Document:

SERVICES AGREEMENT

     This Agreement is effective as of September 16, 2002 by and between Cobalt
Corporation and Blue Cross & Blue Shield United of Wisconsin (collectively known
as the "Company") and James Hartert, M.D. ("Dr. Hartert").

                                    RECITALS

     1.   Dr. Hartert is the Company's Vice President and Chief Medical Officer.

     2.   Dr. Hartert is a knowledgeable and experienced executive familiar with
the Company and its operations.

     3.   Dr. Hartert's position as Vice President and Chief Medical Officer has
been eliminated but the Company desires to retain the availability of Dr.
Hartert's services on the terms and conditions set forth in this Agreement.

     NOW, THEREFORE, in consideration of the premises and the mutual agreements
and covenants contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged by the Company and
Dr. Hartert,

     IT IS HEREBY AGREED AS FOLLOWS:

                                    ARTICLE I
                              CONTINUED EMPLOYMENT

     1.1  Effective September 16, 2002, Dr. Hartert's position as Vice President
and Chief Medical Officer of the Company is eliminated and he is no longer an
officer of the Company.

     1.2  For the period of September 16, 2002 through March 31, 2003, Dr.
Hartert shall continue to serve as an employee of the Company providing such
services as the Company may require consistent with Dr. Hartert's skills and
experience. It is expressly provided, however, that Dr. Hartert shall not be
required to maintain regular hours of employment nor to devote his full-time
efforts to his employment with the Company. At such times as Dr. Hartert's
physical presence at the Company's office is necessary for the performance of
certain services, the Company and Dr. Hartert will mutually agree on a date and
time. The Company acknowledges that, subject to Section 4.2, below, Dr. Hartert
may gain other employment prior to March 31, 2003, and that that will not change
his status as an employee hereunder, nor reduce the compensation and benefits
provided for herein. It is further understood that Dr. Hartert will not be
provided office or administrative support by the Company and that Dr. Hartert's
employment will terminate on March 31, 2003.

     1.3  Dr. Hartert shall report to Stephen E. Bablitch while he is employed
by the Company.
<PAGE>

                                   ARTICLE II
                 COMPENSATION, BENEFITS AND OTHER CONSIDERATION

     2.1  Compensation and Benefits. Dr. Hartert shall receive the following
compensation and benefits from the Company through March 31, 2003:

          (a)  Salary at Dr. Hartert's current monthly rate of $24,099 payable
     according to the Company's normal management payroll procedures;

          (b)  Benefits under the 401(k) Plan, Pension Plan and Supplemental
     Executive Retirement Plan ("SERP") accrued according to the respective plan
     documents;

          (c)  Continued participation in all Company welfare benefit plans
     excluding the executive reimbursement of health expenses. Group health
     insurance coverage will cease during this period if Dr. Hartert becomes
     eligible for other group health insurance coverage. After March 31, 2003,
     Dr. Hartert will be able to continue his group insurance coverage through
     the Company by paying the full COBRA continuation cost. Dr. Hartert may
     also elect to continue the executive reimbursement of health expenses
     benefit by paying the full COBRA continuation cost for that benefit after
     September 15, 2002;

          (d)  Benefits according to the terms of the following named
     compensation plans prorated through September 2002 and paid at the time
     normally applicable to participants in these plans:

               (i)  2002 Profit Sharing Plan (for purposes of this plan, Dr.
                    Hartert will be treated as a Cobalt Corporate Employee);

               (ii) 2002 Management Incentive Plan (individual performance goals
                    to be rated at target level, which is 12% of eligible
                    earnings).

Notwithstanding anything to the contrary contained in the referenced plans, the
payments enumerated in this Section 2.1(d) will be made even if paid after March
31, 2003, and even if Dr. Hartert is no longer employed by the Company on the
date of payment.

          (e)  Three (3) weeks of accrued and unused vacation pay and five (5)
     unused personal days as of March 31, 2003, to be paid on or before April
     15, 2003; and

          (f)  Continued participation in the Company's Equity Incentive Plan
     through March 31, 2003. Continued vesting of options issued to Dr. Hartert
     under the Company's Equity Incentive Plan, through March 31, 2003,
     consistent with his employee status through that date, with the continued
     exercise of vested options after that date being governed by the terms of
     the Plan and the grants thereunder.

     2.2  Conference Attendance. The Company shall pay reasonable expenses,
including transportation costs, registration fees, hotel and meals, associated
with Dr. Hartert's attendance at two professional meetings. Those meetings are:
The American Association of Health Plans held

                                       2
<PAGE>

in Chicago, Illinois on October 10 and 11, 2002 and The National Forum of
Quality Improvement in Health Care to be held December 10 and 11, 2002 in
Orlando, Florida.

     2.3  Business Expenses. The Company shall reimburse Dr. Hartert for all
reasonable expenses incurred in the course of the performance of his duties and
responsibilities pursuant to this Agreement and consistent with the Company's
policies with respect to travel, entertainment and miscellaneous expenses, and
the Company's requirements with respect to the reporting of such expenses.

                                   ARTICLE III
                          EXECUTIVE SEVERANCE AGREEMENT

     3.1  Coordination with Executive Severance Agreement. Dr. Hartert's
termination shall be deemed a termination "by the Company for reasons other than
Cause" as that phrase is used in Section 4.2(a) of the Executive Severance
Agreement dated June 19, 2001, between Cobalt Corporation and Dr. Hartert. Dr.
Hartert's termination is thus a Qualifying Termination under the Executive
Severance Agreement which will entitle Dr. Hartert to the benefits described in
the Severance Agreement in the event a "Change in Control," as that term is used
in the Executive Severance Agreement, occurs in the-six month period immediately
following Dr. Hartert's March 31, 2003 termination of employment. If Dr. Hartert
is entitled to benefits under the Executive Severance Agreement as a result of
such a "Change in Control," any such benefits will offset any corresponding
benefits that he is still entitled to under this Agreement.

                                   ARTICLE IV
                    CONFIDENTIAL INFORMATION; NONCOMPETITION

     4.1  Confidential Information. Dr. Hartert acknowledges that he already has
and may acquire information of a confidential nature relating to the operation,
finances, business relationships and trade secrets of the Company. During Dr.
Hartert's employment by the Company and for a period of two years following
termination thereof (that is, through March 31, 2005), within the geographical
area in which such use, publication or disclosure would reasonably be expected
to harm the Company's existing or potential business interests, Dr. Hartert will
not use (except for use in the course of Dr. Hartert's authorized duties on
behalf of the Company), publish, disclose or authorize anyone else to use,
publish or disclose, without the prior written consent of the Company, any
confidential information pertaining to the Company or its affiliated entities,
including, without limitation, any information relating to existing or potential
business, customers, trade or industrial practices, fees, costs, processes or
technical data; provided, however, that following termination of Dr. Hartert's
employment, Dr. Hartert shall be prohibited from using, publishing, disclosing
or authorizing anyone else to use, publish or disclose, any confidential
information which constitutes a trade secret under applicable law. The foregoing
notwithstanding, Dr. Hartert has no obligation to refrain from using, publishing
or disclosing any such confidential information which is or hereafter shall
become available to the public otherwise than by use, publication or disclosure
by Dr. Hartert. This prohibition also does not prohibit Dr. Hartert's use of
general skills and know-how acquired during and prior to employment, as long as
such use does not involve the use, publication or disclosure of the Company's
confidential information.

                                       3
<PAGE>

     4.2  Noncompetition. During Dr. Hartert's employment with the Company, and
until September 15, 2003, Dr. Hartert shall not, without the prior written
consent of the Company, accept employment by, or directly or indirectly render
consulting services to, a "Competitor of the Company." For purposes of this
Section 4.2, "Competitor of the Company" shall mean: the Wisconsin Operations
and/or Wisconsin Subsidiaries of Humana, WPS, Blue Cross of Minnesota (Atrium),
Medica, United Healthcare and Healthpartners; American Medical Security;
Touchpoint HMO; Network HMO; Dean HMO; and Physicians Plus HMO. For purposes of
this Section 4.2, accepting employment by or rendering services to Wisconsin
Operations and/or Wisconsin Subsidiaries of the named entities means a position,
in which any of Dr. Hartert's primary responsibilities are with, or supervising,
the named companies' operations in Wisconsin or in which he assists anyone else
at such Competitor of the Company to compete with the Company in Wisconsin. It
would not include jobs with the company-wide responsibilities that included
oversight of the same type of operation in multiple states, other than in
Wisconsin. For example, Dr. Hartert could serve as the chief medical officer,
COO or CEO of a company where the majority of its business was in Minnesota, as
opposed to Wisconsin, as long as he does not assist such company to compete with
the Company in Wisconsin as described in this section through September 15,
2003.

     4.3  Non-Solicitation. For a period of one year following March 31, 2003,
Dr. Hartert will not solicit, or assist any person or entity to solicit, any
employee, agent, supplier or other person having business relations with the
Company to terminate such employee's employment or terminate or curtail such
supplier's or other person's business relationship with the Company.

     4.4  Return of Documents and Property.

          (a)  Dr. Hartert represents that he has, to the best of his knowledge
     and belief, returned all of the Company's papers, documents and things,
     including information stored for use in or with computers and software
     applicable to the Company business (and all copies thereof), which were in
     Dr. Hartert's possession or under Dr. Hartert's control, regardless whether
     such papers, documents or things contain confidential information or trade
     secrets, except such papers, documents, and things as the Company may deem
     necessary for Dr. Hartert to fulfill his employment under this Agreement.
     To the extent Dr. Hartert receives any papers, documents or things
     belonging to the Company, in the course of rendering services to the
     Company, in the period starting with the date of this Agreement and ending
     on his last day of employment, he will return them to the Company.

          (b)  Dr. Hartert has returned to the Company his Company-leased car
     and gasoline credit card.

     4.5  No Conflicts. Dr. Hartert represents and warrants that he has not
previously assumed any obligations inconsistent with those of this Agreement and
that employment by the Company does not conflict with any prior obligations to
third parties.

     4.6  Agreement and Fairness. Dr. Hartert acknowledges that (i) this
Agreement has been specifically bargained between the parties and reviewed by
him, (ii) Dr. Hartert has been

                                       4
<PAGE>

advised to consult with legal counsel regarding this Agreement, and (iii) the
covenants made by and duties imposed on Dr. Hartert hereby are fair, reasonable
and necessary to protect the legitimate business interests of the Company, and
such covenants and duties will not place an undue burden upon Dr. Hartert's
livelihood by the strict enforcement of the covenants contained herein.

     4.7  Equitable Relief. Dr. Hartert acknowledges that any material breach of
this Agreement may cause substantial and irreparable harm to the Company for
which money damages would be an inadequate remedy. Accordingly, the Company
shall in any such event be entitled to obtain injunctive and other forms of
equitable relief to prevent such breach and to recover from Dr. Hartert the
monetary value of the consideration that he has received from the Company under
this Agreement.

                                    ARTICLE V
                                    RELEASES

     5.1  Company Release. Dr. Hartert on behalf of himself, his heirs, and his
assignees, releases the Company and each of its employee benefit plans from any
and all claims or causes of action, whether known or unknown, asserted or
unasserted, he may have against the Company, including claims under local, state
and federal employment discrimination laws, the Americans with Disabilities Act,
the Age Discrimination in Employment Act, the Employee Retirement Income
Security Act, or claims under any benefit plan or executive compensation
arrangement, or claims under state law, including actions for defamation, breach
of contract or wrongful termination, and from any other liability, obligation or
responsibility of whatever kind. This Section 5.1, however, does not apply or
adversely affect any claims by Dr. Hartert which involve the following: (i) his
rights to receive vested benefits to which he is entitled as of the date of this
Agreement or the date his employment with the Company terminates under any
qualified or nonqualified employee benefit plans and arrangements of the
Company, including the Company's Equity Incentive Plan; (ii) any benefits under
the Wisconsin Worker's Compensation Act; (iii) claims for indemnification as
provided under applicable law, directors and officers insurance, an agreement
with the Company, or the Articles of Incorporation or By-Laws of the Company; or
(iv) obligations owed by the Company to him under this Agreement.

     5.2  Dr. Hartert Release. The Company hereby releases Dr. Hartert, his
heirs and his assignees from any and all claims or causes of action, whether
known or unknown, asserted and unasserted, it may have against Dr. Hartert,
including claims under any benefit plan or executive compensation arrangement,
or claims under state law, and from any other liability, obligation or
responsibility of whatever kind except for a claim to enforce this Agreement.

     5.3  Older Worker Benefit Protection Act. Dr. Hartert agrees and
acknowledges as follows:

          (a)  He has read the terms of this Agreement, understands its
     contents, and agrees to the terms and conditions set forth herein of his
     own free will.

                                       5
<PAGE>

          (b)  He has been advised to consult with and be represented by legal
     counsel prior to executing this Agreement.

          (c)  He has made an independent investigation of all material facts
     and does not rely on any statement or representation of the Company in
     entering into this Agreement.

          (d)  He understands that this Agreement includes a general release and
     that he can make no claims against the Company except as provided in the
     general release.

          (e)  He acknowledges that he has been offered a period of twenty-one
     (21) days to consider whether to enter into this Agreement.

          (f)  He acknowledges and understands that he may rescind the waiver of
     claims and release contained herein within seven (7) calendar days of the
     date on which he executes this document. Should he wish to exercise his
     right to rescind this waiver and release, the rescission must be in writing
     and must be delivered by hand or mail within seven (7) calendar days of the
     date set forth herein. If he wishes to deliver his rescission by mail, the
     rescission must be postmarked within the seven (7) calendar days set forth
     above; must be sent by certified mail, return receipt requested; and must
     be properly addressed as follows:

               Kathryn Koenen Potos
               Vice President, Human Resources
               Cobalt Corporation
               401 W. Michigan Street
               Milwaukee, WI  53203

                                   ARTICLE VI
                               GENERAL PROVISIONS

     6.1  Notices. Any and all notices provided for in this Agreement shall be
given in writing and shall be deemed given to a party at the earlier of (i) when
actually delivered to such party, (ii) if by fax, the confirmation of receipt,
(iii) if by overnight courier, the business day following mailing, or (iv) when
mailed to such party by registered or certified mail (return receipt requested)
or sent to such party by courier, confirmed by receipt, and addressed to such
party at the address designated below for such party as follows (or to such
other address for such party as such party may have substituted by notice
pursuant to this Section 6.1):

          (a)  If to the Company:
               Cobalt Corporation
               401 W. Michigan Street
               Milwaukee, WI  53203
               Attn:  President

                                       6
<PAGE>

          (b)  Copy to:
               Kathryn Koenen Potos
               Vice President, Human Resources
               Cobalt Corporation
               401 W. Michigan Street
               Milwaukee, WI  53203

          (c)  If to Dr. Hartert:
               Dr. James Hartert
               15405 Turnberry Drive
               Brookfield, WI  53005

          (d)  Copy to:
               Debra Sadow Koenig
               Godfrey & Kahn, S.C.
               780 North Water Street
               Milwaukee, WI  53202

     6.2  Non-Disparagement. Neither Dr. Hartert nor the Company and/or its
corporate officers shall make or publish any disparaging or derogatory
statements about the other or the corporate officers of the Company to Company
employees, customers, vendors, media, the investment community or to any other
person.

     6.3  Confidentiality of Agreement. The Company and Dr. Hartert agree not to
disclose the contents of this Agreement to any other person (including to
nonexecutive personnel of the Company) except to (a) Dr. Hartert's immediate
family, (b) Dr. Hartert's legal or tax advisors, or (c) where disclosure is
required by law or by valid legal process.

     6.4  Fees and Costs. Within thirty (30) days of presentation of an itemized
invoice by Godfrey & Kahn, S.C. to the Company (in care of Kathryn Potos) in
connection with representing Dr. Hartert as regards this Agreement, the Company
will pay Godfrey & Kahn, S.C. up to $5,000 for his reasonable legal fees and
costs that are supported by such an itemized invoice. In addition, if there is a
dispute as regards this Agreement, the prevailing party will be entitled to
receive from the other party reimbursement of its costs (including, without
limitation, reasonable attorneys' fees) incurred in connection with such
dispute.

     6.5  Reference. If a potential employer or partner of Dr. Hartert should
contact any of the corporate officers of the Company for a reference, any such
calls will be directed to Stephen E. Bablitch. The Company, Mr. Bablitch and Dr.
Hartert have agreed that the points contained on the attached Appendix A shall
be the basis for any such reference.

     6.6  Entire Agreement. This Agreement contains the entire understanding and
the full and complete agreement of the parties and supersedes and replaces any
prior understandings and agreements between the parties with respect to the
subject matter hereof.

                                       7
<PAGE>

     6.7  Amendment. This Agreement may be altered, amended or modified only in
writing, signed by both of the parties hereto. Headings included in this
Agreement are for convenience only and are not intended to limit or expand the
rights of the parties hereto. References to Sections herein shall mean sections
of the text of this Agreement, unless otherwise indicated.

     6.8  Assignability. This Agreement shall be binding on and inure to the
benefit of each party and such party's respective heirs, legal representatives,
successors and assigns.

     6.9  Severability. If any court of competent jurisdiction determines that
any provision of this Agreement is invalid or unenforceable, then such
invalidity or unenforceability shall have no effect on the other provisions
hereof, which shall remain valid, binding and enforceable and in full force and
effect, and such invalid or unenforceable provision shall be construed in a
manner so as to give the maximum valid and enforceable effect to the intent of
the parties expressed therein.

     6.10 Waiver of Breach. The waiver by either party of the breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by either party.

     6.11 Governing Law; Construction. This Agreement shall be governed by the
internal laws of the State of Wisconsin, without regard to any rules or
construction concerning the draftsman hereof, and without regard to its
conflicts of law provisions.

     IN WITNESS WHEREOF, the parties have executed this Agreement on the dates
shown below.

COBALT CORPORATION

By: /s/ Stephen E. Bablitch                                     11/13/02
   ----------------------------------------            -------------------------
                                                                  Date

JAMES HARTERT, M.D.

By: /s/ James Hartert, MD.                                      11/8/02
   ----------------------------------------            -------------------------
                                                                  Date

                                       8

<PAGE>

APPENDIX A
----------

Talking points for requests for references for James E. Hartert, MD

Jim has been an admirable member of the executive team of our organization since
joining us in 1996. He has a solid track record of advancement in title and
scope of responsibility with Cobalt. Of particular note Jim was a serious
candidate to succeed Tom Hefty as Cobalt CEO.

To his credit Jim, worked himself out of a job. The Cobalt Board of Directors
chose me to succeed Tom as CEO. As Jim executed his own succession plan, he
successfully sold his business unit, Innovative Resource Group and developed a
competent Medical Management infrastructure. As I faced a need for
reorganization and cost reduction, Jim's position as Chief Medical Officer was
expendable.

Among his many accomplishments during his tenure with Cobalt were:

     Consolidated and integrated 10 Cobalt subsidiaries or lines of business
     -----------------------------------------------------------------------
     into Innovative Resource Group, LLC
     -----------------------------------

          Jim led IRG until it's strategic sale in March 2002 to APS Healthcare.
          Jim identified APS as a suitor, coordinated the due diligence,
          negotiated and closed the sale. This sale generated a significant
          profit over book value.

     Restructured Medical Management processes to exceed industry benchmarks
     -----------------------------------------------------------------------

          He moved Medical Management of Cobalt HMO's from non-compliance with
          NCQA requirements to 3-Year NCQA accreditation for Cobalt's largest
          HMO's.

     Held pharmacy cost trends well below industry and competitor averages for
     -------------------------------------------------------------------------
     past 3 years
     ------------

          He developed and executed a multi-faceted pharmacy strategy that
          included PBM contracting, network recontracting, 3-tiered open
          formulary design, expanded clinical programs and aggressive
          introduction of STEP therapy claim processing.

     Enhanced the reputation of Cobalt through community visibility
     --------------------------------------------------------------

          He regularly represented Cobalt to the community via print and
          television media; presentations to community groups; testimony to
          governmental entities and participation at BCBSA and on national
          committees.

     Supported the reorganization of Cobalt
     --------------------------------------

          He professionally, quietly and successfully executed his own
          succession plan while objectively advising me on the reorganization of
          Cobalt that is currently under way.

                                       9Exhibit 10.32

                             AGREEMENT NO. 47189-3

                                    BETWEEN

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

                                      AND

                              APPLIANCE RECYCLING
                      CENTERS OF AMERICA - CALIFORNIA INC.

                               SEPTEMBER 24, 2002

<PAGE>

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

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

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

<PAGE>

                          APPLIANCE RECYCLING AGREEMENT

1.0      AGREEMENT

1.1      PARTIES

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

2.0      RECITALS

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

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

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

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

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

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

                                       2

<PAGE>

3.0      DEFINITIONS

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

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

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

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

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

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

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

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

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

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

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

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

                                        3

<PAGE>

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

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

         3.14     PCBs: Polychlorinated Biphenyls.

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

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

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

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

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

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

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

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

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

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

                                       4

<PAGE>

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

4.0      STATEMENT OF WORK

         4.1      Services to be Performed

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

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

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

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

4.1.4    Provide reporting to the Department as specified herein.

         4.2      Program Mechanics

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

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

                                        5

<PAGE>

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

         4.3      Contractor's Responsibilities

                  4.3.1    Warranty

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

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

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

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

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

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

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

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

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

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<PAGE>

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

         4.4      Reporting Requirements

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

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

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

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

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

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

                           d)       An estimated weight of metals and recyclable
                                    materials;

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

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

                  4.4.4    Special and Non-recurring Reports

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

                                        7

<PAGE>

5.0      GENERAL CONDITIONS

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

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

                  5.1.2    Prohibition Against Assignment or Delegation

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

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

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

                  5.1.3    Non-Waiver of Agreement

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

                  5.1.4    Time of Effectiveness

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

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

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

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

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<PAGE>

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

                  5.1.5    Independent Contractor

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

                  5.1.6    Applicable Law, Interpretation, Enforcement and
                           Severability.

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

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

         5.2      Personnel

                  5.2.1    Staff Size

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

                  5.2.2    Identification of Key Personnel

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

                  5.2.3    Approval of Key Personnel

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

                  5.2.4    Changes in Key Personnel

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<PAGE>

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

         5.3      Subcontractors

                  5.3.1    Subcontracts/Joint Participation Agreement

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

                  5.3.2    Copies of Subcontractor Agreement

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

                  5.3.3    Provisions Binding on Subcontractors

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

         5.4      Contractor's Quality Assurance Program

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

                                       10

<PAGE>

         5.5      Representatives and Notices

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

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

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

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

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

                  5.5.1    Change of Address or Representatives

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

                  5.5.2    Excusable Delays

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

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<PAGE>

                  5.5.3    Breach

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

         5.6      Permits, Codes, And Statutes

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

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

5.7      Suspension and Termination

                  5.7.1    Suspension of Work

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

                                       12

<PAGE>

                  5.7.2    Termination of Agreement

                           5.7.2.1  Cancellation Without Cause

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

                           5.7.2.2  Termination Due to Expenditure Limit

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

                           5.7.2.3  Expiration of Agreement

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

                           5.7.2.4  Termination of the Services of any Person.

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

         5.8      Patents, Copyrights and Trademarks

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

                                       13

<PAGE>

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

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

         5.9      Express Warranty Provision

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

6.0      COMPENSATION

         6.1      Specific Rates of Compensation

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

         6.2      Payment - Additional Services

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

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<PAGE>

         6.3      Expenditure Limits

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

7.0      BUSINESS POLICIES

         7.1      LADWP Recycling Policy

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

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

         7.2      Affirmative Action

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

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

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

                                       15

<PAGE>

                  7.3.1    MBE/WBE Defined

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

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

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

                  7.3.2    Efforts to Obtain Participation

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

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

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

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

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

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

                                       16

<PAGE>

                                    whether the enterprises are interested in
                                    participating in the work.

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

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

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

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

         7.3.3    Program Documentation

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

                  a)       the name of each participating subcontractor;

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

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

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

                  e)       the cumulative compensation earned by each
                           subcontractor; and

                  f)       the cumulative compensation paid to each
                           subcontractor.

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<PAGE>

         7.4      Service Contract Worker Retention and Living Wage Policy

                  7.4.1    General Provisions

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

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

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

                  7.4.2    Termination Provisions

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

                  7.4.3    Invoice Provisions

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

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

         7.5      Child Support Policy

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

                                       18

<PAGE>

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

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

8.0      INSURANCE REQUIREMENTS

         8.l      General Insurance Coverage

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

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

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

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

                                       19

<PAGE>

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

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

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

         8.2      Specific Coverage

                  8.2.1    Workers' Compensation Insurance

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

                  8.2.2    Commercial General Liability Insurance

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

                                       20

<PAGE>

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

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

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

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

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

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

         8.3      Excess Liability

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

                                       21

<PAGE>

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

         8.4      Pollution Legal Liability

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

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

         8.5      Professional Liability Insurance

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

         8.6      Indemnification Clause

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

                                       22

<PAGE>

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

9.0      INVOICES

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

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

         9.1      Invoice Detail

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

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

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

         9.2      Current Los Angeles City Business Tax Registration Certificate
                  Required

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

         9.3      Taxpayer Identification Number (TIN)

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

                                       23

<PAGE>

10.0     CONFLICTS

         10.1     Errors and Omissions

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

         10.2     Priority of Documents

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

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

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

                      c.    Agreement.

                      d.    Task Assignments.

                      e.    Other Referenced Documents.

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

11.0     MONITORING OF WORK

         11.1     Records and Audits

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

                                       24

<PAGE>

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

         11.2     Right to Review Services, Facilities, and Records

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

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

         11.3     Department's Quality Assurance Program

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

12.0     TITLE TO WORK

         12.1     Confidentiality of Department Information

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

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

<PAGE>

                  12.1.1   Department Property

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

         12.2     Right to Documentation Developed by Contractor

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

                  12.2.1   Nondisclosure

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

         12.3     Confidentiality of Contractor Information

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

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

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

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

                                       26

<PAGE>

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

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

         12.4     Title of Collected Refrigerators and Freezers

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

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

13.0     SECTION HEADINGS

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

                                       27

<PAGE>

14.0     SIGNATURE OF AUTHORIZING AGREEMENT

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

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

                  APPLIANCE RECYCLING CENTERS OF AMERICA- CALIFORNIA, INC.

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

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

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

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

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

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

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

                                       28

<PAGE>

                              AGREEMENT NO. 47190-3

                                     BETWEEN

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

                                       AND

                               APPLIANCE RECYCLING
                      CENTERS OF AMERICA - CALIFORNIA INC.

                               SEPTEMBER 24, 2002

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>

                      APPLIANCE DELIVERY SERVICES AGREEMENT

1.0      AGREEMENT

         1.1      PARTIES

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

2.0      RECITALS

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

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

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

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

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

3.0      DEFINITIONS

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

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

                                        2

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                        3

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                        4

<PAGE>

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

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

4.0      STATEMENT OF WORK

         4.1      Services to be Performed

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

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

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

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

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

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

                                        5

<PAGE>

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

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

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

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

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

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

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

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

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

                                        6

<PAGE>

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

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

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

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

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

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

         4.2      Program Mechanics - LIREP Program

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

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

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

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

                                        7

<PAGE>

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

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

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

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

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

                  4.2.8    Reviewing and approving invoices and reports; and

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

         4.3      Program Mechanics - RETIRE Program

                  Contractor shall provide services under the RETIRE Program as
                  follows:

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

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

                                        8

<PAGE>

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

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

         4.4      Contractor's Responsibilities

                  4.4.1    Warranty

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

                  4.4.2    Contractor shall be responsible for:

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

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

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

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

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

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<PAGE>

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

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

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

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

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

                           a)       Warehousing and inventory of New
                                    Refrigerators;

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

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

                           d)       Recycling of Refrigerator corrugated
                                    cardboard packaging.

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

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

                           b)       Provisions to collect and report data such
                                    as:

                                    i)       Date of each contact with customer;

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

                                    iii)     Department customer account number;

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<PAGE>

                                    iv)      New Refrigerator, model serial
                                             number and size;

                                    v)       Any incentives given to customer;

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

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

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

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

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

                                    xi)      Special instructions (if
                                             applicable); and

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

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

         4.5      Reporting Requirements

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

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

                                       11

<PAGE>

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

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

                  4.5.3    Special and Non-recurring Reports

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

         4.6      New Refrigerator Inspection, Handling and Accounting

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

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

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

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

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<PAGE>

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

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

5.0      CUSTOMER AND REFRIGERATOR/FREEZER QUALIFICATION

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

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

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

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

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

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

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

                           a) boxing/bagging food items;

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<PAGE>

                           b)       clearing a path for safe removal;

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

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

6.0      GENERAL CONDITIONS

         6.1      Integrated Agreement

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

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

                  6.1.2    Prohibition Against Assignment or Delegation

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

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

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

                  6.1.3    Non-Waiver of Agreement

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

                  6.1.4    Time of Effectiveness

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

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

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<PAGE>

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

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

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

                  6.1.5    Independent Contractor

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

                  6.1.6    Applicable Law, Interpretation, Enforcement and
                           Severability.

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

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

         6.2      Personnel

                  6.2.1    Staff Size

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

                  6.2.2    Identification of Key Personnel

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

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<PAGE>

                  6.2.3    Approval of Key Personnel

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

                  6.2.4    Changes in Key Personnel

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

         6.3      Subcontractors

                  6.3.1    Subcontracts/Joint Participation Agreement

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

                  6.3.2    Copies of Subcontractor Agreement

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

                  6.3.3    Provisions Binding on Subcontractors

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

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<PAGE>

         6.4      Contractor's Quality Assurance Program

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

         6.5      Representatives and Notices

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

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

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

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

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

                  6.5.1    Change of Address or Representatives

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

                  6.5.2    Excusable Delays

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

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<PAGE>

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

                  6.5.3    Breach

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

         6.6      Permits, Codes, And Statutes

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

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

         6.7      Suspension and Termination

                  6.7.1    Suspension of Work

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

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<PAGE>

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

                  6.7.2    Termination of Agreement

                           6.7.2.1  Cancellation Without Cause

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

                           6.7.2.2  Termination Due to Expenditure Limit

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

                           6.7.2.3  Expiration of Agreement

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

                           6.7.2.4  Termination of the Services of any Person.

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

         6.8      Patents, Copyrights and Trademarks

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

                                       19

<PAGE>

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

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

         6.9      Express Warranty Provision

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

7.0      COMPENSATION

         7.1      Specific Rates of Compensation

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

                                       20

<PAGE>

         7.2      Payment - Additional Services

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

         7.3      Expenditure Limits

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

8.0      BUSINESS POLICIES

         8.1      LADWP Recycling Policy

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

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

         8.2      Affirmative Action

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

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

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

                                       21

<PAGE>

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

                  8.3.1    MBE/WBE Defined

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

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

                  8.3.2    Efforts to Obtain Participation

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

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

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

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

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

                                       22

<PAGE>

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

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

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

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

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

                  8.3.3    Program Documentation

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

                           a)       the name of each participating
                                    subcontractor;

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

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

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

                           e)       the cumulative compensation earned by each
                                    subcontractor; and

                           f)       the cumulative compensation paid to each
                                    subcontractor.

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<PAGE>

         8.4      Service Contract Worker Retention and Living Wage Policy

                  8.4.1    General Provisions

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

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

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

                  8.4.2    Termination Provisions

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

                  8.4.3    Invoice Provisions

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

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

         8.5      Child Support Policy

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

                                       24

<PAGE>

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

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

9.0      INSURANCE REQUIREMENTS

         9.1      General Insurance Coverage

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

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

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

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

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<PAGE>

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

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

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

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

         9.2      Specific Coverage

                  9.2.1    Workers' Compensation Insurance

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

                  9.2.2    Commercial General Liability Insurance

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

                                       26

<PAGE>

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

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

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

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

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

                  9.2.3    Commercial Automobile Liability Insurance

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

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

         9.3      Excess Liability

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

                                       27

<PAGE>

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

         9.4      Fidelity Bond

                  The contractor shall maintain a fidelity bond covering
                  Employee dishonesty in an amount arranged by the Contractor,
                  but not less than $1,000,000 aggregate, and shall apply to any
                  and all work performed on behalf of the Department. Said bond
                  shall name the City of Los Angeles, the Board of Water and
                  Power Commissioners of the City of Los Angeles, the
                  Department, and their officers, agents and employees, as
                  additional insureds with the Contractor individually and
                  jointly, and shall insure against liability resulting from the
                  Contractor's employees' dishonesty in the performance of this
                  contract. Said bond shall contain a provision that the bond
                  cannot be cancelled, terminated or altered without first
                  giving 30 calendar days' written notice of such cancellation,
                  termination or alteration as previously described under
                  General Insurance Coverage. Evidence of such bond shall be
                  provided to the Department in a form acceptable to the office
                  of the City Attorney.

         9.5      Professional Liability Insurance

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

         9.6      Indemnification Clause

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

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<PAGE>

10.0     INVOICES

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

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

         10.1     Invoice Detail

                  The invoice shall be submitted by the Contractor in the form
                  of one original and three copies. The detailed invoice shall
                  include the following information:

                  (a)      Itemized charges, for Contractor services that have
                           been pre-approved by the Department and completed
                           during the invoice period; and

                  (b)      Itemized charges for task assignments and services as
                           requested by the Department and completed during the
                           invoice period. Charges shall be in accordance with
                           the respective task assignment and price schedule.

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

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

         10.2     Current Los Angeles City Business Tax Registration Certificate
                  Required

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

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<PAGE>

         10.3     Taxpayer Identification Number (TIN)

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

11.0     CONFLICTS

         11.1     Errors and Omissions

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

         11.2     Priority of Documents

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

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

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

                  c.       Agreement.

                  d.       Task Assignments.

                  e.       Other Referenced Documents.

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

12.0     MONITORING OF WORK

         12.1     Records and Audits

                  The Contractor shall maintain records and books of accounts
                  showing all costs and expenses incurred by the Contractor for
                  this Agreement. The Department

                                       30

<PAGE>

                  shall have the right, upon reasonable notice, to audit the
                  books, records, documents, and other evidence and the
                  accounting procedures and practices, where needed, to verify
                  the costs and expenses claimed. The Department retains this
                  right for at least three years after final payment and until
                  all disputes, appeals, litigation, or claims have been
                  resolved. This right to audit shall also include inspection at
                  reasonable times of the Contractor's office or facilities
                  which are engaged in the performance of the Agreement. In
                  addition, the Contractor shall, at no expense to the
                  Department, furnish reasonable facilities and assistance for
                  such an audit. Upon request, Contractor shall also provide
                  copies of documents applicable to this Agreement. The audit
                  findings shall, to the extent allowed by law, be treated by
                  the Department as confidential.

         12.2     Right to Review Services, Facilities, and Records

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

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

         12.3     Department's Quality Assurance Program

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

13.0     TITLE TO WORK

         13.1     Confidentiality of Department Information

                  All data and information, including that supplied by the
                  Department to the Contractor, that obtained by the Contractor
                  from the Department's customers, and that developed by the
                  Contractor in the course of providing Program management and
                  administration services to the Department shall be held in
                  strict confidence and shall be used solely for the performance
                  of the Work pursuant to this Agreement.

                  Contractor, its employees, and any subcontractors shall not
                  disclose any Program or customer information to any person
                  other than the

                                       31

<PAGE>

                  Department's personnel, or the Department's designated agent,
                  either during the term of this Agreement or after its
                  completion, without Contractor having obtained the prior
                  written consent of the Department, except as provided by
                  lawful court order or subpoena and provided contractor gives
                  the Department advance written notice of such order or
                  subpoena.

                  13.1.2   Department Property

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

         13.2     Right to Documentation Developed by Contractor

                  Documentation, including all reports, drawings, documents,
                  field notes, specifications, and data developed by the
                  contractor and its subcontractors, shall be the property of
                  the Department, and may be used; revised, and distributed by
                  the Department in any manner.

                  13.2.1   Nondisclosure

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

                  13.2.2   Attorney Fees and Costs

                           The Parties agree that in any action to enforce the
                           terms of this Agreement that each Party shall be
                           responsible for its own attorney fees and costs.

         13.3     Confidentiality of Contractor Information

                  The Department, its employees and any agents or subcontractors
                  of the Department shall not disclose any confidential or
                  proprietary information of Contractor ("Contractor's
                  Confidential Information") to any person other than
                  Contractor's personnel, either during the term of the
                  Agreement, or after its completion, without having obtained
                  their prior written consent of Contractor

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

                                       32

<PAGE>

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

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

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

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

         13.4     Title of Collected Refrigerators and Freezers

                  13.4.1   Title to the Hazardous Material shall pass to
                           Contractor when Contractor collects Primary or Second
                           Refrigerator and Freezers from customers and said
                           Title shall be held by the Contractor until the
                           Primary or Second Refrigerators and Freezers are
                           transported to the Department's Recycling Center.
                           Subsequently the Title to the Hazardous Material
                           shall pass to the Recycling Contractor.

                  13.4.2   Title to collected Primary or Second Refrigerators
                           and Freezers shall pass to Contractor until the
                           Primary or Second Refrigerators and Freezers are
                           transported to the Department's Recycling Center.
                           Subsequently, the Title to the collected Primary or
                           Second Refrigerators and Freezers shall pass to the
                           Recycling Contractor.

14.0     SECTION HEADING

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

                                       33

<PAGE>

15       SIGNATURE OF AUTHORIZING AGREEMENT

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

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

                  APPLIANCE RECYCLING CENTERS OF AMERICA- CALIFORNIA, INC.

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

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

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

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

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

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

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

                                       34

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