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 January 1, 2000
                                       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 10, 2000, 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
$2,467,210.

As of March 10, 2000, there were outstanding 2,286,744 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, 2000,
are incorporated by reference into Part III hereof.

<PAGE>


                                TABLE OF CONTENTS


                                     PART I

Item 1.  Business
              General
              Industry Background
              Company Background
              Customers and Source of Supply
              Company Operations
              Principal Product and Services
              Sales and Marketing
              Seasonality
              Competition
              Government Regulation
              Employees
Item 2.  Properties
Item 3.  Legal Proceedings
Item 4.  Submission of Matters to a Vote of Security Holders

                                     PART II

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

                                    PART III

Item 10. Directors and Executive Officers of the Company
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

SIGNATURES
INDEX TO EXHIBITS

<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 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 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 1997, 46
million major household appliances were taken out of use in the United States.
The disposal of these appliances has become 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 stream.

         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 Business - Government Regulation.

         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

<PAGE>


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 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
National Appliance Energy Conservation Act requires that a typical 18-cubic-foot
refrigerator manufactured after 1992 have an energy consumption rate not
exceeding 700 kilowatt-hours per year. As new, 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. Some electric utility
companies are delaying new energy conservation programs, including the Company's
refrigerator recycling program. The Company believes, however, that energy
conservation and efficiency programs will remain a long-term component of the
nation's electric utility industry. See Business - Government Regulation.

         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, 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.

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 customers arrange for the removal of old
appliances from consumers' residences. The Company collects old appliances on
behalf of its customers, reconditions and sells suitable used appliances through
its own retail stores and sells 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 are offered to new
appliance manufacturers and retailers, waste management companies, property
management companies and the general public. See Business - Customers and Source
of Supply.

         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

<PAGE>


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.

         Currently, the Company has only one major electric utility customer.
During fiscal year 1999, that customer, Southern California Edison Company
("Edison"), accounted for approximately 33% or $5.2 million of the Company's
total revenues. Edison's year 2000 program has been approved by the California
Public Utilities Commission ("CPUC") and the Company expects to shortly enter
into a contract with Edison for the year 2000. In prior years, the Company's
contract provided for a minimum number of units to be recycled. Neither the 1999
contract nor the expected year 2000 program provides for any minimum or
guaranteed number of units. The Company currently expects the year 2000 program
with Edison, which is now underway, to be at approximately the same level as
1999.

         In February 1999, the Company entered into an 18-month refrigerator
recycling contract with the Los Angeles Department of Water and Power ("DWP").
Under this program, the Company recycles, from low income housing units in Los
Angeles, refrigerators that have been replaced with new energy-efficient models.
The DWP program contains no minimum guarantees and accounted for less than 1% of
the Company's total revenues in 1999.

         In response to the decrease in demand for services from electric
utilities, the Company has increased its marketing of services to appliance
manufacturers and retailers, waste management companies and property management
companies. The Company also has increased its focus on the sale of 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 offer
manufacturers' distressed appliances and reconditioned appliances to
value-conscious individuals and property managers.

         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 decided not to expand the
used 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 now buys
inventory mainly from Whirlpool's Ohio distribution center. The Whirlpool
agreement does not provide for any required or minimum number of units to be
offered for sale to the Company. However, subject to certain exceptions, the
Company has the ability to purchase from Whirlpool up to $3,000,000 of
appliances in any three-month period. The Whirlpool agreement may be terminated
by either party upon six-month's notice, or earlier for certain items. In
addition, the Company has agreed to indemnify Whirlpool for certain claims,
allegations or losses with respect to Whirlpool appliances sold by the Company.

<PAGE>


         Although the Whirlpool agreement does not provide for any set number of
units to be sold to the Company, based on prior performance under the agreement,
the Company believes this contract will provide an adequate supply of
high-quality appliances for its retail outlets.

         In late 1998, the Company decided to close its St. Louis, Missouri,
operations and close one store in the Minneapolis/Saint Paul market. In 1999,
the Company closed one store in the Minneapolis/Saint Paul market and one store
in the California market. The Company currently has three recycling centers,
located in Columbus, Ohio; Minneapolis, Minnesota; and Los Angeles, California.
Also, the Company currently has six retail stores: three in Minneapolis/Saint
Paul, one in Los Angeles and two 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 to collect 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, a primary source of product 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.

         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. Currently, the Company
expects to have only one contract with a major electric utility customer in
2000.

<PAGE>


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 or reconditioned, if
necessary, before being tested and distributed to the Company's ApplianceSmart
authorized factory 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 2000. 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 1999, the Company focused on increasing sales in fewer but larger
retail outlets and began developing a strategy to provide large factory
showrooms to offer consumers a selection of hundreds of appliances. The Company
plans to open 2 to 3 larger retail stores in its existing markets and/or in new
geographic markets. 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.

PRINCIPAL PRODUCT AND SERVICES

         The Company generates revenues from two sources: retailing and
recycling. In prior years, the Company had separately reported byproduct
revenues which are now included in recycling revenues. 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."

                                     1999         1998         1997
                                     ----         ----         ----
         Retail revenues             51.1%        57.6%        34.6%
         Recycling revenues          48.9%        42.4%        65.4%
                                    ------       ------       ------
                                    100.0%       100.0%       100.0%
                                    ======       ======       ======

         Although the Company has two main sources of revenues, management
believes that the Company has one operating segment. That is, even though
certain very limited 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 two revenue sources.

<PAGE>


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 from reverse logistics services and 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
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.

COMPETITION

         Competition for the Company's retail stores comes from new appliance
manufacturers and retailers and other reconditioned and used appliance
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 who may have significantly greater assets than the Company,
but will also be required to compete with numerous independently owned retailers
of new and reconditioned 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 the contract and which
generally offer only some of the services provided by the Company.

         The Company expects its primary competition for 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.

<PAGE>


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 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
liability.

EMPLOYEES

         At March 1, 2000, the Company had 130 full-time employees,
approximately 65% of whom were involved in the collection, transportation and
processing of appliances at the Company's centers and approximately 35% of whom
were in sales, administration and management. The Company has not experienced
any work stoppages and believes its employee relations are good.

<PAGE>


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. In addition, the Company owns a
14,000-square-foot facility in Saint Paul, Minnesota, that contains a retail
store at which it sells distressed and reconditioned appliances. 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 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's retail stores typically have been 2,500 to
5,000 square feet; however, with the move toward larger retail outlets, future
stores are anticipated to be 25,000 to 35,000 square feet.

         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.

<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 Nasdaq
SmallCap Market and the OTC Bulletin Board, as applicable.

                                                          High          Low
                                                          ----          ---

         1998

              First Quarter.......................     $ 2  3/4      $ 1  1/2
              Second Quarter......................       4             2
              Third Quarter.......................       3                3/4
              Fourth Quarter......................       1  1/8           1/2

         1999

              First Quarter.......................     $ 1           $    5/8
              Second Quarter......................        13/16           1/2
              Third Quarter.......................          7/8           1/2
              Fourth Quarter......................       1  1/2         11/16

         On March 10, 2000, the last reported sale price of the Common Stock on
the OTC Bulletin Board was $2.00 per share. As of March 10, 2000, there were
approximately 1,009 beneficial holders of the Company's Common Stock.

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

         During 1998 and 1999, the Company privately placed 1,150,000
unregistered shares and 981,750 warrants to purchase shares. Subsequently, the
Company registered 1,130,000 shares.

         In May 1998, the Company sold in a private placement 100,000 shares of
Common Stock at a price of $2.00 per share. The sale was made to an
institutional investor and the proceeds used for additional working capital.

         In July 1998, the Company issued a promissory note in the principal
amount of $275,000, plus an aggregate of 68,750 warrants to purchase the
Company's Common Stock at $2.25 per share, subject to adjustment. The notes were
repaid in September 1998 from new financing.

         In September 1998, the Company entered into a loan agreement for gross
proceeds of $3.5 million. The loan also provides for non-voting attendance at
board meetings and the issuance to the

<PAGE>


lender of a warrant to purchase 700,000 shares of Common Stock at $2.50 per
share, which price was adjustable under certain circumstances. The current
exercise price of this warrant is $0.60 per share. If exercised in full, this
warrant would represent approximately 24% of the Company's Common Stock after
such exercise. 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, subject to adjustment. The portion of the gross loan proceeds
ascribed to the aforementioned warrants in conjunction with debt was $307,000.

         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.

         In March 1999, the Company issued to a board member 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 agreed to issue to a vendor 50,000 warrants
to purchase the Company's Common Stock at $0.625 per share. These warrants are
not currently issued. The contract provides that 12,750 of these warrants are
currently exercisable and the balance are exercisable based on certain targets.
The warrants expire March 31, 2004.

         In August 1999, the Company settled a lawsuit with a former employee.
The settlement included a cash payment of $105,000 and the issuance of 20,000
shares of the Company's common stock valued at $12,500.

<PAGE>


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               1999          1998           1997           1996           1995
---------------------------------------------------------------------------------------------------
   (In thousands, except
   per share data)
<S>                            <C>           <C>            <C>            <C>            <C>
STATEMENTS OF OPERATIONS
Total revenues                 $ 15,582      $ 13,612       $ 11,979       $ 14,030       $ 16,241
---------------------------------------------------------------------------------------------------
Gross profit                   $  6,666      $  3,981       $  4,990       $  2,744       $  5,630
---------------------------------------------------------------------------------------------------
Operating income (loss)        $  1,139      $ (2,744)      $   (489)      $ (6,899)      $ (1,538)
---------------------------------------------------------------------------------------------------
Net income (loss)              $    505      $ (3,056)      $   (748)      $ (7,269)      $   (943)
---------------------------------------------------------------------------------------------------
Basic earnings (loss)
per common share               $   0.24      $  (2.55)      $  (0.66)      $  (6.53)      $  (0.90)
---------------------------------------------------------------------------------------------------
Diluted earnings (loss)
per common share               $   0.22      $  (2.55)      $  (0.66)      $  (6.53)      $  (0.90)
---------------------------------------------------------------------------------------------------
Basic weighted average
number of common
shares outstanding                2,142         1,200          1,137          1,114          1,052
---------------------------------------------------------------------------------------------------
Diluted weighted average
number of common
shares outstanding                2,274         1,200          1,137          1,114          1,052
---------------------------------------------------------------------------------------------------

BALANCE SHEETS
Working capital (deficit)      $    545      $   (471)      $ (1,959)      $ (1,671)      $  3,503
---------------------------------------------------------------------------------------------------
Total assets                   $  9,517      $  8,843       $  8,569       $  9,992       $ 15,890
---------------------------------------------------------------------------------------------------
Long-term liabilities          $  4,831      $  4,965       $  1,633       $  1,711       $  2,084
---------------------------------------------------------------------------------------------------
Shareholders' equity           $  1,809      $    816       $  3,365       $  4,113       $ 10,188
---------------------------------------------------------------------------------------------------
</TABLE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
       AND RESULTS OF OPERATIONS FOR THE FISCAL YEARS 1999, 1998 AND 1997

OVERVIEW

         The Company's 1999 fiscal year (1999) ended January 1, 2000, its 1998
fiscal year (1998) ended January 2, 1999 and its 1997 fiscal year (1997) ended
January 3, 1998.

         The Company generates revenues from two sources: retail and recycling
activities. In prior years, the Company had separately reported byproduct
revenues, which are now included in recycling revenues. Retail revenues are
sales of appliances, extended warranty sales and delivery fees. Recycling
revenues are fees charged for the disposal of appliances and sales of materials
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.

<PAGE>


         In 1999, the Company focused on increasing sales in fewer but larger
retail outlets. During 1999, the Company withdrew from a market and closed one
center and two stores in that market. The Company also closed two other smaller
stores in 1999. The Company also closed one store as of December 31, 1998. In
1999, same-store sales for stores open the full years of 1999 and 1998 increased
by 57% from 1998. Retail revenues accounted for 51.1% of total revenues in 1999.

REVENUES

         The Company's total revenues for 1999 were $15,582,000 compared to
$13,612,000 in 1998.

         Retail revenues increased to $7,956,000 in 1999 from $7,835,000 in
1998, an increase of 1.5%. The increase was primarily due to an increase in
same-store sales offset by operating fewer stores in 1999 compared to 1998.
Same-store sales for 1999 (a sales comparison of six stores open the full year
in both 1999 and 1998) increased 57%. The increase in same-store sales was
primarily due to higher sales of Whirlpool product in 1999 compared to 1998. The
Whirlpool agreement does not provide for any required or minimum number of units
to be sold to the Company. The Company believes this agreement will provide an
adequate supply for its retail stores. As of January 1, 2000, the Company
operated six retail stores.

         Recycling revenues increased to $7,626,000 in 1999 from $5,777,000 in
1998. The increase was primarily due to an increase in refrigerator recycling
volumes related to the contract with Southern California Edison Company
("Edison") offset slightly by lower sales of reclaimed chlorofluorocarbons and
lower scrap revenue due to a decrease in scrap prices. Edison accounted for
approximately 33% of the Company's total revenues for 1999 and 29% for 1998.
Edison has been approved by the California Public Utilities Commission ("CPUC")
for a program in 2000 and the Company expects to shortly enter into a contract
with Edison for the year 2000. The contract for 2000 does not provide for a
minimum number of refrigerators to be recycled. The Company currently expects
the year 2000 program to be at approximately the same level as 1999. The timing
and amount of revenues will be dependent on advertising by Edison.

         The Company's total revenues for 1998 were $13,612,000 compared to
$11,979,000 in 1997.

         Retail revenues increased to $7,835,000 in 1998 from $4,149,000 in
1997. The increase was primarily due to increased sales of Whirlpool product. In
1998, the Company entered into a contract with Whirlpool Corporation to acquire
its distressed appliances (including discontinued models, factory over-runs,
floor samples and scratch and dent appliances) from distribution centers serving
the Midwest and certain western states. Same-store retail sales for 1998
increased 108% (a sales comparison of 10 stores open for full years in both 1998
and 1997). The Company operated 11 stores throughout 1998.

         Recycling revenues decreased to $5,777,000 in 1998 from $7,830,000 in
1997. The decrease was primarily due to lower volume of appliances related to
the contract with Edison and lower sales of reclaimed chlorofluorocarbons due to
fewer refrigerators being recycled and lower scrap revenue due to a decrease in
scrap prices. Edison accounted for approximately 29% of the Company's total
revenues for 1998 and 38% for 1997.

GROSS PROFIT

         The Company's overall gross profit increased to 42.8% in 1999 from
29.2% in 1998. The increase was primarily due to higher recycling revenues from
the Edison contract without a corresponding increase in expenses, improved
purchase price and mix of inventory for retail sales and

<PAGE>


discontinuing unprofitable programs. Gross profit as a percentage of total
revenues for future periods can be affected favorably or unfavorably by numerous
factors, including the mix of retail product sold, the volume of appliances
recycled from the Edison 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 to 29.2% in 1998 from
41.7% in 1997. The decrease was primarily due to retail revenues, which have a
lower gross profit than recycling revenues, being a higher percentage of total
revenues and a decrease in recycling revenues related to the Edison contract.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses were 35.5% of total
revenues in 1999 compared to 45.2% in 1998. Selling, general and administrative
expenses decreased to $5,527,000 in 1999 from $6,152,000 in 1998, a 10.2%
decrease. Selling expenses decreased to $1,900,000 in 1999 from $2,028,000 in
1998. The decrease was primarily due to operating fewer stores in 1999 compared
to 1998 offset by an increase in advertising expense and sales commissions.
General and administrative expenses decreased to $3,627,000 in 1999 from
$4,124,000 in 1998. The decrease was primarily due to a decrease in personnel
costs as a result of an aggressive overhead reduction program in the first
quarter of 1999 offset by an increase in consultant fees for the Company's
computer systems.

         Selling, general and administrative expenses were 45.2% of total
revenues in 1998 compared to 45.7% in 1997. Selling, general and administrative
expenses increased to $6,152,000 in 1998 from $5,479,000 in 1997, a 12.3%
increase. Selling expenses increased to $2,028,000 in 1998 from $1,498,000 in
1997. The increase in selling expenses was primarily due to an increase in sales
commissions and advertising expense and costs associated with opening an
additional retail store in 1998. General and administrative expenses increased
to $4,124,000 in 1998 from $3,981,000 in 1997. The increase in general and
administrative expenses was primarily due to increased expenses related to
temporary personnel costs.

         In June 1998, the Company took a one-time charge of $518,000 related to
a loss on impaired equipment associated with the Company's decision to curtail
the appliance shredding operation of its recycling business located primarily at
the Company's Minneapolis center. Also, in December 1998, the Company took a
one-time charge of $55,000 related to a loss on impaired assets associated with
the Company's decision to withdraw from a market and close one center and two
retail stores in 1999.

INTEREST EXPENSE

         Interest expense increased to $780,000 in 1999 from $601,000 in 1998.
The increase was primarily due to a higher average borrowed amount outstanding
in 1999 compared to 1998.

         Interest expense increased to $601,000 in 1998 from $347,000 in 1997.
The increase was primarily due to a higher average borrowed amount outstanding
in 1998 compared to 1997.

INCOME TAXES AND NET OPERATING LOSSES

         As of its 1999 and 1998 year-ends, the Company recorded valuation
allowances of $4,085,000 and $4,190,000, respectively, against its net deferred
tax assets due to the uncertainty of their realization. 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.

<PAGE>


         The Company has net operating losses of approximately $8,425,000 at
January 1, 2000, which are available to reduce taxable income and in turn income
taxes payable in future years. Future utilization of these loss and credit
carryforwards is subject to certain limitations under provisions of the Internal
Revenue Code including limitations subject to Section 382, which relates to a 50
percent change in control over a three-year period, and are further dependent
upon the Company attaining profitable operations. The Company believes that the
issuance of Common Stock during 1999 (see Note 8) 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.

MINORITY INTEREST IN NET INCOME OF SUBSIDIARY

         The Company was previously an 80% shareholder in its California
subsidiary, and accordingly, recorded the minority shareholder's interest in the
subsidiary's net income during 1997. During the fourth quarter of 1997, the
Company purchased all the minority shareholder's stock in the California
subsidiary.

LIQUIDITY AND CAPITAL RESOURCES

         At January 1, 2000, the Company had working capital of $545,000
compared to a working capital deficit of $471,000 at January 2, 1999. Cash and
cash equivalents increased to $220,000 at January 1, 2000 from $14,000 at
January 2, 1999. Net cash provided by operating activities was $201,000 in 1999
compared to net cash used in operating activities of $3,078,000 in 1998. The
increase in cash provided by operating activities was primarily due to the
Company's net income plus depreciation in 1999 versus the significant net loss
net of depreciation in 1998.

         Net cash used in investing activities was $164,000 in 1999 compared to
$18,000 in 1998. The increase in net cash used in investing activities in 1999
from 1998 was due to lower proceeds from disposals of equipment in 1999.

         Net cash provided by financing activities was $169,000 in 1999 compared
to $3,097,000 in 1998. The decrease in cash provided by financing activities was
primarily due to no borrowings in 1999 similar to the net proceeds of the
long-term obligations incurred in 1998 offset by greater proceeds from issuance
of common stock in 1999. In September 1998, the Company entered into a loan
agreement with a lender resulting in gross proceeds of $3.5 million.

         The Company's capital expenditures were approximately $252,000 in 1999
and $289,000 in 1998. The 1999 and 1998 capital expenditures were primarily
related to building improvements and the purchase of computer equipment. The
Company did not have any material purchase commitments for assets as of January
1, 2000.

         As of January 1, 2000, the Company had a $2.0 million line of credit
with a lender. The interest rate as of January 1, 2000 was 13.50%. 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, 2000, 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, is guaranteed by
the President of the Company and requires minimum monthly interest payments of
$5,625 regardless of the outstanding principal balance. The lender is also
secured by an inventory repurchase agreement with Whirlpool Corporation. The
loan requires that the Company meet certain covenants, provides payment
penalties for noncompliance, limits the amount of other debt

<PAGE>


the Company can incur, limits the amount of spending on fixed assets and limits
payments of dividends. The Company's unused borrowing capacity was $334,000 at
January 1, 2000 and $463,000 at March 1, 2000.

         In September 1998, the Company entered into a loan agreement with a
lender resulting in gross proceeds of $3.5 million. The maturity date for the
loan is September 30, 2005 and the annual interest rate is 13%. The loan is
secured by all of the Company's personal property and all of its real estate,
and provides for a non-voting attendance at board meetings. The Company used the
proceeds to repay certain indebtedness (including approximately $1,500,000 of
outstanding indebtedness), to finance inventory and for other general corporate
purposes. Payment terms of the loan state that monthly interest payments of
$37,917 are to be made until September 2000. Beginning September 2000, the
monthly payment of principal and interest is $52,259.

         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 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.

         As discussed above, the Company expects to enter into an agreement with
Edison for refrigerator recycling and currently expects revenue consistent with
levels for 1999; however, the agreement does not provide for any minimum
guarantees.

         See also Note 4 to the financial statements.

         The Company believes, based on anticipated sales per retail store, the
anticipated revenues from the expected Edison contract, and the anticipated
gross profit, that its cash balance, anticipated funds generated from operations
and its current line of credit if renewed in August 2000 will be sufficient to
finance its operations and capital expenditures through December 2000. The
Company's total capital requirements will depend, among other things as
previously discussed, on the number of recycling centers operating and the
number and size of retail stores operating during the fiscal year. Currently,
the Company has three centers and six retail stores in operation. If revenues
are lower than anticipated or expenses are higher than anticipated or the line
of credit cannot be maintained, 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 the line of credit
will be renewed or such additional sources of financing will be available or
available on terms satisfactory to the Company or permitted by the Company's
current lenders.

YEAR 2000

         The Company has determined that the Year 2000 issue did not have an
impact on the Company's operations as of January 1, 2000 or subsequent to
January 1, 2000. However, there can be no assurance that the Year 2000 issue
will not have any impact on future operations. As of January 1, 2000, the
Company had incurred approximately $320,000 of both capitalized computer
equipment and expenses related to the Year 2000 issue.

<PAGE>


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 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 at acceptable
prices and the ability and timing of Edison to deliver units under its expected
contract 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 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 used 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 since all debt has a fixed rate. 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 January
1, 2000. However, there can be no assurances that future inflation will not have
an adverse impact on the Company's operating results and financial conditions.

<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Description
         -----------

         Independent Auditor's Report
         Consolidated Balance Sheets as of January 1, 2000
              and January 2, 1999
         Consolidated Statements of Operations for the three years
              ended January 1, 2000
         Consolidated Statements of Shareholders' Equity for the three years
              ended January 1, 2000
         Consolidated Statements of Cash Flows for the three years
              ended January 1, 2000
         Notes to Consolidated Financial Statements

<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 sheets of Appliance
Recycling Centers of America, Inc. and subsidiaries as of January 1, 2000 and
January 2, 1999, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three year
period ended January 1, 2000. 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 generally accepted auditing
standards. 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 January 1, 2000 and January 2,
1999, and the results of their operations and their cash flows for each of the
years in the three year period ended January 1, 2000, in conformity with
generally accepted accounting principles.


                                       McGLADREY & PULLEN, LLP


Minneapolis, Minnesota
February 17, 2000

<PAGE>


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

<TABLE>
<CAPTION>
                                                                  JANUARY 1,            January 2,
                                                                        2000                  1999
--------------------------------------------------------------------------------------------------
<S>                                                             <C>                   <C>
ASSETS

CURRENT ASSETS
Cash and cash equivalents                                       $    220,000          $     14,000
Accounts receivable, net of allowance of
  $25,000 and $18,000, respectively
  (Notes 3 and 9)                                                  1,452,000               498,000
Inventories, net of reserves of $275,000
  and $40,000, respectively (Note 3)                               1,586,000             1,979,000
Deferred income taxes and other
  current assets                                                     164,000               100,000
                                                                ------------          ------------
  Total current assets                                          $  3,422,000          $  2,591,000
                                                                ------------          ------------
PROPERTY AND EQUIPMENT, at cost (Notes 3, 4 and 10)
Land                                                            $  2,103,000          $  2,103,000
Buildings and improvements                                         4,028,000             3,957,000
Equipment                                                          3,542,000             3,597,000
                                                                ------------          ------------
                                                                $  9,673,000          $  9,657,000
Less accumulated depreciation                                      3,950,000             3,876,000
                                                                ------------          ------------
  Net property and equipment                                    $  5,723,000          $  5,781,000
                                                                ------------          ------------
OTHER ASSETS                                                    $    258,000          $    319,000
                                                                ------------          ------------
GOODWILL, net of amortization of $76,000 and
  $38,000, respectively                                              114,000               152,000
                                                                ------------          ------------
  Total assets                                                  $  9,517,000          $  8,843,000
                                                                ============          ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Line of credit (Note 3)                                         $    888,000          $  1,081,000
Current maturities of long-term obligations                          135,000                79,000
Accounts payable                                                   1,037,000             1,202,000
Accrued expenses (Note 5)                                            742,000               700,000
Income taxes payable                                                  75,000                    --
                                                                ------------          ------------
  Total current liabilities                                     $  2,877,000          $  3,062,000
LONG-TERM OBLIGATIONS, less current maturities (Note 4)            4,831,000             4,965,000
                                                                ------------          ------------
  Total liabilities                                             $  7,708,000          $  8,027,000
                                                                ------------          ------------
COMMITMENTS (Note 6)
SHAREHOLDERS' EQUITY (Notes 3 and 8)
Common Stock, no par value; authorized 10,000,000
  shares; issued and outstanding 2,287,000
  and 1,237,000 shares, respectively                            $ 11,345,000          $ 10,857,000
Accumulated deficit                                               (9,536,000)          (10,041,000)
                                                                ------------          ------------
  Total shareholders' equity                                    $  1,809,000          $    816,000
                                                                ------------          ------------
  Total liabilities and shareholders' equity                    $  9,517,000          $  8,843,000
                                                                ============          ============
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>


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

<TABLE>
<CAPTION>
                                                                           For the fiscal year ended
----------------------------------------------------------------------------------------------------------------
                                                                JANUARY 1,         January 2,         January 3,
                                                                      2000               1999               1998
                                                              --------------------------------------------------
<S>                                                           <C>                <C>                <C>
REVENUES (Note 9)
  Retail                                                      $  7,956,000       $  7,835,000       $  4,149,000
  Recycling                                                      7,626,000          5,777,000          7,830,000
                                                              ------------       ------------       ------------

  Total revenues                                              $ 15,582,000       $ 13,612,000       $ 11,979,000

COST OF REVENUES (Note 9)                                        8,916,000          9,631,000          6,989,000
                                                              ------------       ------------       ------------

  Gross profit                                                $  6,666,000       $  3,981,000       $  4,990,000

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 2)            5,527,000          6,152,000          5,479,000

LOSS ON IMPAIRED ASSETS (Note 10)                                       --            573,000                 --
                                                              ------------       ------------       ------------

  Operating income (loss)                                     $  1,139,000       $ (2,744,000)      $   (489,000)

OTHER INCOME (EXPENSE)
  Other income                                                     144,000            319,000            134,000
  Interest income                                                    2,000              1,000              8,000
  Interest expense                                                (780,000)          (601,000)          (347,000)
                                                              ------------       ------------       ------------

  Income (loss) before provision for (benefit of) income
     taxes and minority interest                              $    505,000       $ (3,025,000)      $   (694,000)

PROVISION FOR (BENEFIT OF) INCOME TAXES (Note 7)                        --             31,000            (31,000)
                                                              ------------       ------------       ------------

  Income (loss) before minority interest                      $    505,000       $ (3,056,000)      $   (663,000)

MINORITY INTEREST IN NET INCOME OF SUBSIDIARY                           --                 --             85,000
                                                              ------------       ------------       ------------

  Net income (loss)                                           $    505,000       $ (3,056,000)      $   (748,000)
                                                              ============       ============       ============

BASIC EARNINGS (LOSS) PER COMMON SHARE                        $       0.24       $      (2.55)      $      (0.66)
                                                              ============       ============       ============

DILUTED EARNINGS (LOSS) PER COMMON SHARE                      $       0.22       $      (2.55)      $      (0.66)
                                                              ============       ============       ============

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
  Basic                                                          2,142,000          1,200,000          1,137,000
                                                              ============       ============       ============
  Diluted                                                        2,274,000          1,200,000          1,137,000
                                                              ============       ============       ============
</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>


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


<TABLE>
<CAPTION>
                                                     Common Stock
                                              --------------------------      Accumulated
                                                Shares          Amount          Deficit            Total
                                                ------          ------          -------            -----
<S>                                           <C>           <C>              <C>               <C>
BALANCE, DECEMBER 28, 1996                    1,137,000     $ 10,350,000     $ (6,237,000)     $  4,113,000
  Net loss                                           --               --         (748,000)         (748,000)
------------------------------------------------------------------------------------------------------------

BALANCE, JANUARY 3, 1998                      1,137,000     $ 10,350,000     $ (6,985,000)     $  3,365,000
  Issuance of Common Stock
     (Note 8)                                   100,000          200,000               --           200,000
  Proceeds ascribed to warrants issued
     in conjunction with long-term debt
     (Note 8)                                        --          307,000               --           307,000
  Net loss                                           --               --       (3,056,000)       (3,056,000)
------------------------------------------------------------------------------------------------------------

BALANCE, JANUARY 2, 1999                      1,237,000     $ 10,857,000     $(10,041,000)     $    816,000
  Sales of Common Stock, net
     of fees and expenses of $40,000
     (Note 8)                                 1,030,000          475,000               --           475,000
  Issuance of Common Stock
     in settlement (Note 8)                      20,000           13,000               --            13,000
  Net income                                         --               --          505,000           505,000
------------------------------------------------------------------------------------------------------------

BALANCE, JANUARY 1, 2000                      2,287,000     $ 11,345,000     $ (9,536,000)     $  1,809,000
============================================================================================================
</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>


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

<TABLE>
<CAPTION>
                                                                             For the fiscal year ended
----------------------------------------------------------------------------------------------------------------
                                                                  JANUARY 1,        January 2,        January 3,
                                                                        2000              1999              1998
                                                                ------------------------------------------------
<S>                                                             <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss)                                            $    505,000      $ (3,056,000)     $   (748,000)
   Adjustments to reconcile net income (loss) to net
      cash provided by (used in) operating activities:
   Depreciation and amortization                                     395,000           704,000         1,027,000
   Minority interest in net income of subsidiary                          --                --            85,000
   Gain on sale of equipment                                         (74,000)         (266,000)          (80,000)
   Accretion of long-term debt discount                               35,000                --                --
   Common stock issued for settlement                                 13,000                --                --
   Loss on impaired assets                                                --           573,000                --
   Deferred income taxes                                             (75,000)               --                --
   Change in current assets and liabilities:
      Receivables                                                   (954,000)          238,000           391,000
      Inventories                                                    393,000        (1,285,000)         (250,000)
      Other current assets                                            11,000            40,000           106,000
      Refundable income taxes                                             --            29,000           371,000
      Accounts payable                                              (165,000)           66,000          (255,000)
      Accrued expenses and income taxes payable                      117,000          (121,000)         (339,000)
                                                                ------------      ------------      ------------
        Net cash provided by (used in) operating activities     $    201,000      $ (3,078,000)     $    308,000
                                                                ------------      ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of property and equipment                          $   (252,000)     $   (289,000)     $   (299,000)
   Purchase of minority interest in California subsidiary                 --                --          (275,000)
   Proceeds from disposals of property and equipment                  88,000           271,000           107,000
                                                                ------------      ------------      ------------
           Net cash used in investing activities                $   (164,000)     $    (18,000)     $   (467,000)
                                                                ------------      ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net borrowings (payments) under line of credit               $   (193,000)     $   (432,000)     $    123,000
   Payments on long-term obligations                                (113,000)         (408,000)         (231,000)
   Proceeds from long-term obligations                                    --         3,718,000                --
   Proceeds ascribed to warrants issued in conjunction
      with long-term debt obligations                                     --           307,000                --
   Deferred financing costs                                               --          (288,000)               --
   Proceeds from issuance of common stock                            475,000           200,000                --
                                                                ------------      ------------      ------------
           Net cash provided by (used in)
           financing activities                                 $    169,000      $  3,097,000      $   (108,000)
                                                                ------------      ------------      ------------
   Increase (decrease) in cash and cash equivalents             $    206,000      $      1,000      $   (267,000)

CASH AND CASH EQUIVALENTS
   Beginning                                                          14,000            13,000           280,000
                                                                ------------      ------------      ------------
   Ending                                                       $    220,000      $     14,000      $     13,000
                                                                ============      ============      ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for (receipts of):
   Interest                                                     $    668,000      $    562,000      $    346,000
   Income taxes                                                           --             2,000          (399,000)
                                                                ============      ============      ============

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
   FINANCING ACTIVITIES
      Long-term obligations incurred on purchase
        of equipment                                            $         --      $         --      $     27,000
                                                                ============      ============      ============
</TABLE>

See Notes to Consolidated Financial Statements.

<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 1999
fiscal year (1999) ended January 1, 2000, its 1998 fiscal year (1998) ended
January 2, 1999 and its 1997 fiscal year (1997) ended January 3, 1998. The
fiscal years 1999 and 1998 include 52 weeks. The fiscal year 1997 includes 53
weeks.

REVENUE RECOGNITION: The Company recognizes revenue from appliance sales in the
period the appliance is sold. Revenue from appliance recycling is recognized
when a unit is collected and processed. Byproduct revenue is recognized upon
shipment. In prior years, the Company had separately reported byproduct revenues
which are now included in recycling revenues.

The Company provides allowances for uncollectable revenues receivable based on
management's periodic assessment of the need for such allowances. Such
allowances charged to expense amounted to $23,000, $50,000 and $60,000 for the
fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998,
respectively. The Company defers revenue under appliance extended warranty
arrangements and recognizes it over the terms of the warranty contracts. The
Company accrues the estimated cost of initial warranty arrangements at the time
of the appliance sale.

CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all cash and any treasury bills, commercial paper 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 are stated at the lower of cost, first-in, first-out
(FIFO), or market.

Inventories consisted of the following:

                                                            1999          1998
--------------------------------------------------------------------------------
Finished goods                                        $1,698,000    $1,830,000
Work-in-process-
    unrefurbished units                                  163,000       189,000
Less reserves                                           (275,000)      (40,000)
                                                      ----------    ----------
                                                      $1,586,000    $1,979,000
                                                      ==========    ==========

DEFERRED FINANCING COSTS: In connection with financing transactions in 1998
under notes payable arrangements, the Company incurred $288,000 of costs that
have been recorded in other assets and are being amortized using the
straight-line method over the terms of the related debt.

<PAGE>

GOODWILL: The Company was previously an 80% shareholder in its California
subsidiary, and accordingly, recorded the minority shareholder's interest in the
subsidiary's net income. During the fourth quarter of the year ended January 3,
1998, the Company purchased all of the minority shareholder's stock in the
California subsidiary. This transaction resulted in the Company recording
goodwill of $190,000. Goodwill is being amortized by the straight-line method
over a period of five years.

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

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 date. 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. In 1998, the Company
recorded a loss on impairment of certain assets. (See Note 10.)

ADVERTISING EXPENSE: Advertising is expensed as incurred, and was $532,000,
$448,000 and $259,000 for the fiscal years ended January 1, 2000, January 2,
1999 and January 3, 1998, 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 LOSS 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 for the
fiscal year ended January 1, 2000, 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. Since
the Company had incurred losses in the fiscal years ended January 2, 1999 and
January 3, 1998, the inclusion of potential option and warrant common shares in
the calculation of diluted loss per common share would have been antidilutive.
Therefore, basic and diluted weighted-average shares and per share amounts for
these years are the same.

REPORTING COMPREHENSIVE INCOME: Reporting com-prehensive income is equivalent to
reporting operating results in the statement of operations.

SEGMENT INFORMATION: The Company believes that it 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, it does not measure profit or loss or maintain assets
separately for its products/revenue sources (appliance sales, appliance
recycling and recycling services for utilities).

ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles 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.

NOTE 2. MARKET CLOSINGS AND CORPORATE LIQUIDITY

In December 1998, the Company decided to withdraw from the under-performing St.
Louis, Missouri market. The Company closed its recycling center and two retail
stores in February 1999. For the year ended January 2, 1999, the Company
incurred expenses of approximately $130,000 which included the write-off of
leasehold improvements of approximately $55,000 and inventory and the accrual of
remaining lease payments and other costs of approximately $75,000.

<PAGE>

In August 1999, the Company closed a retail store in the Minneapolis market. The
Company accrued approximately $19,000 for the remaining lease payments and wrote
off leasehold improvements of approximately $3,000 as of January 1, 2000. The
Company also closed a retail store in the California market in June 1999 which
resulted in no closing costs.

The Company believes, based on anticipated sales per retail store, the
anticipated revenues from an expected Southern California Edison Company
contract and the resulting anticipated gross profit, that its cash balance,
anticipated funds generated from operations and its current line of credit if
renewed will be sufficient to finance its operations and capital expenditures
through December 2000. The Company's total capital requirements will depend,
among other things as discussed below, on the number and size of retail stores
operating and the number of recycling centers operating during the fiscal year.
Currently, the Company has three recycling centers and six stores in operation.
If revenues are lower than anticipated or expenses are higher than anticipated
or the line of credit cannot be maintained, 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 or other
securities. There can be no assurance that such additional sources of financing
will be available or available at terms satisfactory to the Company or permitted
by the Company's current lenders.

NOTE 3. LINE OF CREDIT

At January 1, 2000, the Company had a $2.0 million line of credit with a lender.
The interest rate as of January 1, 2000 was 13.50%. 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, 2000
unless 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, is guaranteed by the
President of the Company and requires minimum monthly interest payments of
$5,625 regardless of the outstanding principal balance. The lender is also
secured by an inventory repurchase agreement with Whirlpool Corporation. The
loan also 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 January 1, 2000 the Company's unused borrowing capacity under this
line was $334,000.

NOTE 4. LONG-TERM OBLIGATIONS

Long-term obligations consisted of the following:

                                                       1999                1998
-------------------------------------------------------------------------------
9.00% mortgage, due in
  monthly installments of
  $11,411, including interest,
  balance due February 2004,
  secured by land
  and building                                   $  854,000          $  911,000
8.75% mortgage, due in
  monthly installments of
  $7,027, including interest,
  balance due January 2003,
  secured by land
  by land and building                              652,000             678,000
13.00% note payable,
  monthly interest payments
  of $37,917 until
  September 2000, monthly
  principal and interest
  payments of $52,259
  beginning September 2000,
  balance due September 2005,
  secured by equipment,
  land and building                               3,237,000           3,203,000
9.88% mortgage, due in
  monthly installments of
  $3,286, including interest,
  balance due September
  2008, secured by land
  and building                                      211,000             231,000
Other                                                12,000              21,000
                                                 ----------          ----------
                                                 $4,966,000          $5,044,000
Less current maturities                             135,000              79,000
                                                 ----------          ----------
                                                 $4,831,000          $4,965,000
                                                 ==========          ==========

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

Fiscal year
-----------
2000                                                                 $  135,000
2001                                                                    271,000
2002                                                                    305,000
2003                                                                    867,000
2004                                                                    350,000
Thereafter                                                            3,038,000
                                                                     ----------
                                                                     $4,966,000
                                                                     ==========

NOTE 5. ACCRUED EXPENSES

Accrued expenses were as follows:

                                                       1999                1998
-------------------------------------------------------------------------------
Compensation                                       $178,000            $139,000
Warranty                                            182,000             157,000
Lease contingencies
   and closing costs                                 19,000             124,000
Other                                               363,000             280,000
                                                   --------            --------
                                                   $742,000            $700,000
                                                   ========            ========

<PAGE>

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 rental commitments under noncancelable operating leases as of January 1,
2000 were as follows:

Fiscal Year
-----------
2000                                                                 $  431,000
2001                                                                    241,000
2002                                                                    199,000
2003                                                                    199,000
                                                                     ----------
                                                                     $1,070,000
                                                                     ==========

Rent expense for the fiscal years ended January 1, 2000, January 2, 1999 and
January 3, 1998 was $370,000, $482,000 and $433,000 respectively.

NOTE 7. INCOME TAXES

The provision for (benefit of) income taxes consisted of the following:

                                          1999             1998            1997
-------------------------------------------------------------------------------
Current:
  Federal                            $  75,000        $      --       $      --
  State                                     --           31,000         (31,000)
Deferred                               (75,000)              --              --
                                     ---------        ---------       ---------
                                     $      --        $  31,000       $ (31,000)
                                     =========        =========       =========

A reconciliation of the Company's income tax expense (benefit) with the federal
statutory tax rate is shown below:
                                          1999            1998             1997
-------------------------------------------------------------------------------
Income tax
  expense (benefit)
  at statutory rate                 $  172,000     $(1,049,000)      $ (236,000)
State taxes
  (benefit), net of
  federal tax
  effect                                18,000        (192,000)         (26,000)
Permanent
  differences
  and other                            (85,000)         34,000           74,000
Change in
  valuation
  allowance                           (105,000)        257,000         (289,000)
Effect of NOL
  with no current
  tax benefit                               --         981,000          446,000
                                    ----------     -----------       ----------
                                    $       --     $    31,000       $  (31,000)
                                    ==========     ===========       ==========

The tax effects of principal temporary differences are as follows:

                                                           1999            1998
-------------------------------------------------------------------------------
Deferred tax assets:
  Net operating loss
  carryforwards                                     $ 3,370,000      $3,300,000
  Loss on asset impairment                              658,000         658,000
  Federal and state tax credits                         250,000         250,000
  Inventory reserve                                     110,000          16,000
  Accrued expenses                                      135,000         220,000
                                                    -----------      ----------
    Gross deferred tax assets                       $ 4,523,000      $4,444,000
Deferred tax liability:
  Accelerated tax depreciation                         (363,000)       (254,000)
Valuation allowance                                  (4,085,000)     (4,190,000)
                                                    -----------      ----------
Net deferred tax assets                             $    75,000      $       --
                                                    ===========      ==========

At January 1, 2000, the Company recorded a valuation allowance of $4,085,000
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.

At January 1, 2000, the Company had net operating loss ("NOL") carryforwards
consisting of the following:

Expiration                                                             Amount
----------                                                             ------
2011                                                                 $4,826,000
2012                                                                 $1,115,000
2018                                                                 $2,484,000

Future utilization of NOL and tax credit carryforwards is subject to certain
limitations under provisions of the Internal Revenue Code. These limitations
include Section 382, which relates to a 50 percent change in control over a
three-year period, and NOLs are further dependent upon the Company attaining
profitable operations. The Company believes that the issuance of common stock
during 1999 (see Note 8) 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
200,000 shares, respectively, available for grant. The options that have been
granted under the Plans are exercisable for a

<PAGE>

period of five to ten years from the date of grant and vest over a period of six
months to three years from the date of grant.

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the Plans. Had
compensation cost for the Plans been determined based on the fair value at the
grant date consistent with the provisions of SFAS No. 123, the Company's net
earnings (loss) and basic and diluted earnings (loss) per share amounts would
have been changed to the pro forma amounts indicated below:

                                              1999           1998          1997
-------------------------------------------------------------------------------
Net income (loss):
   As reported                            $505,000    $(3,056,000)    $(748,000)
   Pro forma                              $460,000    $(3,136,000)    $(847,000)
Basic earnings
 (loss) per share:
   As reported                            $   0.24    $     (2.55)    $   (0.66)
   Pro forma                              $   0.21    $     (2.61)    $   (0.75)
Diluted earnings
 (loss) per share:
   As reported                            $   0.22    $     (2.55)    $   (0.66)
   Pro forma                              $   0.20    $     (2.61)    $   (0.75)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:

                                                    1999        1998       1997
-------------------------------------------------------------------------------
Expected dividend yield                               --          --         --
Expected stock price volatility                    81.3%       83.2%      50.4%
Risk-free interest rate                             5.5%        5.5%       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
  December 28, 1996                             80,000              $23.36
  Granted                                       44,000              $ 2.54
  Cancelled                                    (31,000)             $31.31
--------------------------------------------------------------------------------
Outstanding at
  January 3, 1998                               93,000              $10.93
  Granted                                       78,000              $ 1.50
  Cancelled                                    (27,000)             $13.22
--------------------------------------------------------------------------------
Outstanding at
  January 2, 1999                              144,000              $ 5.37
  Granted                                       97,000              $ 0.61
  Cancelled                                     (4,000)             $ 8.95
--------------------------------------------------------------------------------
Outstanding at
  January 1, 2000                              237,000              $ 3.36
--------------------------------------------------------------------------------

The weighted average fair value per option of options granted during fiscal
1999, 1998 and 1997 was $0.28, $0.85 and $0.96, respectively.

The following tables summarize information about stock options outstanding as of
January 1, 2000:

                               OPTIONS OUTSTANDING
                                                          Weighted
                                                           Average
                                                         Remaining     Weighted
Range of                                      Number   Contractual      Average
Exercise                                     Options       Life in     Exercise
Prices                                   Outstanding         Years        Price
-------------------------------------------------------------------------------
$45.52                                         1,000           0.9      $ 45.52
$17.50                                        21,000           1.6      $ 17.50
$10.52                                        10,000           3.5      $ 10.52
$2.38 to $3.00                                31,000           4.8      $  2.60
$0.75 to $2.06                                77,000           5.5      $  1.49
$0.59 to $0.63                                97,000           6.4      $  0.61
                                             -------
                                             237,000
                                             =======

                               OPTIONS EXERCISABLE
Range of                                  Number            Weighted
Exercise                                 Options             Average
Prices                               Exercisable      Exercise Price
--------------------------------------------------------------------
$45.52                                     1,000              $45.52
$17.50                                    21,000              $17.50
$10.52                                    10,000              $10.52
$2.38 to $3.00                            31,000              $ 2.60
$0.75 to $2.06                            58,000              $ 1.48
$0.59 to $0.63                            20,000              $ 0.63
                                         -------
                                         141,000              $ 5.11
                                         =======

<PAGE>

The following table summarizes options exercisable for stock options outstanding
as of January 2, 1999 and January 3, 1998:

                                                   1998            1997
--------------------------------------------------------------------------------
Number of options
  exercisable                                    49,000          40,000
Weighted average
  exercise price                                 $12.37          $19.44

WARRANTS: In March 1999, the Company issued to a board member 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 July 1998, the Company issued 12% subordinated promissory notes in the
principal amount of $275,000 plus an aggregate of 68,750 warrants to purchase
the Company's Common Stock at $2.25 per share.

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 debt was $307,000 as determined using the
Black-Scholes method.

In April 1999, the Company agreed to issue to a vendor 50,000 warrants to
purchase common stock at $0.625 per share. These warrants are not currently
issued. The contract provides that 12,750 of these warrants are currently
exercisable and the balance are exercisable based on certain targets. The
warrants expire March 31, 2004.

All issued warrants are exercisable and expire as follows: 68,750 in 2001;
125,000 in 2003; 83,000 in 2004; 700,000 in 2007 and 5,000 in 2009.

COMMON STOCK ISSUED IN SETTLEMENT: In August 1999, the Company settled a lawsuit
with a former employee. The settlement included a cash payment of $105,000 and
the issuance of 20,000 shares of the Company's Common Stock valued at $12,500.
The previously unaccrued portion of this settlement, $74,000, is included in
selling, general and administrative expenses for fiscal 1999.

PREFERRED STOCK: In April 1998, the Company's shareholders approved an amendment
to the Company's Articles of Incorporation authorizing 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.

PRIVATE PLACEMENT: 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 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.

In May 1998, the Company sold in a private placement 100,000 shares of Common
Stock at a price of $2.00 per share to an institutional investor.

NOTE 9. MAJOR CUSTOMER AND SUPPLIER

MAJOR CUSTOMER: Net revenues include sales to one major customer as follows:

                                                 1999         1998         1997
-------------------------------------------------------------------------------
Revenue percentage:                             33.1%        28.8%        37.8%

As of January 1, 2000, the Company had a receivable from this customer of
$784,000.

MAJOR SUPPLIER: The Company purchases substantially all of its distressed
appliances from one original equipment manufacturer under a contractual
arrangement. Management believes that should this arrangement be terminated
other original equipment manufacturers would be available for alternate sources
of supply.

NOTE 10. LOSS ON IMPAIRED ASSETS

In June 1998, the Company elected to curtail its appliance shredding operation
and intensify its strategic focus on appliance retailing. As a result, the
Company recorded a $518,000 loss on impaired equipment. In addition, as
discussed in Note 2, the Company also recorded an impairment loss of $55,000 in
December 1998 related to withdrawing from an under-performing market.

<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 January 1, 2000, 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 Information Concerning Directors, Nominees and Executive
Officers and under Beneficial Ownership Reporting Compliance in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders to be
held April 27, 2000, and is incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION

         Information regarding Executive Compensation set forth under Executive
Compensation in the Company's definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders to be held April 27, 2000, other than the subsections
captioned Report of the 1999 Compensation and Benefits Committee and Performance
Graph, is incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information regarding security ownership of certain beneficial owners
and management is set forth under Beneficial Ownership of Common Stock in the
Company's definitive Proxy Statement for its 2000 Annual Meeting of Shareholders
to be held April 27, 2000, and is incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information regarding certain relationships and related transactions is
set forth under Information Concerning Directors, Nominees and Executive
Officers in the Company's definitive Proxy Statement for its 2000 Annual Meeting
of Shareholders to be held April 27, 2000, and is incorporated herein by
reference.

<PAGE>


                                     PART IV

ITEM 14. 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. 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, 2000

                  Schedule II - Valuation and Qualifying Accounts

                                                Accounts Receivable    Inventory
                                                    Allowance          Allowance
                  --------------------------------------------------------------
                  Balance, December 28, 1996        $  84,000           $     --
                     Additional allowance              60,000             20,000
                     Write-offs                      (109,000)                --
                  --------------------------------------------------------------
                  Balance, January 3, 1998          $  35,000           $ 20,000
                     Additional allowance              50,000             20,000
                     Write-offs                       (67,000)                --
                  --------------------------------------------------------------
                  Balance, January 2, 1999          $  18,000           $ 40,000
                     Additional allowance              23,000            235,000
                     Write-offs                       (16,000)                --
                  --------------------------------------------------------------
                  BALANCE, JANUARY 1, 2000          $  25,000           $275,000
                  --------------------------------------------------------------

<PAGE>


         3.       EXHIBITS

                  See Index to Exhibits on page 35 of this report.

(b)      REPORTS ON FORM 8-K

         No reports on Form 8-K were filed during the last quarter of the fiscal
         year covered by this report.

<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 20, 2000                  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
                                           Controller

         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.

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


/s/ Edward R. Cameron         Chairman of the Board, President    March 20, 2000
-------------------------     and Chief Executive Officer
Edward R. Cameron


/s/ Linda A. Koenig           Controller                          March 20, 2000
-------------------------
Linda A. Koenig


/s/ George B. Bonniwell       Director                            March 20, 2000
-------------------------
George B. Bonniwell


/s/ Duane S. Carlson          Director                            March 20, 2000
-------------------------
Duane S. Carlson


/s/ Marvin Goldstein          Director                            March 20, 2000
-------------------------
Marvin Goldstein


/s/ Harry W. Spell            Director                            March 20, 2000
-------------------------
Harry W. Spell

<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].

 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].

 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].

 10.8       Agreement dated February 13, 1998 between Western Bank and Appliance
            Recycling Centers of America, Inc. [filed as Exhibit 10.11 to the
            Company's Form 10-K for the year ended January 3, 1998 (File No
            0-19621) and incorporated herein by reference].

<PAGE>


*10.9       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].

 10.10      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].

 10.11      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].

 10.12      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].

 10.13      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].

 10.14      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].

 10.15      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].

 10.16      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].

 10.17      Agreement dated March 19, 1999 between Southern California Edison
            Company and Appliance Recycling Centers of America, Inc. [filed as
            Exhibit 10.17 to the Company's Form 10-Q for the quarter ended April
            3, 1999 (File No. 0-19621) and incorporated herein by reference].

 10.18      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].

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

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

+ 27.0      Financial Data Schedule.

-----------------
*    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.