<PAGE>



                     INDUSTRIAL SERVICES OF AMERICA, INC.



                                UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549
                                  FORM 10-K

      (Mark One)

      [ x ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

            FOR FISCAL YEAR ENDED DECEMBER 31, 1997

      [   ]TRANSITION REPORT UNDER SECTON 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

              For the transition period from _______ to ________
                         Commission File No.: 0-20979

                     INDUSTRIAL SERVICES OF AMERICA, INC.
            (Exact name of registrant as specified in its charter)

                                   Florida 59-0172746
(State or other jurisdiction of           (I.R.S. Employer
incorporation or organization)            Identification No.)

7100 Grade Lane, P.O.Box 32428, Louisville, Kentucky     40232
  (Address of principal executive offices)            (Zip Code)

Registrant's telephone number, including area code: (502) 368-1661

Securities registered pursuant to Section 12(b) of the Act:  None

Title of each class:       Name of each exchange on which registered:

   Not Applicable                   Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, $.01 par value
                               (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

Yes     X       No

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant is $5,999,376 as of March 16, 1998.

The number of shares  outstanding of the  registrant's  class of common stock is
1,929,600 shares as of March 16, 1998.

                      DOCUMENT INCORPORATED BY REFERENCE

Portions  of  the  registrant's  Proxy  Statement  for  the  Annual  Meeting  of
Shareholders to be held on May 21, 1998 are  incorporated by reference into Part
III of this report.



                                    Part I

ITEM 1.    BUSINESS
General

      Industrial  Services of America,  Inc.  (the  "Registrant")  is a ferrous,
non-ferrous and fiber recycling as well as an integrated  solid waste management
company.  The ferrous  division's major products include  recycling of steel and
iron products,  whereas the non-ferrous  division recycles copper,  aluminum and
brass. The fiber recycling  consists mainly of high-grade  papers and corrugated
cardboard.  The management division of the Registrant is engaged in the business
of  commercial,  retail  and  industrial  waste  management  and waste  handling
equipment  sales and service.  The Registrant is able to offer a "total package"
concept to  commercial,  retail and  industrial  clients  to cover  their  waste
management needs. Combining waste reduction, waste materials diversion and waste
equipment  technology,  the Registrant  creates waste programs  tailored to each
client's  individual  needs.  The  Registrant  believes  that it  offers  a more
complete line of products and services than its  competitors  and is better able
to coordinate  these  services on a regional and nationwide  basis.  By offering
competitively  priced  waste  handling  equipment  from a  number  of  different
manufacturers,   the  Registrant  is  able  to  tailor  equipment  packages  for
individual client needs. By carrying limited  inventory,  the Registrant reduces
overhead and passes the savings to the customer.  The waste management  services
offered  by the  Registrant  include  locating  and  contracting  with a hauling
company at a reasonable cost at each participating location for the retail chain
customers of the Registrant that are a part of the management program offered by
the Registrant.  Because the Registrant is not a "waste transporter", it is able
to  maintain  a  neutral  position  vis-a-via  the  customers  and  the  hauling
companies.  The  Registrant  has designed  and  developed  proprietary  computer
software that provides the Registrant's  personnel with relevant  information on
each of the client's  locations,  as well as pertinent  information  on disposal
rates and costs of equipment,  installation  and shipping.  The  availability of
this  software  has  allowed  the  Registrant  to build a database  for  serving
customers  from coast to coast.  The Registrant is able to estimate cost savings
to potential  customers by reviewing their current waste hauling invoices either
regionally or nationwide.

      The  Registrant  plans  to grow by  expanding  its  marketing  base and by
seeking  future  joint  ventures  and   acquisitions  of  companies  in  related
businesses.  The Registrant  continues to target retail and industrial customers
throughout the United States for the purpose of increasing its clientele in this
sector.  Although  the number of locations  for each  industrial  customer  will
generally be less than that of large retail chains,  solid waste output for each
location of industrial clients is generally greater than that of retail clients.
The  Registrant  believes that the  corresponding  greater need for  appropriate
equipment  results  in the  increased  possibility  of large  equipment  orders.
Further,  the  Registrant  believes it can provide  savings for each  industrial
location. <PAGE>

      The Registrant  believes that  opportunities  for its continued growth are
enhanced by the  increasingly  stringent  regulatory  and political  constraints
being placed on the waste hauling and disposal industries.  These more stringent
federal,  state  and  local  regulations  drive  prices  higher  throughout  the
industry.  With  ever-increasing  costs, solid waste disposal is becoming one of
the larger expense items for retail and industrial customers, and perhaps one of
the most difficult to contain.  The Registrant  believes these  increased  costs
will  enhance  the  value  of  its  services.   Through  the  retention  of  the
Registrant's  services,  customers  will be able to  "outsource"  their in-house
waste  needs to an  experienced  independent  entity  capable  of  lowering  and
containing  waste disposal costs.  The Registrant is able to provide  customized
reports detailing clients' recycling revenues as well as waste disposal expense.

      In April 1992 the Registrant entered into a management  agreement with K&R
Corporation ("K&R") a Kentucky corporation.  K&R is an affiliated company of the
Registrant  and solely owned by the  Registrant's  principal  stockholder  Harry
Kletter.  Under this management agreement the Registrant was responsible for the
management of the scrap and corrugated  paper  recycling for K&R and in addition
purchased certain rental equipment and scrap metal inventories from K&R. For its
management  efforts,  the Registrant  retained 80% of the profits generated from
the K&R  operation(s)  pursuant to an  amendment to this  management  agreement,
dated as of October 30, 1995, and effective as of January 1, 1996.  From July 1,
1994 to December 31, 1995, the management agreement provided that the Registrant
was to retain 60% of such profits.  During 1997, 1996 and 1995,  revenue derived
under this  arrangement  resulted in income before provision for income taxes to
the  Registrant   totaling  $469,184,   $712,765  and  $728,391,   respectively.
Commencing in January  1998,  the  Registrant  and K&R entered into a Consulting
Agreement,  such that the  Registrant now retains all profits from the scrap and
corrugated  paper  recycling  facility and pays only the  consulting fee to K&R.
This  Agreement  enables the Registrant to control the management and day-to-day
decisions  regarding the recycling plant. See "Business  Subsequent  Events" for
(the "Consulting Agreement") details of this Consulting Agreement.

      On  July 1,  1997,  the  Registrant  acquired  the  assets  of a  complete
non-ferrous scrap metal recycling facility in Louisville, Kentucky known as "The
Metal Center" pursuant to the "Acquisition of Assets of TMG Enterprises, Inc. by
Industrial Services of America,  Inc." thus expanding the Registrants  recycling
product  lines and  markets.  The Metal  Center is located  at 7100 Grade  Lane,
Louisville,  Kentucky  40213.  The  acquisition of assets  included  purchase of
equipment  and a  non-compete  agreement  with the two  selling  principals  for
$1,600,000.  The purchase  price is to be paid in two  installments  of $800,000
each,  payable  on  January  2,  1998 and July 1,  1998.  The  sellers  have the
alternative  of  receiving  the   equivalent   purchase  price  payable  in  the
Registrant's  Common  Stock at an exchange  rate of $8.00 per share  value.  The
Registrant believes that this acquisition  enhances the Registrant's  ability to
provide turnkey services in the recycling business.  On an annualized basis this
acquisition could increase revenues by over $10 million.

      In September  1997,  the  Registrant  entered into an agreement  (the "MGM
Agreement")  with MGM Services,  Inc.  ("MGM") to void a May 1, 1997  management
agreement in favor of a new  agreement  to: (i)  reimburse  the  Registrant  for
certain operating  expenses,  (ii) cause MGM to assign to the Registrant certain
of the management  contracts of MGM, and (iii) mutually  release each other from
any and all future claims under the MGM Agreement.  Under the MGM Agreement, MGM
agreed to reimburse the Registrant $30,000 for certain

<PAGE>

operating  expenses,  and the  Registrant  agreed  to pay a  purchase  price  of
$300,000 for assignment of management contracts from MGM to the Registrant.  The
management  contracts  are  various  contracts  to manage  the waste  stream and
recyclables for assorted retail,  commercial and industrial clients,  previously
contracted by MGM. The assignment  included  approximately  550 locations and an
approximate $3 million in additional revenues to the Registrant.

      During August 1997, the Registrant issued options (the "Bierman  Options")
to  purchase  100,000  shares  of its  Common  Stock  to its then  acting  Chief
Executive Officer,  Glenn Bierman.  Mr. Bierman's Letter Agreement of August 21,
1997 (the  "Bierman  Agreement")  set forth a monthly  consulting  fee.  Bierman
Options  provide  for an  exercise  price of $5 per  share  and are  exercisable
through October 1999.  Because the exercise price of these options was in excess
of the market value of the Registrant's Common Stock on the date of grant, there
are no compensation costs recorded in 1997 related to these options. In November
1997 it was  mutually  agreed that Mr.  Bierman  would cease to be Acting  Chief
Executive Officer of the Registrant.  The monthly fee due to Mr. Bierman per the
Bierman  Agreement for serving as Acting Chief Executive  Officer was terminated
by mutual agreement in November 1997.

      In October 1997, the Registrant  issued options to purchase  25,000 shares
and an  additional  option to  purchase  100,000  shares of Common  Stock to its
Interim President and Chief Operating Officer,  Sean M. Garber as a component of
a five-year  employment  agreement  (the  "Garber  Employment  Agreement").  The
exercise price related to the options to purchase (i) the 25,000 shares is $1.00
per share and (ii) the 100,000 shares is $5.00 per share.  Both such options are
exercisable over a five year period.  Compensation cost charged to operations in
1997 related to the option to purchase 25,000 shares was $14,974.  The option to
purchase  100,000 shares was at market value the day of the grant,  therefore no
charges were associated with this option.

Registrant Background

      The Registrant was  incorporated in October 1953 in Florida under the name
Alson  Manufacturing,  Inc  ("Alson").  From the date of  incorporation  through
January 5, 1975, the  Registrant  was involved in the design and  manufacture of
various forms of electrical  products.  In 1979,  the Board of Directors and the
shareholders of the Registrant commenced  liquidation of all the tangible assets
of Alson. On October 27, 1983,  Harry Kletter,  the Chairman of the Board of the
Registrant,  acquired  419,500  share of  common  stock of the  Registrant.  The
existing directors resigned and five new directors were elected.

      On July 1, 1984, the Registrant  began a solid waste handling and disposal
equipment sales  organization  under the name Waste Equipment Sales and Services
Company ("WESSCO").  On January 1, 1985, the Registrant merged with Computerized
Waste Systems, Inc. ("CWS"), a Massachusetts corporation.  CWS was a corporation
specializing  in  offering  solid  waste  management   consultations  for  large
multi-location  companies  involved in the  retail,  restaurant  and  industrial
sectors.  At the time of the  merger,  CWS was  concentrating  on  large  retail
chains,  but has  changed  its  emphasis  to include  industrial  clients.  This
strategy created an additional  target market for the Registrant.  Subsequent to
the merger with CWS, the Registrant  moved CWS  headquarters  from  Springfield,
Massachusetts to Louisville,  Kentucky.  At the time of the merger,  much of the
client base and marketing efforts were  concentrated in the Northeast.  With the
move to Louisville,  the Registrant began to expand its marketing efforts, which
are now nationwide  and include most of Canada.  On July 1, 1997, the Registrant
acquired the assets of a complete  non-ferrous  scrap metal recycling  facility,
now called "ISA Recycling". <PAGE>

      The  Registrant's  divisions  operate  closely with each other in terms of
present  customer care and proposals for new customers.  WESSCO has expanded its
product  line and  presently  offers a  variety  of  equipment,  which  would be
necessary  for an  efficient  waste  handling  and/or  recycling  system  for an
individual  user. The prices WESSCO can offer are competitive  with most dealers
since it  purchases  equipment  at dealer  cost  without  having  to pay  dealer
overhead.  The WESSCO  program is  attractive  to customers  planning  expansion
programs.  Some of these  customers have  designated  WESSCO as their  exclusive
waste equipment  supplier and consultant.  By working with the customer from the
time the initial building plans are developed, WESSCO has input into the design,
development and implementation of the waste handling system.

      CWS has  developed a network of over 1000  vendors  throughout  the United
States,  which  include  hauling  companies,  recycling  companies and equipment
manufacturing and maintenance companies. Through this network, the Registrant is
able to provide pricing  estimates for potential  customers in a timely fashion.
CWS  customer  representatives  have  access  to this  information  through  the
computer  software  designed and developed to accommodate the daily needs of the
Registrant.  Through this information retrieval system, customer representatives
can review the  accuracy of customer  concerns  from recent  billings to hauling
rates to the average monthly cost of service.

      Through ISA Recycling, the Registrant processes, sells and brokers a broad
range  of  materials  for  recycling.   These  materials   include  ferrous  and
non-ferrous metals,  corrugated  containers,  high-grade paper and plastic.  The
Registrant offers document  destruction and transport of recyclable materials to
the  Registrant's  facility for regional  clients.  This  division  also brokers
recycled commodities for CWS customers.

      The  Registrant  derives a  significant  portion of its revenues  from two
primary customers  accounting for  approximately  57%, 58% and 44% of 1997, 1996
and 1995 revenues,  respectively. The Registrant is taking affirmative action to
counter its  dependence on any one customer.  The potential  negative  effect of
losing any single customer has been reduced by the Registrant's expansion of its
customer base. However,  there can be no assurance that if the Registrant was to
lose all or the  substantial  portion of the business  with these two  customers
that such losses would not have a material adverse effect on the Registrant.

      In addition to its other  services,  the  Registrant  provides  management
services relating to recycling and waste stream analysis.  The main advantage to
offering  management  services is that the  individual  projects are priced on a
substantial  prepaid  individual  basis.  This  method  of  pricing  allows  the
Registrant  to  collect  an  up-front  fee with the  opportunity  to "sell"  the
customer  traditional  services  after  the  evaluation  and/or  any  subsequent
implementation is complete. By offering management and evaluation services,  the
Registrant is able to pursue additional customers.

      During 1997, the Registrant  committed  approximately  $1,374,000  towards
capital  improvements  with respect to its operation.  A significant  portion of
such  funds  was used to  purchase  two  cranes,  recycling  equipment  and make
additions to the  rental/lease  fleet of equipment.  The acquisition of this new
material  processing  equipment has enhanced operating  efficiencies and created
additional   capacity  for  new  and   expanded   equipment   leasing   business
opportunities. <PAGE>

Equipment Leasing/WESSCO

      The Registrant leased approximately 94 pieces of solid waste and recycling
equipment  to customers in 1997,  with a subsequent  increase in monthly  rental
income to the  Registrant  of 29% as compared  to the same  period of 1996.  The
majority of these contracts are for a minimum of 36 months.  While the resources
required to purchase this  equipment are generated  internally  and the revenues
returned are deferred over the term of the contract, the Registrant's management
believes  this  investment in the rental fleet to be a proper use of capital and
will provide a long-term favorable return on its investment.

Industry Background

      The Registrant is involved in the management of non-hazardous  solid waste
and  recyclables for retail and industrial  customers.  As such, the industry is
actually driven by the multi-billion  dollar solid waste collection and disposal
industry. The size of this industry has increased for the past several years and
should  continue to increase,  as landfill  space becomes more scarce.  Although
society (and industry) has developed an increased awareness of the environmental
issues and recycling has increased, waste production also continues to increase.
Because of  environmental  concerns,  new regulations  and cost factors,  it has
become  difficult to obtain the  necessary  permits to build any new  landfills.
Management of the Registrant  believes that with the consolidation  taking place
in the waste industry,  it will become increasingly  difficult for an individual
to get a fair price.  The  Registrant  should  therefore  be in a position to be
called upon to represent the best interest of that customer;  this fact can only
enhance the Registrant's business.

      The  rising  costs  associated  with solid  waste  disposal  have  created
additional opportunities for the Registrant. Because waste disposal has begun to
be an increasingly larger percentage of the total monthly expenditures  incurred
by commercial establishments,  the Registrant believes that the services offered
by the Registrant will be in greater demand. Many commercial establishments that
have paid little  attention to the costs  associated  with waste disposal in the
past are now looking for ways to reduce  expenses in this area.  The  Registrant
offers commercial establishments its expertise to lower waste disposal bills and
initiate recycling programs to generate  additional revenues and/or reduce costs
and materials bound for ultimate disposal.

      In addition to increasing  landfill  costs,  regulatory  measures and more
stringent control of material bound for disposal ("flow control") are making the
management of solid waste an increasingly  difficult problem.  The United States
Environmental  Protection Agency (the "EPA") is expected to continue the present
trend of restricting the amount of "potentially"  recyclable  material bound for
landfills.  Many states have passed, or are contemplating measures,  which would
require commercial establishments to recycle a minimum percentage of their waste
stream  and  would  restrict  the  percentage  of  recyclable  materials  in any
commercial  load of solid  waste  material.  Many  states  have  already  passed
restrictive  regulations  requiring  a plan  for the  reduction  of waste or the
segregation  of  recyclable  materials  from the  waste  stream  at the  source.
Management  of the  Registrant  believes  that  these  restrictions  may  create
additional  marketing  opportunities  as waste disposal needs within  commercial
establishments  become more  specialized.  Some large commercial  establishments
have hired  in-house  staff to handle the solid waste  management  and recycling
responsibilities,  but have  found that  without  adequate  resources  and staff
support,  in-house  handling of these  responsibilities  may not be an effective
alternative.  The Registrant offers these  establishments a possible solution to
this increasing burden. <PAGE>

Competition

      On a  commercial/industrial  waste  management  level,  the Registrant has
competition  from a  variety  of  sources.  Much  of it is from  companies  that
concentrate  their efforts on a regional  level.  Management  of the  Registrant
believes that with the  proprietary  database of regional and national  pricing,
the Registrant will maintain its edge on a national basis.

      There has been increased competition from national hauling companies.  The
large  national  hauling  companies  often  attempt to handle an entire chain of
locations  for a  "national  chain"  client.  This  scenario  poses a  potential
conflict  of  interest   since  these  hauling   companies  can  attain  greater
profitability  from increases in hauling and disposal  revenues.  In addition to
having an interest in higher hauling and disposal  rates,  the national  hauling
companies do not have operations in every community and do not, to the knowledge
of  management,  have some of the billing and  computer  capabilities  which the
Registrant is able to offer.  Additionally,  management has encountered evidence
of some  reluctance  from  independent  hauling  companies to work with national
hauling companies.

      There  is  also  competition  from  some  equipment  manufacturers.  These
companies have their primary interest in selling or leasing  equipment and offer
management  services in order to secure  these sales or leases.  There is a cost
involved in "using" the  equipment  and the money saved must  justify the amount
spent on this equipment.

     The  metals  recycling  business  is highly  competitive,  it is subject to
significant   changes  in  economic  and  market  conditions.   Certain  of  the
Registrant's competitors have greater financial,  marketing and other resources.
There can be no assurance that the Registrant will be able to obtain its desired
market share based on the competitive nature of this industry.

      An important  difference  between the  Registrant  and the majority of its
competition is the Registrant's  management  "process".  The systematic approach
attempts to provide consistent  results for the customer.  At the implementation
stage,  the  Registrant  actively  "bids out" every location that a new customer
requests.  The Registrant repeats this bidding process at any time that a client
receives  notice of an  undocumented  price increase or at regular  intervals as
indicated in the contractual relationship.  At subsequent stages, the Registrant
will evaluate a customer's  solid waste program and give suggested  alternatives
for improvement.

      The  Registrant  has  developed  a  network  of  maintenance  and  hauling
companies  throughout  the country and due to the volume of business  awarded to
them by the Registrant,  often these companies will offer discounted hauling and
maintenance rates to the Registrant. However, the Registrant is not "affiliated"
with  any  particular  company  or  vendor  in the  hauling  and/or  maintenance
industries,  but rather deals with those  companies  and vendors that can supply
quality  service at a  favorable  price.  In  addition to the volume of business
handled by some of these "vendors",  the vendors  understand that as long as the
accounts are well serviced, they will be invited to bid on future accounts.

      Few if any, of the  Registrant's  competitors  have a national  network of
vendors  similar  to the one the  Registrant  has  developed  over its  years of
operation.  The major  hauling  companies  are  limited in the scope of services
which they can provide to  commercial/industrial  accounts.  Although  the major
hauling companies have operating companies in most major and  intermediate-sized
cities, they do not have nationwide  geographic coverage.  Therefore,  for large
commercial/industrial   clients,  they  must  obtain  bids  from  local  hauling
companies  that may perceive them to be future  competitors.  The Registrant has
positioned itself to negotiate with the haulers,  while servicing its clients on
a nationwide basis.

      Most of the direct  competition  is from small  regional  companies that
bid on  regional  accounts or national  accounts on a regional  basis.  Few of

<PAGE>

the  Registrant's  competitors  appear to be equipped to handle  large  national
accounts nor do they seem to have the  inclination  to expand  their  geographic
coverage.  There are numerous national companies in closely related  businesses,
including national hauling companies that have  substantially  greater financial
resources  than does the  Registrant.  Should any of these  companies  decide to
compete directly with the Registrant, it could have a material adverse effect on
the business of the Registrant.

Employees

      The Registrant has  approximately one hundred and thirteen (113) full-time
employees and two (2) independent consultants.

Effect of State and Federal Environmental Regulations

      Any  environmental  regulatory  liability  relating  to  the  Registrant's
operations  is  generally  borne  by the  customers  with  whom  the  Registrant
contracts and the third party vendors in their  capacity as  transporters.  As a
matter of  Registrant's  policy,  the Registrant uses its best efforts to secure
indemnification  for environmental  liability from its customers and third party
vendors.  Although  management of the Registrant believes that for the most part
its  business  does not subject it to  potential  environmental  liability,  the
Registrant continues to use best efforts to be in compliance with federal, state
and local  environmental  laws,  including but not limited to the  Comprehensive
Environmental Response,  Compensation and Liability Act of 1980, as amended, the
Hazardous Materials  Transportation Act, as amended,  the Resource  Conservation
and Recovery Act, as amended, the Clean Air Act, as amended, and the Clean Water
Act.  Such  compliance  in 1997 did not  constitute  a  material  expense to the
Registrant.

      The  collection  and  disposal  of solid  waste and  rendering  of related
environmental  services  are  subject to federal,  state and local  requirements
which regulate health,  safety, the environment,  zoning and land-use.  Federal,
state and local regulations  vary, but generally govern disposal  activities and
the location and use of facilities and also impose  restrictions  to prohibit or
minimize air and water pollution. In addition, governmental authorities have the
power to enforce  compliance with these regulations and to obtain injunctions or
impose fines in the case of  violations,  including  criminal  penalties.  These
regulations  are  administered  by the EPA and various other federal,  state and
local environmental,  health and safety agencies and authorities,  including the
Occupational Safety and Health Administration of the U.S. Department of Labor.

      The  Registrant  strives to conduct  its  operations  in  compliance  with
applicable  laws and  regulations.  While such  amounts  expended in the past or
anticipated  to be expended  in the future have not had and are not  expected to
have a  material  adverse  effect on the  Registrant's  financial  condition  or
operations,   the  possibility   remains  that   technological,   regulatory  or
enforcement developments,  the results of environmental studies or other factors
could materially alter this expectation.

      Each  state  in  which  the  Registrant  operates  has  its own  laws  and
regulations governing solid waste disposal, water and air pollution and, in most
cases,  releases  and cleanup of hazardous  substances  and  liability  for such
matters.  Several  states have enacted laws that will require  counties to adopt
comprehensive plans to reduce, through waste planning, composting, recycling, or
other programs,  the volume of solid waste  landfills.  These laws have recently
been  promulgated in several  states.  Legislative  and  regulatory  measures to
mandate or encourage waste reduction at the source and waste recycling, also are
under consideration by Congress and the EPA. <PAGE>

      Finally,  various states have enacted, or are considering  enacting,  laws
that  restrict  the  disposal  within  the  state of solid or  hazardous  wastes
generated outside the state. While laws that overtly discriminate against out of
state  waste  have been  found to be  unconstitutional,  some laws that are less
overtly discriminatory have been upheld in court.  Challenges to other such laws
are pending.  The outcome of pending  litigation and the  likelihood  that other
such  laws  will  be  passed  and  will  survive  constitutional  challenge  are
uncertain.   In  addition,   Congress  is  currently   considering   legislation
authorizing states to adopt such restrictions.

Subsequent Events

A. Appointment of President.
      The Board of Directors of the  Registrant  appointed Sean M. Garber to the
position of  President  at its  meeting on February  16,  1998,  retroactive  to
February 5, 1998. The Board of Directors  elected Mr. Garber to this position at
its meeting on February 16, 1998.  Garber  became  Interim  President  effective
December 1, 1997, when Harry Kletter, the former president, resigned.

B.  Election  of New and  Replacement  Directors.  On  February  16,  1998,  the
Registrant  received  resignations  from  the  following  Board  Members:  Peter
Cullian,  Matthew L. Kletter and Timothy W. Myers. The Board of Directors of the
Registrant accepted their resignations effective February 16, 1998 and appointed
Joseph H. Cohen and R. Michael  Devereaux to fill the  vacancies.  Additionally,
for purposes of having outside members on the Board, the Registrant,  with Board
approval,  appointed  Dr.  Barry Naft to the Board,  thus giving the  Registrant
these outside directors:  Dr. Naft and Mr. Devereaux.  Messrs. Cohen,  Devereaux
and Dr. Naft will serve as members of the Board until the 1998 Annual Meeting of
the  Shareholders.  With the  selection of Messrs.  Cohen and  Devereaux and Dr.
Naft, the Board of Directors is comprised of five (5) members, the other members
being Harry Kletter and Sean M. Garber.

C.  Formalization of Lease and Consulting  Arrangements  between K&R Corporation
and the Registrant.
      On February  16, 1998 the  Registrant's  Board of  Directors  ratified and
formalized an existing  relationship  in connection  with (i) the leasing by the
Registrant  of its  facilities  from K&R, and (ii) the  provision of  consulting
services from K&R to the Registrant. K&R is an affiliate of the Registrant.

1. Lease  Agreement.  The Lease  Agreement  (the "K&R  Lease"),  effective as of
January 1, 1998, between K&R, as landlord, and the Registrant, as lessee, covers
approximately  24.5 acres of land and the  improvements  thereon  (including the
recent acquisition by K&R of approximately 4.5 acres plus  improvements),  which
are located at 7100 Grade Lane in Louisville,  Kentucky (the "Leased Premises").
The  principal  improvements  consist of an  approximately  22,750  square  foot
building  used as the  Corporate  Office,  an  approximately  8,286  square foot
building used for CWS offices,  an approximately  13,995 square foot used as the
paper  recycling  plant, an  approximately  12,000 square foot building used for
metals recycling plant, and an approximately 51,760 square foot building used as
the recycling  offices and warehouse space,  with a remaining 15,575 square feet
of space  contained  in five (5)  buildings  ranging in size from  approximately
8,000 to 256 square feet.

      The  initial  term of the K&R Lease is for ten years with two  five-year
option  periods (the "Option  Periods")  available  thereafter.  The base rent
for the first five years is $450,000  per annum,  payable at the  beginning of
each month in an amount  equal to $37,500  (the  "Fixed  Minimum  Rent").  The

<PAGE>

Fixed  Minimum  Rent  adjusts  each five  years,  including  each of the  Option
Periods,  in accordance  with the Consumer  Price Index.  The Fixed Minimum Rent
also increases to $750,000 per annum and an amount equal to $62,500 per month in
the event of a "change  in  control"  of the  Registrant.  Under the K&R  Lease,
"change in control" means a transaction or series of transactions as a result of
which (i) any person who does not  currently  own a majority of the  outstanding
stock of the  Registrant  acquires a majority  of the  outstanding  stock of the
Registrant,   (ii)  the  Registrant  sells  or  otherwise  disposes  of  all  or
substantially all of the assets or business  operations of the Registrant to any
other person;  or (iii) the  Registrant  merges or  consolidates  with any other
person;  unless, in any such case,  shareholders  owning the outstanding  voting
stock  of  the  Registrant   immediately  prior  to  the  consummation  of  such
transaction or transactions  will own, upon  consummation of such transaction or
transactions,  at least a majority of the outstanding shares of the voting stock
of the  person  acquiring  the  shares  or assets of the  person  acquiring  the
Registrant or surviving  the merger or  consolidation  of the  Registrant in the
transaction(s).

      The  Registrant  is also  required to pay, as  additional  rent,  all real
estate  taxes,  insurance,  utilities,  maintenance  and  repairs,  replacements
(including replacement of roofs if necessary) and other expenses. The Registrant
provided a $50,000  security deposit to K&R for performance by the Registrant of
the terms, covenants and conditions of the K&R Lease applicable to it.

      The  K&R  Lease  provides  that  the  Leased  Premises  may be used by the
Registrant  in its metal  recycling  and  recycled  paper  sorting  and  bailing
businesses,  and for its corporate offices.  The Registrant covenants to use and
occupy the Leased  Premises in a careful,  safe and proper  manner,  among other
covenants the Registrant  agrees to and typically  contained in a net lease to a
tenant.  Without  the prior  consent  of K&R (and in the case of (ii)  below the
prior  consent  of any  mortgagee  of K&R) the  Registrant  may not (i) make any
structural alterations, improvements or additions to the K&R Leased Premises, or
(ii) assign  (including a change of control) or sublet the Leased Premises.  The
K&R Lease provides for  indemnification of K&R by the Registrant for all damages
arising  out of  the  Registrant's  use or  condition  of  the  Leased  Premises
excepting  therefrom K&R's  negligence.  The K&R Lease further provides that the
Registrant  will agree to  subordinate  its  leasehold  interest to the mortgage
interest of any mortgagee of K&R.

      The K&R Lease provides for  termination by the Registrant upon damage (the
"Damage") by fire or other casualty that cannot be reasonably  repaired  within,
in most  instances,  120 days of the  Damage.  All rent ceases as of the "injury
date" under these circumstances. The K&R Lease also terminates upon condemnation
of the Leased Premises in whole,  with a condemnation of a portion of the Leased
Premises resulting in an equitable adjustment of the Fixed Minimum Rent.

      Events  of  Default  under  the  K&R  Lease  include  (i)  failure  by the
Registrant  to pay the  Fixed  Minimum  Rent for 10 days  after  written  demand
therefor,  (ii) any  other  default  in the  observance  or  performance  by the
Registrant of any of the other covenants, agreements or conditions of the Lease,
which shall  continue for 30 days after written  notice,  unless the  Registrant
shall have commenced and shall be diligently pursuing curing such default, (iii)
certain bankruptcy or related events affecting the Registrant,  (iv) vacation of
the Leased Premises by the Registrant, or (v) the transfer or devolution whether
by operation of law or otherwise of the K&R Lease or

<PAGE>

the Registrant's  estate or of any of the Registrant's  interest to anyone other
than K&R. Upon the  occurrence  of an event of default,  K&R may, at its option,
terminate  the K&R  Lease  and  enter  into and take  possession  of the  Leased
Premises  with the  right to sue for and  collect  all  amounts  due,  including
damages.

2.  Consulting   Agreement.   The  Consulting  Agreement  (the  "K&R  Consulting
Agreement"), effective as of January 2, 1998, by and between K&R, as consultant,
and the  Registrant,  remains in effect until December 31, 2007,  with automatic
annual renewals thereafter unless one party provides written notice to the other
party of its  intent  not to renew at least six  months in  advance  of the next
renewal  date.  K&R shall  provide  strategic  planning and  development  to the
Registrant,  including advice on management activities,  advertising,  financial
planning  and  mergers  and  acquisitions  (the  "Consulting  Activities").  The
Registrant  shall  be  responsible  for  all of  K&R's  expenses  and pay to K&R
$240,000  in equal  monthly  installments  of  $20,000  in  connection  with the
Consulting Activities.

      The  K&R  Consulting  Agreement  terminates  upon a  non-defaulting  party
providing  written  notice to the other  party of its intent to  terminate.  The
recipient  of the notice has 10 days to cure  monetary  defaults  and 30 days to
cure non-monetary defaults (which will be extended if a cure is being diligently
commenced and pursued during that 30 day period).  The K&R Consulting  Agreement
also terminates  upon the  condemnation or destruction by fire or other casualty
of all or substantially all of the Leased Premises. Upon termination, K&R agrees
not to engage,  directly or  indirectly,  in the business  conducted by, or hire
employees  from,  the Registrant for a period of five years and within 100 miles
of any operation of the Registrant.

      The K&R Consulting  Agreement provides for  cross-indemnification  of each
party by the other for acts other than  negligence or willful  malfeasance.  The
K&R  Consulting   Agreement   further   provides  that  K&R  must  maintain  the
confidentiality of any information of the Registrant not otherwise in the public
domain or required to be disclosed by law.

ITEM 2.   PROPERTIES

      The Registrant  leases its corporate  offices and processing  property and
buildings  for $10,250 per month from Fetra  Enterprises  ("Fetra").  The Leased
Premises  are  located  at  7100  Grade  Lane  in  Louisville,   Kentucky.   The
improvements  include,  among  others,  a 22,750 square foot office and attached
warehouse, an 8,286 square foot office building, and 15,575 square feet of space
in miscellaneous  smaller  buildings.  See "BUSINESS - Subsequent Events - Lease
Agreement".

      During 1997, the Registrant managed the scrap recycling operations of K&R,
an affiliate of the  Registrant,  and paid $15,750 per month for the ferrous and
corrugated scrap processing facilities used in this operation.  This property is
located at 7100  Grade  Lane in  Louisville,  Kentucky  in the same  "industrial
complex" as the Registrant's  corporate offices.  Beginning January 1, 1998, the
Registrant  has  entered  into a  Lease  Agreement  to  lease  these  and  other
facilities from K&R. See "BUSINESS - Subsequent Events Lease Agreement".

      On July 1, 1997,  the  Registrant  entered a Lease  Agreement  (the "Fetra
Lease") with Fetra Investments, a Kentucky partnership,  to lease the 4.412-acre
parcel  where The Metal  Center is  located.  The term of the lease is for seven
months  ending  January 31, 1998.  The Fetra Lease may be extended on a month to
month  basis  with  consent  of the  landlord  after  the  end  of the  original
seven-month  term.  The  landlord  has  the  right  to  sell  the  property  and
improvements  at any time and  acknowledges  that K&R  possesses  an  option  to
purchase the property and improvements. In January 1998, K&R completed the

<PAGE>

purchase of this property and improvements.  The Registrant currently leases the
property and  improvements  from K&R,  and has a  contracted  for first right of
refusal  in the event K&R were to decide to sell.  The  property  is  located in
Louisville,  Kentucky  adjacent to the  Registrant's  existing  operations.  The
property  improvements  include  office,  attached  scrap  processing  building,
scales, and out building containing in the aggregate approximately 51,760 square
feet.  The  periodic  rent is $7,883 per month.  Effective  January 1, 1998 this
property  was  included  in the K&R Lease of property  to the  Registrant.  "See
BUSINESS - Subsequent Events - Lease Agreement".

      Certain of the property and  equipment  of the  Registrant  are subject to
liens securing payment of portions of the Registrant's indebtedness.  See Note 2
of Notes to Financial Statements included herein for information with respect to
debt on these properties.  The Registrant also leases certain of its offices and
equipment,  as  discussed  herein.  See  Notes  5 and 6 of  Notes  to  Financial
Statements included herein for information with respect to leased properties.

ITEM 3.    LEGAL PROCEEDINGS

      There are no material proceedings pending by, or against the Registrant or
affecting any of its properties.

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

      Not applicable.

ITEM 4a.    EXECUTIVE OFFICERS OF THE REGISTRANT.

                  Served as an               Position with the
                   Executive                Registrant and Other
      Name        Officer Since     Age     Principal Occupations

Glenn Bierman     August 21, 1997   42    Acting Chief  Executive  Officer
                                          of
                  to November 1997        of  the  Registrant  from August 21,
                                          1997 to  November 1997;  Mr. Bierman
                                          is  President  and  Founder of Tycon
                                          Equity  Services,  Inc.,  located in
                                          New York,  New York since July 1997;
                                          from March  1994 to July  1997,  Mr.
                                          Bierman  was a co-owner  and founder
                                          of   a   business    advisory    and
                                          consulting    service,     Corporate
                                          Builders,   Inc.,   located  in  New
                                          York,   New   York;   and  was  with
                                          Skadden,  Arps,  Slate,  Meagher and
                                          Flom,  New York,  New York from 1990
                                          to March 1994.

Peter V. Cullinan January 1997      45    Vice    President    of   Management
                  to July 1997            Services  of  the  Registrant   from
                                          January 1997 to July 1997;  Director
                                          of Store  Planning and  Construction
                                          for  Learningsmith,  Inc.  from  May
                                          1994 to December  1995;  Director of
                                          Administrative   Services   of  Ames
                                          Department  Stores  from May 1986 to
                                          December 1993

Sean M. Garber          1996        31    President   and   Treasurer  of  the
                                          Registrant  since  February,   1998;
                                          Interim   President   from  December
                                          1997  to   February,   1998;   Chief
                                          Operating  Officer  and  Director of
                                          the  Registrant  from  November 1997
                                          to  present,   Vice   President   of
                                          Recycling  of  the  Registrant  from
                                          November  1996  to  December   1997;
                                          from  1989  to  November,  1996  Mr.
                                          Garber was an  employee  of and held
                                          positions  as  general  manager  and
                                          marketing  director with OmniSource,
                                          Inc.  of  Fort  Wayne,   Indiana,  a
                                          recycling company; Mr. Garber  holds
                                          degree in Business  Management  from
                                          Indiana University

Charles J. Hulsman      1995        40    Manager  of  CWS   division  of  the
                                          Registrant  since December 1991, and a
                                          sales    representative    of   WESSCO
                                          division  of the  Registrant  prior to
                                          that date

Harry Kletter           1983        71    Chairman   of   the   Board,   Chief
                                          Executive    Officer    and    Chief
                                          Financial  Officer of the Registrant
                                          from  July  31,   1992  to  present,
                                          President  of  the  Registrant  from
                                          July  31,  1992  to  December  1997;
                                          from January 1990 to July 1991,  and
                                          from October  1983 to January  1988;
                                          Mr.  Kletter  is also  Chairman  and
                                          sole      shareholder     of     K&R
                                          Corporation,  a real estate  holding
                                          and  materials  processing  company,
                                          and an affiliate of the Registrant.

Matthew L. Kletter      1994 to     38    Vice President of Legal Affairs and
                   February 1998          Secretary  of  the  Registrant  from
                                          1997 to  February  1998;  Director  of
                                          Legal   Affairs  from  1996  to  1997;
                                          Director of the  Registrant  from 1995
                                          to  February  1998  and  from  1990 to
                                          1991;Attorney,  New  York,  New  York;
                                          Nephew of Harry and Roberta Kletter

Roberta F. Kletter      1983 to     64    Vice   President   of    Shareholder
                    November 1997         Relations     and    of    Corporate
                                          Communications  from 1995 to  November
                                          1997,   and  Secretary  and  Marketing
                                          Director  of the  Registrant  prior to
                                          1995; Director of the Registrant until
                                          November  1997;  Wife of Harry Kletter
                                          and Aunt of Matthew Kletter

Timothy W. Myers        1996 to     46    Senior  Vice President  of   the  Reg-
                    December, 1997        istrant from  1996  to December 1997;
                                          Mr. Myers has  served as  an  Officer
                                          of K&R Corporation  an  affiliate  of
                                          the Registrant, since 1996.
<PAGE>

Alan L. Schroering      1995 to     32    Director of Finance and Treasurer of
                    March, 1998           the   Registrant    from   1995   to
                                          February,  1998;  Controller  of the
                                          Registrant  from  1992  to  February
                                          1998;   Staff   Accountant   of  the
                                          Registrant  from  1984  to  1992. Mr.
                                          Schroering  is a  graduate  of Indiana
                                          University.

      Except  as  described  under  "Position  with  the  Registrant  and  Other
Principal Occupations" in the above table, none of the above officers is related
to one another.  With respect to certain  arrangements  with certain officers of
the  Registrant  relating  to  executive  compensation,   see  section  entitled
"Executive  Compensation  -  Certain  Transactions"  in the  Registrant's  Proxy
Statement for the 1998 Annual Meeting of Shareholders as incorporated  herein by
reference at Item 11.
<PAGE>

PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

      Effective  August  29,  1996,  the  $.01  par  value  common  stock of the
Registrant became listed on the Small Cap Market (the "Small Cap Market") of the
Nasdaq Stock Market under the symbol "IDSA".  During the fourth quarter of 1996,
the  Registrant's  common  stock traded on the Over the Counter  Bulletin  Board
("OTCBB")  operated by the National  Association  of  Securities  Dealers,  Inc.
("NASD"). For the seven years prior to the fourth quarter of 1995, the stock was
traded on a  secondary  market  basis and as a result,  the  Registrant  did not
believe it could provide a meaningful  range of high and low bid information for
the  Registrant's  stock.  The  following  table  sets  forth,  for the  periods
indicated,  the high and low closing  sales prices for the  Registrant's  common
stock as quoted on Nasdaq for 1997 and 1996, respectively.  The over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.

Quarter Ended                 1997                          1996
                        High        Low               High        Low
March 31              13.25         7.25             8.50         5.50
June 30                9.50         5.50            18.00         7.25
September 30           9.50         7.13            15.75         8.25
December 31            7.38         4.50            12.50         8.38

      There were approximately 525 shareholders of record as of March 16, 1998.

      The Registrant has never declared a cash dividend on its Common Stock. The
Board of  Directors  intends  to retain all  earnings  for  investment  into the
Registrant's  business  and  does  not  anticipate  any  cash  dividends  in the
foreseeable future. The retention of these earnings will be used to help finance
the Registrant's  expansion programs.  Although there are no restrictions on the
Registrant's present or future ability to pay dividends,  the Board of Directors
has the discretionary power to make that determination.

      The Nasdaq Stock  Market,  which began  operation in 1971,  is the world's
first electronic  securities  market and the fastest growing stock market in the
U.S.   Nasdaq   utilizes   today's   information    technologies-computers   and
telecommunications-to  unite  its  participants  in  a  screen-based,  floorless
market.  It enables market  participants to compete with each other for investor
orders in each Nasdaq security and, through the use of Nasdaq Workstation II(TM)
and other  automated  systems,  facilitates  the  trading  and  surveillance  of
thousands  of  securities.  This  competitive  marketplace,  along with the many
products and  services  available  to issuers and their  shareholders,  attracts
today's largest and fastest growing companies to Nasdaq.  These include industry
leaders in computers,  pharmaceuticals,  telecommunications,  biotechnology, and
financial  services.  More domestic and foreign companies list on Nasdaq than on
all other U.S. stock markets combined.


<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA



   Selected Financial Data

                              1997       1996      1995       1994       1993
                            ---------------------------------------------------
   (Amounts in Thousands,
   Except Per Share Data)

   Year ended December 31:
     Total revenue          $ 45,211   $ 34,277  $  30,545  $  23,380  $ 23,056
                            =========  ========= ========== ========== =========

     Income from operations      215        742      1,162        489       189
                            =========  ========= ========== ========== =========

     Earnings
       per common share:
       Basic                $   0.07   $   0.25  $    0.41  $    0.28  $    0.11
                            =========  ========= ========== ========== =========

       Assuming Dilution    $   0.07   $   0.24  $    0.40  $    0.28  $    0.11
                            =========  ========= ========== ========== =========

     Cash dividends declared
       Per common share           -          -          -          -         -

   At year end:
     Total assets           $ 13,893   $  9,439  $   6,209  $   4,093  $   3,870
                            =========  ========= ========== ========== =========

     Long-term notes payable$    760   $      5  $     367  $      13  $      29
                            =========  ========= ========== ========== =========


Reclassifications

      Earnings  per share are  computed  under the  provisions  of  statement of
financial  accounting  standards (FASE) No. 128,  "Earnings per Share" which was
adopted  retroactively  at the  beginning  of the fourth  quarter of 1997.  This
resulted in  restatement  of earnings per share as previously  reported for 1996
and 1995.

      Certain  amounts  in the 1996  and 1995  financial  statements  have  been
reclassified  to conform to the 1997  financial  statement  presentation.  These
reclassifications had no effect on 1996 or 1995 retained earnings or net income.

      The Registrant  provides waste  management and consulting  services to its
customers.  Prior to 1995, the Registrant's  service and consulting  revenue was
derived  principally from management fees paid by its customers.  The Registrant
collected  funds  from  its  customers  for  services  rendered,   retained  its
management  fee,  and remitted the  remaining  funds to third party  vendors who
performed  the waste  removal  and  maintenance  services.  In 1995,  because of
certain market dynamics, changes in the industry and changes related to

<PAGE>

the Registrant's  operations,  management reevaluated the Registrant's manner of
conducting  business.  Based  on this  reevaluation,  the  Registrant's  pricing
process was modified.  As a result,  the majority of the Registrant's  customers
pay a negotiated fee for their waste service  needs,  and in turn the Registrant
subcontracts  the  necessary  work to third party vendors and pays those vendors
for their  services.  Accordingly,  the 1993 total  revenue  has been  increased
approximately  $17,837,000  and  total  assets  as of  December  31,  1993  have
increased  approximately  $1,475,000  from amounts  originally  reported.  These
reclassifications, necessary to restate the 1993 selected financial data, had no
effect on net income.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION

General

      In July, 1997, the Registrant continued to pursue a growth strategy in the
recycling  business  through asset  purchase of The Metal Center.  See "BUSINESS
General". This asset purchase brought increased revenue, product line expansion,
and new markets to the  Registrant.  Prior  financial  information  of The Metal
Center is not  available  from its prior  owners  and  accordingly  has not been
presented.  Secondly,  during September 1997, the Registrant further implemented
its acquisition program with the purchase of the accounts management division of
MGM Services,  Inc.  ("MGM").  This acquisition of management  services accounts
fits directly into the management  operations,  with minimum customer disruption
and required no additional  office  capacity.  The accounts  purchased  from MGM
represented  550 new store  locations,  adding to the existing  2,500  locations
serviced  by  the  Registrant.   Management  anticipates  additional  management
services revenue of  approximately  $250,000 per month,  from this  acquisition.
Finally,  the Registrant  undertook a new program to streamline the organization
and reduce overhead,  while also focusing on growing the existing  recycling and
waste management businesses.

      It is  management's  plan to continue  in these  directions  in 1998.  The
Registrant's  goals are to continue  aggressive  pursuit of  acquisitions in the
fields of recycling and waste  management  services.  Also, the Registrant  will
pursue  more   organizational   cost  control  and  efficiency   programs  while
emphasizing the sales and marketing efforts.

Liquidity and Capital Resources

      As of December 31, 1997, the Registrant held cash and cash  equivalents of
$495,834.

      The Registrant  currently  maintains a working capital line of credit with
the Mid-America  Bank of Louisville and Trust Company (the "Bank") in the amount
of $2,000,000.  Indebtedness  under this credit facility accrues interest at the
Bank's prime rate as promulgated from time to time. The maturity date under this
agreement  is July 1,  1998.  The  Credit  Line is  collateralized  by  eligible
accounts receivable,  inventories,  equipment and the personal guarantees of the
majority shareholder of the Registrant,  Harry Kletter. As of December 31, 1997,
$1,800,000 was outstanding  under the credit facility as compared to $600,000 as
of December 31, 1996.

      As consideration  for the acquisition of The Metal Center,  the Registrant
provided  two (2) notes  payable to the sellers in the amount of  $800,000  each
payable, one half on January 2, 1998 and one half on or before July 1, 1998. The
sellers have the alternative of receiving the equivalent  purchase price payable
in the Registrant's Common Stock at an exchange rate

<PAGE>

of $8.00 per share value. On July 1, 1997, the Registrant  opened an acquisition
credit  facility with the Bank in the amount of $1,600,000.  Indebtedness  under
this line accrues  interest at the Bank's prime rate as promulgated from time to
time. The maturity date under this agreement is July 1, 1998. The credit line is
collaterized  by virtually all business  assets and a personal  guarantee of the
majority  shareholder.  As of  December  31,  1997,  there  were  no  borrowings
outstanding under this agreement.

      In 1997, the Registrant  derived all its ferrous scrap and paper recycling
revenue from the management contract arrangement with K&R. The contract business
comprised  36%, 46% and 30% of the  Registrant's  income  before  provision  for
income tax for the years ended December 31, 1997,  1996 and 1995. The Registrant
has reduced its relative profit dependence  further by the asset purchase of The
Metal Center,  thereby  diversifying  into the  non-ferrous  business on July 1,
1997.

Results of Operations

      The following  table  presents,  for the years  indicated,  the percentage
relationship  which certain  captioned  items in the  Registrant's  Consolidated
Statements of Operations bear to total revenues and other pertinent data:

Year ended December 31,              1997       1996      1995

Statements of Operations Data:
Total Revenue...................... 100.0%      100.0%  100.0%
Cost of Goods Sold.................  91.4%       87.0%   81.9%
Selling, general and administrative
expenses...........................   8.1%       10.8%   14.3%
Income from operations.............   0.5%        2.2%    3.8%

Year ended December 31, 1997 Compared to Year ended December 31, 1996

      The  revenue  in  1997  was   $45,211,593   representing  an  increase  of
$10,934,377  or 32% compared to 1996.  The revenue  from the newly  acquired The
Metal  Center is  included  for six months and  represented  14% of the  overall
growth.  The major  products  include  recycling of copper,  aluminum and brass,
referred to herein as  non-ferrous  scrap.  Except for equipment and  corrugated
recycling,  all other  existing  businesses  had solid growth  contributing  the
remaining  18% of the  total.  One of the major  contributors  to the  remaining
growth  was the  ferrous  recycling  business,  which  includes  iron and  steel
products.  Recycling  revenues grew 126% to  $11,513,600  through an increase in
direct sales to mills and more aggressive purchasing  practices.  The management
services business grew 17% to $32,064,237 by increasing the same account and new
account  business  serviced from  approximately  1,500 locations on December 31,
1996 to 2,000  locations  on December  31, 1997.  In  addition,  the  management
services  business absorbed  approximately 550 additional  locations from MGM in
the last quarter.

      The 1997 total cost of sales was $41,330,538 increasing $11,496,175 or 39%
compared to 1996.  The cost of goods sold in  management  services  increased by
22.2%  verses an  increase  in  recycling  cost of goods  sold of  161.3%.  This
divergence  was caused by the addition of the  non-ferrous  business,  which has
typically a lower gross  profit  percentage  than the  existing  business  base.
Secondly,  the ferrous business  spreads narrowed due to competitive  pressures.
Finally,  the corrugated  recycling business,  while the most profitable product
line in recycling and which showed an improved  percentage gross margin in 1997,
experienced a drop in revenue  during 1997.  The equipment  division had cost of
goods sold of  $953,463  or 22% less in 1997  versus  1996.  This cost  decrease
compares with a revenue decrease of 11%. The

<PAGE>

business  experienced  a 28% cost decrease in equipment  sales to  approximately
$803,500 while experiencing a 29% increase in rental/leasing. The Registrant has
focused on the growth of the rental/leasing portion of its business.

      The gross  margin was  $3,881,055  representing  a decrease of $561,798 in
1997 or 12.6% from 1996.  The gross  margin was 8.6% of revenue,  which was 4.4%
lower than 1996. A reduced gross margin  percentage of 4.0% was  experienced  in
management  services due to some fixed fee  contracts  which  experienced  store
location growth during the year. Finally,  the recycling division  experienced a
11.9% gross  profit  decrease  due to the new mix of  non-ferrous  products  and
narrowing spreads on the ferrous products,  and lower volume of corrugated scrap
processing.  The equipment business had 8.6% higher gross margin percentage, due
to a favorable mix of higher rental and leasing  business  relative to equipment
sales.

      The selling,  general,  and  administrative  expenses decreased $35,070 as
compared  to  1996.  As  a  percent  of  revenue,   the  selling,   general  and
administrative dropped from 10.8% of revenue to 8.1%.

Financial Condition at December 31, 1997 Compared to December 31, 1996

      Trade accounts receivable  increased  $1,728,041 to $5,028,769 at December
31, 1997.  Last year the Registrant  received a December  receivable  payment of
$1,264,920  at year  end,  and as a  result  of this  timing  difference,  trade
receivables  decreased from  $4,565,648 to $3,300,728.  Therefore,  the adjusted
increase as of December 31, 1997 was $463,121,  which represented a 10% increase
in 1997. This increase is  significantly  less than the 32% increase in revenue,
reflecting  management  focus on working  capital  through  the  liquidation  of
accounts receivable.

      Inventory  increased  $2,078,723  or  480%  to  $2,511,826.  Of the  total
increase,  equipment  increased  $667,241 and the  non-ferrous  scrap  inventory
increased $960,117 due primarily to the new non-ferrous operation. The remaining
increase was due to the purchase of a major ferrous  scrap plant  rework,  which
occurred at the end of the year,  resulting  in a temporary  increase in ferrous
unprocessed scrap inventory.

      Accounts  payable  trade  increased  $1,385,723  from December 31, 1996 to
$6,176,433 as of December 31, 1997.  This increase was due to higher  volumes in
all areas of the Registrant's operations except corrugated paper.

      As of December 31, 1997, the Registrant's working capital was a deficit of
$495,550,  which  represents a $1,463,614  decrease from 1996. The total current
assets increased $1,875,835 due to the $2,078,723 increase in inventory, and the
increase in total  receivables of $623,185 offset by impact of the lower cash of
$875,601.  The current  liabilities  increased  $3,321,449 affected primarily by
total accounts  payable  increases of $1,228,945 and additional  short-term bank
borrowings of $1,200,000.

Year ended December 31, 1996 Compared to Year ended December 31, 1995

      Total revenue  increased 12% from  $30,545,142  in 1995 to  $34,227,216 in
1996. This increase in revenue is the result of (i) an increase of $3,849,921 in
CWS  operations  and (ii) an increase in volume  related to the scrap  recycling
operations and corrugated paper recycling operations,  which offset the decrease
in market prices in 1996 as compared to 1995.  Rental income  increased 45% from
$296,682  in 1995 to  $430,908  in 1996  due to an  increase  in the  number  of
equipment  units  leased  by  the  Registrant  to  customers.   Recycling  sales
experienced a moderate increase of $73,349 or 1.5% to $5,091,550 in 1996.
<PAGE>

      Cost of goods sold increased  $4,826,700 or 19%, from  $25,007,663 in 1995
to $29,834,363  in 1996. As a percentage of revenue,  these costs were 81.9% and
87.0% in 1995 and 1996,  respectively.  This increase was directly related to an
increase in CWS operations of $4,202,873. Recycling cost of goods sold increased
29% from $3,015,669 in 1995 to $3,880,577 in 1996.

      Selling,   general  and  administrative   expenses  decreased  15.4%  from
$4,375,284 in 1995 to $3,701,246 in 1996. These expenses decreased from 14.3% to
10.8% of revenue in 1995 and 1996, respectively. This decrease was due primarily
to (i) reduced costs in maintenance  and leasing of equipment in connection with
the purchasing of new equipment in the recycling operations,  and (ii) the Chief
Executive  Officer of the  Registrant  electing not to receive a salary in 1996,
compared to a salary of $100,000 taken in 1995.  Depreciation  expense increased
41%  from  $329,481  in 1995 to  $465,838  in 1996  due to the  purchase  of new
operational and rental fleet equipment  totaling  $1,156,839.  Interest  expense
increased 45% from $36,760 in 1995 to $53,268 in 1996 due to increased financing
related to the purchase of new equipment.

      Expenses  to  related  parties  decreased  48%  from  $831,223  in 1995 to
$430,000  in  1996.  This  decrease  was  primarily  due  to the  change  in the
management  agreement  between the Registrant and K&R allowing the Registrant to
retain 80%  (commencing  in 1996) rather than 60% (prior to 1996) of the profits
generated  from the K&R  operations.  The  commissions  expense  related to this
agreement  decreased 64% from $485,124 in 1995 to $177,000 in 1996. Rent expense
decreased  31% from  $268,279 in 1995 to $184,000 in 1996,  primarily due to the
Registrant  purchasing  operational equipment (partially funded through the Bank
Credit Facility) rather than leasing such equipment from K&R.

Inflation and Prevailing Economic Conditions

      To  date,  inflation  has not and is not  expected  to have a  significant
impact on the  Registrant's  operation in the near term.  The  Registrant has no
long-term  fixed-price  contracts and the Registrant believes it will be able to
pass through most cost increases resulting from inflation to its customers.

Impact of Recently Issued Accounting Standards

      Reporting  Comprehensive  Income. In June 1997, the Financial Accounting
Standards Board ("FASB") issued  Statement of Financial  Accounting  Standards
("SFAS")  No. 130,  "Reporting  Comprehensive  Income".  The SFAS  establishes
standards  for the  reporting  and  display  of  comprehensive  income and its
components (revenues, expenses, gains and losses) in financial statements.

Year 2000 Risk Factors

      In February 1997, the  Registrant  implemented  its "Year 2000 Project" to
address the potential  problem with which  substantially  all users of automated
data processing and  information  systems must deal. This problem is mainly with
older systems with only two digits to represent  the year,  rather than the full
four  digits.  Older  computer  systems may not operate  when the two digit year
becomes "00" as will happen in the year 2000.

      The Registrant uses primarily "Microsoft" software,  which is already year
2000 compliant.  Our accounting system is a DOS based system, which could create
the  problem  with "00".  The  Registrant  in its  endeavor  to  alleviate  this
DOS-based problem has contracted with the programmer of the

<PAGE>

Registrant to write  software to prevent this  potential  problem.  The software
upgrade has just been  completed,  and the  Registrant  will test the program to
verify all is in working  order.  By having the  upgrade  this far in advance it
will enable the Registrant to run a test system to avert any future problem.

      The only software that the  Registrant  uses that is beyond its control is
"EDI" or "Electronic Data Interchange".  The vendor of this software used by the
Registrant and many Fortune 500  Companies,  has promised a fix for this problem
with its Spring 1999 Release Software  Upgrade.  This area is the one over which
the Registrant  has the least control.  If EDI completes its upgrade as promised
the Registrant does not anticipate a Year 2000 problem with this software.

      In summary,  the Registrant's Year 2000 Project's goal and expectation are
that all  necessary  modifications  and upgrades will be in place at minimum one
year in  advance,  with the  exception  of EDI that is promised by the vendor in
spring  1999.  The  Registrant  currently  has no reason to believe and does not
anticipate  the cost of  Year-2000  compliance  to be a  significant  expense or
problem.

      Notwithstanding the foregoing,  the Registrant will bear some minimal risk
due to customers who fail to address the issues appropriately; or should the one
vendor fail to meet the spring 1999 deadline.  Presently,  the Registrant has no
reason to believe  that any of its  customers  are  failing to take  appropriate
action to effect  Year-2000  compliance  or that its software  will be unable to
perform as before with the upgrades.

ITEM 7a.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      Not Applicable

ITEM  8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The  response  to this Item is  submitted  as a  separate  section of this
report beginning on page F-1.

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

(a)(1)

      (i)   On July 15, 1997,  the  Registrant  dismissed  Mather,  Hamilton and
            Company ("Mather, Hamilton") as its independent accountants.

      (ii)  Not applicable

      (iii) The  decision  to change  accountants  was  approved by the Board of
            Directors.

      (iv)  (A) During the fiscal years of the  Registrant  ended December 31,
            1996 and  December  31,  1995,  and for the interim  periods  from
            December   31,   1996   through   July  15,  1997  there  were  no
            disagreements between Mather, Hamilton and the Registrant,  on any
            matter of accounting principles or practices,  financial statement
            disclosure,  or  auditing  scope  or  procedure,   which,  if  not
            resolved  to the  former  accountant's  satisfaction,  would  have
            caused  it  to  make  reference  to  the  subject  matter  of  the
            disagreement in connection with its reports.

      (iv)  (B) Not applicable

      (iv)  (c) Not applicable
<PAGE>

      (iv)  (D) Not applicable

      (iv)  (E) Not applicable

     (2)    The Registrant engaged Crowe, Chizek and Company, LLP as the auditor
            for the year ending December 31, 1997, on July 29, 1997.





<PAGE>

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information set out in the sections  entitled ELECTION OF DIRECTORS in
the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders and
the  information  set out in the  section  entitled  EXECUTIVE  OFFICERS  of the
Registrant  on pages 12,  13 and 14 of Part I of this  report  are  incorporated
herein by reference.

ITEM 11.    EXECUTIVE COMPENSATION

      The information set out in the section entitled EXECUTIVE  COMPENSATION in
the Registrant's  Proxy Statement for the 1998 Annual Meeting of Shareholders is
incorporated herein by reference.

ITEM  12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information set out in the section  entitled VOTING  SECURITIES in the
Registrant's  Proxy  Statement for the 1998 Annual  Meeting of  Shareholders  is
incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information  set out in the section  entitled  EXECUTIVE  COMPENSATION
Certain  Transactions  in the  Registrant's  Proxy Statement for the 1998 Annual
Meeting of Shareholders is incorporated herein by reference.

ITEM  14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)   (1)   Financial Statements Filed

Page

      Report of Independent Auditors                        F-1a-b

      Balance Sheets as of December 31, 1997 and 1996       F-2

      Statements of Income for the years
      ended December 31, 1997, 1996 and 1995                F-3

      Statements of Shareholders' Equity for the
      years ended December 31, 1997, 1996 and 1995          F-4

      Statements of Cash Flows for the years
      ended December 31, 1997, 1996 and 1995                F-5

      Notes to Financial Statements                         F-6

      (2)  Financial Statement Schedules                    F-17
            Schedule II

      (3)   List of Exhibits

      The list of  exhibits  on the  Exhibit  Index is  incorporated  herein  by
reference.  The Management Agreement and the Consulting Agreement required to be
filed as  exhibits  to this Form  10-K  pursuant  to Item  14(c) are noted by an
asterisk (*) in the Exhibit Index. <PAGE>

(b) Reports on Form 8-K.

      The  Registrant  did not file any  Reports  on Form 8-K  during the last
quarter of the fiscal year of the  Registrant  ended  December 31,  1997.  The
Registrant did file on Form 8-K on March 3, 1998.

(c)   Exhibits.
      The  exhibits  listed  on the  Exhibit  Index  are filed as a part of this
      report.

(d)  Financial Statement Schedules.
      Schedule  II -  Valuation  and  Qualifying  Accounts  is  incorporated  by
      reference at page F-17 of the Financial Statements of the Registrant.


<PAGE>

SIGNATURES

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

                  INDUSTRIAL SERVICES OF AMERICA INC.
                  (Registrant)



                  By :   /s/  Harry Kletter
                        Harry Kletter
                        Chairman of the Board and Chief Executive Officer

Date: March 31, 1998

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

SIGNATURE                                 DATE

  /s/  Joseph H. Cohen                    3/31/98
Joseph H. Cohen
Director

  /s/  R. Michael Devereaux               3/31/98
R. Michael Devereaux
Director

  /s/  Sean M. Garber                     3/31/98
Sean M. Garber
Director, President, Chief
Operating Officer and Treasurer

  /s/  Harry Kletter                      3/31/98
Harry Kletter
Director and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)

  /s/  Dr. Barry N. Naft                  3/31/98
Dr. Barry N. Naft
Director


  /s/ Marcia E. Terry                     3/31/98
Marcia E. Terry
Principal Accounting Officer


<PAGE>


                                   EXHIBITS

Exhibit
Number                            Description

3.1         Certificate of  Incorporation  of the Registrant is  incorporated by
            reference to Exhibit 3.1 of the  Registrant's  report of Form 10-KSB
            for the year ended December 31, 1995.

3.2         Bylaws of the  Registrant are  incorporated  by reference to Exhibit
            3.2 of the  Registrant's  report on Form  10-KSB  for the year ended
            December 31, 1995.

10.1        Management Agreement,  dated as of April 1, 1992, as amended, by and
            between the Registrant and K&R Corporation.

10.2        Stock Option  Agreement,  dated  February 14, 1996, by and between
            the Registrant and Ernest D. Chu.

10.3        Stock Option  Agreement,  dated June 11, 1996,  by and between the
            Registrant and R. Jerry Falkner.

10.4        Independent  Consulting  Services  Agreement - Maxwell,  dated as of
            March 31, 1995,  and  executed on June 25, 1996,  by and between the
            Registrant and Douglas I. Maxwell, III ("Maxwell"),  is incorporated
            by reference to Exhibit 4(a) of  Registration  Statement on Form S-8
            of the Registrant, filed on June 26, 1996 (File No. 333-06915).

10.5        Confidential  Information and Non-Competition  Agreement Independent
            Contractor - Maxwell,  dated as of March 31,  1995,  and executed on
            June 26,  1996,  by and  between  the  Registrant  and  Maxwell,  is
            incorporated by reference to Exhibit 10.1 of Registration  Statement
            on Form S-8 of the Registrant, filed on June 26, 1996 (File No.
            333-06915).

10.6        Stock Option  Agreement - Maxwell,  dated as of March 31, 1995,  and
            executed  on June  26,  1996,  by and  between  the  Registrant  and
            Maxwell,   is   incorporated   by   reference  to  Exhibit  4(b)  of
            Registration Statement on Form S-8 of the Registrant,  filed on June
            26, 1996 (File No. 333-06915).

10.7        Independent  Consulting  Services Agreement - Sullivan,  dated as of
            March 31, 1995,  and  executed on June 26, 1996,  by and between the
            Registrant and Neil C. Sullivan  ("Sullivan"),  is  incorporated  by
            reference to Exhibit 4(a) of  Registration  Statement on Form S-8 of
            the Registrant, filed on June 26, 1996 (File No.
            333-06909).

10.8        Confidential  Information and Non-Competition  Agreement Independent
            Contractor - Sullivan,  dated as of March 31, 1995,  and executed on
            June 26,  1996,  by and  between the  Registrant  and  Sullivan,  is
            incorporated by reference to Exhibit 10.1 of Registration  Statement
            on Form S-8 of the Registrant, filed on June 26, 1996 (File No.
            333-06909).

10.9        Stock Option  Agreement - Sullivan  dated as of March 31, 1995,  and
            executed  on June  26,  1996,  by and  between  the  Registrant  and
            Sullivan,   is   incorporated   by  reference  to  Exhibit  4(b)  of
            Registration Statement on Form S-8 of the Registrant,  filed on June
            26, 1996 (File No. 333-06909).

10.10       Acquisition  of Assets  Agreement - TMG known as "The Metal  Center"
            dated as of July 1, 1997,  by and  between  the  Registrant  and The
            Metal Center set forth in an Asset Purchase Agreement, is

<PAGE>

            incorporated by reference,  as the sole Exhibit on Form 8-K of the
            Registrant, filed July 15, 1997 (File No. 0-20979).

10.11       Assignment of Contracts - MGM Assignment dated September 4, 1997, by
            and between the Registrant and MGM Services, Inc.

10.12       Employment  Agreement - Garber dated as of October 15, 1997,  by and
            between the Registrant and Garber.

10.13       Lease  Agreement - K&R Lease dated  January 1, 1998,  by and between
            the  Registrant and K&R, is  incorporated  by reference  herein,  to
            Exhibit  10.10 on Form 8-K of the  Registrant,  filed  March 3, 1998
            (File No. 0-20979).*

10.14       Consulting  Agreement - K&R Consulting Agreement dated as of January
            2, 1998, by and between the Registrant and K&R, is  incorporated  by
            reference  herein,  to Exhibit 10.11 on Form 8-K of the  Registrant,
            filed March 3, 1998 (File No. 0-20979).*

10.15       Amendment to  Employment  Agreement - Garber dated as of February 5,
            1998, by and between the  Registrant and Garber,  amending  original
            agreement dated October 15, 1997.

11          Statement of Computation of Earnings Per Share.

23.1        Consent of Mather, Hamilton & Co.

23.2        Consent of Crowe, Chizek and Company, LLP

27          Financial Data Schedule (for SEC use only).

*Denotes a  management  contract  of the  Registrant  required to be filed as an
exhibit pursuant to Item 601(10)(iii) of Regulation S-K.



<PAGE>










                     INDUSTRIAL SERVICES OF AMERICA, INC.

                             FINANCIAL STATEMENTS
                       December 31, 1997, 1996 and 1995
                             Louisville, Kentucky


<PAGE>

                     INDUSTRIAL SERVICES OF AMERICA, INC.
                             FINANCIAL STATEMENTS
                       December 31, 1997, 1996 and 1995

                                   CONTENTS









REPORT OF INDEPENDENT AUDITORS-CROWE, CHIZEK AND COMPANY LLP............... 1a

REPORT OF INDEPENDENT AUDITORS-MATHER, HAMILTON AND CO..................... 1b


FINANCIAL STATEMENTS

   BALANCE SHEETS..........................................................  2

   STATEMENTS OF INCOME....................................................  3

   STATEMENTS OF SHAREHOLDERS' EQUITY......................................  4

   STATEMENTS OF CASH FLOWS................................................  5

   NOTES TO FINANCIAL STATEMENTS...........................................  6


SUPPLEMENTARY INFORMATION

   VALUATION AND QUALIFYING ACCOUNTS....................................... 17



<PAGE>












                        REPORT OF INDEPENDENT AUDITORS




Board of Directors and Shareholders
Industrial Services of America, Inc.
Louisville, Kentucky


We have  audited  the  accompanying  balance  sheet of  Industrial  Services  of
America,  Inc. as of December 31, 1997,  and the related  statements  of income,
shareholders'  equity and cash flows for the year then  ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit. The financial  statements of Industrial Services of America,  Inc. as
of December 31, 1996 and 1995 were audited by other  auditors whose report dated
March 10, 1997, expressed an unqualified opinion on those statements.

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

In our opinion,  the 1997 financial statements referred to above present fairly,
in all material  respects,  the  financial  position of  Industrial  Services of
America,  Inc. at December 31, 1997,  and the results of its  operations and its
cash  flows  for the year  then  ended in  conformity  with  generally  accepted
accounting principles.

Our audit of the foregoing 1997 financial  statements also included the schedule
listed under item 14(a)(2).  In our opinion,  such schedule  presents fairly the
information required to be set forth therein.



                                          Crowe, Chizek and Company LLP

Indianapolis, Indiana
February 28, 1998














                                     F-1a

<PAGE>











                        REPORT OF INDEPENDENT AUDITORS



The Board of Directors and Stockholders
Industrial Services of America, Inc.


We have  audited  the  accompanying  balance  sheet of  Industrial  Services  of
America,  Inc. as of December 31, 1996,  and the related  statements  of income,
shareholders'  equity,  and cash flows for the two years ended December 31, 1996
and 1995.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Industrial Services of America,
Inc. as of December 31,  1996,  and the results of its  operations  and its cash
flows for each of the years in the two-year  period ended  December 31, 1996, in
conformity with generally accepted accounting principles.



 /s/ Mather, Hamilton & Co.
MATHER, HAMILTON & CO.
Louisville, Kentucky
March 10, 1997










                                     F-1b


<PAGE>

                     INDUSTRIAL SERVICES OF AMERICA, INC.
                                BALANCE SHEETS
                          December 31, 1997 and 1996

------------------------------------------------------------------------------

                                                           1997         1996
ASSETS
Current assets
   Cash and cash equivalents                           $  495,834   $1,371,435
   Accounts receivable - trade (after allowance for doubtful
     accounts of $16,000 in 1997 and 1996) (Note 2)      5,028,769   3,300,728
   Accounts receivable - related party (Note 7)             34,667     100,360
   Income tax refund receivable                            164,737   1,203,900
   Net investment in sales-type leases (Note 5)             40,154       8,435
   Inventories (Notes 1 and 2)                           2,511,826     433,103
   Deferred income taxes (Note 4)                           18,200      45,400
   Other                                                   195,993     168,984
                                                         ---------   ---------
      Total current assets                               8,490,180   6,632,345

Net property and equipment (Notes 1, 2 and 3)            3,642,712   2,704,192

Other assets
   Non-compete agreements, net (Note 10)                   450,000           -
   Intangibles (net of accumulated amortization of
     $26,667) (Note 10)                                    773,333           -
   Net investment in sales-type leases (Note 5)            192,154      11,165
   Other assets                                            344,645      91,766
                                                        ----------   ---------
                                                         1,760,132     102,931
                                                        ----------   ---------
                                                       $13,893,024  $9,439,468
                                                       ===========  ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
   Notes payable to bank (Note 2)                       $1,800,000   $ 600,000
   Notes payable (Note 10)                                 800,000           -
   Current maturities of long-term debt (Note 3)            45,479      11,774
   Accounts payable                                      6,176,433   4,790,710
   Affiliated companies payable (Note 7)                    23,000     179,778
   Other current liabilities                               140,818      82,019
                                                        ----------   ---------
      Total current liabilities                          8,985,730   5,664,281

Long-term liabilities
   Long-term debt (Note 3)                                 759,877       5,356
   Deferred income taxes (Note 4)                          257,700     161,000
                               -                         ---------    --------
                                                         1,017,577     166,356

Shareholders' equity
   Common stock, $.01 par value: 10,000,000 shares
     authorized and 1,957,500 shares issued and 1,929,600
     shares outstanding                                     19,575      19,575
   Additional paid-in capital                            1,548,750   1,405,000
   Retained earnings                                     2,329,392   2,192,256
   Treasury stock, 27,900 shares at cost                    (8,000)     (8,000)
                   ------                                ---------   ---------
                                                         3,889,717   3,608,831
                                                         ---------   ---------
                                                       $13,893,024  $9,439,468
                                                       ===========  ==========


                                     F-2
                See accompanying notes to financial statements.

<PAGE>

                      INDUSTRAIL SERVICES OF AMERICA, INC.
                             STATEMENTS OF INCOME
                 Years ended December 31, 1997, 1996 and 1995

------------------------------------------------------------------------------


                                            1997         1996         1995
Revenue
   Recycling                             $11,513,600  $5,091,550   $5,018,201
   Equipment sales, service and leasing    1,633,756   1,830,273    2,021,469
   Management services                    32,064,237  27,355,393   23,505,472
                                          ----------  ----------   ----------
     Total revenue                        45,211,593  34,277,216   30,545,142

Cost of goods sold
   Recycling                              10,141,822   3,880,577    3,015,169
   Equipment sales, service and leasing      953,463   1,226,739    1,468,320
   Management services                    30,235,253  24,727,047   20,524,174
                                          ----------  ----------   ----------
     Total cost of goods sold             41,330,538  29,834,363   25,007,663
                                          ----------  ----------   ----------


Gross margin                              3,881,055    4,442,853    5,537,479

Selling, general and administrative       3,666,176    3,701,246    4,375,284
                                          ---------    ---------    ---------


Income from operations                      214,819      741,607    1,162,195

Other income (expense)
   Interest expense                         (78,810)     (53,268)     (36,760)
   Interest income                           64,549       43,339       56,961
   Gain on sale of assets                     4,496       31,229       42,287
   Other income (expense)                    17,372      (23,471)      (3,524)
                                          ---------      --------    ---------
                                              7,607       (2,171)      58,964


Income before income taxes                  222,426      739,436    1,221,159

Provision for income taxes (Note 4)          85,290      278,600      517,000
                                          ---------     --------    ---------

Net income                                $ 137,136   $  460,836   $  704,159
                                          =========   ==========   ==========

Earnings per share                          $  .07       $  .25       $  .41
                                            ======       ======       ======

Earnings per share, assuming dilution       $  .07       $  .24       $  .40
                                            ======       ======       ======



                                     F-3
                See accompanying notes to financial statements.

<PAGE>

<TABLE>
                      INDUSTRIAL SERVICES OF AMERICA, INC.
------------------------------------------------------------------------------------------------------------------------
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                  Years ended December 31, 1997, 1996 and 1995

------------------------------------------------------------------------------------------------------------------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>


                                                             Additional
                                          Common Stock         Paid-in     Retained        Treasury Stock
                                       Shares      Amount      Capital     Earnings      Shares       Cost        Total

Balance as of January 1, 1995        1,757,500   $  17,575   $   27,000   $1,027,261      27,900   $   8,000  $1,063,836

Net income                                   -           -            -      704,159           -           -     704,159
                                     ---------   ---------   ----------   ----------   ---------   ---------   ---------
Balance as of December 31, 1995      1,757,500      17,575       27,000    1,731,420      27,900       8,000   1,767,995

Fair value of stock options issued for
  consulting services provided to the
  Company (Note 11)                          -           -      117,500            -           -           -     117,500

Common stock issued upon exercise of
  nonemployee stock options (Note 11)  200,000       2,000      248,000            -           -           -
250,000

Income tax benefit related to exercise
  of nonemployee stock options (Note 11)     -           -      970,000            -           -           -
970,000

Stock transferred by Company's principal
  shareholder for services to be provided
  to the Company (Note 7)                    -           -       42,500            -           -           -      42,500

Net income                                   -           -            -      460,836           -           -     460,836
                                     ---------   ---------   ----------   ----------   ---------   ---------   ---------
Balance as of December 31, 1996      1,957,500      19,575    1,405,000    2,192,256      27,900       8,000   3,608,831

Fair value of stock options issued for
  employee stock option plan (Note 11)       -           -      143,750            -           -           -     143,750

Net income                                   -           -            -      137,136           -           -     137,136
                                     ---------   ----------  ----------   ----------   ---------  ----------   ---------
Balance as of December 31, 1997      1,957,500   $  19,575   $1,548,750   $2,329,392      27,900   $   8,000   $3,889,717
                                     =========   =========   ==========   ==========   =========   =========   ==========










                                                       F-4
                                     See   accompanying   notes   to   financial
statements.
</TABLE>
<PAGE>
                      INDUSTRIAL SERVICES OF AMERICA, INC.
--------------------------------------------------------------------------------
                             STATEMENTS OF CASH FLOWS
                   Years ended December 31, 1997,1996 and 1995

--------------------------------------------------------------------------------


                                               1997         1996         1995
                                               ----         ----         ----
Cash flows from operating activities
   Net income                              $  137,136  $   460,836  $  704,159
   Adjustments to reconcile net income to net
     cash from operating activities
      (Gain) loss on equity investment        (29,142)      29,142           -
      Stock options granted for services       14,974      100,625           -
      Depreciation and amortization           730,227      465,838     329,481
      Provisions for doubtful accounts         37,983        2,255      33,200
      Deferred income taxes                   123,900       55,400      37,600
      Gain on sale of property and equipment   (4,496)     (31,229)    (42,287)
      Change in assets and liabilities
         Receivables                         (661,168)    (404,297)   (863,787)
         Inventories                       (2,078,723)    (294,600)     22,708
         Other current assets                 (27,009)     (52,715)     85,788
         Accounts payable                   1,228,945    1,193,376     992,570
         Other current liabilities             58,802      (28,407)     65,248
                                            ----------   ----------  ----------
           Net cash from operating activities(468,571)   1,496,224   1,364,680

Cash flows from investing activities
   Proceeds from sale of property & equipment  86,028       59,603     119,580
   Proceeds from sale of joint venture         44,826            -           -
   Purchases of sales-type leases            (226,517)      (2,369)     (6,875)
   Proceeds from sales-type leases             13,807       39,388      36,937
   Investment in joint venture                      -      (44,826)          -
   Purchases of property and equipment     (1,373,610)  (1,156,839) (1,555,359)
   Purchase of restricted investment                 -            -   (100,000)
   Other                                     (139,787)      (7,537)    (15,893)
                                           -----------  ----------- -----------
      Net cash from investing activities   (1,595,253)  (1,112,580) (1,521,610)

Cash flows from financing activities
   Net borrowings from note payable to bank 1,200,000      600,000     300,000
   Proceeds from issuance of long-term debt         -            -      31,525
   Payments on long-term debt                 (11,777)    (370,098)    (21,590)
   Proceeds from exercise of nonemployee            -      250,000           -
     stock options                         -----------  ----------- -----------
      Net cash from financing activities    1,188,223      479,902     309,935
                                           -----------  ----------- -----------
Net change in cash                           (875,601)     863,546     153,005

Cash at beginning of year                   1,371,435      507,889     354,884
                                           -----------  ----------- -----------
Cash at end of year                        $  495,834   $1,371,435  $  507,889
                                           ==========   ==========  ==========
Supplemental disclosure of cash flow information
   Cash paid for interest                  $   78,810   $   48,748   $  36,760
   Cash paid (refunded) for taxes         $(1,077,773)  $  641,226   $ 583,659






                                   F-5
                 See accompanying notes to financial statements

<PAGE>

                      INDUSTRIAL SERVICES OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business:  Industrial Services of America, Inc. (the Company) provides
products  and  services  to meet the  waste  management  needs of its  customers
related to ferrous,  non-ferrous  and  corrugated  scrap  recycling,  management
services and waste equipment sales and rental.  Management  services  represents
contracts with retail businesses to handle their waste disposal needs, primarily
by  subcontracting  with commercial  waste hauling and disposal  companies.  The
Company's customers are located throughout the United States and Canada.

Common Control: The Company conducts significant levels of business (see Note 7)
with K & R  Corporation,  Inc.  (K&R) which is owned by the Company's  principal
shareholder.  Because these entities are under common control, operating results
or financial position of the Company may be materially different from those that
would have been obtained if the entities were autonomous.

Estimates: In preparing the financial statements, management must make estimates
and assumptions. These estimates and assumptions affect the amounts reported for
assets, liabilities, revenues and expenses, as well as affecting the disclosures
provided. Future results could differ from the current estimates.

Inventories:  Inventories  consist  principally of waste equipment machinery and
parts and scrap  materials  held for  resale and are stated at the lower of cost
(first-in,  first-out method) or market. Inventories as of December 31, 1997 and
1996 consist of the following:
                                                         1997        1996

   Equipment and parts                               $  752,099   $  84,858
   Ferrous material                                     756,940     305,575
   Non-ferrous materials                              1,002,787      42,670
                                                      ---------   ---------
                                                     $2,511,826   $ 433,103
                                                     ==========   =========

Property  and  Equipment:  Property  and  equipment  are  stated at cost and are
depreciated  on a  straight-line  basis over the  estimated  useful lives of the
related property.

Property  and  equipment  as of  December  31,  1997  and  1996  consist  of the
following:
                                        Life            1997         1996

   Equipment and vehicles          3-10 years        $3,373,097  $2,536,174
   Office equipment                 3-5 years           402,186     426,777
   Rental equipment                   5 years         1,202,207     844,765
   Leasehold improvements            10 years           296,308     143,477
                                                     ----------  ----------
                                                      5,273,798   3,951,193
   Accumulated depreciation
     and amortization                                 1,631,086   1,247,001
                                                      ---------   ---------
                                                     $3,642,712  $2,704,192
                                                     ==========  ==========




                                       F-6
                                   (Continued)

<PAGE>
                      INDUSTRIAL SERVICES OF AMERICA, INC.
                         NOTES TO FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Depreciation  expense for the years ended  December 31, 1997,  1996 and 1995 was
$653,561, $465,838 and $329,481, respectively.

Intangible  Assets:  The  excess of cost over fair value of assets  acquired  is
being  amortized  over a period  of 15 years  using  the  straight-line  method.
Non-compete  agreements are being amortized using the straight-line  method over
the benefit period of 5 years.

Income  Taxes:  The Company  records  income tax expense  based on the amount of
taxes due on its tax returns plus deferred  taxes computed based on the expected
future tax  consequences of temporary  differences  between the carrying amounts
and tax basis of assets and liabilities, using enacted tax rates.

Statement of Cash Flows:  The statement of cash flows has been prepared  using a
definition of cash that includes  deposits with original  maturities of 3 months
or less.

Reclassifications:  Certain  amounts in the 1996 and 1995  financial  statements
have been reclassified to conform to the 1997 financial statement  presentation.
These  reclassifications had no effect on 1996 and 1995 retained earnings or net
income.

Earnings  Per Common  Share:  Earnings  per Common  Share is computed  under the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," which was adopted  retroactively  by the Company at the beginning of the
fourth quarter of 1997.  Adoption of the Statement  resulted in a restatement of
the EPS amounts  previously  reported by the Company for prior  annual  periods.
Amounts  reported as Earnings per Common Share for each of the three years ended
December 31, 1997 reflect the earnings available to common  shareholders for the
year divided by the weighted average number of common shares  outstanding during
the year.  The weighted  average common shares  outstanding  for the years ended
December  31,  1997,  1996 and 1995 were  1,929,600,  1,837,933  and  1,729,600,
respectively.

Stock-Based  Compensation and  Transactions:  Expense for employee  compensation
under  stock  option  plans is reported  only if options  are granted  below the
market price at the grant date. Pro forma disclosures of net income and earnings
per share are  provided  as if the fair  value  method of  Financial  Accounting
Standard No. 123 was used for stock-based compensation.

Fair Values of Financial  Instruments:  Fair value of financial  instruments are
estimated using relevant market  information and other  assumptions.  Fair value
estimates involve  uncertainties and matters of significant  judgment  regarding
interest rates,  prepayments and other factors. Changes in assumptions or market
conditions could significantly affect the estimates. As of December 31, 1997 and
1996, the estimated fair value of financial instruments approximated book value.


                                       F-7
                                  (Continued)
<PAGE>
                      INDUSTRIAL SERVICES OF AMERICA, INC.
                         NOTES TO FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995

NOTE 2 - NOTES PAYABLE TO BANK

At December 31,  1997,  the Company has a  $2,000,000  operating  line of credit
collateralized by eligible accounts receivable,  inventories,  equipment and the
personal guarantee of the majority  shareholder.  Interest is payable monthly on
the  outstanding  principal  balance at the current  bank's prime rate. The note
matures in June 1998.

The Company also has available a $1,600,000  operating line of credit secured by
virtually  all  business  assets  and  a  personal  guarantee  of  the  majority
shareholder. Interest is payable monthly on the outstanding principal balance at
the current bank's prime rate. The note matures in July 1998. As of December 31,
1997, the Company had not drawn any funds on this note.

NOTE 3 - LONG-TERM DEBT

Long term debt as of December 31, 1997 and 1996 consists of the following:

                                                          1997        1996
                                                          ----        ----
   Notes payable to a bank in monthly installments of $10,000 including interest
   at 8.5% through  April 2003;  secured by virtually  all company  assets and a
   personal guarantee of the majority
   shareholder.                                          $800,000   $      -


   Notes  payable;   interest   ranging  from  8.75%  to  11%;  due  in  monthly
   installments  of principal and interest  totaling $909 with various  maturity
   dates through January 1999;
   secured by vehicles.                                    5,356     17,130
                                                        --------   --------
                                                         805,356     17,130
   Current maturities                                     45,479     11,774
                                                        --------   --------
                                                        $759,877   $  5,356
                                                        ========   ========


The long-term debt requires annual principal payments as follows:

            1998                                        $   45,479
            1999                                            57,621
            2000                                            62,714
            2001                                            68,258
            2002                                            74,291
            Thereafter                                     496,993




                                        F-8
--------------------------------------------------------------------------------
                                  (Continued)

<PAGE>

                      INDUSTRIAL SERVICES OF AMERICA, INC.
                         NOTES TO FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995
--------------------------------------------------------------------------------
NOTE 4 - INCOME TAXES

The  provision  for income taxes  consists of the  following for the years ended
December 31, 1997, 1996 and 1995:
                                               1997       1996        1995
                                               ----       ----        ----
   Federal
      Current                                $(32,800)  $177,900   $386,700
      Deferred                                105,300     48,500     31,900
                                              -------    -------    -------
                                               72,500    226,400    418,600
   State
      Current                                  (5,810)    45,300     92,700
      Deferred                                 18,600      6,900      5,700
                                               ------      -----      -----
                                               12,790     52,200     98,400
                                               ------     ------     ------
                                             $ 85,290   $278,600   $517,000
                                             ========   ========   ========

A  reconciliation  of  income  taxes  at the  statutory  rate  to the  company's
effective rate is as follows:
                                               1997       1996        1995
                                               ----       ----        ----

   Federal income tax at statutory rate      $ 75,600   $251,400   $415,200
   State and local income taxes, net of
     federal income tax affect                  8,400     25,100     63,000
   Effect of tax rate change in deferred
     tax assets                                     -          -     13,500
   Other differences, net                       1,290      2,100     25,300
                                             --------   --------   --------
                                             $ 85,290   $278,600   $517,000
                                             ========   ========   ========

Significant  components of the Company's  deferred tax liabilities and assets as
of December 31, 1997 and 1996 are as follows:
                                                          1997        1996
                                                          ----        ----

   Deferred tax liabilities
      Tax depreciation in excess of book                $277,000   $172,800

   Deferred tax assets
      Allowance for doubtful accounts                     18,200     18,200
      Book amortization in excess of tax                  13,300          -
      Stock options                                        6,000     39,000
                                                        --------   --------
                                                          37,500     57,200
                                                        --------   --------
         Net deferred tax liabilities                   $239,500   $115,600
                                                        ========   ========



                                       F-9
                                  (Continued)


<PAGE>

                      INDUSTRIAL SERVICES OF AMERICA, INC.
                         NOTES TO FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995



NOTE 5 - LEASES

The Company is the lessor of equipment under sales-type lease agreements  having
terms of three to five years,  with the lessees having the option to acquire the
equipment  at the  termination  of the leases.  All costs  associated  with this
equipment are the responsibility of the lessees.

The Company also is the lessor of equipment under operating  leases having terms
of one to  five  years.  All  costs  associated  with  this  equipment  are  the
responsibility of the lessees. These revenues are offset by rental payments made
by the Company  totaling  approximately  $117,000  annually.  The  remaining net
investment in equipment leased to customers under noncancelable operating leases
as of December 31, 1997 and 1996 is as follows:
                                                         1997        1996

   Rental equipment                                   $1,202,207  $ 844,765
   Accumulated depreciation                             518,805     376,730
                                                        -------     -------
                                                      $ 683,402   $ 468,035
                                                      =========   =========

Future minimum lease payments  receivable for sales-type and operating leases as
of December 31, 1997 are as follows:
                                                      Sales-Type   Operating
                                                      ----------   ---------
   1998                                               $  99,899   $ 638,320
   1999                                                  97,250     520,375
   2000                                                  87,197     459,366
   2001                                                  72,676     384,811
   2002                                                  66,000     325,338
   ----                                                  ------     -------

      Net minimum lease payments receivable             423,022   $2,328,210
                                                                  ==========
   Less unearned income                                 190,714
                                                        -------
      Net investment in sales-type leases               232,308
   Less current portion                                  40,154
                                                        -------
                                                      $ 192,154
                                                      =========








                                      F-10
                                  (Continued)

<PAGE>

                      INDUSTRIAL SERVICES OF AMERICA, INC.
                         NOTES TO FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995
-------------------------------------------------------------------------------

NOTE 6 - COMMITMENTS

The  Company  leases  its  facility  from a related  party (see Note 7) under an
operating  lease  expiring  December 2007.  This agreement  provides for monthly
payments of $37,500  through  December 2002,  increasing at the beginning of the
second five years based on the change in the Consumer Price Index.

The following is a schedule by year of future minimum lease payments at December
31, 1997:

               1998                                   $ 450,000
               1999                                     450,000
               2000                                     450,000
               2001                                     450,000
               2002                                     450,000
               Thereafter                             2,250,000

Total rent expense for the years ending  December 31,  1997,  1996 and 1995 were
$381,884, $242,372 and $338,729, respectively.


NOTE 7 - RELATED PARTY TRANSACTIONS

The Company enters into various  transactions with related parties including the
Company's  principal  shareholder  and an affiliated  company  controlled by the
Company's  principal  shareholder  (K&R). A summary of these  transactions is as
follows:

                                             1997        1996        1995

   Accounts receivable                    $  34,667   $ 100,360
                                          =========   =========
   Accounts payable                       $  23,000   $ 179,778
                                          =========   =========
   Sales                                  $       -   $ 204,386
                                          =========   =========
   Rent expense                           $ 261,000   $ 184,000   $ 268,279
                                          =========   =========   =========
   Commission expense                     $ 114,000   $ 177,000   $ 485,124
                                          =========   =========   =========
   Consulting fees                        $  15,473   $  53,000   $  52,820
                                          =========   =========   =========
   Legal expenses                         $   9,100   $  16,000   $  25,000
                                          =========   =========   =========






                                    F-11
                                  (Continued)

<PAGE>

                      INDUSTRAIL SERVICES OF AMERICA, INC.
                         NOTES TO FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995
--------------------------------------------------------------------------------


NOTE 7 - RELATED PARTY TRANSACTIONS (Continued)

In November 1996, the Company entered into a one year  consulting  agreement for
certain  marketing  expertise.  The Company's  principal  shareholder  agreed to
transfer 5,000 shares of his stock on behalf of the Company to the consultant as
payment for these future services. The Company recorded deferred consulting fees
and  additional  paid-in-capital  of $42,500 in 1996  resulting from the stock's
quoted  market value as of the date of the  agreement.  This was  recognized  in
expense in 1997.

The  Company's   principal   shareholder   and  Chief   Executive   Officer  has
discretionary  authority  regarding  his annual  salary.  During the years ended
December 31, 1997 and 1996,  the CEO did not receive a salary.  The CEO's salary
for the year ended  December  31,  1995  totaled  $100,000  which is included in
selling, general and administrative expenses in the statement of income.

The  Company  had an  agreement  with K&R to manage all  aspects of K&R's  scrap
recycling  operations.  The agreement provided that the Company pay a commission
equal to 20% of the profits from K&R's scrap recycling  operations.  The Company
included  all  revenue  from the  scrap  recycling  operations  and the  related
commission  fee in the  statement  of income.  The Company  incurred  commission
expenses to K&R  totaling  $114,000,  $177,000  and $485,124 for the years ended
December 31, 1997,  1996 and 1995  respectively.  This agreement was canceled on
July 1, 1997.

In January 1998,  the Company  entered into an agreement with K&R for consulting
services  related to the scrap metal and paper recycling  operations and related
equipment sales and services. The agreement is for a 10 year period and requires
payments of $240,000 annually.

NOTE 8 - MAJOR CUSTOMERS

Revenue from two customers in 1997, 1996 and 1995 represents  approximately 57%,
58% and 44% of total  revenues,  respectively.  At  December  31, 1997 and 1996,
amounts due from these customers included in accounts receivable were $2,102,934
and $1,552,941, respectively.


NOTE 9 - EMPLOYEE RETIREMENT PLAN

The Company sponsors a defined contribution retirement plan under Section 401(k)
of the Internal Revenue Code which covers substantially all employees.  Eligible
employees  may  contribute  a maximum of 15% of their annual  salary.  Under the
plan, the Company matches 10% of each employee's  voluntary  contributions.  The
Company's  contributions  to the plan for  1997,  1996  and 1995  were  $11,448,
$13,856 and $31,111, respectively.


                                    F-12
                                  (Continued)

<PAGE>

                      INDUSTRAIL SERVICES OF AMERICA, INC.
                         NOTES TO FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995
--------------------------------------------------------------------------------


NOTE 10 - ACQUISITION

On July 1, 1997,  the Company  entered an agreement  with the  principles of TMG
Enterprises  (TMG) d/b/a The Metal Center to purchase  equipment for $1,100,000.
The  purchase  price of  $1,100,000  exceeded  the fair  value of the net assets
acquired by $800,000.  The excess is being amortized on the straight-line method
over 15 years.  Non-compete  agreements of $500,000 represent the portion of the
purchase price allocated to the arrangement  whereby TMG's principles agreed not
to  compete  with the  Company  for a period  of five  years.  The cost is being
amortized  on the  straight-line  method over the term of the  arrangement.  The
amount charged to expense in 1997 was $50,000. The results of operations include
the acquired operations from the date of acquisition.  The pro forma disclosures
required by APB No. 16 are not material.

Payments are due in two installments of $800,000 on January 2, and July 1, 1998.
No interest is being imputed on these installments. This note payable is secured
by letters of credit in the amount of $1,600,000.

NOTE 11 - STOCK OPTION PLANS

During the years ended  December  31, 1996 and 1995,  the Company  entered  into
various consulting  agreements for certain strategic and advisory  services.  In
conjunction  with these  agreements,  the Company  granted  stock options to the
consultants.  The fair value of each stock option was based on the quoted market
price of the  Company's  common  stock at the date of grant.  Due to the limited
trading of the Company's  stock, the quoted market price of the Company's common
stock less the exercise  price of the related  stock option was used as the best
estimate  of each  stock  option's  fair  value  at the date of  grant.  Because
exercise  prices of the stock options issued in 1996 were below the market price
of the Company's common stock at the dates of grant, consulting costs of $16,875
and  $100,625  were  recorded  for the years ended  December  31, 1997 and 1996,
respectively.  Because  exercise prices of the stock options issued in 1995 were
above the market price of the Company's  common stock at the dates of grant,  no
consulting  costs were  recorded  related to issuance  of these  stock  options.
Because the stock  options  issued in 1996 and 1995 were valued at fair value as
would  have  been  determined  in  accordance  with SFAS No.  123,  no pro forma
disclosures  related  to net income  and  earnings  per share for the year ended
December 31, 1996 and 1995 are necessary.

During 1997,  the Company  adopted an employee stock option plan under which the
Company may grant options for up to 330,000 shares of common stock. The exercise
price of each option is equal to the market price of the Company's  stock on the
date of grant. The maximum term of the option is five years.




                                      F-13
                                  (Continued)

<PAGE>

                      INDUSTRIAL SERVICES OF AMERICA, INC.
                         NOTES TO FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995
--------------------------------------------------------------------------------

NOTE 11 - STOCK OPTION PLANS (Continued)

The Company  applies APB Opinion 25 in accounting  for its employee stock option
plan.  Accordingly,  no  compensation  cost has been  recognized for the plan in
1997.

The Company also issued options to purchase 25,000 shares of common stock to its
president as a component of a two year employment agreement beginning in October
1997. The exercise price of each option is $1 per share and is exercisable  over
a five year period.  Compensation  cost charged to operations in 1997 related to
this option was $14,974.

During 1997,  the Company  issued  options to purchase  100,000 shares of common
stock to its acting Chief Executive Officer.  The exercise price is $5 per share
and is  exercisable  through  October 1999.  Because the exercise price of these
options was in excess of the market value of the  Company's  common stock on the
date of grant,  there were no  compensation  costs  recorded in 1997  related to
these options.

Had compensation  costs been recorded on the employee stock options on the basis
of fair market value pursuant to FASB Statement No. 123, net income and earnings
per share would have been reduced as follows:

   Net income

      As reported                                                 $ 137,136
                                                                  =========

      Pro forma                                                   $(145,684)
                                                                  =========

   Basic Earnings Per Share

      As reported                                                 $     .07
                                                                  =========

      Pro forma                                                   $    (.08)
                                                                  =========

   Diluted Earnings Per Share

      As reported                                                 $     .07
                                                                  =========

      Pro forma                                                   $    (.07)
                                                                  =========

The above pro forma  information  is based on an  estimated  fair value of these
stock  options  as of the date of grant  using a  Black-Scholes  option  pricing
method with the  following  weighted  average  assumptions  for 1997:  risk free
interest rate of 4.0%,  dividend yield of 0%,  volatility factor of the expected
market  price of the  Company's  common  stock of .60,  and a  weighted  average
expected life of the options of 4 years.


                                      F-14
                                  (Continued)

<PAGE>

                      INDUSTRIAL SERVICES OF AMERICA, INC.
                         NOTES TO FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995
--------------------------------------------------------------------------------

NOTE 11 - STOCK OPTION PLANS (Continued)

Following  is a summary of stock option  activity and number of shares  reserved
for outstanding options for the years ended December 31, 1997, 1996 and 1995:

                                    Weighted
                                           Weighted           Maximum  Average
                                            Average   Option  Term ofGrant Date
                                Number ofOption PricePrice PerOptionsFair Value
                                 Shares    Per Share   Share  Grantedof Options
                                --------   --------- -------- ------- ---------
Balance as of January 1, 1995          -
  Granted                        200,000  $1.25  $.50 to $2.00   2 years $   -
  Exercised                            -       -         -       -           -
                                --------
Balance as of December 31, 1995  200,000    1.25  $.50 to $2.00  2 years     -
  Granted                         70,000    5.00      $5.00      2 to 10  2.93
                                                                  years
  Exercised                     (200,000)   1.25  $.50 to $2.00  2 years     -
                                --------

Balance as of December 31, 1996   70,000    5.00      $5.00      2 to 10  2.93
                                                                  years
  Granted                        225,000    4.55  $1.00 to $5.00 2 to 5   5.19
                                                                  years
  Exercised                            -
  Expired                        (50,000)   5.00      $5.00      2 years
                                 -------
Balance as of December 31, 1997  245,000    4.59
                                 =======

As of December 31, 1997, the 245,000  options  outstanding  have exercise prices
between $1 to $5 and a weighted-average remaining contractual life of 3.8 years.

The tax effect of income tax  deductions  for the year ended  December  31, 1996
related to the 1996 exercise of the non-employee stock options issued during the
year ended December 31, 1995 was credited to additional paid-in capital. Because
no consulting costs were recorded in 1995 related to the issuance of these stock
options,  the amount credited to additional  paid-in capital  represents the tax
effect  related to the excess of the market price of the Company's  common stock
at the date of exercise compared to the related stock option exercise price.










                                      F-15
                                  (Continued)

<PAGE>

                      INDUSTRIAL SERVICES OF AMERICA, INC.
                         NOTES TO FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995
--------------------------------------------------------------------------------
NOTE 12 - SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
  FINANCING ACTIVITIES

The following  noncash  investing and financing  activities  occurred during the
year ended December 31, 1997, 1996 and 1995.

                                                 1997      1996       1995
                                                 ----      ----       ----
   Reclassification of deposits on operating
     equipment                                $      -   $125,000   $     -

   Transfer of restricted investment in lieu of
     for cash payment of accounts payable to K&R     -    100,000         -

   Fair value of stock options issued for
     employee and non-employee services        128,776    117,500         -

   Income tax benefit related to exercise of
     nonemployee stock options                       -    970,000         -

   Stock transferred by Company's principal
     shareholderfor future consulting services
     to be provided to the Company                   -     42,500         -

   Acquisition of TMG Enterprises by issuing 1,600,000          -         -
     note payable

NOTE 13 - PER SHARE DATA

The following illustrates the computation for earnings per share and earning per
share assuming dilution.

                                           1997         1996         1995
                                           ----         ----         ----
Earnings per share
   Net income                           $  137,136   $  460,836   $ 704,159
   Weighted average shares outstanding   1,929,600    1,837,933   1,729,600
                                         ---------    ---------   ---------
      Basic earnings per share          $      .07  $       .25   $     .41
                                        ==========  ===========   =========
Earnings per share assuming dilution
   Net income                           $  137,136   $  460,836   $ 704,159

   Weighted average shares outstanding   1,929,600    1,837,933   1,729,600
   Add dilutive effect of assumed
     exercising of stock options            28,595      106,522      52,853
                                        ----------   ----------   ---------
      Diluted average shares outstanding 1,958,195    1,944,455   1,782,453
                                        ----------    ---------   ---------

      Earnings per share assuming        $     .07   $      .24   $     .40
        dilution                         =========   ==========   =========








                                      F-16
<PAGE>


SCHEDULE II            INDUSTRIAL SERVICES OF AMERICA, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
                          Year ended December 31, 1997

--------------------------------------------------------------------------------

                        Balance at Charged to Charged to             Balance
                         Beginning  Costs and    Other               at End
                          of Year   Expenses   Accounts   Deductions of Year

Description

Allowance for doubtful
  accounts (deducted from
  accounts receivable)   $ 16,000   $      -    $     -    $     -   $ 16,000
                         ========   ========    =======    =======   ========

Allowance for doubtful
  accounts (deducted from
  notes receivable)      $ 29,455   $      -    $     -    $     -   $ 29,455
                         ========   ========    =======    =======   ========





























                                      F-17
<PAGE>

EXHIBIT 10.11



                                    September 4, 1997

Mr. Tom Sutton, Chairman of the Board
MGM Services, Inc.
800 Bering Drive, Suite 400
Houston, Texas 77057

Dear Mr. Sutton:

Upon  mutual  desire of MGM  Services,  Inc.  (MGM) and  Industrial  Services of
America, Inc. (ISA) the following changes are to be agreed upon and made. First,
the management  agreement dated May 1, 1997 is to be voided and second,  certain
contracts with MGM's customers will be assigned to ISA for consideration.
Accordingly, it is agreed as follows:

1.   Termination of Management Agreement.  The Management Agreement dated May 1,
     1997 between MGM and ISA shall be deemed voided and shall be of not past or
     future  force or effect and ISA and MGM shall  mutually  release each other
     from any and all claims  that  either  party may have had against the other
     party with respect to that agreement.

2.   Reimbursement  for Certain Operating  Expenses.  MGM shall reimburse to ISA
     $30,000 for certain  expenses  that ISA has  incurred and will incur in the
     assistance of the operations  management of MGM up to the effective date of
     the assignment of the contracts  described herein.  Of this  reimbursement,
     $20,000  shall be paid to ISA over the next three (3)  months  and  $10,000
     will be credited  towards ISA's purchase of certain  furniture and fixtures
     of MGM.

3.   Assignment of Contracts.  MGM shall assign to ISA the contracts it has with
     its  customers  as  set  forth  in  Schedule  1(a)  attached   hereto.   In
     consideration for such assignment, ISA shall pay MGM Three hundred thousand
     ($300,000)  dollars  (the  "Purchase  Price")  which shall be payable on or
     before  September  22,  1997.  This  assignment  of the  contracts is to be
     effective  January 1, 1998. As a condition  precedent to ISA paying MGM the
     Purchase  Price,  MGM shall furnish ISA with a signed letter in the form of
     Exhibit A to evidence each  customer's  consent to the  assignment of their
     respective waste management agreement with MGM. In the event, MGM is unable
     to receive the consent of any customer  identified  on Schedule  1(a),  the
     parties  shall adjust the  Purchase  Price  proportionately  based upon the
     percentage  figures  listed  on  Schedule  1(a) and any  amounts  otherwise
     payable to MGM shall be deferred until such time as the applicable  consent
     has been received.  In the event any customers  identified on Schedule 1(a)
     cancels its account before December 31, 1997, ISA shall be entitled to make
     a  proportionate  adjustment of the Purchase  Price based on the percentage
     figures  listed on Schedule  1(a) and agreed upon by MGM and ISA. ISA shall
     have the right to retain  amounts  otherwise  payable to MGM in the form of
     commissions  hereunder  in order to receive  an amount  equal to the dollar
     value of such adjustment.  MGM will also assign any revenue rights starting
     January 1, 1998 and waste  management  obligations  to the customers as set
     forth  in  Schedule  1(b)  attached  hereto.   In  consideration  for  such
     assignment,  ISA shall pay MGM a monthly commission fee equal to 20% of the
     "management fee" and commodity  revenues paid by such respective  customers
     listed on Schedule  1(b) to ISA for the period  commencing  January 1, 1998
     and ending June 30, 1998. In the event any of the  customers  identified on
     the attached  Schedule 1(a) or Schedule 1(b) expand their locations managed
     under the contracts or agreements,  ISA shall pay MGM a monthly  commission
     fee equal to 20% of the  "management  fee" and  commodity  revenues paid by
     such respective  locations to ISA for the period commencing January 1, 1998
     and ending June 30, 1998.  MGM retains the right to any and all  management
     fees,  commodity  revenues and processing fees earned through  December 31,
     1997 for  those  customers  identified  on the  attached  Schedule  1(a) or
     Schedule 1(b).  CWS/ISA will not be  responsible  for any past due balances
     owed by MGM.

4.   Mutual  Release.  Upon the execution of this  agreement,  ISA and MGM shall
     mutually  release  and hold  harmless  each  other  from any and all claims
     either party may have had against the other party,  other than the right to
     enforce this agreement.

5.   J.C.  Penney.  The parties  agree to address the J.C.  Penney  account at a
     later date under a separate agreement.

6.   Further Documentation.  Each party agrees to enter into any and all further
     documentation necessary to effectuate the terms of this agreement as agreed
     upon by both parties to this agreement.  The parties have agreed to conduct
     themselves in the manner contemplated in Schedule 2 attached hereto.

If the foregoing  meets with your  approval,  please sign in the space  provided
below and return a copy of this letter to ISA.


                                    Sincerely,

                                    Industrial Services of America, Inc.



                                    By:  /s/ Harry Kletter
                                          Harry Kletter, President

Agreed to and Accepted:

MGM Services, Inc.



By:  /s/ Thomas L. Sutton
      Thomas L. Sutton, Chairman of the Board


<PAGE>

                                  SCHEDULE 1(a)

                        LIST OF CONTRACTS TO BE ASSIGNED

Customer Name                 Locations         %value of Purchase Price

Home Base                      84               22%

Franks                        261               33%

Mervyns                       147               22%

TGIF                           77               15%

Taco Bueno                    107                8%

Proffitts                      13                0%

Austin Commercial               1                0%



<PAGE>

                                  SCHEDULE 1(b)

                     LIST OF CUSTOMERS RIGHTS TO BE ASSIGNED

Customer Name                 Locations

Bontons                       66

Toys R Us                     31

Save A Lot                     9

La Quinta                     14

Lord & Taylor                  5


<PAGE>

                                   SCHEDULE 2

SCHEDULE OF PLANNED EVENTS

1. Get letters of consent signed with contract accounts.

2.   CWS/ISA  and MGM  contact  to make a  personal  visit and  introduction  to
     CWS/ISA to each account.

3.   Transfer  of funds to be done in a timely  manner  upon the  receipt of the
     signed letter of assignment.

4.   If account does not agree to sign a letter of consent,  account to become a
     commission  account due the 20%  commission  as set forth in item #3 of the
     contract rather than being treated as a contract account.

5. Set-up timetable of account roll-out into Louisville system.

6.   MGM Dallas  personnel to input  correct  store and hauler  information  and
     rates to CWS database after verifying necessary information.

7.   MGM personnel to coordinate new procedures with account  corporate  contact
     and stores.

8.   MGM  personnel  to get hauler  invoices  address  changed  from  Houston to
     Louisville address.

9.   MGM personnel to get recyclers to change remittance address from Houston to
     Louisville.

10. Accounts to start calling into Louisville dispatch office.

11.  Monthly  account  management  reports and invoices to be generated from CWS
     management database and dispatch system.

12.  Invoices  for  accounts in CWS/ISA  systems to be paid by ISA by funds that
     come in for  remittance on invoices  generated by CWS.  CWS/ISA will not be
     responsible for any past due balances owed by MGM.

13. ISA Louisville to begin EDI on applicable account no sooner than 1/1/98.

14.  MGM Dallas  office to downsize as accounts  are shifted to CWS  Louisville.
     Leased  employees,  furniture,  telephone and office space downsizing to be
     handled by Tom Sutton and Tim Roach.

15. CWS - Dallas office to start-up 1/1/98. <PAGE>

Exhibit 10.12

                              EMPLOYMENT AGREEMENT

     THIS AGREEMENT made this 14th day of October,  1997 (the "Effective  Date")
by and between  Sean Garber  residing  at 4403 Water  Crest  Court,  Louisville,
Kentucky 40241 (hereinafter  referred to as "Employee") and Industrial  Services
of  America,  Inc.,  a Florida  company  located at 7100 Grade Lane,  Bldg.  #2,
Louisville, Kentucky 40213 (hereinafter referred to as the "Company").

     WHEREAS, the Company is highly dependent on its senior management team; and
the loss of the services of any member of senior  management may have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations;

     WHEREAS,  the Company  desires to retain  Employee as a full time employee,
and  Employee  desires  to  accept  employment  upon the  terms  and  conditions
hereinafter set forth.

     NOW,  THEREFORE,  in  consideration  of the mutual covenants and agreements
herein contained, Employee and the Company do hereby mutually agree as follows:

1.   Term.

     1.1  The Company  agrees to retain  Employee as a full-time  employee for a
          term of five (5)  years  commencing  upon the date of this  agreement,
          unless this agreement is earlier terminated as provided herein.

     1.2  This Agreement shall automatically renew for additional successive one
          (1) year periods  unless  either party hereto shall have  provided the
          other party notice of intent not to renew within 180 days prior to the
          expiration of the then current term.

2.   Duties.

     2.1  Employee hereby agrees to serve as a full-time employee,  and exercise
          his full time best  efforts in  performing  functions  assigned by the
          Board of  Directors  of the  Company  under the  terms and  conditions
          contained  in this  agreement  and such  other  policies,  directions,
          regulations,  and  other  requirements  as may  from  time  to time be
          established  by the Board of  Directors  of the  Company.  The parties
          acknowledge that the Employee is being hired to serve as a Senior Vice
          President and Chief Operating Officer for the Company.

3.   Exclusiveness of Services.

     3.1  Employee  hereby  agrees  that during the term of this  Agreement  the
          Employee will make  available his services  solely and  exclusively to
          the Company,  and that during such time the  Employee  will not render
          any similar  services  for his own  account,  or any  services for any
          other person, firm, or corporation,  without first obtaining the prior
          written  consent of the Company.  Employee  further agrees to promptly
          reveal to other  appropriate  Employees  of the  Company  all  matters
          coming to his attention pertaining to the business or interests of the
          Company.

4.   Confidential Information.

     4.1  Employee  recognizes  that the  Employee  has  access to a variety  of
          confidential information concerning the Company;  therefore,  Employee
          agrees that the Employee will not, either during his employment or any
          time after the termination of his employment with the Company,  use or
          divulge or reveal to any person,  firm,  or  corporation,  directly or
          indirectly,   any   confidential   proprietary   information   or  any
          information obtained by the Employee during the term of this Agreement
          that  might  be  used in any  way to  injure  or  interfere  with  the
          Company's  business or trade or to  alienate  customers,  dealers,  or

<PAGE>

          employees from the Company or to cause  discontent or  dissatisfaction
          among  the  Company's  customers  or  employees   (collectively,   the
          "Confidential  Information").   The  obligations  set  forth  in  this
          Section,  will not apply to  information  or  materials  which (i) are
          already  known to  Employee  at the time  that they are  disclosed  by
          Company;  or (ii) are publicly  known at the time of  disclosure.  The
          obligations  in this Section will cease as to particular  Confidential
          Information   after   the  date  that  the   particular   Confidential
          Information:  (i) becomes publicly known through no fault of Employee;
          (ii) is received by Employee  properly and lawfully from a third party
          without  restriction on disclosure and without knowledge or reasonable
          suspicion  that the  third  party's  disclosure  is in  breach  of any
          obligations to Company;  or (iii) has been approved for public release
          by written authorization of Company.

     4.2  This covenant of confidentiality  shall extend beyond the term of this
          Agreement and shall survive the  termination of this Agreement for any
          reason.

5.   Covenant Not-to-Compete

     5.1  Employee  agrees that,  upon  termination of his  employment  with the
          Company for any reason whatsoever,  voluntary or involuntary, that for
          a period of two (2) years after date of termination of employment with
          the Company,  Employee shall not,  directly or  indirectly,  interfere
          with,  solicit,  or accept for  himself  or for anyone  other than the
          Company any of the clients or  customers  of the Company or any of its
          affiliates at the time of said  termination of employment,  or perform
          any services of any competitive nature in connection with said clients
          or customers for anyone other than the Company or its affiliates. This
          covenant  not-to-compete  shall be effective  within the  geographical
          territory  within a radius of one  hundred  (100)  miles of any of the
          Company's business operations.

     5.2  It is understood and agreed that the purpose of this limitation is for
          the protection of the Company in that  competition  with its customers
          would be detrimental to the Company.  Employee acknowledges that there
          is no  adequate  remedy at law in favor of the  Company  for breach of
          this Agreement by Employee and that the Company, in addition to all of
          the rights  which may be  available,  shall have the right of specific
          performance  in the event of breach or of  injunction  in any event of
          any  threatened  breach.  5.3 This covenant of  non-competition  shall
          extend  beyond  the  term of this  Agreement  and  shall  survive  the
          termination of this Agreement for any reason.  If any of the covenants
          set forth in this  Section are held to be  unreasonable,  arbitrary or
          against  public policy,  such  covenants will be considered  divisible
          with respect to scope,  time, and  geographical  area, and modified to
          the extent  necessary  to make the same  enforceable,  and such lesser
          scope,  time and  geographical  area, as may necessary to make same be
          enforceable against the Employee.

6. Compensation and Benefits.

     6.1  (a) Employee shall receive an annual  minimum salary  commencing as of
          the date of this agreement as follows:

            Year                                Amount
            First Year                          $90,000
            Second Year                         $95,000
            Third Year                          $100,000
            Fourth Year                         $105,000
            Fifth Year and thereafter           $110,000

     6.1  (b) Concurrently, with the execution of this Agreement, the Company is
          granting  Employee a  nontransferable  option to acquire  twenty  five
          thousand  (25,000)  shares  of  common  stock  of the  Company,  at an
          exercise price of $1 per share,  which option shall vest two (2) years
          after the execution of this  agreement,  provided  Employee  remains a
          full time  Employee of the  Company,  and shall  terminate  and expire
          three (3) years  thereafter;  and, to the extent not inconsistent with
          the  foregoing,  shall  be  subject  to  other  terms  and  conditions
          applicable to options  granted under the Company's 1997 Employee Stock
          Option Plan (the "Stock Option Plan").

     6.1  (c) Concurrently with the execution of this Agreement,  the Company is
          granting  Employee a  nontransferable  option to acquire  one  hundred
          thousand  (100,000)  shares of common stock of the Company pursuant to
          the Stock Option Plan, which option shall have an exercise price equal
          to the  market  price  of such  stock on the date  this  agreement  is
          entered into and shall vest immediately and be exercisable within five
          (5)  years  from the  date of this  Agreement.  The  other  terms  and
          conditions  of such option  shall be fixed and set forth in the Option
          Certificate  evidencing  such  option,  in  accordance  with the Stock
          Option Plan.

     6.1  (d) The  obligation  of the Company to issue or  transfer  and deliver
          shares of common stock upon  exercise of the options  being granted to
          Employee concurrently with the execution of this Agreement shall be

<PAGE>

          subject  to  all  applicable  laws,  regulations,  rules,  orders  and
          approvals  which shall then be in effect and required by  governmental
          entities and the stock exchanges and stock markets on which the common
          stock  may be  traded.  In  addition,  all  transactions  contemplated
          hereunder  shall be subject to, and may be limited by, the  provisions
          of applicable  law  including,  but not limited to,  federal and state
          securities laws.

          As a condition  to the  exercise of the options  being  granted to the
          Employee,  and described in (b) and (c) above, the Company may require
          Employee to represent to and agree with the Company in writing that he
          is acquiring such shares without a view to distribution  thereof.  The
          certificates  for such shares may include any legend which the Company
          deems  appropriate  to reflect  any  restrictions  on  transfer  under
          federal and applicable  state  securities  laws. All  certificates for
          shares of common stock  delivered  upon  exercise of options  shall be
          subject to such  stock-transfer  orders and other  restrictions as the
          Company  may deem  advisable  under the rules,  regulations  and other
          requirements  of the  Securities and Exchange  Commission,  the NASDAQ
          Stock Market or any stock exchange upon which the common stock is then
          listed,  and any applicable  federal or state  securities law, and the
          Company may cause a legend(s)  to be put on any such  certificates  to
          make appropriate reference to such restrictions. 6.2 Employee shall be
          entitled to receive such annual bonuses, if any, as may be established
          by the  Compensation  Committee and approved by the Board of Directors
          based  upon  the  Company's  fiscal  performance  and  the  Employee's
          performance during each year.

     6.3  As long as  Employee  is a  full-time  employee  of the  Company,  the
          Company shall  maintain a life insurance  policy  insuring the life of
          the Employee in the principal  amount of $1,000,000 and Employee shall
          have the full right to designate the beneficiary(s) under such policy.

     6.4  Employee  shall also be entitled to participate in and receive any and
          all  other  benefits,  including  medical,  dental,  health,  and life
          insurance,  pension,  retirement and disability benefit (long-term and
          short-term), profit sharing, vacation and other benefits and all other
          comparable  benefits  and  programs  as are  now or  hereafter  may be
          customarily  made available by the Company to employees  and/or senior
          Employees, subject to any qualification requirements imposed under the
          Company's written compensation plans and requirements imposed by law.

     6.5  Nothing in this Agreement shall be construed as obligating the Company
          to continue in force and effect any Company plan, Company program,  or
          Company   perquisite  and  the  Company  shall  have  full  power  and
          authority, subject to the terms of such Company plan, Company program,
          or Company perquisite, to amend, alter, modify,  supplement,  replace,
          or terminate any plan,  program,  or perquisite or any part thereof to
          which Employee is or may be entitled to participate.

     6.6   INTENTIONALLY DELETED

     6.7  In the event the Company fails to renew the term of this  agreement as
          provided in Section 1.2 above, or Employee becomes  disabled,  resigns
          within 180 days  following the effective  date of a Change In Control,
          or is  terminated  without  cause as  contemplated  in,  respectively,
          Section  8.2, and Section 8.3 and Section 8.5 hereof,  Employee  shall
          receive a payment equal to his then current  annual salary  multiplied
          by two (2),  and any and all stock  options  granted by the Company to
          Employee,   herein  or  elsewhere,  in  effect  at  such  time,  shall
          immediately  vest and become  exercisable,  provided  Employee has and
          continues to honor the  provisions  of Section 4 and Section 5 of this
          Agreement.  The payment referred to in the preceding sentence shall be
          paid by the Company to the Employee in twenty four (24) equal  monthly
          installments  unless  there is a Change In Control,  in which case the
          payment  referred to in the  preceding  sentence  shall be made in one
          lump sum payment  within thirty (30) days of the effective date of the
          applicable resignation or termination (as the case may be). "Change In
          Control" means a transaction or series of  transactions as a result of
          which (i) any person  who does not  currently  own a  majority  of the
          outstanding  voting  stock of the  Company  acquires a majority of the
          outstanding voting stock of the Company;  or (ii) the Company sells or
          otherwise  disposes  of all or  substantially  all  of the  assets  or
          business  operations of the Company to any other person;  or (iii) the
          Company merges or consolidates  with any other person;  unless, in any
          such case,  shareholders  owning the  outstanding  voting stock of the
          Company  immediately  prior to the consummation of such transaction or
          transactions  will  own,  upon  consummation  of such  transaction  or
          transactions,  at least a majority of the outstanding shares of voting
          stock of the person  acquiring  the shares or assets of the Company or
          surviving  the  merger  or   consolidation   of  the  Company  in  the
          transaction(s).  Notwithstanding  anything to the  contrary  contained
          elsewhere  in this  Agreement,  the Company  shall not be obligated to
          pay,  and  Employee  shall  have no right  to  receive,  any  payments
          pursuant  to this  Section  6.7 at any time  that the  Employee  is in
          breach  of his  obligations  under  Section  4 and  Section  5 of this
          Agreement.
<PAGE>

     7.   Facilities.

     7.1  The Company shall furnish Employee with such administrative assistance
          as is reasonably  required to enable Employee to perform his duties as
          set forth herein.

     7.2  The Company  agrees to reimburse  Employee for  reasonable  traveling,
          entertainment,  and  other  expenses  incurred  in  the  rendering  of
          services by Employee  under this  Agreement  in  accordance  with such
          policy  or  policies  as may from time to time be  established  by the
          Company and in effect pertaining to such expenses.

     8.   Termination.

     8.1  Death.   Upon  Employee's  death,  this  Agreement  shall  immediately
          terminate and payment of  compensation to Employee shall cease and all
          options  granted  Employee,  to the extent not  previously  exercised,
          shall automatically expire and terminate.

     8.2  Disability. Should Employee be unable to perform his obligations under
          this  Agreement  on  account of illness  or  disability,  payments  of
          compensation  and benefits shall continue to be made to him under this
          Agreement in accordance  with the Company's  policy then in effect for
          other active  Company  employees of like age and  position,  until the
          Company's  long-term  disability  coverage would be effective.  If the
          Employee is unable to resume his duties  under this  Agreement  at the
          end of the time the Company's  long-term  disability  coverage becomes
          effective,   Employee's  employment  and  this  Agreement  shall  then
          immediately   terminate.   The  Employee  shall  be  entitled  to  the
          compensation  set forth in Section 6.7. In addition,  such termination
          shall not cause  Employee to lose those benefits to which the Employee
          is entitled solely by reason of his illness or disability  pursuant to
          any plan or program of the Company then in effect.

     8.3  Resignation.  Employee may resign and terminate  this  Agreement  upon
          ninety (90) days written notice to the Company.  In the event Employee
          resigns  from his  position  with the Company,  this  Agreement  shall
          immediately  terminate  and  Employee  shall be entitled to no further
          compensation  from the  Company  unless such  resignation  takes place
          within 180 days following the effective date of a Change In Control as
          contemplated in Section 6.7.

     8.4  Termination For Cause.  Employee's  employment under the terms of this
          Agreement  may be  terminated  by the  Board  of  Directors,  and,  if
          Employee is a member of such Board of  Directors,  the Employee  shall
          not be  permitted  to  vote  on  such  issue,  or to  attend,  without
          invitation  by a majority of the other board  members,  the meeting of
          such Board of  Directors at which such issue is being  considered,  at
          any time  during  the term,  if such  Board of  Directors  reasonably,
          properly,  and in good  faith  determines  by  majority  vote of those
          members present and voting at any meeting at which a quorum is present
          that any of the following causes for terminating Employee's employment
          exists:

     (a)  Employee  is  engaging  in   competition   with  the  Company  or  its
          subsidiaries  in any  manner  which is  substantially  harmful  to the
          business of the Company or its subsidiaries;

     (b)  Employee is regularly making a frequent,  substantial,  abusive use of
          alcohol, drugs, or similar substances, and such abuse has affected his
          ability to conduct the business of the Company in a proper and prudent
          manner,  provided  Company has  provided  Employee  with a  reasonable
          period of time to cure such ailment;

     (c)  Employee is convicted of a felony; or

     (d)  Employee  has  materially  breached the terms of this  agreement,  and
          fails or refuses to correct  such  breach  within  thirty (30) days of
          receipt of written  notice to the Employee from the Board of Directors
          of the Company of the breach,  which such  notice  shall  specifically
          describe Employee's breach of this agreement and the steps required to
          remedy the same.

     If  its  Board  of  Directors  reasonably,  properly,  and  in  good  faith
determines that any one or more of the above causes for  terminating  Employee's
employment  exists,  then the Company may, by giving  thirty (30) days'  written
notice of its  intention  to terminate  Employee's  employment,  terminate  this
Agreement,  the term, and Employee's  employment,  and all rights,  duties,  and
obligations of the parties under this Agreement,  except Employee shall continue
to be bound by the  provisions  of Section 4 and 5 of this  Agreement.  Employee
shall be entitled to receive all  compensation  and fringe benefits  hereinabove
provided  for such period of thirty (30) days,  plus any accrued  vacation  time
(pro-rated  to the end of such thirty (30) day  period),  plus any rights to any
fringe benefits or other  compensation  hereinabove  described in this Agreement
which accrue during such period of thirty (30).

     All determinations by the Board of Directors of the Company that sufficient
grounds  exist for the  termination  of  Employee's  employment  under the above
provisions of this  paragraph  must be made  reasonably,  properly,  and in good
faith.

     8.5  Termination  Without Cause. The Company may at any time, upon delivery
          of written notice to Employee, terminate this Agreement and Employee's
          employment  hereunder,  provided  payment of  compensation to Employee
          shall be as provided in Section 6.7.

     8.6  Survival.  The Employees  obligations  under  Sections 4 and 5 of this
          Agreement shall survive any termination of this agreement.

     9.   Severability and Limited Enforceability.

     9.1  It is understood and agreed that,  should any portion of any clause or
          paragraph of this Agreement be deemed too broad to permit  enforcement
          to its full  extent,  then  such  restriction  shall be  forced to the
          maximum  extent  permitted by law, and  Employee  hereby  consents and
          agrees that such scope may be modified  accordingly  in any proceeding
          brought to  enforce  such  restriction.  Further,  it is agreed  that,
          should any provision in this Agreement be entirely unenforceable,  the
          remaining provisions of the Agreement shall not be affected thereby.

     10.  Governing Law

     10.1 This  Agreement  shall be  governed  by,  and  construed  under and in
          accordance with, the laws of the Commonwealth of Kentucky.


     11.  Assignment.

     11.1 This  Agreement  and the rights  and  obligations  hereunder  shall be
          deemed  personal to Employee and Employee  may not  transfer,  pledge,
          encumber,  assign,  anticipate,  or  alienate  all or any part of this
          Agreement.

     12.  Indemnification

     12.1 The Company shall indemnify the Employee against  expenses  (including
          reasonable  attorney's  fees),  judgments,   taxes,  penalties,  fines
          (including  any  excise tax  assessed  with  respect  to any  employee
          benefit   plan)  and   amounts   paid  in   settlement   (collectively
          "Liability"),  incurred by the Employee in connection  with  defending
          any  threatened,  pending  or  completed  action,  suit or  proceeding
          (whether civil,  criminal,  administrative  or investigative) to which
          the Employee is, or is threatened to be made, a party because Employee
          is or was an  employee  of the  Company,  or is or was  serving at the
          request of the Company as a Director,  Officer,  partner,  employee or
          agent of another domestic or foreign corporation,  partnership,  joint
          venture, trust or other enterprise, including services with respect to
          employee benefit plans. The Employee shall be considered to be serving
          an employee  benefit plan at the Company's  request if the  Employee's
          duties to the  Company  also  impose  duties on or  otherwise  involve
          services  by the  Employee  to the  plan,  or to  participants  in, or
          beneficiaries  of,  the  plan.  The  Company  shall  pay or  reimburse
          expenses  (including   reasonable  attorneys  fees)  incurred  by  the
          Employee as a party to a proceeding in advance of final disposition of
          such proceeding.

     12.2 The  indemnification  against  Liability and  advancement  of expenses
          provided  by, or granted  pursuant  to,  this  provision  shall not be
          deemed  exclusive  of any other  rights to which the  Employee  may be
          entitled  under  law,  any other  agreement  or  otherwise,  and shall
          continue  after the Employee  ceases to be an employee or agent of the
          Company, and shall inure to the benefit of the heirs,  executors,  and
          administrators of the Employee.

     12.3 The Company  may  purchase  and  maintain  insurance  on behalf of the
          Employee  while an employee or agent of the Company,  or while serving
          at the  request  to  the  Company  as a  Director,  Officer,  partner,
          trustee, employee or agent of the Company and/or of another foreign or
          domestic  corporation,  partnership,  joint venture,  trust,  employee
          benefit plan or other enterprise,  against Liability  asserted against
          or incurred  by the  Employee  in that  capacity  or arising  from his
          status  as a  Director,  Officer,  employee  or agent,  regardless  of
          whether the Company  would have power to  indemnify  the Employee as a
          Director or Officer  against the same Liability under the provision of
          Section 607.0850 of the Florida Business Corporation Act.

     12.4 Any  termination or expiration of the Employment  Agreement  shall not
          adversely  affect any right or protection  of the Employee  under this
          provision with respect to any act or omission  occurring  prior to the
          time of such termination or expiration.

     12.5 The  indemnification   provided  to  the  Employee  by  the  foregoing
          provisions  shall  not be  effective  and hence  not  provided  to the
          Employee by the Company with regard to (I) a violation of the criminal
          law, unless the director,  officer,  employee, or agent had reasonable
          cause to believe his conduct was lawful; (ii) a transaction from which
          the director, officer, employee, or agent derived an improper personal
          benefit;  (iii)  liability  provided  under  Section  607.0834  of the
          Florida Business Corporation Act (to the extent the Employee is acting
          as a  Director  of the  Company);  or  (iv)  willful  misconduct  or a
          conscious  disregard  for  the  best  interests  of the  Company  in a
          proceeding  by or in the right of the Company to procure a judgment in
          its favor or in a proceeding by or in the right of a shareholder.

     13.  Binding on Other Parties.

     13.1 This  Agreement  shall be  binding  upon and inure to the  benefit  of
          Employee,  his  heirs,  executors,  and  administrators,  and shall be
          binding  upon  and  inure  to the  benefit  of  the  Company  and  its
          successors  and assigns,  including  without  limitation,  any person,
          foreign Company,  or other business entity which at any time,  whether
          by merger,  purchase, or otherwise,  acquires all or substantially all
          of the assets or  business of the  Company.  Nothing  herein  shall be
          construed as preventing the liquidation, dissolution, sale, merger, or
          consolidation of the Company or any subsidiary, division, or affiliate
          of the Company.

     14.  Arbitration.

     14.1 In the event of any  controversy  or claim  arising out of  employee's
          employment by the Company or this Agreement or the breach thereof, the
          parties  shall  try  to  settle  such   conflicts   amicably   between
          themselves.  Should this prove impossible, the matter in dispute shall
          be settled by binding arbitration.

     14.2 In the event of any dispute or controversy as to which  arbitration is
          called  for,  the  same  shall  be  submitted  to  and  determined  by
          arbitration  in Louisville,  Kentucky in accordance  with the rules of
          the American Arbitration Association then in effect; and that judgment
          may be entered upon such  determination  in the  appropriate  court of
          competent jurisdiction.

     15.  Miscellaneous.

     15.1 This Agreement contains all the terms, conditions, and promises of the
          parties hereto. No modification or waiver of this Agreement, or of any
          provision  thereof,  shall be valid or binding,  unless in writing and
          executed by both of the parties  hereto.  No waiver by either party or
          any  breach  of any  term or  provisions  of this  Agreement  shall be
          construed  as a waiver  of any  succeeding  breach  of the same or any
          other term or provision.

     15.2 The  Employee  acknowledges  that the Employee has been advised by the
          Company  to seek  independent  counsel to review  and  negotiate  this
          agreement on his behalf.
<PAGE>

IN WITNESS  WHEREOF,  the parties  hereto have executed this Agreement as of the
day and year first above written.



                                          INDUSTRIAL SERVICES OF
                                          AMERICA, INC.


                                          By:  /s/ Harry Kletter
                                          Title:  President

ATTEST:


 /s/ Matthew Kletter
Secretary


                                           /s/ Sean Garber
                                          SEAN GARBER
WITNESS:


/s/ Tim Myers




<PAGE>

Exhibit 10.15

EXHIBIT A

AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT

     This Amendment No. 1 to Employment  Agreement (as hereinafter defined) made
and  effective as of the 5th day of February,  1998 (the  "Amendment"),  between
INDUSTRIAL  SERVICES  OF  AMERICA,  INC.  (the  "Corporation")  maintaining  its
principal place of business at 7100 Grade Lane, Louisville,  Kentucky 40213; and
SEAN  GARBER  ("Employee"),  residing  at 4403 Water  Crest  Court,  Louisville,
Kentucky 40241.

                                   WITNESSETH:

     WHEREAS the Corporation and Employee  entered into an Employment  Agreement
dated October 15, 1997 ("Employment Agreement"); and

     WHEREAS under the Employment  Agreement both the  Corporation  and Employee
desire to amend the  Employment  Agreement  with  respect to certain  provisions
contained therein;

     NOW  THEREFORE  in  consideration  of the  above  recitals  and the  mutual
agreements herein contained and for other good and valuable  consideration,  the
parties hereby agree as follows:

     1.   Section 2.1 of the  Employment  Agreement is hereby amended to read in
          its entirety as follows:

          2.1  Employee  hereby  agrees to serve as a  full-time  employee,  and
          exercise his full time best efforts in performing  functions  assigned
          by the  Board  of  Directors  of  the  Company  under  the  terms  and
          conditions  contained  in this  agreement  and  such  other  policies,
          directions,  regulations,  and other  requirements as may from time to
          time be established by the Board of Directors of the Corporation.  The
          parties  acknowledge  that the  Employee  is  being  hired to serve as
          President of the Corporation.

     2.   Section 6.1(a) of the  Employment  Agreement is hereby amended to read
          in its entirety as follows:

          6.1(a)  Employee shall receive an annual minimum salary  commencing as
          of the date of this agreement as follows:

            Year                          Amount

            First Year                    $104,000
            Second Year                   $110,000
            Third Year                    $120,000
            Fourth Year                   $130,000
            Fifth Year and thereafter     $140,000
            Incentive pay to be established by the compensation committee.

     3.   Section 6.1(c) of the  Employment  Agreement is hereby amended to read
          in its entirety as follows:

          6.1(c) Concurrently with the execution of this Agreement,  the Company
          is granting Employee a  nontransferable  option to acquire one hundred
          thousand (100,000) shares of common stock of the Company pursuant to a
          certain Stock Option Agreement dated October 15, 1997, as amended (the
          "Stock Option Agreement") which option shave have an exercise price of
          $5.00 per share and shall vest  immediately and be exercisable  within
          five (5) years from the date of this  Agreement.  The other  terms and
          conditions  of such  option  shall be fixed and set forth in the Stock
          Option Agreement.

     4.   Other than is set forth in this Amendment,  all the terms, conditions,
          rights,  duties,  responsibilities  and  obligations  set forth in the
          Employment Agreement remain in full force and effect.

<PAGE>

     IN WITNESS WHEREOF, the Corporation has executed this Amendment by its duly
authorized corporate officer as of the date set forth above.


                              "Corporation"
                              INDUSTRIAL SERVICES OF AMERICA, INC.



                              By:  /s/ Harry Kletter
                              Harry Kletter, Chairman of the Board of Directors


                                    Accepted by:

                                    "Employee"



                                     /s/ Sean Garber
                                    SEAN GARBER


<PAGE>


EXHIBIT B

AMENDMENT NO. 1 TO OPTION AGREEMENT

      This Amendment No. 1 to Stock