the Property, or any part thereof, shall be
condemned for any reason, including without limitation fire or earthquake
damage, or otherwise taken for public or quasi-public use under the power of
eminent domain, or be transferred in lieu thereof, (such event being called a
"TAKING") and if the damages or other amounts awarded for the Taking are
reasonably expected to exceed $10,000 and if an Event of Default has not
occurred hereunder and is not continuing, GE Capital shall apply all such
proceeds to the restoration, replacement and rebuilding of the Property, and
such restoration, replacement and rebuilding shall be accomplished, upon
satisfaction of each and all of the following conditions: (i) except as provided
in (ii) below, GE Capital shall be satisfied that by the expenditure of such
proceeds the Property will be fully restored within a reasonable period of time
to its value immediately preceding the Taking, free and clear of all liens,
except the lien of this Instrument, the permitted exceptions set forth in
Schedule 1 attached hereto, and such other liens as are specifically approved by
GE Capital in writing under this Instrument; (ii) in the event such proceeds
shall be insufficient to restore or rebuild the Property, Borrower shall deposit
promptly with GE Capital funds which, together with the proceeds, shall be
sufficient in GE Capital's judgment to restore



                                       11
<PAGE>


and rebuild the Property; (iii) the excess of such proceeds above the amount
necessary to complete such restoration and compensate Borrower for all other
losses shall be applied on account of the Indebtedness (first to interest, then
to expenses reimbursable to GE Capital and then to principal amounts falling due
under the Note without prepayment premium); (iv) GE Capital reviews and approves
in writing the plans and specifications for the restoration work and GE Capital
receives written evidence satisfactory to GE Capital that the same have been
approved by all governmental authorities having jurisdiction; (v) Borrower shall
have furnished to GE Capital, for GE Capital's approval, a detailed budget and
cost breakdown for said restoration work signed by Borrower and describing the
nature and type of expenses and amounts thereof estimated by Borrower for said
restoration work including, but not limited to, the cost of material and
supplies, architect and designer fees, general contractor's fees, and the
anticipated monthly disbursement schedule, and GE Capital shall have given to
Borrower written approval of such budget and cost breakdown (if Borrower
determines at any time that its actual expenses differ or will differ from its
estimated budget, it will so advise GE Capital promptly); (vi) Borrower has
delivered to GE Capital evidence satisfactory to GE Capital that all Leases
existing at the time of the Taking will remain in full force and effect subject
only to abatement of rent in accordance with the terms of the Leases until
completion of such repair and restoration; and (vii) in GE Capital's reasonable
judgment, such restoration work can be completed at least six (6) months prior
to the maturity of the Note.

     In the event any of such conditions are not or cannot be satisfied, then
all of the proceeds payable with respect to such Taking will be applied to the
payment of the Indebtedness in such order as GE Capital may elect.

     Under no circumstances shall GE Capital become obligated to take any action
to restore the Property; all proceeds released or applied by GE Capital to the
restoration of the Property pursuant to the provisions of this Section 11 shall
be released and/or applied on the cost of restoration (including within the term
"RESTORATION" any repair, reconstruction or alteration) as such restoration
progresses, in amounts which shall equal ninety percent (90%) of the amounts
from time to time certified by an architect approved by GE Capital to have been
incurred in such restoration of any and all of the Property (i.e., 90% of the
total amount expended by the contractor for the project under a contract
approved by GE Capital and billed by the contractor to Borrower) and performed
by a contractor reasonably satisfactory to GE Capital and who shall furnish such
corporate surety bond, if any, as may be reasonably required by GE Capital in
accordance with the plans and specifications therefor approved by GE Capital and
the remaining ten percent (10%) upon completion of such restoration and delivery
to GE Capital of evidence reasonably satisfactory to GE Capital that no
mechanics' lien exists with respect to the work of such restoration; that the
restoration work has been completed and fully paid for in accordance with plans
and specifications for said work approved by GE Capital; and that all Leases
existing at the time the Taking occurred are in full force and effect with all
tenants in possession and paying full Lease rental; and that all governmental
approvals required for the completion of said restoration work and occupancy of
the Property have been obtained and the same are in form and substance
satisfactory to GE Capital.

     If within a reasonable period of time after the occurrence of any Taking,
Borrower shall not have submitted to GE Capital and received GE Capital's
approval of plans and specifications



                                       12
<PAGE>



for the repair, restoration or rebuilding of the Property or shall not have
obtained approval of such plans and specifications from all governmental
authorities whose approval is required, or if, after such plans and
specifications are approved by GE Capital and by all such governmental
authorities, Borrower shall fail to commence promptly such repair, restoration
or rebuilding, or if thereafter Borrower fails to carry out diligently such
repair, restoration or rebuilding or is delinquent in the payment to mechanics,
materialmen or others of the costs incurred in connection with such work, or if
any other condition of this Section 11 is not satisfied within a reasonable
period of time after the occurrence of any such Taking, then GE Capital may, in
addition to all other rights herein set forth, at GE Capital's option, (A)
declare that an Event of Default has occurred and/or apply all of the proceeds
of the Taking to the payment of the Indebtedness in such order as GE Capital may
elect, and/or (B) GE Capital, or any lawfully appointed receiver of the Property
may at their respective options, perform or cause to be performed such repair,
restoration or rebuilding, and may take such other steps as they deem advisable
to carry out such repair, restoration or rebuilding, and may enter upon the
Property for any of the foregoing purposes, and Borrower hereby waives, for
itself and all others holding under it, any claim against GE Capital and such
receiver (other than a claim based upon the alleged gross negligence or
intentional misconduct of GE Capital or any such receiver) arising out of
anything done by them or any of them pursuant to this Section 11 and GE Capital
may in its discretion apply any proceeds held by it to reimburse itself and/or
such receiver for all amounts expended or incurred by it in connection with the
performance of such work, including attorneys' fees, and any excess costs shall
be paid by Borrower to GE Capital and Borrower's obligation to pay such excess
costs shall be secured by the lien of this Instrument and shall bear interest at
the default rate set forth in the Note, until paid.

     Nothing herein, and no authority given to Borrower to repair, rebuild or
restore the Property or any portion thereof, shall be deemed to constitute
Borrower the agent of GE Capital for any purpose, or to create, either expressly
or by implication, any liens or claims or rights on behalf of laborers,
mechanics, materialmen or other lien holders which could in any way be superior
to the lien or claim of GE Capital, or which could be construed as creating any
third party rights of any kind or nature to the proceeds. At reasonable times
during the work of restoration, and upon reasonable notice, GE Capital, either
personally or by duly authorized agents, shall have the right to enter upon the
Property for inspection of the work. Borrower expressly assumes all risk of
loss, including a decrease in the use, enjoyment or value of the Property from
any casualty whatsoever, whether or not insurable or insured against.

     SECTION 12. BORROWER AND LIEN NOT RELEASED. From time to time, GE Capital
may, at GE Capital's option, without giving notice to or obtaining the consent
of Borrower, Borrower's successors or assigns or of any junior lienholder or
guarantors, without liability on GE Capital's part and notwithstanding the
occurrence of an Event of Default, extend the time for payment of the
Indebtedness or any part thereof, reduce the payments thereon, release anyone
liable on any of the Indebtedness, accept an extension or modification or
renewal note or notes therefor, modify the terms and time of payment of the
Indebtedness, release from the lien of this Instrument any part of the Property,
take or release other or additional security, reconvey any part of the Property,
consent to any map or plan of the Property, consent to the granting of any
easement, join in any extension or subordination agreement, and agree in writing
with Borrower to modify the rate of interest or period of amortization of the
Note or change the amount of the



                                       13
<PAGE>


monthly installments payable thereunder. Any actions taken by GE Capital
pursuant to the terms of this Section 12 shall not affect the obligation of
Borrower or Borrower's successors or assigns to pay the sums secured by this
Instrument and to observe the covenants of Borrower contained herein, shall not
affect the guaranty of any person, corporation, partnership or other entity for
payment of the Indebtedness, and shall not affect the lien or priority of the
lien hereof on the Property. Borrower shall pay GE Capital a service charge,
together with such title insurance premiums and attorneys' fees as may be
incurred at GE Capital's option, for any such action if taken at Borrower's
request.

     SECTION 13. FORBEARANCE BY GE CAPITAL NOT A WAIVER. Any forbearance by GE
Capital in exercising any right or remedy hereunder, or otherwise afforded by
applicable law, shall not be a waiver of or preclude the exercise of any other
right or remedy. The acceptance by GE Capital of payment of any sum secured by
this Instrument after the due date of such payment shall not be a waiver of GE
Capital's right to either require prompt payment when due of all other sums so
secured or to declare a default for failure to make prompt payment. The
procurement of insurance or the payment of taxes or other liens or charges by GE
Capital shall not be a waiver of GE Capital's right to accelerate the maturity
of the Indebtedness secured by this Instrument, nor shall GE Capital's receipt
of any awards, proceeds or damages under Sections 5 and 11 hereof operate to
cure or waive Borrower's default in payment of sums secured by this Instrument.

     SECTION 14. UNIFORM COMMERCIAL CODE SECURITY AGREEMENT. This Instrument is
intended to be a security agreement pursuant to the California Uniform
Commercial Code for any of the items specified above as part of the Property
which, under applicable law, may be subject to a security interest pursuant to
the California Uniform Commercial Code, and Borrower hereby grants and conveys
to GE Capital a first and prior security interest in all of the Property that
constitutes personalty, ("Collateral", for purposes of this Section 14), whether
now owned or hereafter acquired. Borrower agrees that GE Capital may file this
Instrument, or a reproduction thereof, in the real estate records or other
appropriate index, as a financing statement for any of the items specified above
as part of the Collateral. Any reproduction of this Instrument or of any other
security agreement or financing statement shall be sufficient as a financing
statement. Borrower hereby authorizes GE Capital to file this Instrument, or a
reproduction thereof, as a financing statement for any of the items specified
above as part of the collateral, and any financing statements, extensions,
renewals, amendments and other records in connection therewith, in the real
estate records and/or other appropriate index. Borrower hereby waives any and
all rights Borrower may have to file in the real estate records and any other
index any financing statement, amendment, termination statement and other record
pertaining to the collateral and/or GE Capital's interest therein. Borrower
shall execute and deliver to GE Capital, upon GE Capital's request, any
financing statements, extensions, renewals, amendments and other records, and
reproductions of this Instrument, in such form as GE Capital may require to
perfect a security interest with respect to the foregoing items. Borrower shall
pay all costs of filing such financing statements and any extensions, renewals,
amendments and releases thereof, and shall pay all costs and expenses of any
record searches for financing statements GE Capital may require. Without the
prior written consent of GE Capital, Borrower shall not create or suffer to be
created pursuant to the Uniform Commercial Code any other security interest in
said items, including replacements and additions thereto. Upon Borrower's breach
of any covenant or



                                       14
<PAGE>


agreement of Borrower contained in this Instrument, including the covenants to
pay when due all sums secured by this Instrument, GE Capital shall have the
remedies of a secured party under the Uniform Commercial Code, and GE Capital
may also invoke the remedies provided in Section 25 of this Instrument as to
such items. In exercising any of said remedies GE Capital may proceed against
the items of real property and any items of personal property specified above
separately or together and in any order whatsoever, without in any way affecting
the availability of GE Capital's remedies under the Uniform Commercial Code or
of the remedies provided in Section 25 of this Instrument. Within ten (10) days
following any request therefor by GE Capital, Borrower shall prepare and deliver
to GE Capital a written inventory specifically listing all of the personal
property covered by the security interest herein granted, which inventory shall
be certified by Borrower as being true, correct, and complete.

     SECTION 15. LEASES OF THE PROPERTY. Borrower shall comply with and observe
Borrower's obligations as landlord under all Leases of the Property or any part
thereof. All Leases now or hereafter entered into will be in form and substance
subject to the approval of GE Capital. Borrower shall pay all attorneys' fees
incurred by GE Capital in reviewing any Lease or proposed Lease. All Leases of
the Property shall specifically provide that such Leases are subordinate to this
Instrument; that the tenant attorns to GE Capital, such attornment to be
effective upon either GE Capital's or any other party's acquisition of the
Property, or any portion thereof, either by foreclosure or deed-in-lieu thereof;
that the tenant agrees to execute such further evidences of attornment as GE
Capital may from time to time request; and that the attornment of the tenant
shall not be terminated by foreclosure or a deed-in-lieu thereof; and that GE
Capital may, at GE Capital's option, accept or reject such attornments (except
as to third- party credit tenants unrelated to Borrower, as to which GE Capital
shall grant a non-disturbance provision). Borrower shall not, without GE
Capital's written consent, request or consent to the subordination of any Lease
of all or any part of the Property to any lien subordinate to this Instrument.
If Borrower becomes aware that any tenant proposes to do, or is doing, any act
or thing which may give rise to any right of set-off against rent, Borrower
shall (i) take such steps as shall be reasonably calculated to prevent the
accrual of any right to a set-off against rent, (ii) immediately notify GE
Capital thereof in writing and of the amount of said set-offs, and (iii) within
ten (10) days after such accrual, reimburse the tenant who shall have acquired
such right to set-off or take such other steps as shall effectively discharge
such setoff and as shall assure that Rents thereafter due shall continue to be
payable without set-off or deduction. Upon GE Capital's receipt of notice of the
occurrence of any default or violation by Borrower of any of its obligations
under the Leases, GE Capital shall have the immediate right, but not the duty or
obligation, without prior written notice to Borrower or to any third party, to
enter upon the Property and to take such actions as GE Capital may deem
necessary to cure the default or violation by Borrower under the Leases. The
costs incurred by GE Capital in taking any such actions pursuant to this
paragraph shall become part of the Indebtedness, shall bear interest at the rate
provided in the Note, and shall be payable by Borrower to GE Capital on demand.
GE Capital shall have no liability to Borrower or to any third party for any
actions taken by GE Capital or not taken pursuant to this paragraph.

     SECTION 16. REMEDIES CUMULATIVE. Each remedy provided in this Instrument is
distinct and cumulative to all other rights or remedies under this Instrument or
afforded by law or equity, and may be exercised concurrently, independently, or
successively, in any order whatsoever.



                                       15
<PAGE>


     SECTION 17. TRANSFERS OF THE PROPERTY OR BENEFICIAL INTERESTS IN BORROWER;
SUBORDINATE FINANCING PROHIBITED; ASSUMPTION. GE Capital may, at its option,
declare all sums secured by this Instrument to be immediately due and payable,
and GE Capital may invoke any remedies permitted by Section 25 of this
Instrument, if title to the Property is changed without the prior written
consent of GE Capital, which consent shall be at GE Capital's sole discretion.
Any transfer of any interest in the Property or in the income therefrom, by
sale, lease (except for Leases to tenants in the ordinary course of managing
income property which are approved by GE Capital pursuant to Section 15 of this
Instrument), contract, mortgage, deed of trust, further encumbrance or otherwise
(including any such transfers as security for additional financing of the
Property). Leasehold mortgages and collateral assignments of any Lease of the
Property given by tenants of the Property are prohibited without the prior
written consent of GE Capital, which consent may be withheld in GE Capital's
sole discretion. Notwithstanding the foregoing, additional but subordinate deeds
of trust may be granted to GE Capital and, subject to the prior written consent
of GE Capital, which consent may be withheld in GE Capital's sole discretion,
may be granted to entities owned by or under common control with GE Capital.

     GE Capital shall have the right to condition its consent to any proposed
sale or transfer described in this Section 17 upon, among other things, GE
Capital's approval of the transferee's creditworthiness and management ability
and the transferee's execution, prior to the sale or transfer, of a written
assumption agreement containing such terms as GE Capital may require, including,
if required by GE Capital, the imposition of an assumption fee of one percent
(1%) of the then outstanding balance of the Indebtedness. Consent by GE Capital
to one transfer of the Property shall not constitute consent to subsequent
transfers or waiver of the provisions of this Section 17. No transfer by
Borrower shall relieve Borrower of liability for payment of the Indebtedness,
unless GE Capital shall otherwise agree in writing at the time of such transfer.
Borrower shall pay any recording tax, recording cost, title insurance premium,
attorneys' fees, or other third-party expenses incurred by GE Capital in
connection with any transfer, whether or not consent is required.

     The transfer to and assumption by an approved transferee of the Borrower's
obligations under the Loan shall not constitute a "prepayment" of the Loan
requiring payment of a "Prepayment Premium" (as defined in the Note).

     SECTION 18. NOTICE. Except for any notice required under applicable law to
be given in another manner, any and all notices, elections, demands, or requests
permitted or required to be made under this Instrument or under the Note shall
be in writing, signed by the party giving such notice, election, demand or
request, and shall be delivered personally, or sent by registered, certified, or
Express United States mail, postage prepaid, or by Federal Express or similar
service requiring a receipt, to the other party at the address stated above, or
to such other party and at such other address within the United States of
America as any party may designate in writing as provided herein. The date of
receipt of such notice, election, demand or request shall be the earliest of (i)
the date of actual receipt, (ii) three (3) business days after the date of
mailing by registered or certified mail, (iii) one (1) business day after the
date of mailing by Express Mail or the delivery (for redelivery) to Federal
Express or another similar service requiring a receipt, or (iv) the date of
personal delivery (or refusal upon presentation for delivery).



                                       16
<PAGE>


17

     SECTION 19. SUCCESSORS AND ASSIGNS BOUND; JOINT AND SEVERAL LIABILITY;
AGENTS; CAPTIONS. The covenants and agreements herein contained shall bind, and
the rights hereunder shall inure to, the respective heirs, successors and
assigns of GE Capital and Borrower, subject to the provisions of Section 17
hereof. If Borrower is comprised of more than one person or entity, whether as
individuals, partners, partnerships, limited liability companies or
corporations, each such person or entity shall be jointly and severally liable
for Borrower's obligations hereunder. In exercising any rights hereunder or
taking any actions provided for herein, GE Capital may act through its
employees, agents or independent contractors as authorized by GE Capital. The
captions and headings of the sections of this Instrument are for convenience
only and are not to be used to interpret or define the provisions hereof.

     SECTION 20. WAIVER OF STATUTE OF LIMITATIONS. Borrower hereby waives the
right to assert any statute of limitations as a bar to the enforcement of the
lien of this Instrument or to any action brought to enforce the Note or any
other obligation secured by this Instrument.

     SECTION 21. WAIVER OF MARSHALING. Notwithstanding the existence of any
other security interests in the Property held by GE Capital or by any other
party, GE Capital shall have the right to determine the order in which any or
all of the Property shall be subjected to the remedies provided herein. GE
Capital shall have the right to determine the order in which any or all portions
of the Indebtedness secured hereby are satisfied from the proceeds realized upon
the exercise of the remedies provided herein. Borrower, any party who consents
to this Instrument and any party who now or hereafter acquires a security
interest in the Property and who has actual or constructive notice hereof hereby
waives any and all right to require the marshaling of assets in connection with
the exercise of any of the remedies permitted by applicable law or provided
herein.

     SECTION 22. ADVANCES, COSTS AND EXPENSES. Borrower shall pay within ten
(10) days after written demand from GE Capital all sums advanced by GE Capital
and all costs and expenses incurred by GE Capital in taking any actions pursuant
to the Loan Documents including attorneys' fees and disbursements, accountants'
fees, appraisal and inspection fees and the costs for title reports and
guaranties, together with interest thereon at the rate applicable under the Note
after an Event of Default from the date such costs were advanced or incurred.
All such costs and expenses incurred by GE Capital, and advances made, shall
constitute advances under this Instrument to protect the Property and shall be
secured by and have the same priority as the lien of this Instrument. If
Borrower fails to pay any such advances, costs and expenses and interest
thereon, GE Capital may apply any undisbursed loan proceeds to pay the same,
and, without foreclosing the lien of this Instrument, may at its option commence
an independent action against Borrower for the recovery of the costs, expenses
and/or advances, with interest, together with costs of suit, costs of title
reports and guaranty of title, disbursements of counsel and reasonable
attorneys' fees incurred therein or in any appeal therefrom.

     SECTION 23. ASSIGNMENT OF LEASES AND RENTS. Borrower, for good and valuable
consideration, the receipt of which is hereby acknowledged, to secure the
Indebtedness, does hereby absolutely and unconditionally grant, bargain, sell,
transfer, assign, convey, set over and deliver unto GE Capital all right, title
and interest of Borrower in, to and under the Leases of the



                                       17
<PAGE>



Property, whether now in existence or hereafter entered into, and all
guaranties, amendments, extensions and renewals of said Leases and any of them,
and all Rents which may now or hereafter be or become due or owing under the
Leases, and any of them, or on account of the use of the Property.

     Borrower represents, warrants, covenants and agrees with GE Capital as
follows:

          (a) The sole ownership of the entire lessor's interest in the Leases
     is vested in Borrower, and Borrower has not, and shall not, perform any
     acts or execute any other instruments which might prevent GE Capital from
     fully exercising its rights with respect to the Leases under any of the
     terms, covenants and conditions of this Instrument.

          (b) The Leases are and shall be valid and enforceable in accordance
     with their terms and have not been and shall not be altered, modified,
     amended, terminated, canceled, renewed or surrendered except as approved in
     writing by GE Capital, which approval shall not be unreasonably withheld..
     The terms and conditions of the Leases have not been and shall not be
     waived in any manner whatsoever except as approved in writing by GE
     Capital, which approval shall not be unreasonably withheld.

          (c) Borrower shall not decrease the term or the amount of rent payable
     under any Lease without prior written notice to GE Capital and GE Capital's
     consent.

          (d) There are no defaults now existing under any of the Leases and, to
     the best of Borrower's knowledge, there exists no state of facts which,
     with the giving of notice or lapse of time or both, would constitute a
     default under any of the Leases.

          (e) Borrower shall give prompt written notice to GE Capital of any
     notice received by Borrower claiming that a default has occurred under any
     of the Leases on the part of Borrower, together with a complete copy of any
     such notice.

          (f) Each of the Leases shall remain in full force and effect
     irrespective of any merger of the interest of lessor and any lessee under
     any of the Leases.

          (g) Borrower will not permit any Lease to become subordinate to any
     lien other than the lien of this Instrument.

          (h) Borrower shall not permit or consent to the assignment by any
     tenant of its rights under its Lease without the prior written consent of
     GE Capital. Without limitation of the foregoing, Borrower shall not permit
     or consent to the filing of any encumbrance against the tenant's interest
     under any Lease including, without limitation, any leasehold mortgage.

     The assignment made hereunder is an absolute, present assignment from
Borrower to GE Capital, effective immediately, and is not merely an assignment
for security purposes but is irrevocable by Borrower so long as the Indebtedness
remains outstanding. Notwithstanding the foregoing, until a notice is sent to
the Borrower in writing that an Event of Default (as defined



                                       18
<PAGE>


below) has occurred under the terms and conditions of the Note or any instrument
constituting security for the Note (which notice is hereafter called a
"Notice"), Borrower is granted a license to receive, collect and enjoy the Rents
accruing from the Property.

     If an Event of Default shall occur , GE Capital may, at its option, after
service of a Notice, receive and collect all such Rents as they become due, from
the Property. GE Capital shall thereafter continue to receive and collect all
such Rents, until GE Capital shall otherwise agree in writing. All sums received
by Borrower after service of such Notice shall be deemed received in trust and
shall be immediately turned over to GE Capital.

     Borrower hereby irrevocably appoints GE Capital its true and lawful
attorney-in-fact with power of substitution and with full power for GE Capital
in its own name and capacity or in the name and capacity of Borrower, from and
after service of Notice, to demand, collect, receive and give complete
acquittances for any and all Rents accruing from the Property, either in its own
name or in the name of Borrower or otherwise, which GE Capital may deem
necessary or desirable in order to collect and enforce the payment of the Rents
and to demand, correct, receive, endorse, and deposit all checks, drafts, money
orders or notes given in payment of such Rents. Such appointment is coupled with
an interest and is irrevocable. GE Capital shall not be liable for or prejudiced
by any loss of any note, checks, drafts, etc., unless such loss shall have been
found by a court of competent jurisdiction to have been due to the gross
negligence or willful misconduct of GE Capital.

     GE Capital shall apply the Rents received from Borrower's lessees, to
accrued interest and principal under the Note. If no Event of Default remains
uncured, amounts received in excess of the aggregate monthly payment due under
the Note shall be remitted to Borrower in a timely manner. Nothing contained
herein shall be construed to constitute GE Capital as a mortgagee-in-possession
in absence of its physically taking possession of the Property.

     Borrower also hereby irrevocably appoints GE Capital as its true and lawful
attorney-in- fact to appear in any state or federal bankruptcy, insolvency, or
reorganization proceeding in any state or federal court involving any of the
tenants of the Leases. Lessees of the Property are hereby expressly authorized
and directed, from and after service of a Notice to pay any and all amounts due
Borrower pursuant to the Leases to GE Capital or such nominee as GE Capital may
designate in writing delivered to and received by such lessees who are expressly
relieved of any and all duty, liability or obligation to Borrower in respect of
all payments so made.

     If an Event of Default shall occur, GE Capital is hereby vested with full
power from and after service of a Notice to use all measures, legal and
equitable, deemed by it necessary or proper to enforce the assignment granted
hereunder and to collect the Rents assigned hereunder, including the right of GE
Capital or its designee, to enter upon the Property, or any part thereof, and
take possession of all or any part of the Property together with all personal
property, fixtures, documents, books, records, papers and accounts of Borrower
relating thereto, and may exclude the Borrower, its agents and servants, wholly
therefrom. Borrower hereby grants full power and authority to GE Capital to
exercise all rights, privileges and powers herein granted at any and all times
after service of a Notice, with full power to use and apply all of the Rents and
other income herein assigned to the payment of the costs of managing and
operating the Property and of any



                                       19
<PAGE>


indebtedness or liability of Borrower to GE Capital, including but not limited
to the payment of taxes, special assessments, insurance premiums, damage claims,
the costs of maintaining, repairing, rebuilding and restoring the Improvements
on the Premises or of making the same rentable, reasonable attorneys' fees
incurred in connection with the enforcement of the assignment granted hereunder,
and of principal and interest payments due from Borrower to GE Capital on the
Note and this Instrument, all in such order as GE Capital may determine. GE
Capital shall be under no obligation to exercise or prosecute any of the rights
or claims assigned to it hereunder or to perform or carry out any of the
obligations of the lessor under any of the Leases and does not assume any of the
liabilities in connection with or arising or growing out of the covenants and
agreements of Borrower in the leases. It is further understood that the
assignment granted hereunder shall not operate to place responsibility for the
control, care, management or repair of the Property, or parts thereof, upon GE
Capital, nor shall it operate to make GE Capital liable for the performance of
any of the terms and conditions of any of the Leases, or for any waste of the
Property by any lessee under any of the Leases or any other person, or for any
dangerous or defective condition of the Property or for any negligence in the
management, upkeep, repair or control of the Property resulting in loss or
injury or death to any lessee, licensee, employee or stranger, unless the same
shall have been found by a court of competent jurisdiction to have been due to
the gross negligence or willful misconduct of GE Capital.

     SECTION 24. DEFAULT. The following shall each constitute an event of
default ("EVENT OF DEFAULT"):

          (a) The occurrence of an "Event of Default" under the Note;

          (b) Failure of Borrower within the time required by this Instrument to
     make any payment for taxes, insurance or for reserves for such payments, or
     any other payment necessary to prevent filing of or discharge of any lien,
     and such failure shall continue for a period of ten (10) days after written
     notice is given to Borrower by GE Capital specifying such failure;

          (c) Failure by Borrower to observe or perform any obligations of
     Borrower to GE Capital on or with respect to any transactions, debts,
     undertakings or agreements other than the transaction evidenced by the
     Note, following the giving of any notice required thereunder and/or the
     expiration of any applicable period of grace provided thereby;

          (d) Failure of Borrower to make any payment or perform any obligation
     under any superior liens or encumbrances on the Property, within the time
     required thereunder, or commencement of any suit or other action to
     foreclose any superior liens or encumbrances;

          (e) Failure by Borrower to observe or perform any of its obligations
     under any of the Leases, following the giving of any notice required
     thereunder and/or the expiration of any applicable period of grace provided
     thereby;



                                       20
<PAGE>


          (f) The Property is transferred or any agreement to transfer any part
     or interest in the Property in any manner whatsoever is made or entered
     into without the prior written consent of GE Capital, except as
     specifically allowed under this Instrument, including without limitation
     creating or allowing any liens on the Property or leasing any portion of
     the Property;

          (g) Filing by Borrower of a voluntary petition in bankruptcy or filing
     by Borrower of any petition or answer seeking or acquiescing in any
     reorganization, arrangement, composition, readjustment, liquidation, or
     similar relief for itself under any present or future federal, state or
     other statute, law or regulation relating to bankruptcy, insolvency or
     other relief for debtors, or the seeking, consenting to, or acquiescing by
     Borrower in the appointment of any trustee, receiver, custodian,
     conservator or liquidator for Borrower, any part of the Property, or any of
     the income or rents of the Property, or the making by Borrower of any
     general assignment for the benefit of creditors, or the inability of or
     failure by Borrower to pay its debts generally as they become due, or the
     insolvency on a balance sheet basis or business failure of Borrower, or the
     making or suffering of a preference within the meaning of federal
     bankruptcy law or the making of a fraudulent transfer under applicable
     federal or state law, or concealment by Borrower of any of its property in
     fraud of creditors, or the imposition of a lien upon any of the property of
     Borrower which is not discharged in the manner permitted by Section 4 of
     this Instrument, or the giving of notice by Borrower to any governmental
     body of insolvency or suspension of operations; or

          (h) Filing of a petition against Borrower seeking any reorganization,
     arrangement, composition, readjustment, liquidation, or similar relief
     under any present or future federal, state or other law or regulation
     relating to bankruptcy, insolvency or other relief for debts, or the
     appointment of any trustee, receiver, custodian, conservator or liquidator
     of Borrower, of any part of the Property or of any of the income or rents
     of the Property, unless such petition shall be dismissed within sixty (60)
     days after such filing, but in any event prior to the entry of an order,
     judgment or decree approving such petition;

          (i) The institution of any proceeding for the dissolution or
     termination of Borrower voluntarily, involuntarily, or by operation of law,
     unless such proceeding shall be dismissed within sixty (60) days after such
     filing, but in any event prior to the entry of an order, judgment or decree
     for relief, or the death or incompetence of Borrower;

          (j) A material adverse change occurs in the assets, liabilities or net
     worth of Borrower from the assets, liabilities or net worth of Borrower or
     any of the guarantors of the indebtedness evidenced by the Note previously
     disclosed to GE Capital;

          (k) Any warranty, representation or statement furnished to GE Capital
     by or on behalf of Borrower under the Note, this Instrument or any of the
     other Loan Documents shall prove to have been false or misleading in any
     material respect;



                                       21
<PAGE>


          (l) Failure of Borrower to observe or perform any other covenant or
     condition contained herein and such default shall continue for thirty (30)
     days after notice is given to Borrower specifying the nature of the
     failure, or if the default cannot be cured within such applicable cure
     period, Borrower fails within such time to commence and pursue curative
     action with reasonable diligence or fails at any time after expiration of
     such applicable cure period to continue with reasonable diligence all
     necessary curative actions; provided, however, that no notice of default
     and no opportunity to cure shall be required if during the prior twelve
     (12) months GE Capital has already sent a notice to Borrower concerning
     default in performance of the same obligation;

          (m) Failure of Borrower to observe or perform any other obligation
     under this Instrument or any other Loan Document when such observance or
     performance is due, and such failure shall continue beyond the applicable
     cure period set forth in such Loan Document, or if the default cannot be
     cured within such applicable cure period, Borrower fails within such time
     to commence and pursue curative action with reasonable diligence or fails
     at any time after expiration of such applicable cure period to continue
     with reasonable diligence all necessary curative actions. No notice of
     default and no opportunity to cure shall be required if during the prior
     twelve (12) months GE Capital has already sent a notice to Borrower
     concerning default in performance of the same obligation;

          (n) Borrower's abandonment of the Property;

          (o) Any Event of Default under GE Capital Loan No. 050-0009840-001; or

          (p) Any of the events specified in (g) - (j) above shall occur with
     respect to any tenant of the Property, with respect to any guarantor of any
     of Borrower's obligations in connection with the Indebtedness or with
     respect to any guarantor of any tenant's obligations relating to the
     Property, or such guarantor dies or becomes incompetent.

     SECTION 25. RIGHTS AND REMEDIES ON DEFAULT.

          (a) REMEDIES. Upon the occurrence of any one or more Events of
     Default, Trustee and/or GE Capital may (but shall not be obligated), in
     addition to any rights or remedies available to them hereunder or under the
     other Loan Documents, take such action personally or by their agents or
     attorneys, with or without entry, and without notice, demand, presentment
     or protest (each and all of which are hereby waived to the extent permitted
     by law) as they deem necessary or advisable to protect and enforce GE
     Capital's rights and remedies against Borrower and in and to the Property,
     including the following actions, each of which may be pursued concurrently
     or otherwise, at such time and in such order as Trustee and/or GE Capital
     may determine, in their sole discretion, without impairing or otherwise
     affecting its or their other rights or remedies:

               (i) GE Capital may declare all sums secured by this Instrument
          immediately due and payable, including any prepayment premium which
          Borrower would be required to pay.



                                       22
<PAGE>


               (ii) Trustee and GE Capital shall have the right to cause any or
          all of the Property to be sold under the power of sale granted herein
          or any of the other documents executed or delivered in connection
          herewith in any manner permitted by applicable law, or GE Capital
          shall have the right to foreclose by judicial foreclosure, in either
          case in accordance with applicable law. For any sale under the power
          of sale granted by this Instrument, Trustee or GE Capital must record
          and give all notices required by law and then, upon the expiration of
          such time as is required by law, may sell the Property, and all
          estate, right, title, interest, claim and demand of Borrower therein,
          and all rights of redemption thereof, at one or more sales, as an
          entirety or in parcels, with such elements of real and/or personal
          property (and, to the extent permitted by applicable law, may elect to
          deem all of the Property to be real property for purposes thereof),
          and at such time or place and upon such terms as Trustee and GE
          Capital may determine and shall execute and deliver to the purchaser
          or purchasers thereof a deed or deeds conveying the property sold, but
          without any covenant or warranty, express or implied, and the recitals
          in the deed or deeds of any facts affecting the regularity or validity
          of the sale will be conclusive against all persons. In the event of a
          sale, by foreclosure or otherwise, of less than all of the Property,
          this Instrument shall continue as a lien and security interest on the
          remaining portion of the Property.

               (iii) Trustee and GE Capital may institute a proceeding or
          proceedings for the partial foreclosure of this Instrument under any
          applicable provision of law for the portion of the Indebtedness then
          due and payable, subject to the lien of this Instrument continuing
          unimpaired and without loss of priority so as to secure the balance of
          the Indebtedness not then due and payable.

               (iv) If this Instrument is foreclosed by judicial procedure, GE
          Capital will be entitled to a judgment which will provide that if the
          foreclosure sale proceeds are insufficient to satisfy the judgment,
          execution may issue for any amount by which the unpaid balance of the
          obligations secured by this Instrument exceeds the net sale proceeds
          payable to GE Capital.

               (v) With respect to all or any part of the Property that
          constitutes personalty, GE Capital shall have all rights and remedies
          of secured party under the California Uniform Commercial Code.

               (vi) GE Capital may apply (whether by noticed motion or by ex
          parte application) to a court of competent jurisdiction for the
          appointment of a receiver designated by GE Capital of and for the
          Property (including, without limitation, all rents, issues, profits,
          revenues, earnings and income arising therefrom) in accordance with
          the provisions below and to which appointment GE Capital shall be
          entitled as a matter of right, without bond, and without regard to or
          the necessity to disprove the adequacy of the security for the
          Indebtedness or the solvency of Borrower or any other person liable
          for the payment or performance of the Indebtedness; and Borrower, each
          other person claiming any interest in the



                                       23
<PAGE>


          Property, or any portion thereof, by or through Borrower and every
          other person liable for the payment or performance of the Indebtedness
          hereby waives and consents to, or shall be conclusively deemed to have
          waived and consented to such appointment, whether such application be
          made by noticed motion or by an ex parte application.

     In every instance when a receiver is appointed with respect to all or any
portion of the Property, the receiver may be authorized, among such other duties
and powers as may be ordered or granted by the court, to take possession of the
Property; to manage, control and protect the Property; to collect the rents,
issues, profits, revenues, earnings and income arising therefrom, and to apply
the same toward the payment of expenses, including management and operating
expenses, taxes, assessments, utilities, mortgage payments and insurance
premiums of or in connection with the Property; to maintain the Property in a
reasonable state of repair so that there will be no excessive depreciation or
devaluation thereof arising from lack of prudent management; to enter into such
lease agreements or rental agreements with new tenants for the Property as such
receiver deems reasonable and prudent; to amend, extend or renew existing Leases
upon such terms as such receiver deems reasonable and prudent; to, if necessary,
retain a property management firm to assist in such duties upon such terms as
such receiver deems reasonable and appropriate; and to take such other action as
is necessary in order to provide services to the tenants under any existing or
future Leases or as is necessary to accomplish any of the foregoing. GE Capital
shall also have all rights described in Section 22 above with respect to the
Property.

               (vii) In the event Borrower remains in possession of the Property
          after the Property is sold as provided above or GE Capital otherwise
          becomes entitled to possession of the Property upon default of
          Borrower, Borrower shall become a tenant at will of GE Capital or the
          purchaser of the Property and shall pay a reasonable rental for use of
          the Property while in Borrower's possession.

               (viii) Trustee and GE Capital shall have any other right or
          remedy provided in this Instrument, the Note, or any other Loan
          Document or instrument delivered by Borrower in connection therewith,
          or available at law, in equity or otherwise.

               (ix) GE Capital may institute an action, suit or proceeding in
          equity for the specific performance of any of the provisions contained
          in the Loan Documents.

               (x) GE Capital may release any portion of the Property for such
          consideration as GE Capital may require without, as to the remainder
          of the Property, in any way impairing or affecting the lien or
          priority of this Instrument, or improving the position of any
          subordinate lienholder with respect thereto, except to the extent that
          the Indebtedness shall have been reduced by the actual monetary
          consideration, if any, received by Trustee and/or GE Capital for such
          release, and may accept by assignment, pledge or otherwise any other
          property in



                                       24
<PAGE>



          place thereof as Trustee and/or GE Capital may require without being
          accountable for so doing to any other lienholder.

               (xi) GE Capital shall have all the rights and remedies set forth
          in Sections 22 and 23.

     In the event that Trustee and/or GE Capital shall exercise any of the
rights or remedies set forth in this Section 25 neither Trustee nor GE Capital
shall be deemed to have entered upon or taken possession of the Property except
upon the exercise of its option to do so, evidenced by its demand and overt act
for such purpose, nor shall it be deemed a beneficiary or mortgagee in
possession by reason of such entry or taking possession, unless applicable law
requires that it be deemed to be a beneficiary or mortgagee in possession.
Neither Trustee nor GE Capital shall be liable to account for any action taken
pursuant to any such exercise other than for rents actually received by such
party, nor liable for any loss sustained by Borrower resulting from any failure
to let the Property, or from any other act or omission of Trustee and/or GE
Capital, except to the extent such loss is caused by the willful misconduct or
bad faith of such party or such liability may not be waived under applicable
law. Borrower hereby consents to, ratifies and confirms the exercise by Trustee
and/or GE Capital of said rights and remedies.

          (b) RIGHTS PERTAINING TO SALES. Subject to the provisions or other
     requirements of law, the following provisions shall apply to any sale or
     sales of the Property under or by virtue of this Section 25, whether made
     under the power of sale herein granted or by virtue of judicial proceedings
     or of a judgment or decree of foreclosure and sale:

               (i) Trustee, at the request of GE Capital, may conduct any number
          of sales from time to time. The power of sale set forth in this
          Section 25 hereof shall not be exhausted by any one or more such sales
          as to any part of the Property which shall not have been sold, nor by
          any sale which is not completed or is defective in Trustee's or GE
          Capital's opinion, until the Indebtedness shall have been paid in
          full.

               (ii) Any sale may be postponed or adjourned by public
          announcement at the time and place appointed for such sale or for such
          postponed or adjourned sale without further notice.

               (iii) After each sale, Trustee, or an officer of any court
          empowered to do so, shall execute and deliver to the purchaser or
          purchasers at such sale a good and sufficient instrument or
          instruments granting, conveying, assigning and transferring all right,
          title and interest of Borrower in and to the property and rights sold
          and shall receive the proceeds of said sale or sales and apply the
          same as herein provided. Trustee is hereby appointed the true and
          lawful attorney-in-fact of Borrower, which appointment is irrevocable
          and shall be deemed to be coupled with an interest, in Borrower's name
          and stead, to make all necessary conveyances, assignments, transfers
          and deliveries of the property and rights so sold, and for that
          purpose Trustee may execute all necessary instruments of conveyance,
          assignment, transfer and delivery, and may substitute one or more



                                       25
<PAGE>


          persons with like power, Borrower hereby ratifying and confirming all
          that said attorney or such substitute or substitutes shall lawfully do
          by virtue thereof. Nevertheless, Borrower, if requested by Trustee or
          GE Capital, shall ratify and confirm any such sale or sales by
          executing and delivering to Trustee or such purchaser or purchasers
          all such instruments as may be advisable, in Trustee's or GE Capital's
          judgment, for the purposes as may be designated in such request.

               (iv) Any and all statements of fact or other recitals made in any
          of the instruments referred to in this Section 25 given by Trustee
          and/or GE Capital as to nonpayment of the Indebtedness, or as to the
          occurrence of any Event of Default, or as to GE Capital having
          declared all or any of the Indebtedness to be due and payable, or as
          to the request to sell, or as to notice of time, place and terms of
          sale and of the property or rights to be sold having been duly given,
          or as to the refusal, failure or inability to act of Trustee, or as to
          the appointment of any substitute or successor Trustee, or as to any
          other act or thing having been duly done by Borrower, GE Capital, or
          by such Trustee, shall be taken as conclusive and binding against all
          persons as to evidence of the truth of the facts so stated and
          recited. Trustee and/or GE Capital may appoint or delegate any one or
          more persons as agent to perform any act or acts necessary or incident
          to any sale so held, including the posting of notices and the conduct
          of sale, but in the name and behalf of Trustee or GE Capital, as
          applicable.

               (v) The receipt of Trustee for the purchase money paid at any
          such sale, or the receipt of any other person authorized to receive
          the same, shall be sufficient discharge therefor to any purchaser of
          any property or rights sold as aforesaid, and no such purchaser, or
          its representatives, grantees or assigns, after paying such purchase
          price and receiving such receipt, shall be bound to see to the
          application of such purchase price of any part thereof upon or for any
          trust or purpose of this Instrument or, in any manner whatsoever, be
          answerable for any loss, misapplication or non-application of any such
          purchase money, or part thereof, or be bound to inquire as to the
          authorization, necessity, expediency or regularity of any such sale.

               (vi) Any such sale or sales shall operate to divest all of the
          estate, right, title, interest, claim and demand whatsoever, whether
          at law or in equity, of Borrower in and to the properties and rights
          so sold, and shall be a perpetual bar both at law and in equity
          against Borrower and any and all persons claiming or who may claim the
          same, or any part thereof or any interest therein, by, through or
          under Borrower to the fullest extent permitted by applicable law.

               (vii) Upon any such sale or sales, GE Capital may bid for and
          acquire the Property and, in lieu of paying cash therefor, may make
          settlement for the purchase price by crediting against the
          Indebtedness the amount of the bid made therefor, after deducting
          therefrom the expenses of the sale, the cost of any enforcement
          proceeding hereunder and any other sums which Trustee or GE



                                       26
<PAGE>


          Capital is authorized to deduct under the terms hereof, to the extent
          necessary to satisfy such bid.

               (viii) In the event that Borrower, or any person claiming by,
          through or under Borrower, shall transfer or refuse or fail to
          surrender possession of the Property after any sale thereof, then
          Borrower, or such person shall be deemed a tenant at sufferance of the
          purchaser at such sale, subject to eviction by means of forcible entry
          and detainer proceedings, or subject to any other right or remedy
          available hereunder or under applicable law.

               (ix) Upon any such sale, it shall not be necessary for Trustee,
          GE Capital or any public officer acting under execution or order of
          court to have present or constructively in its possession any of the
          Property.

               (x) In the event of any sale referred to in this Section 25, the
          entire Indebtedness, if not previously due and payable, immediately
          thereupon shall, notwithstanding anything to the contrary herein or in
          the other Loan Documents, become due and payable.

               (xi) In the event a foreclosure hereunder shall be commenced by
          Trustee at the request of GE Capital, Trustee or GE Capital may at any
          time before the sale of the Property abandon the sale, and may
          institute suit for the collection of the Indebtedness and for the
          foreclosure of this Instrument, or in the event that Trustee or GE
          Capital should institute a suit for collection of the Indebtedness,
          and for the foreclosure of this Instrument, GE Capital may at any time
          before the entry of final judgment in said suit dismiss the same and
          sell or require Trustee to sell the Property in accordance with the
          provisions of this Instrument.

               (c) APPLICATION OF PROCEEDS. The purchase money, proceeds or
     avails of any sale referred to in this Section 25(c), together with any
     other sums which may be held by Trustee or GE Capital hereunder, whether
     under the provisions of this Section 25 or otherwise, shall except as
     herein expressly provided to the contrary, be applied as follows:

               (i) FIRST: To the payment of the costs and expenses of any such
          sale, including compensation to Trustee and/or GE Capital, their
          agents and counsel, and of any judicial proceeding wherein the same
          may be made, and of all expenses, liabilities and advances made or
          incurred by Trustee and/or GE Capital hereunder, together with
          interest thereon as provided herein, and all taxes, assessments and
          other charges, except any taxes, assessments or other charges subject
          to which the Property shall have been sold.

               (ii) SECOND: To the payment in full of the Indebtedness
          (including principal, interest, premium and fees) in such order as GE
          Capital may elect.



                                       27
<PAGE>


               (iii) THIRD: To the payment of any other sums secured hereunder
          or required to be paid by Borrower pursuant to any provisions of the
          Loan Documents.

               (iv) FOURTH: To the payment of the surplus, if any, to whomsoever
          may be lawfully entitled to receive the same.

               (d) NOTICE OF SALE. GE Capital shall give Borrower reasonable
     notice of the time and place of any public sale of any personal property or
     of the time after which any private sale or other intended disposition of
     the personal property is to be made. Reasonable notice shall mean notice
     given in accordance with applicable law, including notices given in the
     manner and at the times required for notices in a nonjudicial foreclosure.

               (e) ADDITIONAL PROVISIONS AS TO REMEDIES.

               (i) No right or remedy herein conferred upon or reserved to
          Trustee or GE Capital is intended to be exclusive of any other right
          or remedy, and each and every such right or remedy shall be cumulative
          and continuing, shall be in addition to every other right or remedy
          given hereunder, or under the other Loan Documents or now or hereafter
          existing at law or in equity, and may be exercised from time to time
          and as often as may be deemed expedient by Trustee or GE Capital.

               (ii) No delay or omission by Trustee or GE Capital to exercise
          any right or remedy hereunder upon any Event of Default shall impair
          such exercise, or be construed to be a waiver of any such Event of
          Default or an acquiescence therein.

               (iii) The failure, refusal or waiver by Trustee or GE Capital of
          its right to assert any right or remedy hereunder upon any Event of
          Default or other occurrence shall not be construed as waiving such
          right or remedy upon any other or subsequent Event of Default or other
          occurrence.

               (iv) Neither Trustee nor GE Capital shall have any obligation to
          pursue any rights or remedies they may have under any other agreement
          prior to pursuing their rights or remedies hereunder or under the
          other Loan Documents.

               (v) No recovery of any judgment by Trustee or GE Capital and no
          levy of an execution upon the Property or any other property of
          Borrower shall affect, in any manner or to any extent, the lien of
          this Instrument upon the Property, or any liens, rights, powers or
          remedies of Trustee or GE Capital hereunder, and such liens, rights,
          powers and remedies shall continue unimpaired as before.

               (vi) GE Capital may resort or cause Trustee to resort to any
          security given by this Instrument or any other security now given or
          hereafter existing to



                                       28
<PAGE>


          secure the Indebtedness, in whole or in part, in such portions and in
          such order as GE Capital may deem advisable, and no such action shall
          be construed as a waiver of any of the liens, rights or benefits
          granted hereunder.

               (vii) Acceptance of any payment after the occurrence of any Event
          of Default shall not be deemed a waiver or a cure of such Event of
          Default, and acceptance of any payment less than any amount then due
          shall be deemed an acceptance on account only.

               (viii) In the event that Trustee or GE Capital shall have
          proceeded to enforce any right or remedy hereunder by foreclosure,
          sale, entry or otherwise, and such proceeding shall be discontinued,
          abandoned or determined adversely for any reason, then Borrower,
          Trustee and GE Capital shall be restored to their former positions and
          rights hereunder with respect to the Property, subject to the lien
          hereof.

               (f) WAIVER OF RIGHTS AND DEFENSES. To the full extent Borrower
     may do so, Borrower agrees with GE Capital as follows:

               (i) Borrower will not at any time, insist on, plead, claim or
          take the benefit or advantage of any statute or rule of law now or
          hereafter in force providing for any appraisement, valuation, stay,
          extension, moratorium or redemption, or of any statute of limitations,
          and Borrower, for itself and its heirs, devises, representatives,
          successors and assigns, and for any and all persons ever claiming an
          interest in the Property (other than GE Capital) hereby, to the extent
          permitted by applicable law, waives and releases all rights of
          redemption, valuation, appraisement, notice of intention to mature or
          declare due the whole of the Indebtedness, and all rights to a
          marshaling of the assets of Borrower, including the Property, or to a
          sale in inverse order of alienation, in the event of foreclosure of
          the liens and security interests created hereunder.

               (ii) Borrower shall not have or assert any right under any
          statute or rule of law pertaining to any of the matters set forth in
          this Section 25, to the administration of estates of decedents or to
          any other matters whatsoever to defeat, reduce or affect any of the
          rights or remedies of Trustee and GE Capital hereunder, including the
          rights of Trustee and/or GE Capital hereunder to a sale of the
          Property for the collection of the Indebtedness without any prior or
          different resort for collection, or to the payment of the Indebtedness
          out of the proceeds of sale of the Property in preference to any other
          person.

               (iii) If any statute or rule of law referred to in this Section
          25(f) and now in force, of which Borrower or any of its
          representatives, successors or assigns and such other persons claiming
          any interest in the Property might take advantage despite this Section
          25(f), shall hereafter be repealed or cease to be in force, such
          statute or rule of law shall not thereafter be deemed to preclude the
          application of this Section 25(f).



                                       29
<PAGE>


               (iv) Borrower shall not be relieved of its obligation to pay the
          Indebtedness at the time and in the manner provided herein and in the
          other Loan Documents, nor shall the lien or priority of this
          Instrument or any other Loan Documents be impaired by any of the
          following actions, non-actions or indulgences by Trustee or GE
          Capital:

                    (A) any failure or refusal by Trustee or GE Capital to
               comply with any request by Borrower (X) to consent to any action
               by Borrower or (Y) to take any action to foreclose this
               Instrument or otherwise enforce any of the provisions hereof or
               of the other Loan Documents;

                    (B) any release, regardless of consideration, of the whole
               or any part of the Property or any other security for the
               Indebtedness or any person liable for payment of the
               Indebtedness;

                    (C) any waiver by GE Capital of compliance by Borrower with
               any provision of this Instrument or the other Loan Documents, or
               consent by GE Capital to the performance by Borrower of any
               action which would otherwise be prohibited thereunder, or to the
               failure by Borrower to take any action which would otherwise be
               required hereunder or thereunder; and

                    (D) any agreement or stipulation between Trustee or GE
               Capital and Borrower, or, with or without Borrower's consent,
               between Trustee or GE Capital and any subsequent owner or owners
               of the Property or any other security for the Indebtedness,
               renewing, extending or modifying the time of payment or the terms
               of this Instrument or any of the other Loan Documents (including
               a modification of any interest rate), and in any such event
               Borrower shall continue to be obligated to pay the Indebtedness
               at the time and in the manner provided herein and in the other
               Loan Documents, as so renewed, extended or modified, unless
               expressly released and discharged by GE Capital.

               (v) Regardless of consideration, and without the necessity for
          any notice to or consent by the holder of any subordinate lien,
          encumbrance, right, title or interest in or to the Property, GE
          Capital may release any person at any time liable for the payment of
          the Indebtedness or any portion thereof or any part of the security
          held for the Indebtedness and may extend the time of payment or
          otherwise modify the terms of this Instrument or of any of the Loan
          Documents, including a modification of the interest rate payable on
          the principal balance of the Note, without in any manner impairing or
          affecting this Instrument, as so extended and modified, as security
          for the Indebtedness under any such subordinate lien, encumbrance,
          right, title or interest. GE Capital may resort for the payment of the
          Indebtedness to any other security held by GE Capital (or any trustee
          for the benefit of GE Capital) in such order and manner as GE Capital
          in its discretion, may elect. GE Capital may take or cause to be taken
          action to recover the Indebtedness, or



                                       30
<PAGE>


          any portion thereof, or to enforce any provision hereof or of the
          other Loan Documents without prejudice to the right of GE Capital
          thereafter to foreclose or cause to be foreclosed this Instrument. GE
          Capital shall not be limited exclusively to the right and remedies
          herein stated but shall be entitled to every additional right and
          remedy now or hereafter afforded by law or equity. The rights of
          Trustee and GE Capital under this Instrument shall be separate,
          distinct and cumulative and none shall be given effect to the
          exclusion of the others. No act of Trustee and/or GE Capital shall be
          construed as an election to proceed under any one provision herein to
          the exclusion of any other provision.

               (g) EXERCISE BY TRUSTEE. Notwithstanding anything herein to the
          contrary, Trustee (a) shall not exercise, or waive the exercise of,
          any of its rights or remedies under this Section 25 (other than its
          right to reimbursement) except upon the request of GE Capital, and (b)
          shall exercise, or waive the exercise of, any or all of such rights or
          remedies upon the request of GE Capital and at the direction of GE
          Capital as to the manner of such exercise or waiver, provided that
          Trustee shall have the right to decline to follow any of such request
          or direction if Trustee shall be advised by counsel that the action or
          proceeding, or manner thereof, so directed may not lawfully be taken
          or waived.

               (h) EXPENSES. If any action is commenced to foreclose this
          Instrument or to enforce any other remedy of Trustee and/or GE Capital
          under any of the Loan Documents, whether such action is judicial or
          pursuant to the power of sale contained herein or otherwise, there
          shall be added to the Indebtedness secured by this Instrument all
          costs and expenses, including attorney's fees, plus interest thereon
          at the default rate as set forth in the Note until paid, in the
          commencement and prosecution of such action, whether or not such
          action results in a foreclosure sale, foreclosure or other judicial
          decree or judgment.

     SECTION 26. ENVIRONMENTAL DEFAULT AND REMEDIES. In the event that any
portion of the Property is determined to be "environmentally impaired" (as
"environmentally impaired" is defined in California Code of Civil Procedure
Section 726.5(e)(3)) or to be an "affected parcel" (as "affected parcel" is
defined in California Code of Civil Procedure Section 726.5(e)(1)), then,
without otherwise limiting or in any way affecting GE Capital's or Trustee's
rights and remedies under this Deed of Trust, GE Capital may elect to exercise
its right under California Code of Civil Procedure Section 726.5(a) to (1) waive
its lien on such environmentally impaired or affected parcel portion of the
Property and (2) exercise (i) the rights and remedies of an unsecured creditor,
including reduction of its claim against Borrower to judgment, and (ii) any
other rights and remedies permitted by law. For purposes of determining GE
Capital's right to proceed as an unsecured creditor under California Code of
Civil Procedure Section 726.5(a), Borrower shall be deemed to have willfully
permitted or acquiesced in a release or threatened release of hazardous
materials, within the meaning of California Code of Civil Procedure Section
726.5(d)(1), if the release or threatened release of hazardous materials was
knowingly or negligently caused or contributed to by any lessee, occupant or
user of any portion of the Property and Borrower knew or should have known of
the activity by such lessee, occupant or user which caused or contributed to the
release or threatened release. All costs and expenses,



                                       31
<PAGE>


including, but not limited to, attorneys' and paralegals' fees and costs and
court costs incurred by GE Capital in connection with any action commenced under
this Section 26, including any action required by California Code of Civil
Procedure Section 726.5(b) to determine the degree to which the Property is
environmentally impaired, plus interest thereon at the rate of five percent (5%)
per annum above the prime interest rate as quoted in the Wall Street Journal in
effect from time to time, or fifteen percent (15%) per annum, whichever is
higher, provided that such interest rate shall not exceed the maximum interest
rate permitted by law, until paid, shall be added to the Indebtedness secured by
this Deed of Trust and shall be due and payable to GE Capital upon its demand
made at any time following the conclusion of such action.

     SECTION 27. RECONVEYANCE. Upon payment of all sums secured by this
Instrument, GE Capital shall request Trustee to reconvey the Property and shall
surrender this Instrument and all notes evidencing Indebtedness secured by this
Instrument to Trustee. Trustee shall reconvey the Property without warranty to
the person or persons legally entitled thereto. Such person or persons shall pay
Trustee's costs incurred in so reconveying the Property.

     SECTION 28. SUBSTITUTE TRUSTEE. In accordance with applicable law, GE
Capital may from time to time appoint a successor trustee to any Trustee
appointed hereunder. Without conveyance of the Property, the successor trustee
shall succeed to all the title, power and duties conferred upon the Trustee
herein and by applicable law.

     SECTION 29. USE OF PROPERTY. The Property is not currently used for
agricultural, farming, timber or grazing purposes. Borrower warrants that this
Instrument is and will at all times constitute a commercial trust deed, as
defined under appropriate state law.

     SECTION 30. FUTURE ADVANCES. Upon request of Borrower, GE Capital, at GE
Capital's option so long as this Instrument secures Indebtedness held by GE
Capital, may make Future Advances to Borrower. Such Future Advances, with
interest thereon, shall be secured by this Instrument when evidenced by
promissory notes stating that said notes are secured hereby.

     SECTION 31. IMPOSITION OF TAX BY STATE.

          (a) STATE TAXES COVERED. The following constitute state taxes to which
     this Section applies:

               (i) A specific tax upon trust deeds or upon all or any part of
          the indebtedness secured by a trust deed.

               (ii) A specific tax on a grantor which the taxpayer is authorized
          or required to deduct from payments on the indebtedness secured by a
          trust deed.

               (iii) A tax on a trust deed chargeable against the beneficiary or
          the holder of the note secured.

               (iv) A specific tax on all or any portion of the indebtedness or
          on payments of principal and interest made by a grantor.



                                       32
<PAGE>


          (b) REMEDIES. If any state tax to which this Section applies is
     enacted subsequent to the date of this Instrument, this shall have the same
     effect as an Event of Default, and GE Capital may exercise any or all of
     the remedies available to it unless the following conditions are met:

               (i) Borrower may lawfully pay the tax or charge imposed by state
          tax, and

               (ii) Borrower pays the tax or charge within thirty (30) days
          after notice from GE Capital that the tax has been levied.

     SECTION 32. ATTORNEYS' FEES. In the event suit or action is instituted to
enforce or interpret any of the terms of this Instrument (including without
limitation efforts to modify or vacate any automatic stay or injunction), the
prevailing party shall be entitled to recover all expenses reasonably incurred
at, before and after trial and on appeal whether or not taxable as costs, or in
any bankruptcy proceeding including, without limitation, attorneys' fees,
witness fees (expert and otherwise), deposition costs, copying charges and other
expenses. Whether or not any court action is involved, all reasonable expenses,
including but not limited to the costs of searching records, obtaining title
reports, surveyor reports, title insurance, trustee fees, and other attorney
fees, incurred by GE Capital that are necessary at any time in GE Capital's
opinion for the protection of its interest or enforcement of its rights shall
become a part of the Indebtedness payable on demand and shall bear interest from
the date of expenditure until repaid at the interest rate as provided in the
Note. The term "ATTORNEYS' FEES" as used in the Loan Documents shall be deemed
to mean such fees as are reasonable and are actually incurred.

     SECTION 33. GOVERNING LAW; SEVERABILITY. This Instrument shall be governed
by the law of the State of California applicable to contracts made and to be
performed therein (excluding choice-of-law principles). In the event that any
provision or clause of this Instrument or the Note conflicts with applicable
law, such conflict shall not affect other provisions of this Instrument or the
Note which can be given effect without the conflicting provision, and to this
end the provisions of this Instrument and the Note are declared to be severable.

     SECTION 34. TIME OF ESSENCE. Time is of the essence of this Instrument.

     SECTION 35. CHANGES IN WRITING. This Instrument and any of its terms may
only be changed, waived, discharged or terminated by an instrument in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought. Any agreement subsequently made by Borrower or GE
Capital relating to this Instrument shall be superior to the rights of the
holder of any intervening lien or encumbrance.

     SECTION 36. NO OFFSET. Borrower's obligation to make payments and perform
all obligations, covenants and warranties under this Instrument and under the
Note shall be absolute and unconditional and shall not be affected by any
circumstance, including without limitation any setoff, counterclaim, abatement,
suspension, recoupment, deduction, defense or other right that Borrower or any
guarantor may have or claim against GE Capital or any entity participating



                                       33
<PAGE>


in making the loan secured hereby. The foregoing provisions of this Section,
however, do not constitute a waiver of any claim or demand which Borrower or any
guarantor may have in damages or otherwise against GE Capital or any other
person, or preclude Borrower from maintaining a separate action thereon;
provided, however, that Borrower waives any right it may have at law or in
equity to consolidate such separate action with any action or proceeding brought
by GE Capital.

     SECTION 37. PROVISIONS REGARDING TRUSTEE. Trustee shall not be liable for
any error of judgment or act done by Trustee, or be otherwise responsible or
accountable under any circumstances whatsoever. Trustee shall not be personally
liable in case of entry by it or anyone acting by virtue of the powers herein
granted it upon the Property for debts contracted or liability or damages
incurred in the management or operation of the Property. All monies received by
Trustee shall, until used or applied as herein provided, be held in trust for
the purposes for which they were received, but need not be segregated in any
manner from any other monies (except to the extent required by law) and Trustee
shall be under no liability for interest on any monies received by it hereunder.

     Trustee may resign by giving of notice of such resignation in writing to GE
Capital. If Trustee shall die, resign or become disqualified from acting, or
shall fail or refuse to exercise its powers hereunder when requested by GE
Capital so to do, or if for any reason and without cause GE Capital shall prefer
to appoint a substitute trustee to act instead of the original Trustee named
herein, or any prior successor or substitute trustee, GE Capital shall have full
power to appoint a substitute trustee and, if preferred, several substitute
trustees in succession who shall succeed to all the estate, rights, powers and
duties of the forenamed Trustee. Upon appointment by GE Capital, any new Trustee
appointed pursuant to any of the provisions hereof shall, without any further
act, deed or conveyance, become vested with all the estates, properties, rights,
powers and trusts of its predecessor in the rights hereunder with the same
effect as if originally named as Trustee herein.

     SECTION 38. WAIVER OF JURY TRIAL. BORROWER HEREBY KNOWINGLY, VOLUNTARILY
AND INTELLIGENTLY WAIVES ANY AND ALL RIGHTS THAT EACH PARTY TO THIS INSTRUMENT
MAY NOW OR HEREAFTER HAVE UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR THE
STATE OF CALIFORNIA, TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING DIRECTLY
OR INDIRECTLY IN ANY ACTION OR PROCEEDING RELATING TO THIS INSTRUMENT, THE LOAN
DOCUMENTS OR ANY TRANSACTIONS CONTEMPLATED THEREBY OR RELATED THERETO. IT IS
INTENDED THAT THIS WAIVER SHALL APPLY TO ANY AND ALL DEFENSES, RIGHTS, CLAIMS
AND/OR COUNTERCLAIMS IN ANY SUCH ACTION OR PROCEEDING.

     BORROWER UNDERSTANDS THAT THIS WAIVER IS A WAIVER OF A CONSTITUTIONAL
SAFEGUARD, AND EACH PARTY INDIVIDUALLY BELIEVES THAT THERE ARE SUFFICIENT
ALTERNATE PROCEDURAL AND SUBSTANTIVE SAFEGUARDS, INCLUDING, A TRIAL BY AN
IMPARTIAL JUDGE, THAT ADEQUATELY OFFSET THE WAIVER CONTAINED HEREIN.



                                       34
<PAGE>


     SECTION 39. MAXIMUM INTEREST CHARGES. Notwithstanding anything contained
herein or in any of the Loan Documents to the contrary, in no event shall GE
Capital be entitled to receive interest on the loan secured by this Instrument
(the "LOAN") in amounts which, when added to all of the other interest charged,
paid to or received by GE Capital on the Loan, causes the rate of interest on
the Loan to exceed the highest lawful rate. Borrower and GE Capital intend to
comply with the applicable law governing the highest lawful rate and the maximum
amount of interest payable on or in connection with the Loan. If the applicable
law is ever judicially interpreted so as to render usurious any amount called
for under the Loan Documents, or contracted for, charged, taken, reserved or
received with respect to the Loan, or if acceleration of the final maturity date
of the Loan or if any prepayment by Borrower results in Borrower having paid or
demand having been made on Borrower to pay, any interest in excess of the amount
permitted by applicable law, then all excess amounts theretofore collected by GE
Capital shall be credited on the principal balance of the Note (or, if the Note
has been or would thereby be paid in full, such excess amounts shall be refunded
to Borrower), and the provisions of the Note, this Instrument and any demand on
Borrower shall immediately be deemed reformed and the amounts thereafter
collectible thereunder and hereunder shall be reduced, without the necessity of
the execution of any new document, so as to comply with the applicable law, but
so as to permit the recovery of the fullest amount otherwise called for
thereunder and hereunder. The right to accelerate the final maturity date of the
Loan does not include the right to accelerate any interest which has not
otherwise accrued on the date of such acceleration, and GE Capital does not
intend to collect any unearned interest in the event of acceleration. All sums
paid or agreed to be paid to GE Capital for the use, forbearance or detention of
the Loan shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread through the full term of the Loan until payment
in full so that the rate or amount of interest on account of the Loan does not
exceed the applicable usury ceiling. By execution of this Instrument, Borrower
acknowledges that it believes the Loan to be nonusurious and agrees that if, at
any time, Borrower should have reason to believe that the Loan is in fact
usurious, it will give GE Capital written notice of its belief and the reasons
why Borrower believes the Loan to be usurious, and Borrower agrees that GE
Capital shall have ninety (90) days following its receipt of such written notice
in which to make appropriate refund or other adjustment in order to correct such
condition if it in fact exists.

     SECTION 40. REQUEST FOR NOTICE. Pursuant to California Government Code
Section 27321.5(b), Borrower hereby requests that a copy of any notice of
default and a copy of any notice of sale given pursuant to this Instrument be
mailed to Borrower at the address set forth herein above.



                                       35
<PAGE>




     SECTION 41. FIXTURE FILING. Portions of the Property are goods which are or
are to become fixtures relating to the Property, and Borrower covenants and
agrees that the filing of this Instrument in the real estate records of the
county where the Property is located shall also operate from the time of filing
as a fixture filing in accordance with Section 9313 of the California Uniform
Commercial code.

     SECTION 42. LOCAL LAW PROVISIONS. In the event of any conflict between the
terms and provisions of any other section of this Instrument, the terms and
provisions of this section shall govern and continue.

     (a)     With or without notice, and without releasing Borrower from any
obligation hereunder, to cure any default of Borrower and, in connection
therewith, GE Capital or its agents, acting by themselves or through a court
appointed receiver, may enter upon the Premises or any part thereof and perform
such acts and things as GE Capital deems necessary or desirable to inspect,
investigate, assess, and protect the security hereof, including without
limitation of any of its other rights:

               (i) to obtain a court order to enforce GE Capital's right to
          enter and inspect the Premises under Section 2929.5 of the California
          Civil Code, to which the decision of GE Capital as to whether there
          exists a release or threatened release of Hazardous Materials in or
          onto the Premises shall be deemed reasonable and conclusive as between
          the parties hereto; and

               (ii) to have a receiver appointed under Section 564 of the
          California Code of Civil Procedure to enforce GE Capital's right to
          enter and inspect the Premises for Hazardous Materials. All costs and
          expenses reasonably incurred by Lender with respect to the audits,
          tests, inspections, and examinations which Lender or its agents or
          employees may conduct, including the fees of the engineers,
          laboratories, contractor, consultants, and attorneys, shall be paid by
          Borrower. All reimbursement costs and expenses incurred by Trustee and
          GE Capital pursuant to this subparagraph (including, without
          limitation, court costs, consultant fees and attorneys' fees, whether
          incurred in litigation or not and whether before or after judgment)
          shall be added to the Loan Obligations and shall bear interest at the
          Default Rate from the date they are incurred until said sums have been
          paid if not paid within 10 days after demand.

          (b)     GE Capital may seek a judgment that Borrower has breached its
     covenants, representations and/or warranties with respect to the
     environmental matters set forth in the Indemnity or herein, by commencing
     and maintaining an action or actions in any court of competent jurisdiction
     for breach of contract pursuant to Section 736 of the California Code of
     Civil Procedure, whether commenced prior to foreclosure of the Premises,
     and to seek the recovery of any and all costs, damages, expenses, fees,
     penalties, fines, judgments, indemnification payments to third parties, and
     other out-of-pocket costs or expenses actually incurred by GE Capital
     (collectively, the "ENVIRONMENTAL COSTS") incurred or advanced by GE
     Capital relating to the cleanup, remediation or other response action,
     required by applicable law or to which Lender believes necessary to protect
     the Premises, it being conclusively presumed between GE Capital and
     Borrower that all such Environmental Costs incurred or advanced by GE
     Capital relating to the cleanup, remediation, or other response action of
     or to the Premises were made by GE Capital in good faith. All Environmental
     Costs incurred by GE Capital under this subparagraph (including, without
     limitation, court costs, consultant fees and attorneys' fees,



                                       36
<PAGE>


whether incurred in litigation or not and whether before or after judgment)
shall bear interest at the Default Rate from the date of expenditure until said
sums have been paid if not paid within 10 days after demand. GE Capital shall be
entitled to bid, at the sale of the Premises, the amount of said costs, expenses
and interest in addition to the amount of the other obligations hereby secured
as a credit bid, the equivalent of cash.

          (c)    Borrower acknowledges and agrees that notwithstanding any term
     or provision contained herein or elsewhere, the Environmental Costs shall
     be exceptions to any limited recourse or exculpatory provision, and
     Borrower shall be fully and personally liable for the Environmental Costs
     hereunder, and such liability shall not be limited to the original
     principal amount of the obligations secured by this Instrument, and
     Borrower's Premises or this Instrument. For the purposes of any action
     brought under this subparagraph, Borrower hereby waives the defense of
     laches and any applicable statute of limitations.

          (d)    GE Capital may waive its lien against the Premises or any
     portion thereof, whether fixtures or personal property, to the extent such
     property is found to be environmentally impaired in accordance with Section
     726.5 of the California Code of Civil Procedure and to exercise any and all
     rights and remedies of an unsecured creditor against Borrower and all of
     Borrower's assets and property for the recovery of any deficiency and
     Environmental Costs, including, but not limited to, seeking an attachment
     order under Section 483.010 of the California Code of Civil Procedure. As
     between GE Capital and Borrower, for purposes of Section 726.5 of the
     California Code of Civil Procedure, Borrower shall have the burden of
     proving that Borrower or any related party (or any affiliate or agent of
     Borrower or any related party) was not in any way negligent in permitting
     the release or threatened release of Hazardous Substances. Borrower
     acknowledges and agrees that notwithstanding any term or provision
     contained herein or pursuant to this subsection elsewhere in the Loan
     Documents, all judgments and awards entered against Borrower shall be
     exceptions to any nonrecourse or exculpatory provision, and Borrower shall
     be fully and personally liable for all judgments and awards entered against
     Borrower hereunder and such liability shall not be limited to the original
     principal amount of the obligations secured by this Instrument and
     Borrower's obligations shall survive the foreclosure, deed in lieu of
     foreclosure, release, reconveyance, or any other transfer of the Premises
     or this Instrument. For the purposes of any action brought under this
     subparagraph, Borrower hereby waives the defense of laches and any
     applicable statute of limitations.

          Trustor hereby waives all other rights it may now or hereafter have,
     whether or not similar to any of the foregoing, by reason of laws of the
     State of California pertaining to sureties, including without limitation
     all rights and defenses that are or may become available to Trustor by
     reason of Sections 2787 to 2855, inclusive, 2899, and 3433 of the
     California Civil Code.

                    [REMAINDER OF PAGE INTENTIONALLY BLANK;
                            EXECUTION PAGE FOLLOWS]



                                       37
<PAGE>


     IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ
CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR
ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED.
YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.

     IN WITNESS WHEREOF, Borrower has executed this Instrument or has caused the
same to be executed by its representatives thereunto duly authorized.


                                        BORROWER:

                                        APPLIANCE RECYCLING CENTERS OF
                                        AMERICA, INC., a Minnesota corporation

                                        By: /s/Edward R. Cameron
                                        Print: Edward R. Cameron
                                        Its: President
STATE OF MINNESOTA      )
                        )  ss.
COUNTY OF R a m s e y   )


On     12/23/02   , before me,         Sara Dammann, Notary Public,
   ---------------             --------------------------------------------
        Date                            Name and Title of Officer
                                     (e.g. "Jane Doe, Notary Public")

personally appeared         Edward R. Cameron
                    ---------------------------------
                         Name of Signer(s)

X personally known to me - OR - [ ]     proved to me on the basis of
                                        satisfactory evidence to be the
                                        person(s) whose name(s) is/are
                                        subscribed to the within instrument and
                                        acknowledged to me that he/she/they
                                        executed the same in his/her/their
                                        authorized capacity(ies), and that by
                                        his/her/their signature(s) on the
                                        instrument the person(s), or the entity
                                        upon behalf of which the person(s)
                                        acted, executed the instrument.

                                        WITNESS my hand and official seal.


                                        ________________________________________
                                        /s/ Sara L. Dammann, Signature of Notary
                                        Public



     [EXECUTION AND ACKNOWLEDGE PAGE OF COMMERCIAL DEED OF TRUST, FINANCING
       STATEMENT, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND
                                FIXTURE FILING]


<PAGE>


General Electric Capital Business
Asset Funding Corporation
Loan No.: 001-0010771-001

                                   EXHIBIT A
                                   ---------

         (1920 Acacia Avenue, Compton, Los Angeles County, California)


Legal Description:
- ------------------

Parcels 1 and 2 of Parcel Map No. 21013, in the City of Compton, County of Los
Angeles, State of California, as per map recorded in Book 233 Pages 7 and 8 of
Parcel Maps, in the office of the County Recorder of said County.

EXCEPT therefrom that portion of said Parcel 2 lying Southerly of the following
described line:

Commencing at the Northwest corner of said Parcel 1, said point also lying on
the Easterly line of Acacia Avenue, as shown on said Parcel Map No. 21013;
thence along the Westerly lines of said Parcels 1 and 2, South 2 04' 39" East a
distance of 341.09 feet to the point of beginning; thence North 87 55' 21" East
299.26 feet, more or less, to the Easterly line of said Parcel 2.

EXCEPT therefrom all oil, gas, minerals, and other hydrocarbon substances lying
below the surface of said land, but with no right of surface entry as provided
in deeds of record.


<PAGE>


General Electric Capital Business
Asset Funding Corporation
Loan No.: 001-0010771-001

                                   SCHEDULE 1
                                   ----------

         (1920 Acacia Avenue, Compton, Los Angeles County, California)


Permitted Exceptions:
- ---------------------

1.        An easement for the purpose show below and right incidental thereto as
          set forth in a document:

          Purpose:  pipe lines

          Recorded: December 8, 1953 as Instrument No. 394 in Book 43333, Page
                    81 Official Records

          Affects:  Portion of Parcel 1

2.        Covenants, conditions and restrictions as set forth in the document:


          Recorded: August 23, 1968 as Instrument No. 3626 in Book M2963, Page
                    52 Official Records

Modification of said covenants, conditions and restrictions

          Recorded: January 14, 1970 as Instrument No. 3300 in Book M3389, Page
                    928 Official Records

          Affects: Parcels 1 and 2

3.        An easement for the purpose shown below and rights incidental thereto
          as set forth in a document

          Purpose:  storm drains and appurtenances

          Recorded: September 13, 1971 as Instrument No. 3040 in Book D5189 Page
                    338, Official Records

          Affects:  Parcel 1

4.        An easement for the purpose shown below and rights incidental thereto
          as set forth in a document

          Purpose:  overhead and underground electrical supply systems and
                    communications systems, consisting of poles, guys and
                    anchors, crossarms, wires, underground conduits, cables,
                    vaults, manholes,


<PAGE>


                    handholes, and including above ground enclosures, markers
                    and concrete pads and other appurtenant fixtures.

          Recorded: September 14, 1971 as Instrument No. 3026 in Book D5192 Page
                    228 Official Records

          Affects:  portions of Parcels 1 and 2

5.        An easements for the purpose shown below and rights incidental thereto
          as set forth in a document

          Purpose:  public utilities and appurtenances

          Recorded: June 9, 1972 as Instrument No. 3586 in Book D5489 Page 63,
                    Official Records

          Affects:  portion of Parcel 1

6.        An easement for the purpose shown below and rights incidental thereto
          as set forth in a document

          Purpose:  wires, underground conduits, cables, vaults, manholes and
                    handholes

          Recorded: February 6, 1978 as Instrument No. 78-139103 Official
                    Records

          Affects:  portions of Parcels 1 and 2

7.        A covenant and agreement

          Executed by: not shown

          In favor of: not shown

          Recorded: September 27, 1993 as Instrument/File No. 93-1881160,
                    Official Records

          Reference is made to said document for full particulars.

8.        An easement for the purpose shown below and rights incidental thereto
          as set forth in a document

          Purpose:  surface drainage

          Recorded: October 29, 1993 as Instrument No. 93-2117784 Official
                    Records

          Affects:  10.00 foot wide strip


<PAGE>


9.        The effect of Acceptance Form

          Dated:    not shown

          Executed by: not shown

          In favor of: not shown

          Recorded: November 15, 1993 as Instrument/File No. 93-2242434 Official
                    Records

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.34
<SEQUENCE>6
<FILENAME>arca031327_ex10-34.txt
<DESCRIPTION>CONTRACT
<TEXT>

                             THIRTEENTH AMENDMENT TO
                      GENERAL CREDIT AND SECURITY AGREEMENT

         THIS AGREEMENT, dated and effective as of January 23, 2003, between
SPECTRUM Commercial Services Company, a Minnesota Corporation, having its
mailing address and principal place of business at Two Appletree Square, Suite
415, Bloomington, Minnesota 55425 (herein called "Lender" or "SCS"), and
Appliance Recycling Centers of America, Inc., a Minnesota corporation, having
the mailing address and principal place of business at 7400 Excelsior Boulevard,
Minneapolis, MN 55426, (herein called "Borrower"), amends that certain General
Credit and Security Agreement dated August 30, 1996, ("Credit Agreement") as
amended. Where the provisions of this Agreement conflict with the Credit
Agreement, the intent of this Agreement shall control.

1. The definition of "Borrowing Base" appearing in Paragraph 2 is amended in its
entirety to read as follows:

                  "Borrowing Base" shall mean the sum of (i) Eighty percent
                  (80%) of the net amount of Eligible Receivables or such
                  greater or lesser percentage as Lender, in its sole
                  discretion, shall deem appropriate, plus (ii) the lesser of
                  (x) Two Hundred Fifty Thousand and No/100ths Dollars
                  ($250,000) or (y) Twenty Five percent (25%) of the net amount
                  of Eligible Inventory (excluding Eligible Whirlpool Inventory
                  and Eligible Scratch and Dent Inventory), or such greater or
                  lesser dollars and/or percentage as Lender, in its sole
                  discretion, shall deem appropriate, plus (iii) the lesser of
                  (x) Three Million and No/100ths Dollars ($3,000,000) or (y)
                  Fifty percent (50%) of the net amount of Eligible Scratch and
                  Dent Inventory, or such greater or lesser dollars and/or
                  percentage as Lender, in its sole discretion, shall deem
                  appropriate, plus (iv) the lesser of (x) Four Million and
                  No/100ths Dollars ($4,000,000) or (y) Eighty percent (80%) of
                  the net amount of Eligible Whirlpool Inventory, or such
                  greater or lesser dollars and/or percentage as Lender, in its
                  sole discretion, shall deem appropriate, provided however,
                  that notwithstanding the dollar limits contained in
                  subsections (ii) - (iv) above, that the total aggregate amount
                  available under subsections (ii) - (iv) shall in no event
                  exceed Six Million and No/100ths Dollars ($6,000,000), or such
                  greater or lesser dollars as Lender, in its sole discretion,
                  shall deem appropriate.

         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

SPECTRUM COMMERCIAL SERVICES                APPLIANCE RECYCLING CENTERS
COMPANY                                     OF AMERICA, INC.

By /s/Steven I. Lowenthal                   By /s/Edward R. Cameron
  ----------------------------                 ---------------------------------
Steven I. Lowenthal, Principal
                                               Its President
                                               ---------------------------------


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>7
<FILENAME>arca031327_ex21-1.txt
<DESCRIPTION>SUBSIDIARIES OF ARCA
<TEXT>
                                                                    EXHIBIT 21.1

                  APPLIANCE RECYCLING CENTERS OF AMERICA, INC.

                      SUBSIDIARIES AS OF DECEMBER 28, 2002

                                     JURISDICTION OF        PERCENT VOTING
NAME OF SUBSIDIARY                    INCORPORATION        SECURITIES OWNED
- ------------------                    -------------        ----------------

Appliance Recycling Centers of
  America-California, Inc.              California              100%

ARCA of St. Louis, Inc.                 Missouri                100%



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>8
<FILENAME>arca031327_ex23-1.txt
<DESCRIPTION>INDEPENDENT AUDITOR'S CONSENT
<TEXT>
                                                                    EXHIBIT 23.1








                          INDEPENDENT AUDITOR'S CONSENT



We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (commission file No. 33-51584), on Form S-8 (commission
file No. 33-68890), and on Form S-8 (commission file No. 333-28571) of our
reports dated February 17, 2003 with respect to the consolidated financial
statements and financial statement schedule of Appliance Recycling Centers of
America, Inc., and Subsidiaries appearing in this Annual Report on Form 10-K for
the year ended December 28, 2002.






                                                         McGLADREY & PULLEN, LLP

Minneapolis, Minnesota
March 21, 2003



</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
