FORM 10-Q

SECURITIES
AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

x QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2010


OR


o TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the Transition Period From _________ to ________


Commission File Number 0-20979

|                                                      
|------------------------------------------------------
|INDUSTRIAL
 SERVICES OF AMERICA, INC.                 
|                                                      
|(Exact Name of Registrant as specified in its Charter)

|                                |  |                    
|------------------------------- |  | -------------------
|Florida                         |  | 59-0712746         
|                                |  |                    
|(State or other jurisdiction of |  | (IRS Employer      
|Incorporation or Organization)  |  | Identification No.)

|                                                    
|----------------------------------------------------
|7100 Grade Lane, PO Box 32428                       
|Louisville, Kentucky 40232                          
|(Address of principal executive offices)            
|                                                    
|(502) 368-1661                                      
|(Registrants Telephone Number, Including Area Code)

Check 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 o

Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.


|             |                           |                            
|------------ | ------------------------- | ---------------------------
|(Check one): | Large accelerated filer o | Accelerated filer o        
|             | Non-accelerated filer o   | Smaller reporting company x

Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of
each of the issuers classes of common stock, as of March 31, 2010: 4,303,292.

1

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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

INDEX

|        |                                                                                                              |  |         
|------- | ------------------------------------------------------------------------------------------------------------ |  | --------
|        |                                                                                                              |  | Page No.
|Part I  | Financial
 Information                                                                                       |  |         
|        |                                                                                                              |  |         
|        | Condensed
 Consolidated Balance Sheets March 31, 2010 (Unaudited) and December 31, 2009                      |  | 3       
|        |                                                                                                              |  |         
|        | Condensed
 Consolidated Statements of Operations - Three Months Ended March 31, 2010 and
 2009 (Unaudited)   |  | 5       
|        |                                                                                                              |  |         
|        | Condensed
 Consolidated Statements of Shareholders Equity March 31, 2010 (Unaudited)
 and December 31, 2009 |  | 6       
|        |                                                                                                              |  |         
|        | Condensed
 Consolidated Statements of Cash Flows  Three Months Ended March 31, 2010 and
 2009 (Unaudited)   |  | 7       
|        |                                                                                                              |  |         
|        | Notes to
 Condensed Consolidated Financial Statements (Unaudited)                                            |  | 8       
|        |                                                                                                              |  |         
|        | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                       |  | 22      
|        |                                                                                                              |  |         
|Part II | Other Information                                                                                            |  | 31      

2

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|                                                     
|-----------------------------------------------------
|PART I  FINANCIAL INFORMATION                       
|                                                     
|ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 
|                                                     
|INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
|                                                     
|CONDENSED CONSOLIDATED BALANCE SHEETS                
|                                                     
|ASSETS                                               

|                                                                                                  |  |                            |            |                   |   |            | 
|------------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | ----------------- | - | ---------- | 
|                                                                                                  |  | March 31, 2010
(Unaudited) |            | December 31,
2009 |  
|                                                                                                  |  |                            |            |                   |  
|                                                                                                  |  |                            |            |                   |   |            | 
|Current
 assets                                                                                   |  |                            |            |                   |   |            | 
|Cash and cash equivalents                                                                         |  | $                          | 1,135,651  |                   | $ | 713,062    | 
|Accounts receivable - trade (after
 allowance for doubtful accounts of $100,000 in 2010 and 2009) |  |                            | 24,032,248 |                   |   | 8,512,326  | 
|Net investment in sales-type leases                                                               |  |                            | 29,202     |                   |   | 27,928     | 
|Inventories                                                                                       |  |                            | 19,852,863 |                   |   | 26,426,611 | 
|Deferred income taxes                                                                             |  |                            | 538,045    |                   |   | 538,045    | 
|Other                                                                                             |  |                            | 290,885    |                   |   | 322,847    | 
|                                                                                                  |  |                            |            |                   |   |            | 
|                                                                                                  |  |                            |            |                   |   |            | 
|Total current assets                                                                              |  |                            | 45,878,894 |                   |   | 36,540,819 | 
|                                                                                                  |  |                            |            |                   |   |            | 
|Net property
 and equipment                                                                       |  |                            | 26,565,457 |                   |   | 26,994,539 | 
|                                                                                                  |  |                            |            |                   |   |            | 
|Other Assets                                                                                      |  |                            |            |                   |   |            | 
|Goodwill                                                                                          |  |                            | 2,567,046  |                   |   | 2,567,046  | 
|Net investment in sales-type leases                                                               |  |                            | 65,503     |                   |   | 73,300     | 
|Notes receivable  related party                                                                  |  |                            | 119,116    |                   |   | 129,079    | 
|Other assets                                                                                      |  |                            | 361,811    |                   |   | 368,834    | 
|                                                                                                  |  |                            |            |                   |   |            | 
|                                                                                                  |  |                            | 3,113,476  |                   |   | 3,138,259  | 
|                                                                                                  |  |                            |            |                   |   |            | 
|                                                                                                  |  |                            |            |                   |   |            | 
|                                                                                                  |  | $                          | 75,557,827 |                   | $ | 66,673,617 | 
|                                                                                                  |  |                            |            |                   |   |            | 

|                                                              | 
|------------------------------------------------------------- | 
|See accompanying notes to consolidated
 financial statements.

3

---



|                                                     
|-----------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
|                                                     
|CONDENSED CONSOLIDATED BALANCE SHEETS                
|CONTINUED                                            
|                                                     
|LIABILITIES AND STOCKHOLDERS EQUITY                 

|                                                                                                                                                                                                       |  |                             |            |                     |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ---------- | ------------------- | - | ---------- | -
|                                                                                                                                                                                                       |  | March 31, 2010
 (Unaudited) |            | December 31, 
 2009 |  
|                                                                                                                                                                                                       |  |                             |            |                     |  
|Current liabilities                                                                                                                                                                                    |  |                             |            |                     |   |            |  
|Current maturities of long term debt (Note
 4)                                                                                                                                                         |  | $                           | 1,321,413  |                     | $ | 12,539,889 |  
|Current maturities of capital lease obligation                                                                                                                                                         |  |                             | 2,474      |                     |   | 20,798     |  
|Accounts payable                                                                                                                                                                                       |  |                             | 14,358,913 |                     |   | 4,684,386  |  
|Income tax payable                                                                                                                                                                                     |  |                             | 1,058,229  |                     |   | 517,828    |  
|Note payable to BB&T (Note 4)                                                                                                                                                                          |  |                             |           |                     |   | 5,000,000  |  
|Interest rate swap agreement liability
 (Note 4)                                                                                                                                                       |  |                             | 620,328    |                     |   | 564,715    |  
|Accrued bonuses                                                                                                                                                                                        |  |                             | 1,850,800  |                     |   | 1,513,800  |  
|Other current liabilities                                                                                                                                                                              |  |                             | 358,175    |                     |   | 380,718    |  
|                                                                                                                                                                                                       |  |                             |            |                     |   |            |  
|Total current liabilities                                                                                                                                                                              |  |                             | 19,570,332 |                     |   | 25,222,134 |  
|                                                                                                                                                                                                       |  |                             |            |                     |   |            |  
|Long-term liabilities                                                                                                                                                                                  |  |                             |            |                     |   |            |  
|Long-term debt (Note 4)                                                                                                                                                                                |  |                             | 29,315,942 |                     |   | 16,654,481 |  
|Deferred income taxes                                                                                                                                                                                  |  |                             | 2,857,264  |                     |   | 2,879,509  |  
|                                                                                                                                                                                                       |  |                             |            |                     |   |            |  
|                                                                                                                                                                                                       |  |                             | 32,173,206 |                     |   | 19,533,990 |  
|                                                                                                                                                                                                       |  |                             |            |                     |   |            |  
|Stockholders equity                                                                                                                                                                                   |  |                             |            |                     |   |            |  
|Common stock, $.005 par value, 10,000,000
 shares authorized, 4,795,000 shares issued in 2010 and 2009, 4,303,292 shares
 outstanding and 4,286,292 shares outstanding in 2010 and 2009,
 respectively |  |                             | 23,975     |                     |   | 23,975     |  
|Additional paid-in capital                                                                                                                                                                             |  |                             | 7,572,696  |                     |   | 7,442,346  |  
|Retained earnings                                                                                                                                                                                      |  |                             | 17,649,078 |                     |   | 15,885,814 |  
|Accumulated other comprehensive loss                                                                                                                                                                   |  |                             | (372,197   | )                   |   | (338,829   | )
|Treasury stock, 491,708 shares and 508,708
 shares at average cost in 2010 and 2009, respectively                                                                                                      |  |                             | (1,059,263 | )                   |   | (1,095,813 | )
|                                                                                                                                                                                                       |  |                             |            |                     |   |            |  
|                                                                                                                                                                                                       |  |                             | 23,814,289 |                     |   | 21,917,493 |  
|                                                                                                                                                                                                       |  |                             |            |                     |   |            |  
|                                                                                                                                                                                                       |  | $                           | 75,557,827 |                     | $ | 66,673,617 |  
|                                                                                                                                                                                                       |  |                             |            |                     |   |            |  

|                                                              | 
|------------------------------------------------------------- | 
|See
 accompanying notes to consolidated financial statements.

4

---



|                                                     
|-----------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
|                                                     
|CONDENSED CONSOLIDATED STATEMENTS OF
 OPERATIONS     
|THREE MONTHS ENDED MARCH 2010 AND 2009               
|(UNAUDITED)                                          

|                                             |  |      |            |      |   |            |  
|-------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                             |  | 2010 |            | 2009 |  
|                                             |  |      |            |      |  
|                                             |  |      |            |      |   |            |  
|Revenue from service                         |  | $    | 1,535,133  |      | $ | 2,645,568  |  
|Revenue from
 product sales                  |  |      | 72,633,833 |      |   | 21,604,355 |  
|                                             |  |      |            |      |   |            |  
|Total Revenue                                |  |      | 74,168,966 |      |   | 24,249,923 |  
|                                             |  |      |            |      |   |            |  
|Cost of
 goods sold for services             |  |      | 1,350,403  |      |   | 2,262,928  |  
|Cost of
 goods sold for product sales        |  |      | 66,535,105 |      |   | 18,002,190 |  
|                                             |  |      |            |      |   |            |  
|Total Cost of goods sold                     |  |      | 67,885,508 |      |   | 20,265,118 |  
|                                             |  |      |            |      |   |            |  
|Selling,
 general and administrative expense |  |      | 3,201,022  |      |   | 2,709,661  |  
|                                             |  |      |            |      |   |            |  
|                                             |  |      |            |      |   |            |  
|Income before other income (expense)         |  |      | 3,082,436  |      |   | 1,275,144  |  
|                                             |  |      |            |      |   |            |  
|Other income
 (expense)                      |  |      |            |      |   |            |  
|Interest expense                             |  |      | (328,969   | )    |   | (138,505   | )
|Interest income                              |  |      | 7,829      |      |   | 15,243     |  
|Gain on sale of assets                       |  |      | 184,648    |      |   | 3,750      |  
|Other expense                                |  |      | (7,169     | )    |   | (65,527    | )
|                                             |  |      |            |      |   |            |  
|                                             |  |      | (143,661   | )    |   | (185,039   | )
|                                             |  |      |            |      |   |            |  
|                                             |  |      |            |      |   |            |  
|Income before income taxes                   |  |      | 2,938,775  |      |   | 1,090,105  |  
|                                             |  |      |            |      |   |            |  
|Income tax
 provision                        |  |      | 1,175,511  |      |   | 436,042    |  
|                                             |  |      |            |      |   |            |  
|                                             |  |      |            |      |   |            |  
|Net income                                   |  | $    | 1,763,264  |      | $ | 654,063    |  
|                                             |  |      |            |      |   |            |  
|                                             |  |      |            |      |   |            |  
|Basic
 earnings per share                    |  | $    | 0.41       |      | $ | 0.18       |  
|                                             |  |      |            |      |   |            |  
|                                             |  |      |            |      |   |            |  
|Diluted
 earnings per share                  |  | $    | 0.41       |      | $ | 0.18       |  
|                                             |  |      |            |      |   |            |  
|                                             |  |      |            |      |   |            |  
|Weighted
 shares outstanding:                |  |      |            |      |   |            |  
|Basic                                        |  |      | 4,299,681  |      |   | 3,575,292  |  
|                                             |  |      |            |      |   |            |  
|                                             |  |      |            |      |   |            |  
|Diluted                                      |  |      | 4,325,100  |      |   | 3,575,292  |  
|                                             |  |      |            |      |   |            |  

|                                                              | 
|------------------------------------------------------------- | 
|See
 accompanying notes to consolidated financial statements.

5

---



INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
THREE MONTHS ENDED MARCH 31, 2010
(UNAUDITED)


---

|                                                           |  |              |           |                              |                    |        |  |                                        |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|---------------------------------------------------------- |  | ------------ | --------- | ---------------------------- | ------------------ | ------ |  | -------------------------------------- | --------- |  | ---- | ---------- | ----- | - | -------- | - |  | -------- | - | - | ---------- | - | - | ---------- | -
|                                                           |  |              |           |                              |                    |        |  | Accumulated
 Other
 Comprehensive Loss |           |  |      |            |       |   |         
|                                                           |  |              |           | Additional
 Paid-in
 Capital |                    |        |  |                                        |           |  |      |            |       |  
|                                                           |  | Common Stock |           |                              | Retained
 Earnings |        |  | Treasury Stock                         |           |  |     
|                                                           |  |              |           |                              |                    |        |  |                                        |           | 
|                                                           |  | Shares       |           | Amount                       |                    |        |  |                                        | Shares    |  | Cost |            | Total |  
|                                                           |  |              |           |                              |                    |        |  |                                        |           |  |      |            |       |   |          |   | 
|                                                           |  |              |           |                              |                    |        |  |                                        |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Balance as of December 31, 2009                            |  |              | 4,795,000 |                              | $                  | 23,975 |  | $                                      | 7,442,346 |  | $    | 15,885,814 |       | $ | (338,829 | ) |  | (508,708 | ) | $ | (1,095,813 | ) | $ | 21,917,493 |  
|                                                           |  |              |           |                              |                    |        |  |                                        |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Stock bonuses                                              |  |              |          |                              |                    |       |  |                                        | 130,350   |  |      |           |       |   |         |   |  | 17,000   |   |   | 36,550     |   |   | 166,900    |  
|                                                           |  |              |           |                              |                    |        |  |                                        |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Net unrealized loss on derivative
 instruments, net of tax |  |              |          |                              |                    |       |  |                                        |          |  |      |           |       |   | (33,368  | ) |  |         |   |   |           |   |   | (33,368    | )
|                                                           |  |              |           |                              |                    |        |  |                                        |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Net income                                                 |  |              |          |                              |                    |       |  |                                        |          |  |      | 1,763,264  |       |   |         |   |  |         |   |   |           |   |   | 1,763,264  |  
|                                                           |  |              |           |                              |                    |        |  |                                        |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|                                                           |  |              |           |                              |                    |        |  |                                        |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Balance as of March 31, 2010                               |  |              | 4,795,000 |                              | $                  | 23,975 |  | $                                      | 7,572,696 |  | $    | 17,649,078 |       | $ | (372,197 | ) |  | (491,708 | ) | $ | (1,059,263 | ) | $ | 23,814,289 |  
|                                                           |  |              |           |                              |                    |        |  |                                        |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  

See accompanying notes to consolidated financial statements.

6

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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)

|                                                                                      |  |      |             |      |   |             |  
|------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                      |  | 2010 |             | 2009 |  
|                                                                                      |  |      |             |      |  
|Cash
 flows from operating activities                                                 |  |      |             |      |   |             |  
|Net income                                                                            |  | $    | 1,763,264   |      | $ | 654,063     |  
|Adjustments to reconcile net income to net cash from (used in)
 operating activities: |  |      |             |      |   |             |  
|Depreciation and amortization                                                         |  |      | 864,257     |      |   | 613,626     |  
|Stock bonus distribution to
 employees                                                |  |      | 166,900     |      |   |            |  
|Deferred income taxes                                                                 |  |      |            |      |   | (23,305     | )
|Gain on sale of property and
 equipment                                               |  |      | (184,648    | )    |   | (3,750      | )
|Change in assets and liabilities Receivables                                          |  |      | (15,519,922 | )    |   | (8,128,716  | )
|Receivables                                                                          
|Net investment in sales-type
 leases                                                  |  |      | 6,523       |      |   | 12,880      |  
|Inventories                                                                           |  |      | 6,573,748   |      |   | 6,087,742   |  
|Other assets                                                                          |  |      | 38,985      |      |   | (138,230    | )
|Accounts payable                                                                      |  |      | 9,674,527   |      |   | (709,380    | )
|Accrued bonuses                                                                       |  |      | 337,000     |      |   | 315,000     |  
|Other current liabilities                                                             |  |      | 517,858     |      |   | (1,014,554  | )
|                                                                                      |  |      |             |      |   |             |  
|Net cash from /(used in) operating
 activities                                        |  |      | 4,238,492   |      |   | (2,334,624  | )
|                                                                                      |  |      |             |      |   |             |  
|Cash
 flows from investing activities                                                 |  |      |             |      |   |             |  
|Proceeds from sale of property
 and equipment                                         |  |      | 274,512     |      |   | 3,750       |  
|Purchases of property and
 equipment                                                  |  |      | (525,039    | )    |   | (1,719,843  | )
|Payments for shredder system                                                          |  |      |            |      |   | (1,210,493  | )
|Acquisition from Venture
 Metals                                                      |  |      |            |      |   | (8,846,794  | )
|Payments from related party                                                           |  |      | 9,963       |      |   | 9,431       |  
|                                                                                      |  |      |             |      |   |             |  
|Net cash used in investing activities                                                 |  |      | (240,564    | )    |   | (11,763,949 | )
|                                                                                      |  |      |             |      |   |             |  
|Cash
 flows from financing activities                                                 |  |      |             |      |   |             |  
|Payments on capital lease
 obligation                                                 |  |      | (18,324     | )    |   | (15,079     | )
|Proceeds from long-term debt                                                          |  |      | 1,086,554   |      |   | 14,033,750  |  
|Payments on long-term debt                                                            |  |      | (4,643,569  | )    |   | (157,551    | )
|                                                                                      |  |      |             |      |   |             |  
|Net cash (used in)/from financing
 activities                                         |  |      | (3,575,339  | )    |   | 13,861,120  |  
|                                                                                      |  |      |             |      |   |             |  
|                                                                                      |  |      |             |      |   |             |  
|Net increase/(decrease) in
 cash                                                      |  |      | 422,589     |      |   | (237,453    | )
|                                                                                      |  |      |             |      |   |             |  
|Cash at beginning of
 period                                                          |  |      | 713,062     |      |   | 1,103,842   |  
|                                                                                      |  |      |             |      |   |             |  
|                                                                                      |  |      |             |      |   |             |  
|Cash at
 end of period                                                                |  | $    | 1,135,651   |      | $ | 866,389     |  
|                                                                                      |  |      |             |      |   |             |  
|                                                                                      |  |      |             |      |   |             |  
|Supplemental disclosure of
 cash flow information                                     |  |      |             |      |   |             |  
|Cash paid for interest                                                                |  | $    | 328,969     |      | $ | 138,505     |  
|Cash paid for taxes                                                                   |  | $    | 635,110     |      | $ | 625,210     |  

See accompanying notes to consolidated
financial statements.

7

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INDUSTRIAL SERVICES OF AMERICA, INC. AND
SUBSIDIARIES

NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Basis of Presentation

The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U. S. generally accepted accounting principles
(GAAP) for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U. S. generally accepted accounting principles for
complete consolidated financial statements. The information furnished includes
all adjustments, which are, in the opinion of management, necessary to present
fairly our financial position as of March 31, 2010 and the results of our
operations and changes in our cash flow for the periods ended March 31, 2010
and 2009. Results of operations for the period ended March 31, 2010 are not
necessarily indicative of the results that may be expected for the entire year.
Additional information, including the audited December 31, 2009 consolidated
financial statements and the Summary of Significant Accounting Policies, is
included in our Annual Report on Form 10-K for the year ended December 31, 2009
on file with the Securities and Exchange Commission.

Fair Value

We carry
certain of our financial assets and liabilities at fair value on a recurring
basis. These financial assets and liabilities are composed of trading account
assets, investment securities available for sale and various types of
derivative instruments. In addition, we measure certain assets, such as
goodwill and other long-lived assets, at fair value on a non-recurring basis to
evaluate those assets for potential impairment. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.

In accordance
with the accounting standard, we categorize our financial assets and
liabilities into the following fair value hierarchy:

Level 1 
Financial assets and liabilities with values based on unadjusted quoted prices
for identical assets or liabilities in an active market. Examples of level 1
financial instruments include active exchange-traded equity securities and
certain U.S. government securities.

Level 2 
Financial assets and liabilities with values based on quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for
the asset or liability, either directly or indirectly, for substantially the
full term of the asset or liability. Examples of level 2 financial instruments
include commercial paper purchased from the State Street-administered
asset-backed commercial paper conduits, various types of interest-rate
derivative instruments, and various types of fixed-income investment
securities. Pricing models are utilized to estimate fair value for certain
financial assets and liabilities categorized in level 2.

Level 3 
Financial assets and liabilities with values based on prices or valuation
techniques that require

8

---



inputs that
are both unobservable in the market and significant to the overall fair value
measurement. These inputs reflect managements judgment about the assumptions
that a market participant would use in pricing the asset or liability, and are
based on the best available information, some of which is internally developed.
Examples of level 3 financial instruments include certain corporate debt, asset-
and mortgage-backed securities and certain derivative instruments with little
or no market activity and a resulting lack of price transparency.

When
determining the fair value measurements for financial assets and liabilities
carried at fair value on a recurring basis, we consider the principal or most
advantageous market in which we would transact and consider assumptions that
market participants would use when pricing the asset or liability. When
possible, we look to active and observable markets to price identical assets or
liabilities. When identical assets and liabilities are not traded in active
markets, we look to market observable data for similar assets and liabilities.
Nevertheless, certain assets and liabilities are not actively traded in observable
markets, and we use alternative valuation techniques to derive fair value
measurements.

We use the
fair value methodology outlined in the related accounting standard to value the
assets and liabilities for cash, debt and derivatives. All of our cash is
defined as Level 1 and all our debt and derivative contracts are defined as
Level 2. In accordance with this guidance, the following table represents our
fair value hierarchy for Level 1 and Level 2 financial instruments at March 31,
2010:

|                |  |                           |   |                |  |  |  |   |            |  | 
|--------------- |  | ------------------------- | - | -------------- |  |  |  | - | ---------- |  | 
|Asset/Liability |  | Cash and cash equivalents |   | Long-term debt | 
|Level 1         |  |                           | $ | 1,135,651      |  |  |  |   |            |  | 
|Level 2         |  |                           |   |                |  |  |  | $ | 30,637,353 |  | 
|Total           |  |                           | $ | 1,135,651      |  |  |  | $ | 30,637,353 |  | 

We have had no transfers in
or out of Levels 1 or 2 fair value measurements, and no activity in Level 3
fair value measurements for the quarter ending March 31, 2010.

Subsequent Events

We have
evaluated the period from March 31, 2010 through the date the financial
statements herein were issued, for subsequent events requiring recognition or
disclosure in the financial statements. The following events were identified:

Debt Restructuring:On April 13, 2010, Industrial Services of America,
Inc. (the Company) entered into a Loan Agreement (the Loan Agreement) with
Branch Banking and Trust Company (the Bank) and BB&T Bankcard Corporation
pursuant to which the Bank agreed to provide the Company a revolving credit
facility in the amount of $20,000,000 for the purpose of replacing the
Companys existing $12,000,000 promissory note to the Bank and the Companys
existing $10,000,000 senior revolving credit facility with the Bank. In
addition, the Company, the Bank and certain other parties entered into a
Modification and Cross-Collateralization Agreement (the Modification
Agreement) pursuant to which the Company and the Bank modified the Companys
existing $5,000,000 term loan to the Bank. Proceeds of the new revolving credit
facility in the amount of $17.7 million were used to repay the outstanding
principal balance of the $12,000,000 promissory note and the amount outstanding
under the prior credit facility and to pay closing costs.See
Note 4  Long Term Debt and Notes Payable to Bank.

9

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Asset Purchase Agreement with Venture Metals,
LLC:On March 26, 2010, we entered into an agreement dated
July 1, 2010, subject to shareholder approval of certain issuances of shares
of our common stock. If approved, on July 1, 2010, we will enter into an asset
purchase agreement and a non-compete agreement with Venture Metals, LLC, 3409
Camp Ground Road, Louisville, KY 40211, conditioned upon approval of our
shareholders of the issuance of 200,000 shares of our common stock. Pursuant
to the asset purchase agreement dated July 1, 2010, in consideration for the
transfer of the Venture Metals, LLC name and entry into the Non-Compete
Agreement, we will deliver to Venture Metals, LLC 200,000 shares of our common
stock based on a price of $11.30 per share (the Purchase Price) based
on the stock price on March 5, 2010. We paid $1,348,942 cash to Venture Metals as additional consideration for the asset transfer and
non-compete agreement on April 12, 2010.

The purchase
price was negotiated between us and Steve Jones, co-owner of Venture Metals,
LLC. Venture Metals, LLC is owned by Steve Jones and Jeff Valentine, both of
whom are our employees. At the same time as these negotiations took place, we
renegotiated the employment agreements of Mr. Jones and Mr.

10

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Valentine, as
further described Note 10  Certain Related Party Transactions. Mr. Jones and
Mr. Valentines original employment agreements were entered into in connection
with our prior purchase of assets from Venture Metals, LLC. An outside
financial consultant is also assessing the transaction to provide an opinion of
the fair value of the transaction. We expect his opinion to be comparable with
the negotiated price.

The material
terms of the Non-Compete Agreement include that (i) Venture Metals, or any
entity that Venture Metals may become, operating under any name agrees that for
a period of five (5) years from the date of the Agreement (the Non-Competition
Period), Venture Metals will not directly or indirectly (a) engage in any
business which is the same or substantially the same as any business of the
Company (the Restricted Business), or (b) have any interest in any other
business venture, whether as a debt or equity holder, member, manager, partner,
agent, security holder, consultant or otherwise, that directly or indirectly is
engaged in the Restricted Business, within one hundred (100) direct miles of
any geographic area in which the Company, its affiliates or any of their
respective subsidiaries, engages in the business operations as of the date
hereof (the Restricted Area); (ii) during the Non-Competition Period, Venture
Metals will not, directly or indirectly, (a) solicit for employment or employ
(or attempt to solicit for employment or employ), for Venture Metals or on
behalf of any other person (other than the Company or any of its respective
subsidiaries), or (b) otherwise encourage any such employee to leave his or her
employment with the Company, its affiliates or any of their respective
subsidiaries; (iii) during the Non-Competition Period, Venture Metals shall
not, directly or indirectly, (a) solicit, call on, or transact or engage in the
Restricted Business with (or attempt to do any of the foregoing with respect
to) any customer (e.g.: North American Stainless), distributor, vendor,
supplier or agent with whom the Company, its affiliates or any of their
respective subsidiaries shall have dealt, or that the Company, its affiliates
or any of their respective subsidiaries shall have actively sought to deal, for
or on behalf of Venture Metals or any other person (other than the Company, its
affiliates or any of their respective subsidiaries) in connection with the
Restricted Business or (b) encourage any such customer, distributor, vendor,
supplier or agent to cease, in whole or in part, its business relationship with
the Company, its affiliates or any of their respective subsidiaries; and (iv)
if Venture Metals breaches the terms of this Agreement, the Company will be
entitled to the following remedies: (a) damages from Venture Metals; (b) to
offset against any and all amounts owing to Venture Metals under the Asset
Purchase Agreement any and all amounts which the Company claims under the
Agreement; (c) in addition to its right to damages and any other rights it may
have to obtain injunctive or other equitable relief to restrain any breach or
threatened breach or otherwise to specifically enforce the provisions of this
Agreement, it being agreed that money damages alone would be inadequate to
compensate the Company and would be an inadequate remedy for such breach; and
(d) the rights and remedies of the parties to the Agreement are cumulative and
not alternative.

NOTE 2  STOCK DIVIDEND

On May 3, 2010, the Board of Directors declared a 3-for-2 stock split to be effected by a 50% stock
dividend.  The stock dividend will be issued to holders of record as of May 17, 2010, payable June 1,
2010.

11

---



NOTE 3  ESTIMATES

In preparing
the condensed consolidated financial statements in accordance with U. S.
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X, 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.

NOTE 4  LONG TERM DEBT AND NOTES PAYABLE TO
BANK

On April 13,
2010, we entered into a Loan Agreement with BB&T and BB&T Bankcard
Corporation pursuant to which the Bank agreed to provide the Company a
revolving credit facility in the amount of $20,000,000 for the purpose of
replacing the Companys existing $12,000,000 promissory note to the Bank dated
February 11, 2009 and the Companys existing $10,000,000 senior revolving
credit facility with the Bank dated December 22, 2006. In addition, the Company,
the Bank and certain other parties entered into a Modification and
Cross-Collateralization Agreement (the Modification Agreement) pursuant to
which the Company and the Bank modified the Companys existing $5,000,000 term
loan to the Bank dated June 9, 2009. Proceeds of the new revolving credit
facility in the amount of $17.7 million were used to repay the outstanding
principal balance of the $12,000,000 promissory note and the amount outstanding
under the prior credit facility and to pay closing costs. The financial
information involving restructured debt is presented in these notes under the
new credit facility. As of March 31, 2010, the outstanding balance of the
restructured debt was $16,438,931.

With respect
to the revolving credit facility, the interest rate is one month LIBOR plus two
hundred fifty basis points (2.50%) per annum, adjusted monthly on the first day
of each month, with a floor of three and one half percent (3.50%). The
revolving credit facility expires on April 13, 2013. Under the revolving credit
facility, the Company is permitted to borrow the lesser of $20,000,000 or the
borrowing base, consisting of the sum of 80% of eligible accounts receivable
plus 55% of eligible inventory up to $10,000,000. Eligible accounts are
generally those receivables that are less than 90 days from the invoice date.
As security for the revolving credit facility, the Company provided the Bank a
first priority security interest in the accounts receivable from most of its
customers and in its inventory. The Company also cross collateralized the
revolving line of credit with the $5,000,000 term loan, an existing rental
fleet loan in favor of the Bank and a $500,000 purchasing credit card
commitment, in addition to all other existing debt the Company owes to the
Bank.

The $5,000,000
term loan provides for an interest rate that is the same as the interest rate
for the revolving credit facility. Accrued interest is payable monthly, with
the first such payment commencing on May 13, 2010. The outstanding balance
under the term loan plus accrued interest is payable in monthly installments in
accordance with a 9.5 year amortization schedule, with a final scheduled
payment of $3.1 million of principal due at maturity of the note on April 7,
2014. As security for the modified term loan, the Company provided the Bank a
first priority security interest in all equipment other than the rental fleet
that the Company owns. In addition, the Company provided a first mortgage on
the property at the following locations: 3409 Campground Road, 6709, 7023,
7025, 7101, 7103 and 7110 Grade Lane, Louisville Kentucky, 1565 East Fourth
Street, Seymour, Indiana and 1617 State Road 111, New Albany, Indiana. The
Company also cross collateralized the term loan with the revolving credit facility,
the rental fleet loan, the

12

---



$500,000
purchasing credit card commitment and all other existing debt the Company owes
to the Bank. As of March 31, 2010, the outstanding balance of the term loan was
$4,987,686.

In the Loan
Agreement, the Company agreed to certain covenants, including the maintenance
of minimum tangible net worth of $16,000,000 as of December 31, 2009
(increasing by 40% of after tax net income annually, plus 100% of new equity
issued by the Company), maintenance of a ratio of earnings before interest,
taxes, depreciation and amortization (EBITDA) to the sum of the preceding 12
months interest expense plus projected principal payments on long-term debt in
the next succeeding 12 months of not less than 1.25 to 1, and maintenance of a ratio
of debt to tangible net worth of not more than 3.5 to 1. As of March 31, 2010,
we were in compliance with these covenants.

In the
financial statements and accompanying notes, we are presenting the current
maturities of long term debt and the long term debt reflecting the impact of
the refinancing.

On May 14,
2008, we executed a loan agreement with BB&T in the amount of $6.0 million
to finance the purchase of our shredder system and complementary facility
improvements. The security for this facility is the shredder and assets being
purchased. Our Board approved the acquisition and installation of the shredder
system and complementary facility improvements on June 21, 2007. The note has a
term beginning May 2008 and originally expiring November 2013. Until October
15, 2008, the facility bore interest at the one month Libor rate, as published
in the Wall Street Journal, plus 1.625% per annum. The facility originally
provided for interest only monthly payments which commenced June 7, 2008 and
continued through November 7, 2008. Effective October 15, 2008, we converted
this revolving credit facility into a fixed interest rate of 5.89% by executing
a floating to fixed interest rate swap with BB&T as the counterparty to the
ISDA Master Agreement, Schedule and confirmation. The maturity date under this
revised agreement is April 7, 2014. The repayment terms are interest only paid
in 6 monthly payments starting on November 7, 2008 and continuing through April
7, 2009, principal paid in twelve (12) monthly payments of $37,636.11 plus
interest commencing on May 7, 2009 and continuing through April 7, 2010,
principal paid in 12 monthly payments of $39,957.42 plus interest commencing on
May 7, 2010 and continuing through April 7, 2011, principal paid in 12 monthly payments
of $42,421.91 plus interest commencing on May 7, 2011 and continuing through
April 7, 2012, principal paid in 12 monthly payments of $45,038.40 plus
interest commencing on May 7, 2012 and continuing through April 7, 2013,
principal paid in eleven (11) monthly payments of $47,816.27 plus interest
commencing on May 7, 2013 and continuing through March 7, 2014, with one final
payment of all remaining principal and accrued interest due at maturity on
April 7, 2014. The principal and interest payments of the facility are
calculated on the basis of a ten (10) year amortization, resulting in a
principal balance of approximately $3.5 million being due on or before April 7,
2014, at which time we anticipate that we will refinance. The terms of the loan
agreement place certain restrictive covenants on us, including maintenance of a
specified tangible net worth, debt to net worth and EBITDA ratio. Consequently,
these covenants restrict our ability to incur as much additional debt as we may
desire for future growth. As of March 31, 2010, the outstanding balance of this
loan was $5,548,367.

At March 31,
2010, we were in compliance with all three restrictive covenants.

On May 14,
2008, we executed a loan agreement with BB&T in the amount of $3.0 million
secured by our rental fleet equipment. This note replaces the $2.0 million
rental fleet loan with Fifth Third Bank. Until October 15, 2008, indebtedness
under this loan agreement accrued interest at the one month Libor rate, as

13

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published in
the Wall Street Journal, plus 1.625% per annum. Fifty-nine (59) monthly
principal and interest payments of $30,966.76 commenced on June 7, 2008 with
one final payment of all remaining principal and accrued interest due on May 7,
2013. Effective October 15, 2008, we converted this revolving credit facility
with a variable interest rate into a fixed interest rate of 5.65% by executing
a floating to fixed interest rate swap with BB&T as the counterparty to the
ISDA Master Agreement, Schedule and confirmation. The maturity date under this
revised agreement is May 7, 2013. The repayment terms are principal paid in
twelve (12) monthly payments of $19,673.54 plus interest commencing on November
7, 2008 and continuing through October 7, 2009, principal paid in 12 monthly
payments of $20,835.07 plus interest commencing on November 7, 2009 and
continuing through October 7, 2010, principal paid in 12 monthly payments of
$22,065.17 plus interest commencing on November 7, 2010 and continuing through
October 7, 2011, principal paid in 12 monthly payments of $23,367.89 plus
interest commencing on November 7, 2011 and continuing through October 7, 2012,
principal paid in six (6) monthly payments of $24,747.53 plus interest
commencing on November 7, 2012 and continuing through April 7, 2013, with one
final payment of all remaining principal and accrued interest due at maturity
on May 7, 2013. The principal and interest payments of this facility are
calculated on the basis of a ten (10) year amortization, resulting in a
principal balance of approximately $1.7 million due at maturity. The terms of
the loan agreement place certain restrictive covenants on us, including
maintenance of a specified tangible net worth, debt to net worth and EBITDA
ratio. Consequently, these covenants restrict our ability to incur as much
additional debt as we may desire for future growth. As of March 31, 2010, the
outstanding balance of this loan was $2,536,021. At March 31, 2010, we were in
compliance with all three restrictive covenants.

On August 2,
2007, we entered into an asset purchase agreement for $1,300,000 funded
primarily by a note payable to ILS, the sole member of which is Brian Donaghy,
our president and chief operating officer, whereby we pay $20,000 per month for
60 months for various assets including tractor trailers, trucks and containers.
The note payable reflects a seven percent (7.0%) interest payment on the
outstanding balance plus principal amortization. We also paid ILS $100,000 cash
as a portion of the purchase price at the time of execution of the asset
purchase agreement. We recorded a note payable of $1,010,040 with an
outstanding balance at March 31, 2009 of $532,172.

We entered
into three interest rate swap agreements swapping variable rates for fixed
rates. The first swap agreement covers $5.6 million in debt and commenced April
7, 2009 and matures on April 7, 2014. The second swap agreement covers
approximately $2.6 million in debt and commenced October 15, 2008 and matures
on May 7, 2013. The third swap agreement covers approximately $547,000 in debt
and commenced October 22, 2008 and matures on October 22, 2013. The three swap
agreements fix our interest rate at approximately 5.8%. At March 31, 2010, we
recorded the estimated fair value of the liability related to the three swaps
as approximately $620,000. Accounting rules require us to recognize all
derivatives on the balance sheet at estimated fair value. We have designated
these agreements as a cash flow hedge.

14

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Our long term
debt as of March 31, 2010 and December 31, 2009 consisted of the following:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |             |            |      |   |            | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | ---- | - | ---------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | 2010        |            | 2009 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |             |            |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | (unaudited) |            |      |  
|Non-revolving line of
 credit with BB&T effective February 11, 2009 in the amount of $12,000,000
 with an original maturity date of February 11, 2010, which was extended to
 March 24, 2010, and then to April 13, 2013 under the new loan agreement.
 Interest was payable monthly starting March 11, 2009, and the note bore
 interest at the adjusted LIBOR rate of one month LIBOR plus 2.25% per annum
 with a floor of 4%. As of March 31, 2010, the applicable interest rate was
 4%. All our assets (except rental fleet equipment) secure this note. |  | $           |           |      | $ | 11,517,440 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |             |            |      |   |            | 
|Revolving credit facility
 of $10 million with BB&T secured by all assets except for rental fleet
 equipment with a variable interest rate of Libor plus 2.25% and no required
 monthly principal payments. As of March 31, 2010, the applicable interest
 rate was 2.4986%. The original maturity date under this agreement was January
 1, 2012, extended to April 13, 2013 under the new loan agreement.                                                                                                                                                    |  |             |           |      |   | 8,166,917  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |             |            |      |   |            | 
|Revolving credit facility
 of $20 million with BB&T and BB&T Bankcard Corporation secured by
 accounts receivable and inventory with a variable interest rate of Libor plus
 2.50% per annum with a floor of 3.50% and no required monthly principal
 payments. The credit facility expires on April 13, 2013.                                                                                                                                                                                                                                                 |  |             | 16,438,931 |      |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |             |            |      |   |            | 
|Note payable to BB&T in
 the amount of $5 million secured by all equipment except for rental fleet
 equipment and certain real property with a variable interest rate of Libor
 plus 2.50% per annum with a floor of 3.50%. The repayment terms are principal
 and interest paid monthly commencing on May 13, 2010 with one final payment
 of all remaining principal and accrued interest due at maturity date on April
 7, 2014.                                                                                                                            |  |             | 4,987,686  |      |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |             |            |      |   |            | 
|Note payable to BB&T in
 the amount of $3 million secured by our rental fleet equipment with a fixed
 interest rate of 5.65%. The repayment terms are principal and interest paid
 monthly commencing on November 7, 2008 with one final payment of all
 remaining principal and accrued interest due at maturity on May 7, 2013.                                                                                                                                                                                                                              |  |             | 2,536,021  |      |   | 2,598,526  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |             |            |      |   |            | 
|Note payable to BB&T in
 the amount of $6.0 million secured by our shredder system assets with a fixed
 interest rate of 5.89%. The repayment terms are principal and interest paid
 monthly commencing on November 7, 2008 with one final payment of all
 remaining principal and accrued interest due at maturity on April 7, 2014.                                                                                                                                                                                                                          |  |             | 5,548,367  |      |   | 5,661,275  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |             |            |      |   |            | 
|Note payable to BB&T in
 the amount of $609,900 secured by a crane with a fixed interest rate of
 5.89%. The repayment terms are principal and interest paid monthly beginning
 December 1, 2008 with one final payment of all remaining principal and
 accrued interest due at maturity in October 2013.                                                                                                                                                                                                                                                      |  |             | 542,909    |      |   | 555,215    | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |             |            |      |   |            | 
|Note payable to Paccar
 Financial Corp. in the amount of $163,655 secured by two Kenworth trucks.
 Payments are $3,395.36 per month with an effective interest rate of 6.5%. The
 maturity date under this agreement is September 2011.                                                                                                                                                                                                                                                                                                                        |  |             | 51,269     |      |   | 112,724    | 

15

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|                                                                                                                                                                                                                                                   |  |   |            |  |   |            | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---------- |  | - | ---------- | 
|Note payable to ILS for
 various assets including tractor trailers, trucks and containers. The
 repayment terms are $20,000 per month for 60 months at a seven percent (7%)
 interest rate. The maturity date under this agreement is August 2012. |  |   | 532,172    |  |   | 582,273    | 
|                                                                                                                                                                                                                                                   |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                   |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                   |  |   | 30,637,355 |  |   | 29,194,370 | 
|Less current maturities                                                                                                                                                                                                                            |  |   | 1,321,413  |  |   | 12,539,889 | 
|                                                                                                                                                                                                                                                   |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                   |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                   |  | $ | 29,315,942 |  | $ | 16,654,481 | 
|                                                                                                                                                                                                                                                   |  |   |            |  |   |            | 

The annual maturities of long-term debt as of March 31, 2010 are as
follows:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2010       |  | $ | 1,321,413  | 
|2011       |  |   | 1,552,311  | 
|2012       |  |   | 1,470,340  | 
|2013       |  |   | 23,070,273 | 
|Thereafter |  |   | 3,223,018  | 
|           |  |   |            | 
|           |  |   |            | 
|Total      |  | $ | 30,637,355 | 
|           |  |   |            | 

NOTE 5  SEGMENT INFORMATION

The Companys operations
include two primary segments: Recycling and Waste Services. In the first
quarter of 2009, we initially decided to report our stainless steel alloys
business as a separate segment. However, as we gained more experience with the
business and upon further management review, we have determined that stainless
steel alloys should be reported as part of the Recycling segment. As our alloys
business developed, we realized that it was more like recycling than a separate
segment. Furthermore, during the second quarter of 2009, we found that
stainless steel alloys shared resources with Recycling, including employees,
equipment, and corporate functions. We also found that the chief decision maker
of the Recycling segment makes the decisions on allocation of funds to the
different division levels within recycling, including stainless steel alloys.
Thus, the segment information for the first quarter of 2009 reflects the
recycling segment, which combines the previously reported ISA Recycling and ISA
Alloys information.

The Companys two reportable
segments are determined by the products and services that each offers. The
Recycling segment generates its revenues based on buying and selling of ferrous,
non-ferrous, including stainless steel, and fiber scrap. Waste Services
revenues consist of charges to customers for waste disposal services and
equipment sales and lease income. The components of the column labeled other
are selling, general and administrative expenses that are not directly related
to the two primary segments.

We evaluate segment
performance based on gross profit or loss and the evaluation process for each
segment includes only direct expenses and selling, general and administrative
costs, omitting any other income and expense and income taxes.

16

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|                                               |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|---------------------------------------------- |  | --------- | ----------- | --------------- | - | ---------- | - | --------------- | ---------- | - | - | ----------- | -
|FOR THE
 THREE MONTHS ENDED
 MARCH 31, 2010    |  | RECYCLING |             | WASTE
 SERVICES |   | OTHER      |   | SEGMENT
 TOTALS |           
|                                               |  |           |             |                 |   |            |   |                 |           
|                                               |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|Recycling revenues                             |  | $         | 72,069,234  |                 | $ |           |   | $               |           |   | $ | 72,069,234  |  
|Equipment sales, service
 and leasing revenues |  |           |            |                 |   | 564,599    |   |                 |           |   |   | 564,599     |  
|Management fees                                |  |           |            |                 |   | 1,535,133  |   |                 |           |   |   | 1,535,133   |  
|Cost of goods sold                             |  |           | (66,311,974 | )               |   | (1,573,534 | ) |                 |           |   |   | (67,885,508 | )
|Selling, general and
 administrative expenses  |  |           | (1,674,775  | )               |   | (282,457   | ) |                 | (1,243,790 | ) |   | (3,201,022  | )
|                                               |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|                                               |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|Segment profit (loss)                          |  | $         | 4,082,485   |                 | $ | 243,741    |   | $               | (1,243,790 | ) | $ | 3,082,436   |  
|                                               |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|                                               |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|Segment assets                                 |  | $         | 69,991,681  |                 | $ | 2,510,021  |   | $               | 3,056,125  |   | $ | 75,557,827  |  
|                                               |  |           |             |                 |   |            |   |                 |            |   |   |             |  

|                                               |  |           |             |                 |   |            |   |                 |           |   |   |             |  
|---------------------------------------------- |  | --------- | ----------- | --------------- | - | ---------- | - | --------------- | --------- | - | - | ----------- | -
|FOR THE
 THREE MONTHS ENDED
 MARCH 31, 2009    |  | RECYCLING |             | WASTE
 SERVICES |   | OTHER      |   | SEGMENT
 TOTALS |          
|                                               |  |           |             |                 |   |            |   |                 |          
|                                               |  |           |             |                 |   |            |   |                 |           |   |   |             |  
|Recycling revenues                             |  | $         | 21,051,635  |                 | $ |           |   | $               |          |   | $ | 21,051,635  |  
|Equipment sales, service
 and leasing revenues |  |           |            |                 |   | 552,720    |   |                 |          |   |   | 552,720     |  
|Management fees                                |  |           |            |                 |   | 2,645,568  |   |                 |          |   |   | 2,645,568   |  
|Cost of goods sold                             |  |           | (17,803,930 | )               |   | (2,461,188 | ) |                 |          |   |   | (20,265,118 | )
|Selling, general and
 administrative expenses  |  |           | (1,726,513  | )               |   | (376,524   | ) |                 | (606,624  | ) |   | (2,709,661  | )
|                                               |  |           |             |                 |   |            |   |                 |           |   |   |             |  
|                                               |  |           |             |                 |   |            |   |                 |           |   |   |             |  
|Segment profit (loss)                          |  | $         | 1,521,192   |                 | $ | 360,576    |   | $               | (606,624  | ) | $ | 1,275,114   |  
|                                               |  |           |             |                 |   |            |   |                 |           |   |   |             |  
|                                               |  |           |             |                 |   |            |   |                 |           |   |   |             |  
|Segment assets                                 |  | $         | 35,132,498  |                 | $ | 2,831,806  |   | $               | 3,910,070 |   | $ | 41,874,374  |  
|                                               |  |           |             |                 |   |            |   |                 |           |   |   |             |  

NOTE 6  INVENTORIES

Our inventories primarily
consist of ferrous and non-ferrous, including stainless steel, scrap metals and
are valued at the lower of average purchased cost or market. Beginning in 2010,
we refined this method of valuing inventory to the specific identification
method, whereas in all prior years inventory is valued using the weighted
average method. This enhancement became available due to a change in the
inventory software, which now provides the ability to specifically track and
identify individual scrap metal commodities within the system. This improvement
provides a more accurate value of the inventory and will apply for all future
periods. Quantities of inventories are determined based on our inventory
systems and are subject to periodic physical verification using estimation
techniques including observation, weighing and other industry methods. We would
recognize inventory impairment when the market value, based upon current market
pricing, falls below recorded value or when the estimated volume is less than
the recorded volume of the inventory. We would record the loss in cost of goods
sold in the period during which we identified the loss.

Some commodities are in
saleable condition at acquisition. We purchase these commodities in small

17

---



amounts until we have a
truckload of material available for shipment. Some commodities are not in
saleable condition at acquisition. These commodities must be torched, sheared,
shredded or baled. We do not have work-in-process inventory that needs to be
manufactured to become finished goods. We include processing costs in inventory
for all commodities.

Stainless steel inventory of
$13,498,359 at March 31, 2010 was comprised only of raw materials. Ferrous
inventory of $3,259,704 at March 31, 2010 was comprised of $715,803 in raw
materials and $2,543,901 in finished goods. Non-ferrous inventory of $2,180,273
at March 31, 2010 was comprised of $593,581 in raw materials and $1,586,692 of
finished goods. Replacement parts inventory for the shredder at March 31, 2010
was $761,125. Stainless steel inventory of $21,549,014 at December 31, 2009 was
comprised only of raw materials. Ferrous inventory of $1,587,475 at December
31, 2009 was comprised of $269,344 in raw materials and $1,318,131 of finished
goods. Non-ferrous inventory of $2,219,137 at December 31, 2009 was comprised
of $653,019 in raw materials and $1,566,118 of finished goods. Replacement
parts inventory for the shredder at December 31, 2009 was $879,831. We charged
$152,894 in general and administrative processing costs to cost of sales for
the three months ended March 31, 2010 and $4,711,982 for the year ended
December 31, 2009.

Inventory also includes all
types of industrial waste handling equipment and machinery held for resale such
as compactors, balers, and containers. Shredder replacement parts included in
Inventory are depreciated over a one-year life. Other inventory includes misc
equipment, fuel, cardboard and baling wire. Inventories as of March 31, 2010
and December 31, 2009 consist of the following:

|                           |  |                             |            |                   |   |            | 
|-------------------------- |  | --------------------------- | ---------- | ----------------- | - | ---------- | 
|                           |  | March 31, 2010
 (unaudited) |            | December 31, 2009 |  
|                           |  |                             |            |                   |  
|                          
|Stainless steel alloys     |  | $                           | 13,498,359 |                   | $ | 21,549,014 | 
|Ferrous materials          |  |                             | 3,259,704  |                   |   | 1,587,475  | 
|Non-ferrous materials      |  |                             | 2,180,273  |                   |   | 2,219,137  | 
|Shredder replacement parts |  |                             | 761,125    |                   |   | 879,831    | 
|Waste equipment machinery  |  |                             | 59,950     |                   |   | 102,032    | 
|Other                      |  |                             | 93,452     |                   |   | 89,122     | 
|                           |  |                             |            |                   |   |            | 
|                           |  |                             |            |                   |   |            | 
|Total inventories          |  | $                           | 19,852,863 |                   | $ | 26,426,611 | 
|                           |  |                             |            |                   |   |            | 

NOTE 7 - LEASE COMMITMENTS

Operating
Leases:

We lease our Louisville,
Kentucky facility from a related party under an operating lease expiring
December 2012. The rent was adjusted in December 2007 per the agreement to
monthly payments of $48,500 through December 2012. In addition, we are also
responsible for real estate taxes, insurance, utilities and maintenance
expense.

We also lease a management
services operations facility and various pieces of equipment in Dallas, Texas
for which monthly payments of $969 are due through September 2010.

18

---



We also lease other
machinery and equipment under operating leases which expire through June 2010.

Future minimum lease
payments for operating leases as of March 31, 2010 are as follows:

|                               |  |   |           | 
|------------------------------ |  | - | --------- | 
|2010                           |  | $ | 657,847   | 
|2011                           |  |   | 636,000   | 
|2012                           |  |   | 477,000   | 
|Thereafter                     |  |   |          | 
|                               |  |   |           | 
|                               |  |   |           | 
|Future minimum lease
 payments |  | $ | 1,770,847 | 
|                               |  |   |           | 

Total rent expense for the
three months ended March 31, 2010 and 2009 was $213,459 and $307,220,
respectively.

Capital
Leases:

We lease various pieces of
equipment which qualify as capital leases. These lease arrangements require
monthly lease payments expiring at various dates through June 2010.

The following is a summary
of assets held under capital leases which are included in property and
equipment:

|                               |  |      |         |      |   |         | 
|------------------------------ |  | ---- | ------- | ---- | - | ------- | 
|                               |  | 2010 |         | 2009 |  
|                               |  |      |         |      |  
|                              
|Equipment                      |  | $    | 341,709 |      | $ | 366,172 | 
|                               |  |      |         |      |   |         | 
|Less accumulated
 depreciation |  |      | 118,483 |      |   | 83,273  | 
|                               |  |      |         |      |   |         | 
|                               |  |      |         |      |   |         | 
|                               |  | $    | 223,226 |      | $ | 282,899 | 
|                               |  |      |         |      |   |         | 

The present value of future
net minimum capital lease payments at March 31, 2010 is $2,474, all current.

NOTE 8  PER SHARE DATA

The computation for basic
and diluted earnings per share is as follows:

Three months ended March 31,
2010 compared to three months ended March 31, 2009:

|                                    |  |      |           |      |   |           | 
|----------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|                                    |  | 2010 |           | 2009 |  
|                                    |  |      |           |      |  
|Basic
 earnings per share           |  |      |           |      |   |           | 
|Net income                          |  | $    | 1,763,266 |      | $ | 654,063   | 
|                                    |  |      |           |      |   |           | 
|Weighted average shares outstanding |  |      | 4,299,681 |      |   | 3,575,292 | 
|                                    |  |      |           |      |   |           | 
|                                    |  |      |           |      |   |           | 
|Basic earnings per share            |  | $    | 0.41      |      | $ | 0.18      | 
|                                    |  |      |           |      |   |           | 

19

---



|                                                           |  |   |           |  |   |           | 
|---------------------------------------------------------- |  | - | --------- |  | - | --------- | 
|Diluted
 earnings per share                                |  |   |           |  |   |           | 
|Net income                                                 |  | $ | 1,763,266 |  | $ | 654,063   | 
|                                                           |  |   |           |  |   |           | 
|Weighted average shares outstanding                        |  |   | 4,299,681 |  |   | 3,575,292 | 
|Add dilutive effect of assumed exercising of stock options |  |   | 25,419    |  |   |          | 
|                                                           |  |   |           |  |   |           | 
|                                                           |  |   |           |  |   |           | 
|Diluted weighted average shares outstanding                |  |   | 4,325,100 |  |   | 3,575,292 | 
|                                                           |  |   |           |  |   |           | 
|                                                           |  |   |           |  |   |           | 
|Diluted earnings per share                                 |  | $ | 0.41      |  | $ | 0.18      | 
|                                                           |  |   |           |  |   |           | 

NOTE 9  LONG TERM INCENTIVE PLAN

At our June 16, 2009 annual
shareholders meeting, shareholders approved ratification of a long term
incentive plan and approved the issuance of additional common shares of our
stock. The plan proposes to make available up to 800,000 shares of our common
stock for performance-based awards under the plan. Contingent upon shareholder
approval, we will reserve 800,000 additional shares of our common stock under this
plan, so that the total number of shares reserved will increase from 800,000 to
1,600,000 shares. We may grant any of these types of awards: non-qualified and
incentive stock options; stock appreciation rights; and other stock awards
including stock units, restricted stock units, performance shares, performance
units, and restricted stock. The performance goals that we may use for such
awards will be based on any one or more of the following performance measures:
cash flow; earnings; earnings per share; market value added or economic value
added; profits; return on assets; return on equity; return on investment;
revenues; stock price; or total shareholder return.

The plan is administered by
a committee selected by the Board, initially our Compensation Committee, and
consisting solely of two or more outside members of the Board. The Committee
may grant one or more awards to our employees, including our officers, our
directors and consultants, and will determine the specific employees who will
receive awards under the plan and the type and amount of any such awards. A
participant who receives shares of stock awarded under the plan must hold those
shares for six months before the participant may dispose of such shares. The
Committee may settle an award under the plan in cash rather than stock.

As of July 1, 2009, we
awarded options to purchase 20,000 shares of our stock each to our three
independent directors for a total of 60,000 shares at a per share exercise
price of $6.35. As of January 11, 2010, we awarded 12,000 shares of our stock
to management at a per share price of $9.70 and as of February 11, 2010, we
awarded 5,000 shares of our stock to management at a per share price of $10.10.

NOTE 10  CERTAIN RELATED PARTY TRANSACTIONS

Effective April 1, 2010,
Industrial Services of America, Inc. (the Company) and K&R, LLC
(K&R) entered into an agreement (the Amendment) which amends a
consulting agreement which the parties had entered into on January 2, 1998 (the
Prior Agreement). Under the Prior Agreement, the Company engaged K&R as a
consultant and retained the services of K&R management personnel to perform
planning and consulting services with respect to the Companys businesses,
including the preparation of

20

---



business
plans, proforma budgets, and assistance with general operational issues. The
Prior Agreement provided for a term of ten years, with an automatic renewal for
additional terms of one year on January 1 of each successive calendar year
unless either party provides the other party with written notice of its intent
not to renew at least six months prior to the expiration of the then existing
term. The Companys Chief Executive Officer, Harry Kletter, is a member of
Kletter Holding, LLC, which is the sole member of K&R. The Amendment
increases the consulting fees from $240,000 per annum to $480,000 per annum.
The annual fee is payable in equal monthly installments of $40,000. The
Amendment otherwise ratifies the Prior Agreement in all respects.

In addition,
on March 26, 2010, the Company entered into certain other agreements, the
performance of each of which is subject to shareholder approval of certain
issuances of shares of the Companys common stock (Common Stock). Those
Agreements would do the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Amend and
 restate the employment agreement of Brian Donaghy (Mr. Donaghy), the
 Companys President and Chief Operating Officer, to (a) extend the term to
 June 30, 2015, and (b) provide for (i) an annual bonus based on the Companys
 achievement of certain return on net asset (RONA) targets pursuant to
 incentive plans to be established by the Company, to be payable in cash or
 partly in Common Stock at the election of Mr. Donaghy, (ii) a bonus of up to
 10,000 shares of Common Stock per annum based on the Companys achievement of
 certain RONA targets, and (iii) a one-time bonus of up to 150,000 shares of
 Common Stock based on the Companys achievement of certain 5 year RONA
 targets as measured on December 31, 2014;                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Amend and
 restate the employment agreement of Steve Jones (Mr. Jones), the Companys
 Vice President of Operations  ISA Alloys, to (a) extend the term to June
 30, 2015, and (b) replace the annual bonus of a cash payment equal to 7.5% of
 the amount determined for each fiscal year of the segment profit of ISA
 Alloys minus selling, general and administrative expenses applicable to the
 ISA Alloys segment with (i) an annual bonus based on the Companys
 achievement of certain RONA targets pursuant to incentive plans to be established
 by the Company, to be payable in cash or partly in Common Stock, at the
 election of Mr. Jones, (ii) a bonus of up to 30,000 shares of Common Stock
 per annum based on the Companys achievement of certain RONA targets, and
 (iii) a one-time bonus of up to 150,000 shares of Common Stock based on the
 Companys achievement of certain 5 year RONA targets as of December 31, 2014;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Amend and
 restate the employment agreement of Jeffrey Valentine (Valentine), the
 Companys General Manager of ISA Alloys, to (a) extend the term to June 30,
 2015, and (b) replace the annual bonus of a cash payment equal to 7.5% of the
 amount determined for each fiscal year of the segment profit of ISA Alloys
 minus selling, general and administrative expenses applicable to the ISA
 Alloys segment with (i) an annual cash bonus based on the Companys
 achievement of certain RONA targets pursuant to an incentive plan to be
 established by the Company, (ii) a bonus of up to 30,000 shares of Common
 Stock per annum based on the Companys achievement of certain RONA targets,
 and (iii) a one-time bonus of up to 50,000 shares of Common Stock based on
 the Companys achievement of certain 5 year RONA targets as of December 31,
 2014;                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Enter into an asset purchase agreement dated July 1, 2010 with Venture Metals,
LLC (Venture) pursuant to which the Company will issue to Venture 200,000
shares of Common Stock and pay Venture $1,348,942.41 in cash, in exchange for
the Venture name, Ventures execution of a noncompete agreement, and Ventures
agreement to cause Mr. Jones and Mr. Valentine to provide the company with
noncompete agreements. Venture is owned by Mr. Jones and Mr. Valentine. For
additional information regarding this agreement, please see Subsequent Events
under Note 1 in the Notes to Condensed Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                    

21

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ITEM 2:    MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should
be read in conjunction with our unaudited condensed consolidated financial
statements and the accompanying notes thereto included elsewhere in this
report.

The following discussion and analysis
contains certain financial predictions, forecasts and projections which
constitute forward-looking statements within the meaning of the federal
securities laws. Actual results could differ materially from those financial
predictions, forecasts and projections and there can be no assurance that we
will achieve such financial predictions, forecasts and projections. Factors
that could affect financial predictions, forecasts and projections include the
fluctuations in the commodity price index and any conditions internal to our
major customers, including loss of their accounts and other factors as listed
in our Form 10-K for the year ended December 31, 2009, as filed with the
Securities and Exchange Commission.

General

We are
primarily focusing our attention now and in the future towards our recycling
business. We sell processed ferrous and non-ferrous scrap material to end-users
such as steel mini-mills, integrated steel makers, foundries and refineries. We
purchase ferrous and non-ferrous scrap material primarily from industrial and
commercial generators of steel, iron, aluminum, copper, stainless steel and
other metals as well as from other scrap dealers who deliver these materials
directly to our facilities. We process these materials by sorting, shredding,
shearing, cutting and/or baling. We will also continue to focus on initiating growth
in our waste services business segment, which includes management services and
waste and recycling equipment sales, service and leasing.

In 2009, we
expanded into the stainless steel recycling market for super alloys and high
temperature metals by purchasing inventories and related equipment from Venture
Metals, LLC and hiring two of its key executives. We buy, remelt, and sell
stainless steel and high-temperature alloys to steel mills like North American
Stainless, our primary customer. The Venture Metals asset purchase is the
latest in a series of actions we have undertaken to position ourselves for
strategic growth. The multi-million-dollar shredder project, completed in June
2009, expands our processing capacity, offers specialty grades of scrap and
improves end-product quality. The shredder began operations on July 1, 2009. In
the last quarter of 2009, we improved the Grade Lane location and added a new
entrance for our ISA Alloys operations, which we moved from the Camp Ground
Road location to 7100 Grade Lane in November 2009. In 2010, we hired an Alloys
Operations Manager to aid in the expansion of specialty alloys within our
recycling segment, specifically in the area of aerospace alloys.

Despite the
loss of two major customers in 2008, we continue to pursue a growth strategy in
the waste management services arena by adding new locations of existing
customers as well as marketing our

22

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services to
potential customers. Currently, we service approximately 600 customer locations
throughout the United States and we utilize an active database of over 6,500
vendors to provide timely, thorough and cost-effective service to our
customers.

Although our
focus is on the recycling industry, our goal is to remain dedicated to the
management services, and equipment industry as well, while sustaining steady
growth at an acceptable profit, adding to our net worth, and providing positive
returns for stockholders. We intend to increase efficiencies and productivity
in our core business while remaining alert for possible acquisitions, strategic
partnerships, mergers and joint-ventures that would enhance our profitability.

We have
operating locations in Louisville, Kentucky, Seymour, Indiana, New Albany,
Indiana, and Dallas, Texas. We do not have operating locations outside the
United States.

Liquidity and Capital Resources

As of March
31, 2010 we held cash and cash equivalents of $1,135,651.

On April 13,
2010, Industrial Services of America, Inc. (the Company) entered into a Loan
Agreement (the Loan Agreement) with Branch Banking and Trust Company (the
Bank) and BB&T Bankcard Corporation pursuant to which the Bank agreed to
provide the Company a revolving credit facility in the amount of $20,000,000
for the purpose of replacing the Companys existing $12,000,000 promissory note
to the Bank and the Companys existing $10,000,000 senior revolving credit
facility with the Bank. In addition, the Company, the Bank and certain other
parties entered into a Modification and Cross-Collateralization Agreement (the
Modification Agreement) pursuant to which the Company and the Bank modified
the Companys existing $5,000,000 term loan to the Bank. Proceeds of the new
revolving credit facility in the amount of $17.7 million were used to repay the
outstanding principal balance of the $12,000,000 promissory note and the amount
outstanding under the prior credit facility and to pay closing costs.

With respect
to the revolving credit facility, the interest rate is one month LIBOR plus two
hundred fifty basis points (2.50%) per annum, adjusted monthly on the first day
of each month, with a floor of three and one half percent (3.50%). The
revolving credit facility expires on April 13, 2013. Under the revolving credit
facility, the Company is permitted to borrow the lesser of $20,000,000 or the
borrowing base, consisting of the sum of 80% of eligible accounts receivable
plus 55% of eligible inventory up to $10,000,000. Eligible accounts are
generally those receivables that are less than 90 days from the invoice date.
As security for the revolving credit facility, the Company provided the Bank a
first priority security interest in the accounts receivable from most of its
customers and in its inventory. The Company also cross collateralized the
revolving line of credit with the $5,000,000 term loan, an existing rental
fleet loan in favor of the Bank and a $500,000 purchasing credit card
commitment, in addition to all other existing debt the Company owes to the
Bank.

The $5,000,000
term loan provides for an interest rate that is the same as the interest rate
for the revolving credit facility. Accrued interest is payable monthly, with
the first such payment commencing on May 13, 2010. The outstanding balance
under the term loan plus accrued interest is payable in monthly installments in
accordance with a 9.5 year amortization schedule, with a final scheduled
payment of $3.1 million of principal due at maturity of the note on April 7,
2014. As security for the

23

---



modified term
loan, the Company provided the Bank a first priority security interest in all
equipment other than the rental fleet that the Company owns. In addition, the
Company provided a first mortgage on the property at the following locations:
3409 Campground Road, 6709, 7023, 7025, 7101, 7103 and 7110 Grade Lane, Louisville
Kentucky, 1565 East Fourth Street, Seymour, Indiana and 1617 State Road 111,
New Albany, Indiana. The Company also cross collateralized the term loan with
the revolving credit facility, the rental fleet loan, the $500,000 purchasing
credit card commitment and all other existing debt the Company owes to the
Bank.

In the Loan
Agreement, the Company agreed to certain covenants, including the maintenance
of minimum tangible net worth of $16,000,000 as of December 31, 2009
(increasing by 40% of after tax net income annually, plus 100% of new equity
issued by the Company), maintenance of a ratio of earnings before interest,
taxes, depreciation and amortization (EBITDA) to the sum of the preceding 12
months interest expense plus projected principal payments on long-term debt in
the next succeeding 12 months of not less than 1.25 to 1, and maintenance of a
ratio of debt to tangible net worth of not more than 3.5 to 1.

In the
financial statements and accompanying notes, we are presenting the current
maturities of long term debt and the long term debt reflecting the impact of
the refinancing.

We have long
term debt comprised of the following:

|                              |  |                              |            |                    |   |            | v
|----------------------------- |  | ---------------------------- | ---------- | ------------------ | - | ---------- | -
|                              |  | March 31,
 2010
 (unaudited) |            | December 31,
 2009 |  
|                              |  |                              |            |                    |  
|                              |  |                              |            |                    |   |            |  
|Non-revolving line of
 credit |  | $                            |           |                    | $ | 11,517,440 |  
|Revolving line of credit      |  |                              | 16,438,931 |                    |   | 8,166,917  |  
|Notes payable                 |  |                              | 14,198,424 |                    |   | 9,510,013  |  
|                              |  |                              |            |                    |   |            |  
|                              |  | $                            | 30,637,355 |                    | $ | 29,194,370 |  
|                              |  |                              |            |                    |   |            |  

As of March
31, 2010, we were in compliance with all three restrictive covenants related to
our debt.

We expect that
existing cash flow from operations and available credit under our restructured
credit facilities will be sufficient to meet our cash needs for the next year
and beyond.

Results of Operations

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

|                                              |  |                                |       |      |  |       |  
|--------------------------------------------- |  | ------------------------------ | ----- | ---- |  | ----- | -
|                                              |  | Three months ended 
 March 31, |      
|                                              |  |                                |      
|                                              |  | 2010                           |       | 2009 | 
|                                              |  |                                |       |      | 
|Statements
 of Operations Data:               |  |                                |       |      |  |       |  
|Total
 Revenue                                |  |                                | 100.0 | %    |  | 100.0 | %
|Cost of
 goods sold                           |  |                                | 91.5  | %    |  | 83.6  | %
|Selling,
 general and administrative expenses |  |                                | 4.3   | %    |  | 11.2  | %
|Income
 before other income/expenses          |  |                                | 4.2   | %    |  | 5.2   | %

24

---



Three months ended March 31, 2010 compared to three months ended March
31, 2009

Total revenue
increased $49,919,043 or 205.9% to $74,168,966 in 2010 compared to $24,249,923
in 2009. Recycling revenue increased $51,017,599 or 242.4% to $72,069,234 in
2010 compared to $21,051,635 in 2009. This is primarily due to an increase of
82.8% in volume of stainless steel materials, a 192.7% increase in volume of
ferrous materials and a 206.4% increase in volume of non-ferrous materials, and
an average increase in price of 63.4%. Waste Services revenue decreased
$1,098,556 or 34.3% to $2,099,732 in 2010 compared to $3,198,288 in 2009
primarily due to a decrease of approximately 1,500 customer locations as well
as a $53,404 decrease in rental and baling wire revenue and a $7,500 decrease in
VISA rebates, partially offset by a $50,015 increase in equipment sales,
service and repairs revenue.

Total cost of
goods sold increased $47,620,390 or 235.0% to $67,885,508 in 2010 compared to
$20,265,118 in 2009. Recycling cost of goods sold increased $48,508,044 or
272.5% to $66,311,974 in 2010 compared to $17,803,930 in 2009. This is
primarily due to the increases in shipments noted above and 110.7% higher
commodity purchase prices. Waste services cost of goods sold decreased $887,654
or 36.1% to $1,573,534 in 2010 compared to $2,461,188 in 2009 primarily due to
the decrease in customer locations, partially offset by an increase of $37,356
in cost of equipment sales.

Selling,
general and administrative expenses increased $491,361 or 18.1% to $3,201,022
in 2010 compared to $2,709,661 in 2009. As a percentage of revenue, selling,
general and administrative expenses were 4.3% in 2010 compared to 11.2% in
2009. The primary drivers of the increase in total expenses are increases in
management stock bonuses of $166,900, and bonuses of $422,800, offset by
decreases in license taxes and fees of $70,404, legal expenses of $55,261 and
bad debt expense of $54,970.

Other expense
decreased $41,378 to other expense of $143,661 in 2010 compared to other
expense of $185,039 in 2009. This was primarily due to an increase in the gain
on sale of assets of $180,898 and a decrease in legal settlements of $65,597,
partially offset by an increase in interest expense of $190,474.

Income tax
provision increased $739,469 to $1,175,511 in 2010 compared to $436,042 in
2009. The effective tax rate in 2010 and 2009 was 40.0% based on federal and
state statutory rates.

Financial condition at March 31, 2010 compared to December 31, 2009

Cash and cash
equivalents increased $422,589 to $1,135,651 as of March 31, 2010 compared to
$713,062 as of December 31, 2009.

Net cash from
operating activities was $4,238,492 for the three months ended March 31, 2010.
This was primarily due to the combination of increased sales, purchases, and
pricing, resulting in an increase of $9,674,527 in accounts payable and a
decrease of $6,573,748 in inventories, offset by a $15,519,922 increase in
accounts receivable.

We used net
cash from investing activities of $240,564 for the three months ended March 31,
2010. We used $40,922 for road and building improvements. We purchased
recycling and rental fleet equipment,

25

---



shredder
system equipment, and shearer parts of $125,885. The rental fleet equipment
consists of solid waste handling and recycling equipment such as compactors, containers
and balers. It is our intention to continue to pursue this market.
Additionally, we spent $358,232 on accounting software. We received $185,000
from sales of our rental fleet compactors, balers, and containers and $89,512
from the sale of one of our trucks.

We used net
cash from financing activities of $3,575,339 for the three months ended March
31, 2010 is primarily due to advances of $1,086,554 offset by payments on debt
of $4,643,569.

Accounts
receivable trade increased $15,519,922 or 182.3% to $24,032,248 as of March 31,
2010 compared to $8,512,326 as of December 31, 2009. This change is due to
increased sales in the first quarter and the timing of customer payments.

Inventories
consist principally of stainless steel, ferrous and nonferrous scrap materials
and waste equipment machinery held for resale. We value inventory at the lower
of cost or market. Inventory decreased $6,573,748 or 24.9% to $19,852,863 as of
March 31, 2010 compared to $26,426,611 as of December 31, 2009. The primary
reason for the decrease in inventory was that the increases in the volume of
shipments of all materials in the first quarter were higher than the increases
in the volume of purchases of all materials in the first quarter.

Inventory
aging for the period ended March 31, 2010 (Days Outstanding):

|                           |  |      |            |       |   |           |  |         |        |       |   |         |  |   |            | 
|-------------------------- |  | ---- | ---------- | ----- | - | --------- |  | ------- | ------ | ----- | - | ------- |  | - | ---------- | 
|Description                |  | 1-30 |            | 31-60 |   | 61-90     |  | Over 90 |        | Total |  
|Stainless steel alloys     |  | $    | 11,391,331 |       | $ | 1,572,458 |  | $       | 14,862 |       | $ | 519,708 |  | $ | 13,498,359 | 
|Ferrous materials          |  |      | 3,010,275  |       |   | 175,077   |  |         | 25,948 |       |   | 48,404  |  |   | 3,259,704  | 
|Non-ferrous materials      |  |      | 1,939,794  |       |   | 93,819    |  |         | 47,469 |       |   | 99,191  |  |   | 2,180,273  | 
|Shredder replacement parts |  |      | 761,125    |       |   |          |  |         |       |       |   |        |  |   | 761,125    | 
|Waste equipment machinery  |  |      | 5,500      |       |   |          |  |         |       |       |   | 54,450  |  |   | 59,950     | 
|Other                      |  |      | 93,452     |       |   |          |  |         |       |       |   |        |  |   | 93,452     | 
|                           |  |      |            |       |   |           |  |         |        |       |   |         |  |   |            | 
|Total                      |  | $    | 17,201,477 |       | $ | 1,841,354 |  | $       | 88,279 |       | $ | 721,753 |  | $ | 19,852,863 | 
|                           |  |      |            |       |   |           |  |         |        |       |   |         |  |   |            | 

Inventory
aging for the year ended December 31, 2009 (Days Outstanding):

|                           |  |      |            |       |   |           |  |         |           |       |   |           |  |   |            | 
|-------------------------- |  | ---- | ---------- | ----- | - | --------- |  | ------- | --------- | ----- | - | --------- |  | - | ---------- | 
|Description                |  | 1-30 |            | 31-60 |   | 61-90     |  | Over 90 |           | Total |  
|Stainless steel alloys     |  | $    | 11,738,653 |       | $ | 2,564,183 |  | $       | 5,170,224 |       | $ | 2,075,954 |  | $ | 21,549,014 | 
|Ferrous materials          |  |      | 1,513,849  |       |   | 47,151    |  |         | 19,834    |       |   | 6,641     |  |   | 1,587,475  | 
|Non-ferrous materials      |  |      | 1,801,125  |       |   | 243,708   |  |         | 47,545    |       |   | 126,759   |  |   | 2,219,137  | 
|Shredder replacement parts |  |      | 879,831    |       |   |          |  |         |          |       |   |          |  |   | 879,831    | 
|Waste equipment machinery  |  |      | 9,670      |       |   |          |  |         |          |       |   | 92,362    |  |   | 102,032    | 
|Other                      |  |      | 89,122     |       |   |          |  |         |          |       |   |          |  |   | 89,122     | 
|                           |  |      |            |       |   |           |  |         |           |       |   |           |  |   |            | 
|Total                      |  | $    | 16,032,250 |       | $ | 2,855,042 |  | $       | 5,237,603 |       | $ | 2,301,716 |  | $ | 26,426,611 | 
|                           |  |      |            |       |   |           |  |         |           |       |   |           |  |   |            | 

Accounts
payable trade increased $9,674,527 or 206.5% to $14,358,913 as of March 31,
2010 compared to $4,684,386 as of December 31, 2009, primarily due to increased
purchases in the first quarter and the timing of payments made to our vendors.

Working
capital increased $14,989,877 to $26,308,562 as of March 31, 2010 compared to

26

---



$11,318,685 as
of December 31, 2009. The increase was primarily driven by the debt
restructuring, which reclassified $21.1 million in current maturities to long-term
debt, and the $15.5 million increase in accounts receivable. These increases
were partially offset by the $6.6 million decrease in inventory, the $9.7
million increase in accounts payable, the $0.5 million increase in income taxes
payable, and the $0.3 million increase in the bonus accrual.

Contractual Obligations

The following
table provides information with respect to our known contractual obligations
for the quarter ended March 31, 2010.

|                                 |  |       |            |                   |   |           |  |           |           |                     |   |            |  |   |   | 
|-------------------------------- |  | ----- | ---------- | ----------------- | - | --------- |  | --------- | --------- | ------------------- | - | ---------- |  | - | - | 
|Obligation Description           |  | Total |            | Less
 than 1 year |   | 1-3 years |  | 3-5 years |           | More 
 than 5 years |  
|                                
|Long-Term Debt Obligations       |  | $     | 30,637,355 |                   | $ | 1,321,413 |  | $         | 3,022,651 |                     | $ | 26,293,291 |  | $ |  | 
|Capital Lease Obligations
 (1)   |  |       | 2,474      |                   |   | 2,474     |  |           |          |                     |   |           |  |   |  | 
|Operating Lease
 Obligations (2) |  |       | 1,770,847  |                   |   | 657,847   |  |           | 1,113,000 |                     |   |           |  |   |  | 
|                                 |  |       |            |                   |   |           |  |           |           |                     |   |            |  |   |   | 
|Total                            |  | $     | 32,410,676 |                   | $ | 1,981,734 |  | $         | 4,135,651 |                     | $ | 26,293,291 |  | $ |  | 
|                                 |  |       |            |                   |   |           |  |           |           |                     |   |            |  |   |   | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | We lease various pieces of
 equipment that qualify for capital lease treatment. These lease arrangements
 require monthly lease payments expiring at various dates through June 2010.                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (2) | We lease the Louisville,
 Kentucky facility from K&R, LLC, the sole member of which is Harry
 Kletter, our chief executive officer, under an operating lease expiring December
 2012. We have monthly rental payments of $48,500 through December 2012. In
 the event of a change of control, the monthly payments become $62,500.                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | We have subleased the
 Lexington property to an unaffiliated third party for a term commencing March
 1, 2007 and ending December 31, 2012 for $4,500 per month. We currently lease
 this property from an unrelated party for $4,500 per month; the lease
 terminates December 31, 2012. If for any reason the sub-lessee defaults, we
 remain liable for the remainder of the lease payments through December 31,
 2012.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | We also lease a management
 services operations facility and various pieces of equipment in Dallas, Texas
 for which monthly payments of $969 are due through September 2010.                                                                                                                                                                                                                                             

Long-term
debt, including the current portions thereof, decreased $3,557,015 to
$30,637,355 as of March 31, 2010 compared to $34,194,370 as of December 31,
2009.

Impact of Recently Issued Accounting
Standards

In March 2008,
the FASB issued authoritative guidance on disclosures about derivative
instruments and hedging activities and updated this guidance in February 2010
through guidance entitled Technical Corrections to Various Topics. The March
2008 guidance amends and expands the disclosure requirements in the previously
issued guidance on accounting for derivative instruments and hedging activities
and is effective for fiscal years and interim periods beginning after November
15, 2008, the year beginning January 1, 2009 for us. The February 2010 update
is effective for the first reporting period beginning after issuance, the year
ending December 31, 2009 for us. We have included the required disclosures in
Note 4 of our Condensed Consolidated Financial Statements.

In May 2009,
the FASB issued authoritative guidance on subsequent events, but this guidance
was amended by new authoritative guidance issued in February, 2010. The
original guidance required the disclosure of the date through which an entity
has evaluated subsequent events and the basis for that

27

---



datethat is,
whether that date represents the date the financial statements were issued or
were available to be issued. The new guidance removes the requirement for an
SEC filer to disclose a date in both issued and revise financial statements.
This amendment removes potential conflicts with SEC requirements. The original
guidance became effective for interim and annual periods ending after June 15,
2009, the quarter ending June 30, 2009 for us, and the amendment became
effective upon issuance of the final update in February, 2010.

The FASB
issued authoritative guidance on accounting for transfers of financial assets
in June 2009 with an update issued in December 2009. This guidance is effective
for reporting periods beginning after November 15, 2009, the year ending December
31, 2010 for us. This new guidance limits the circumstances in which a
financial asset may be de-recognized when the transferor has not transferred
the entire financial asset or has continuing involvement with the transferred
asset. The concept of a qualifying special-purpose entity, which had previously
facilitated sale accounting for certain asset transfers, is removed by this new
guidance. The adoption of this new guidance did not impact our financial
position or results of operations.

The FASB
issued authoritative guidance on accounting for variable interest entities
(VIE) in June 2009 with an update issued in December 2009. This guidance is
effective for reporting periods beginning after November 15, 2009, the year
ending December 2010 for us. This guidance changes the process for how an
enterprise determines which party consolidates a VIE, to a primarily
qualitative analysis. The party that consolidates the VIE (the primary
beneficiary) is defined as the party with (1) the power to direct activities of
the VIE that most significantly affect the VIEs economic performance and (2)
the obligation to absorb losses of the VIE or the right to receive benefits
from the VIE. Upon adoption, reporting enterprises must reconsider their
conclusions on whether an entity should be consolidated and should a change
result, the effect on net assets will be recorded as a cumulative effect
adjustment to retained earnings. The adoption of this new guidance did not
impact our financial position or results of operations.

In January
2010, the FASB issued authoritative guidance entitled Accounting for
Distributions to Shareholders with Components of Stock and Cash to address and
eliminate the diversity in practice related to the accounting for a
distribution to shareholders that offers them the ability to elect to receive
their entire distribution in cash or shares of equivalent value with a
potential limitation on the total amount of cash that shareholders can elect to
receive in the aggregate. The amendments in this update clarify that the stock
portion of a distribution to shareholders that allows them to elect to receive
cash or stock with a potential limitation on the total amount of cash that all
shareholders can elect to receive in the aggregate is considered a share
issuance that is reflected in earnings per share prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). Those distributions should be accounted for and included in
earnings per share calculations in accordance with paragraphs 480-10-25-14 and
260-10-45-45 through 45-47 of the FASB Accounting Standards Codification. The
amendments in this update are effective on a retrospective basis for interim
and annual periods ending on or after December 15, 2009, the year ending
December 31, 2009 for us. The adoption of this new guidance did not impact our
financial position or results of operations.

28

---



|        |                                                             
|------- | ------------------------------------------------------------
|ITEM 3: | QUANTITATIVE
 AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Fluctuating commodity prices
affect market risk in our recycling segment. We mitigate this risk by selling
our product on a monthly contract basis. Each month we negotiate selling prices
for all commodities. Based on these monthly agreements, we determine purchase
prices based on a margin needed to cover processing and administrative
expenses.

We are exposed to commodity
price risk, mainly associated with variations in the market price for ferrous
and nonferrous metal, and other commodities. The timing and magnitude of
industry cycles are difficult to predict and are impacted by general economic
conditions. We respond to changes in recycled metal selling prices by adjusting
purchase prices on a timely basis and by turning rather than holding inventory
in expectation of higher prices. However, financial results may be negatively
impacted where selling prices fall more quickly than purchase price adjustments
can be made or when levels of inventory have an anticipated net realizable
value that is below average cost.

Our floating rate borrowings
expose us to interest rate risk. On June 30, 2009, we executed a promissory
note, loan agreement and related security documents with BB&T in the amount
of $5,000,000 for the purpose of financing our ongoing growth. On October 15,
2009, we executed a note modification agreement for this note, which extended
the maturity date to December 15, 2009. On December 21, 2009, we executed a
note modification agreement, which extended the maturity date until March 15,
2010. On March 12, 2010, we executed a commitment letter to, among other
things, amend this financing through April 7, 2014. On April 13, 2010, we
entered into a Loan Agreement with BB&T and BB&T Bankcard Corporation
pursuant to which the Bank agreed to provide the Company a revolving credit
facility in the amount of $20,000,000 for the purpose of replacing the
Companys existing $12,000,000 promissory note to the Bank and the Companys
existing $10,000,000 senior revolving credit facility with the Bank. In
addition, Company, the Bank and certain other parties entered into a
Modification and Cross-Collateralization Agreement pursuant to which the
Company and the Bank modified the Companys existing $5,000,000 term loan to
the Bank. Proceeds of the new revolving credit facility in the amount of $17.7
million were used to repay the outstanding principal balance of the $12,000,000
promissory note and the amount outstanding under the prior credit facility and
to pay closing costs. See Note 1  Subsequent Events in the Notes to Condensed
Consolidated Financial Statements for additional information on the new loan
agreement and modification of the $5,000,000 term loan.

Prior to the new loan
agreement, this non-revolving credit facility bore interest at the month LIBOR
plus 3.25% per annum, which was to be adjusted monthly on the first day of each
month for each LIBOR interest period with a minimum interest rate of 4.5%. The
interest rate as of March 31, 2010 was 4.5%. This credit facility had
$4,987,686 in outstanding borrowings as of March 31, 2010. We also maintained a
$10.0 million senior revolving credit facility with the BB&T which had
$6,747,785 in outstanding borrowings as of March 31, 2010. This revolving
credit facility bore interest at the one month LIBOR rate, as published in the
Wall Street Journal, plus two and twenty-five one-hundredths percent (2.25%)
per annum, which was 2.4986% as of March 31, 2010. On February 11, 2009, we
executed a promissory note with BB&T in the amount of $12,000,000 which had
$9,691,146 in outstanding borrowings as of March 31, 2010. This note bore
interest at the adjusted LIBOR rate of one month LIBOR plus 2.25% per annum
with a floor of 4%. As of March 31, 2010, the applicable interest rate was 4%.
Based on our average anticipated borrowings under our credit

29

---



agreements in fiscal 2010, a
hypothetical increase or decrease in the LIBOR rate by 1% would increase or
decrease interest expense on our variable borrowings by 1% of the outstanding
balance, with a corresponding change in cash flows.

We entered into three interest
rate swap agreements swapping variable rates for fixed rates. The first swap
agreement covers $5.6 million in debt and commenced April 7, 2009 and matures
on April 7, 2014. The second swap agreement covers approximately $2.6 million
in debt and commenced October 15, 2008 and matures on May 7, 2013. The third
swap agreement covers approximately $547,000 in debt and commenced October 22,
2008 and matures on October 22, 2013. The three swap agreements fix our
interest rate at approximately 5.8%. At March 31, 2010, we recorded the
estimated fair value of the three swaps as approximately $620,000. Accounting
rules require us to recognize all derivatives on the balance sheet at estimated
fair value. We have designated these agreements as a cash flow hedge.

We are exposed to market risk from changes in interest rates in the
normal course of business. Our interest income and expense are most sensitive
to changes in the general level of U.S. interest rates and the LIBOR rate. In
order to manage this exposure, we use a combination of debt instruments,
including the use of derivatives in the form of interest rate swap agreements.
We do not enter into any derivatives for trading purposes. The use of the
interest rate swap agreement is intended to convert the variable rate to a
fixed rate.

|           |                         
|---------- | ------------------------
|ITEM 4(T): | CONTROLS AND
 PROCEDURES

|    |                                     
|--- | ------------------------------------
|(a) | Disclosure
 controls and procedures.

ISAs management, including
ISAs principal executive officer and principal financial officer, have
evaluated the effectiveness of our disclosure controls and procedures, as
such term is defined in Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934. Based upon their evaluation, our principal executive
officer and principal financial officer concluded that, as of March 31, 2010,
ISAs disclosure controls and procedures were effective for the purpose of
ensuring that the information required to be disclosed in the reports that ISA
files under the Exchange Act with the Securities and Exchange Commission (1) is
recorded, processed, summarized and reported within the time periods specific
in the SECs rules and forms, and (2) is accumulated and communicated to ISAs
management, including our principal executive and principal financial officers,
as appropriate to allow timely decisions regarding the required disclosure.

|    |                                             
|--- | --------------------------------------------
|(b) | Internal
 controls over financial reporting.

Our management is responsible
for establishing and maintaining adequate internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the
Exchange Act). Our internal control over financial reporting is designed to
provide reasonable assurance to our management and Board of Directors regarding
the reliability of financial reporting and the preparation and fair
presentation of published financial statements for external purposes in
accordance with generally accepted accounting principles in the United States.

30

---



Our internal control over
financial reporting includes those policies and procedures that:

--          pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect our transactions and dispositions of our assets;

--          provide
reasonable assurance that our transactions are recorded as necessary to permit
preparation of our financial statements in accordance with GAAP, and that our
receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and

--          provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material
effect on our financial statements.

Because of its inherent
limitations, internal control over financial reporting cannot prevent or detect
every potential misstatement. Therefore, even those systems determined to be
effective can provide only reasonable assurances with respect to financial
statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may decline.

|    |                                                      
|--- | -----------------------------------------------------
|(c) | Changes to
 internal control over financial reporting

With the exception noted below,
there were no changes in ISAs internal control over financial reporting during
the three months ended March 31, 2010 that have materially affected, or are
reasonably likely to affect ISAs internal control over financial reporting.

During 2009, ISA purchased a new recycling system software package
    from a third party vendor, and began using it for our Alloys operations in
    April, 2009. ISA installed this new software in the New Albany, Seymour,
    and Campground Road recycling satellite locations on October, 1, 2009. ISA
installed this new software in the Grade Lane location on January 4, 2010.

PART II 
OTHER INFORMATION

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 1. | Legal
 Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | On January
 4, 2007, Lennox Industries, Inc., a commercial heating and air-conditioning
 manufacturer, filed a suit against us in Lennox Industries, Inc. v.
 Industrial Services of America, Inc., Case No. CV-2007-004 in the
 Arkansas County, Arkansas Circuit court in Stuttgart, Arkansas. Lennox in its
 Second Amended Complaint currently alleges breach of contract, negligence,
 and breach of fiduciary duty arising from our alleged miscategorization of
 Lennoxs scrap metal and mismanagement of the scrap metal recycling
 operations at three Lennox plants during the contract period April 18, 2001
 through November 2005.

31

---



|         |                                                                                                                                                                                                                                                                                                                                                               
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | We filed a
 Motion for Summary Judgment in October, 2009, which the court denied in
 February, 2010. Discovery by the parties is still ongoing. There are
 currently no dates set for either a mediation or a jury trial. We are
 vigorously defending all of Lennoxs claims as we believe the claims to be
 without merit.                                  
|         |                                                                                                                                                                                                                                                                                                                                                               
|Item 1A. | Risk Factors                                                                                                                                                                                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                                               
|         | We have had
 no material changes from the risk factors reported in our Form 10-K for the
 year ended December 31, 2009, as filed with the Securities and Exchange
 Commission on March 22, 2010.                                                                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                               
|Item 2.  | Unregistered
 Sales of Equity Securities and Use of Proceeds                                                                                                                                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                                               
|         | On November
 15, 2005, our Board of Directors authorized a program to repurchase up to
 200,000 shares of our common stock at current market prices. No shares were
 repurchased in 2010 or 2009. In 2008, we repurchased 55,607 shares. In 2007
 we repurchased 40,000 shares, in 2006 we repurchased 5,509 shares and in 2005
 we repurchased 10,000 shares.

Issuer Purchases of Equity Securities

|        |  |                                     |  |                                |   |                                                                                      |  |                                                                                    |  |  |         |  | 
|------- |  | ----------------------------------- |  | ------------------------------ | - | ------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------- |  |  | ------- |  | 
|Period  |  | Total
 Number
 of Shares
 Purchased |  | Average
 Price
 Paid per Share |   | Total
 Number of Shares
 Purchased as part of
 Publicly Announced Plans
 or Programs |  | Maximum
 Number of
 Shares that may yet
 be Purchased Under
 the Plans or Programs | 
|        |  |                                     |  |                                |   |                                                                                      |  |                                                                                    |  |  |         |  | 
|Mar-08  |  | 19,753                              |  |                                | $ | 8.2823                                                                               |  | 75,262                                                                             |  |  | 124,738 |  | 
|        |  |                                     |  |                                |   |                                                                                      |  |                                                                                    |  |  |         |  | 
|Jun-08  |  | 9,854                               |  |                                | $ | 11.4169                                                                              |  | 85,116                                                                             |  |  | 114,884 |  | 
|        |  |                                     |  |                                |   |                                                                                      |  |                                                                                    |  |  |         |  | 
|Sept-08 |  | 26,000                              |  |                                | $ | 9.7902                                                                               |  | 111,116                                                                            |  |  | 88,884  |  | 
|        |  |                                     |  |                                |   |                                                                                      |  |                                                                                    |  |  |         |  | 

|        |                                 
|------- | --------------------------------
|Item 3. | Defaults
 upon Senior Securities
|        |                                 
|        | None.                           
|        |                                 
|Item 4. | Reserved.                       
|        |                                 
|Item 5. | Other
 Information              
|        |                                 
|        | None                            
|        |                                 
|Item 6. | Exhibits                        
|        |                                 
|        | See exhibit
 index.             

32

---



SIGNATURES

Pursuant to
the requirements 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.       
|                    |                                              | 
|Date: May
 10, 2010 | /s/ Harry
 Kletter                           | 
|                    |                                              | 
|                    | Chairman and
 Chief Executive Officer       
|                    | (Principal
 Executive and Financial Officer)
|                    |                                              | 
|                    |                                              | 
|Date: May
 10, 2010 | /s/ Alan L.
 Schroering                      | 
|                    |                                              | 
|                    | Chief
 Financial Officer                     | 

33

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INDEX TO EXHIBITS

|                |  |                                                                                                                                                                                                      
|--------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Description of
 Exhibits                                                                                                                                                                             
|                |  |                                                                                                                                                                                                      
|                |  |                                                                                                                                                                                                      
|10.1            |  | Loan
 Agreement, dated April 13, 2010, in the amount of $20,000,000 from ISA in
 favor of Branch Banking and Trust Company and BB&T Bankcard Corporation
 of North Carolina.                         
|                |  |                                                                                                                                                                                                      
|10.2            |  | Schedule DD to BB&T Loan Agreement.                                                                                                                                                                
|                |  |                                                                                                                                                                                                      
|10.3            |  | Promissory Note, dated April 13, 2010, in
 the amount of $20,000,000 payable to Branch Banking and Trust Company.                                                                                    
|                |  |                                                                                                                                                                                                      
|10.4            |  | Addendum to Promissory Note dated April 13,
 2010.                                                                                                                                                   
|                |  |                                                                                                                                                                                                      
|10.5            |  | Modification and Cross-Collateralization
 Agreement, dated April 13, 2010, among ISA, ISA Real Estate, LLC, ISA Indiana
 Real Estate, LLC, 7021 Grade Lane, LLC and Branch Banking and Trust Company.
|                |  |                                                                                                                                                                                                      
|10.6            |  | ISA Asset Purchase Agreement, dated July 1,
 2010, by and between ISA and Venture Metals, LLC, of Florida.                                                                                           
|                |  |                                                                                                                                                                                                      
|10.7            |  | Amended and Restated Executive Employment
 Agreement, dated April 1, 2010, by and between ISA and Brian Donaghy.                                                                                     
|                |  |                                                                                                                                                                                                      
|10.8            |  | Amended and Restated Executive Employment
 Agreement, dated July 1, 2010, by and between ISA and Steve Jones.                                                                                        
|                |  |                                                                                                                                                                                                      
|10.9            |  | Amended and Restated Executive Employment
 Agreement, dated July 1, 2010, by and between ISA and Jeff Valentine.                                                                                     
|                |  |                                                                                                                                                                                                      
|31.1            |  | Rule 13a-14(a) Certification of Harry
 Kletter for the Form 10-Q for the quarter ended March 31, 2010.                                                                                               
|                |  |                                                                                                                                                                                                      
|31.2            |  | Rule 13a-14(a) Certification of Alan
 Schroering for the Form 10-Q for the quarter ended March 31, 2010.                                                                                             
|                |  |                                                                                                                                                                                                      
|32.1            |  | Section 1350 Certification of Harry Kletter
 and Alan Schroering for the Form 10-Q for the quarter ended March 31, 2010.                                                                             

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