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JUST WEEKS BEFORE THE birth of David Bieler's daughter, his digital camera went kaput. No worries, thought the 36-year-old from Poughkeepsie, N.Y. That's what the $100 extended warranty he'd purchased was for. He quickly shipped off the camera along with an urgent-sounding note that he'd need the camera back right away.

Little Jocelyn was nearly three months old by the time the camera was returned to him. He had long since purchased a new one.

Extended warranties on appliances and electronic devices are a huge business. They're offered by retailers and third-party providers on everything from washing machines to Apple (AAPL: 62.65, -0.07, -0.1%) iPods. But what sounds like a great idea when you're in the store, experts and burned consumers warn, might not be worth the added cost. Consumer Reports has concluded that extended warranties are often a waste of money simply because many products tend not to break down during the first few years of service. And even when something does go wrong, you might have a tough time getting it fixed thanks to the small print on your contract or, in Bieler's case, the hassle factor.

Since extended warranties are claimed so rarely, the profit margins on them run as high as 40% to 80%, says Marlys Harris, finance editor for Consumer Reports. That can pad a company's bottom line nicely. During 2004, in fact, nearly 100% of Circuit City Stores' (CC: 23.41, -1.07, -4.4%) and 50% of Best Buy's (BBY: 55.44, -0.49, -0.9%) operating income came from extended warranties, say analysts. Is it any wonder that the big box retailers aggressively push these contracts?

That said, there are certain situations when an extended warranty might make sense - like when you purchase something expensive, such as a $6,000 Viking range, or an electronic device that uses new technology, like a plasma TV. But in most cases, consumers are better off skipping this option.

Still not convinced? Read on.

It's Already Covered

Most appliances and electronic devices come with a one-year warranty from the manufacturer. Some products, including washing machines and dishwashers, guarantee specific parts for even longer, says Chris Hall, president of RepairClinic.com, a web site that sells parts for appliances. Refrigerators, for example, have a unique sealed refrigeration system, which is by far the most expensive component to repair, and is typically under guarantee for five years, says Hall.

Your credit card might also extend your warranty at no added cost. All American Express cards - even the entry-level green card - will double a warranty up to one year. All Visa Signature and MasterCard Gold, Platinum and World cards offer the same service. All you have to do to claim your benefits is keep all of your receipts and call your credit card company.

It's also worth noting that when you buy, say, a three-year extended warranty from a retailer or third party, you purchase double coverage for at least a portion of that contract. The clock starts ticking on a contract when you buy the product - not after the original warranty expires. So if you're paying $100 for a three-year warranty on a digital camera and you bought it with your Amex green card, you're really spending $100 for just one year of coverage. Still think it's worth it?

It Probably Won't Break Anyway

According to a recent survey by Consumer Reports, most products today are very reliable. After three years of use, the likelihood that a major appliance such as a refrigerator (without an ice dispenser) or a digital camera will need a repair is just 8%. The item most likely to break down is a desktop PC, at 37%. See the full list below. (To check the reliability of specific brands, you'll need a subscription to the Consumer Reports web site, which costs $26.)

When it comes to appliances, the majority of repairs are needed within the first year, when the product is still under the original warranty, says RepairClinic.com's Hall. If a product can make it through the first year, chances are it will continue to function well for the next four, he adds. "I personally feel you are buying an extended warranty at the wrong time, when you are least likely to need it," Hall says.

The same goes for electronic devices, says CNET's editor and columnist Thomas Merritt. Most of the products CNET has tested over the years have turned out to be pretty reliable, and come with good standard warranties. Most problems are manufacturing defects that tend to show themselves early on.

A Few Exceptions

When purchasing a very expensive item, an extended warranty might make sense. Alan Wang, a 40-year-old New York resident, decided to buy an extended warranty for his $5,800 Sub-Zero refrigerator, since it's not the type of item he could easily replace. The experts we spoke with agreed that his decision made sense.

Consumer Reports also recommends extended warranties for treadmills and elliptical trainers that come with standard warranties of less than one year on parts and labor. These plans are estimated to cost between $70 and $100 for two to three years of coverage. One service call could cost that much.

Extended warranties could make sense for plasma TVs, which run hot and cold and could wear out. Contracts can range from $300 to $1,000, depending on the set. Just beware that an annoying problem referred to as burn-in of static images isn't typically covered. Laptops are another consideration, since they're expensive, fragile and difficult to repair, says Consumer Reports' Harris.

CNET's Merritt warns that the large high-definition televisions have lamps inside of them that have a tendency to burn out. An extended warranty that covers that part might make sense. Some companies consider the lamp issue part of normal wear and tear and won't cover it, he says.

One Last Warning

In the rare case that your appliance or electronic device does break down, you might have a tough time getting it repaired. That fine print on the extended warranty contract can be harder to interpret than the Constitution. (How does one define normal wear and tear?) And even when the defect is covered, you could find yourself at the bottom of a very long waiting list.

Third-party repair shops often make a lot less money from a warranty company than when dealing directly with a customer, says RepairClinic.com's Hall. So don't be surprised if there's only one outfit in town that will fix your washing machine. As Bieler learned the hard way, your warranty might guarantee you service, but there's no limit on how long it could take.

I can remember the old days, the simple days when buying a consumer electronics product or appliance meant that you'd get to the cash register and their big question was "how do you want to pay for that?" Not any more, though: the big question of the twenty-first century is "did you want to buy an extended service warranty with that?"

You've heard it too. In fact, you can even buy extended service warrantees here on line. Just Google "extended warranty" and be prepared for thousands of questionable sites pushing various bad deals. Because, don't be confused about it, in almost every single case, extended service warranties are a very bad deal for the consumer.

But for the corporation, they're manna from heaven, a windfall of profits that can even be woven into corporate spreadsheets to make the entire business more profitable.

Two of the biggest companies in this space are Best Buy and Circuit City.For the 2003-2004 fiscal year, Best Buy generated staggering profit margins on contracts of 60%, and Circuit City had a profit margin of over 50%.

But the numbers don't stop there. According to an article in BusinessWeek from a few months ago, Best Buy calculated that extended-service contracts account for a whopping 45% of their operating profits (amazing, given that the contracts only represent 4% of their overall sales). That number pales beside Circuit City, where 100% of their operating profits were produced by extended-service contracts.

Without extended service warranties, Circuit City would have reported a loss, rather than a profit, for the fiscal 2003-2004 year. In that period extended-service contracts were worth $326 million in sales.

Here's how these warranties work: Say you splurge and buy a $3000 flat-panel TV. The extended service contract would cost an additional $400, of which Best Buy pays out $160 to the third-party insurer, keeping the additional $240 as pure profit. Nice! Especially when you consider that in the highly competitive, highly commoditized consumer electronic business, their actual profit on the sale of the TV might be as low as $100.

But then again, go into Best Buy and pick up a cheapo Magnavox DVD player for $39.99 and you'll find that the four-year extended service contract will cost you an additional $49.99, more than buying a second unit and storing it in your attic. Or go into CompUSA and buy a $59.99 Netgear router and you'll find that the extended contract costs $17.99. Not too bad, until you read the small print and find out that Netgear's already got you covered for the same three years of the CompUSA extended contract. CompUSA 1, you 0.

Retailers often duplicate contracts that you can buy from manufacturers too. Consider this: Toshiba sells an extended service warranty for a Satellite laptop (a $1000 computer) for $199. A similar, though less comprehensive, warranty from CompUSA costs a cool $369.99. Less coverage, more money, more profit for the retailer.

Across the entire business ecosystem, extended service contracts and warranties now account for $15 billion dollars annually. And they're all set up so that the company selling the contract keeps over half the value of the transaction. That's $7.5 billion in pure profit. A sweet deal for retailers, no question!

But for consumers, isn't it a rip-off? Like all insurance, of course, you're betting against the house, paying in to a system that you hope you'll never have to get paid back from because of an accident, a health problem, etc. There are some products that analysts think might be worth covering, including laptops and exercise equipment, but most products either fail in their first year, victims of faulty parts (and covered under the original warranty) or work fine for years until parts wear out, at which point the extended service contract has also expired.

As I learned with the extended service contract for my Toyota Prius, if you are convinced that you want to buy the warranty, shop around and find the best price: you have an entire year after purchase to extend the warranty and certainly don't need to be pressured into it by a salesperson at the point of purchase.

Extended-service contracts are like so much else in our world, another case of buyer beware.