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 1934

For the quarterly period ended September 30, 2010
OR


|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT
 TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934

For 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
September 30, 2010: 6,784,917.

---



INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

INDEX

|         |                                                                                                                  |         
|-------- | ---------------------------------------------------------------------------------------------------------------- | --------
|         |                                                                                                                  | Page No.
|Part
 I  | Financial Information                                                                                            |         
|         |                                                                                                                  |         
|         | Condensed Consolidated Balance Sheets
 September 30, 2010 (Unaudited) and December 31, 2009                      | 3       
|         |                                                                                                                  |         
|         | Condensed Consolidated Statements of
 Operations - Three Months Ended
 September 30, 2010 and 2009 (Unaudited)   | 5       
|         |                                                                                                                  |         
|         | Condensed Consolidated Statements of
 Operations - Nine Months Ended
 September 30, 2010 and 2009 (Unaudited)    | 6       
|         |                                                                                                                  |         
|         | Condensed Consolidated Statements of
 Shareholders Equity
 September 30, 2010 (Unaudited) and December 31, 2009 | 7       
|         |                                                                                                                  |         
|         | Condensed Consolidated Statements of
 Cash Flows - Nine Months Ended
 September 30, 2010 and 2009 (Unaudited)    | 8       
|         |                                                                                                                  |         
|         | Notes to Condensed Consolidated
 Financial Statements (Unaudited)                                                | 9       
|         |                                                                                                                  |         
|         | Managements Discussion and Analysis
 of Financial Condition and Results
 of Operations                          | 20      
|         |                                                                                                                  |         
|Part
 II | Other Information                                                                                                | 28      

---



PART I  FINANCIAL INFORMATION

ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

|                                                                                                      |  |                                |             |                    |   |            | 
|----------------------------------------------------------------------------------------------------- |  | ------------------------------ | ----------- | ------------------ | - | ---------- | 
|                                                                                                      |  | September 30, 2010
(Unaudited) |             | December 31,
 2009 |  
|                                                                                                      |  |                                |            
|                                                                                                      |  |                                |            
|                                                                                                      |  |                                |             |                    |  
|                                                                                                      |  |                                |             |                    |   |            | 
|Current assets                                                                                        |  |                                |             |                    |   |            | 
|Cash and cash equivalents                                                                             |  | $                              | 2,068,705   |                    | $ | 713,062    | 
|Accounts receivable - trade (after allowance
 for doubtful accounts of $100,000 in 2010
 and in 2009) |  |                                | 36,170,369  |                    |   | 8,512,326  | 
|Net investment in sales-type leases                                                                   |  |                                | 31,929      |                    |   | 27,928     | 
|Inventories                                                                                           |  |                                | 30,872,638  |                    |   | 26,426,611 | 
|Deferred income taxes                                                                                 |  |                                | 538,045     |                    |   | 538,045    | 
|Other                                                                                                 |  |                                | 428,974     |                    |   | 322,847    | 
|                                                                                                      |  |                                |             |                    |   |            | 
|                                                                                                      |  |                                |             |                    |   |            | 
|Total current assets                                                                                  |  |                                | 70,110,660  |                    |   | 36,540,819 | 
|                                                                                                      |  |                                |             |                    |   |            | 
|Net property and equipment                                                                            |  |                                | 26,447,146  |                    |   | 26,994,539 | 
|                                                                                                      |  |                                |             |                    |   |            | 
|Other Assets                                                                                          |  |                                |             |                    |   |            | 
|Goodwill                                                                                              |  |                                | 2,567,046   |                    |   | 2,567,046  | 
|Intangible assets, net (Note 2)                                                                       |  |                                | 6,712,500   |                    |   |           | 
|Net investment in sales-type leases                                                                   |  |                                | 48,827      |                    |   | 73,300     | 
|Notes receivable  related party                                                                      |  |                                | 98,773      |                    |   | 129,079    | 
|Other assets                                                                                          |  |                                | 1,300,428   |                    |   | 368,834    | 
|                                                                                                      |  |                                |             |                    |   |            | 
|                                                                                                      |  |                                | 10,727,574  |                    |   | 3,138,259  | 
|                                                                                                      |  |                                |             |                    |   |            | 
|                                                                                                      |  |                                |             |                    |   |            | 
|                                                                                                      |  | $                              | 107,285,380 |                    | $ | 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

|                                                                                                                                                                                         |  |                                 |             |                    |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----------- | ------------------ | - | ---------- | -
|                                                                                                                                                                                         |  | September 30,
 2010
(Unaudited) |             | December 31,
 2009 |  
|                                                                                                                                                                                         |  |                                 |            
|                                                                                                                                                                                         |  |                                 |            
|                                                                                                                                                                                         |  |                                 |             |                    |  
|Current liabilities                                                                                                                                                                      |  |                                 |             |                    |   |            |  
|Current maturities of long term debt (Note 4)                                                                                                                                            |  | $                               | 1,517,900   |                    | $ | 12,539,889 |  
|Current maturities of capital lease obligation                                                                                                                                           |  |                                 |            |                    |   | 20,798     |  
|Accounts payable                                                                                                                                                                         |  |                                 | 14,707,433  |                    |   | 4,684,386  |  
|Income tax payable                                                                                                                                                                       |  |                                 | 2,235,879   |                    |   | 517,828    |  
|Note payable to BB&T (Note 4)                                                                                                                                                            |  |                                 |            |                    |   | 5,000,000  |  
|Interest rate swap agreement liability (Note 4)                                                                                                                                          |  |                                 | 781,094     |                    |   | 564,715    |  
|Accrued bonuses                                                                                                                                                                          |  |                                 | 1,803,400   |                    |   | 1,513,800  |  
|Other current liabilities                                                                                                                                                                |  |                                 | 493,875     |                    |   | 380,718    |  
|                                                                                                                                                                                         |  |                                 |             |                    |   |            |  
|Total current liabilities                                                                                                                                                                |  |                                 | 21,539,581  |                    |   | 25,222,134 |  
|                                                                                                                                                                                         |  |                                 |             |                    |   |            |  
|Long-term liabilities                                                                                                                                                                    |  |                                 |             |                    |   |            |  
|Long-term debt (Note 4)                                                                                                                                                                  |  |                                 | 47,542,491  |                    |   | 16,654,481 |  
|Other liabilities (Note 10)                                                                                                                                                              |  |                                 | 4,520,000   |                    |   |           |  
|Deferred income taxes                                                                                                                                                                    |  |                                 | 3,150,622   |                    |   | 2,879,509  |  
|                                                                                                                                                                                         |  |                                 |             |                    |   |            |  
|                                                                                                                                                                                         |  |                                 | 55,213,113  |                    |   | 19,533,990 |  
|                                                                                                                                                                                         |  |                                 |             |                    |   |            |  
|Stockholders equity                                                                                                                                                                     |  |                                 |             |                    |   |            |  
|Common stock, $0.0033 par value, 10,000,000 shares authorized,
 and 7,192,500 shares issued in 2010 and 2009, 6,784,917 and 6,429,438
 shares outstanding in 2010 and 2009, respectively |  |                                 | 23,975      |                    |   | 23,975     |  
|Additional paid-in capital                                                                                                                                                               |  |                                 | 9,645,096   |                    |   | 7,442,346  |  
|Retained earnings                                                                                                                                                                        |  |                                 | 21,918,899  |                    |   | 15,885,814 |  
|Accumulated other comprehensive loss                                                                                                                                                     |  |                                 | (468,657    | )                  |   | (338,829   | )
|Treasury stock, 407,583 and 763,062 shares at average cost
 in 2010 and 2009, respectively                                                                                               |  |                                 | (586,627    | )                  |   | (1,095,813 | )
|                                                                                                                                                                                         |  |                                 |             |                    |   |            |  
|                                                                                                                                                                                         |  |                                 | 30,532,686  |                    |   | 21,917,493 |  
|                                                                                                                                                                                         |  |                                 |             |                    |   |            |  
|                                                                                                                                                                                         |  | $                               | 107,285,380 |                    | $ | 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 SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)

|                                            |  |      |            |      |   |            |  
|------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                            |  | 2010 |            | 2009 |  
|                                            |  |      |            |      |  
|                                            |  |      |            |      |  
|Revenue from services                       |  | $    | 1,761,589  |      | $ | 1,552,696  |  
|Revenue from product sales                  |  |      | 74,788,711 |      |   | 78,416,778 |  
|                                            |  |      |            |      |   |            |  
|Total revenue                               |  |      | 76,550,300 |      |   | 79,969,474 |  
|                                            |  |      |            |      |   |            |  
|Cost of goods sold for services             |  |      | 1,687,588  |      |   | 972,874    |  
|Cost of goods sold for product sales        |  |      | 67,493,739 |      |   | 72,483,157 |  
|                                            |  |      |            |      |   |            |  
|Total cost of goods sold                    |  |      | 69,181,327 |      |   | 73,456,031 |  
|                                            |  |      |            |      |   |            |  
|Selling, general and administrative expense |  |      | 3,884,059  |      |   | 2,606,476  |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Income before other income (expense)        |  |      | 3,484,914  |      |   | 3,906,967  |  
|                                            |  |      |            |      |   |            |  
|Other income (expense)                      |  |      |            |      |   |            |  
|Interest expense                            |  |      | (353,338   | )    |   | (350,589   | )
|Interest income                             |  |      | 6,491      |      |   | 5,619      |  
|Gain on sale of assets                      |  |      | 21,893     |      |   | 42,137     |  
|Other income (expense)                      |  |      | 44,408     |      |   | (2,111     | )
|                                            |  |      |            |      |   |            |  
|                                            |  |      | (280,546   | )    |   | (304,944   | )
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Income before income taxes                  |  |      | 3,204,368  |      |   | 3,602,023  |  
|                                            |  |      |            |      |   |            |  
|Income tax provision                        |  |      | 1,281,747  |      |   | 1,440,809  |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Net income                                  |  | $    | 1,922,621  |      | $ | 2,161,214  |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Basic earnings per share                    |  | $    | 0.28       |      | $ | 0.37       |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Diluted earnings per share                  |  | $    | 0.28       |      | $ | 0.37       |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Weighted shares outstanding:                |  |      |            |      |   |            |  
|Basic                                       |  |      | 6,784,917  |      |   | 5,850,633  |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Diluted                                     |  |      | 6,835,480  |      |   | 5,864,585  |  
|                                            |  |      |            |      |   |            |  

|                                                             
|-------------------------------------------------------------
|                                                             
|                                                             
|See accompanying notes to
 consolidated financial statements.
|                                                             
|5                                                            

---



INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)

|                                            |  |      |             |      |   |             |  
|------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                            |  | 2010 |             | 2009 |  
|                                            |  |      |             |      |  
|                                            |  |      |             |      |  
|Revenue from services                       |  | $    | 4,831,239   |      | $ | 5,720,398   |  
|Revenue from product sales                  |  |      | 238,702,989 |      |   | 137,623,313 |  
|                                            |  |      |             |      |   |             |  
|Total revenue                               |  |      | 243,534,228 |      |   | 143,343,711 |  
|                                            |  |      |             |      |   |             |  
|Cost of goods sold for services             |  |      | 4,474,040   |      |   | 4,388,861   |  
|Cost of goods sold for product sales        |  |      | 217,654,093 |      |   | 124,305,531 |  
|                                            |  |      |             |      |   |             |  
|Total cost of goods sold                    |  |      | 222,128,133 |      |   | 128,694,392 |  
|                                            |  |      |             |      |   |             |  
|Selling, general and administrative expense |  |      | 10,649,352  |      |   | 7,756,020   |  
|                                            |  |      |             |      |   |             |  
|                                            |  |      |             |      |   |             |  
|Income before other income (expense)        |  |      | 10,756,743  |      |   | 6,893,299   |  
|                                            |  |      |             |      |   |             |  
|Other income (expense)                      |  |      |             |      |   |             |  
|Interest expense                            |  |      | (1,021,949  | )    |   | (702,255    | )
|Interest income                             |  |      | 23,798      |      |   | 27,779      |  
|Gain on sale of assets                      |  |      | 256,041     |      |   | 53,109      |  
|Other income (expense)                      |  |      | 40,509      |      |   | (42,787     | )
|                                            |  |      |             |      |   |             |  
|                                            |  |      | (701,601    | )    |   | (664,154    | )
|                                            |  |      |             |      |   |             |  
|                                            |  |      |             |      |   |             |  
|Income before income taxes                  |  |      | 10,055,142  |      |   | 6,229,145   |  
|                                            |  |      |             |      |   |             |  
|Income tax provision                        |  |      | 4,022,057   |      |   | 2,491,658   |  
|                                            |  |      |             |      |   |             |  
|                                            |  |      |             |      |   |             |  
|Net income                                  |  | $    | 6,033,085   |      | $ | 3,737,487   |  
|                                            |  |      |             |      |   |             |  
|                                            |  |      |             |      |   |             |  
|Basic earnings per share                    |  | $    | 0.92        |      | $ | 0.67        |  
|                                            |  |      |             |      |   |             |  
|                                            |  |      |             |      |   |             |  
|Diluted earnings per share                  |  | $    | 0.91        |      | $ | 0.67        |  
|                                            |  |      |             |      |   |             |  
|                                            |  |      |             |      |   |             |  
|Weighted shares outstanding:                |  |      |             |      |   |             |  
|Basic                                       |  |      | 6,566,879   |      |   | 5,565,593   |  
|                                            |  |      |             |      |   |             |  
|                                            |  |      |             |      |   |             |  
|Diluted                                     |  |      | 6,610,879   |      |   | 5,570,294   |  
|                                            |  |      |             |      |   |             |  

|                                                             
|-------------------------------------------------------------
|                                                             
|                                                             
|See accompanying notes to
 consolidated financial statements.
|                                                             
|6                                                            

---



INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2010
(UNAUDITED)


|                                                          |  |               |           |                              |   |                    |                 |                                         |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|--------------------------------------------------------- |  | ------------- | --------- | ---------------------------- | - | ------------------ | --------------- | --------------------------------------- | --------- |  | ---- | ---------- | ----- | - | -------- | - |  | -------- | - | - | ---------- | - | - | ---------- | -
|                                                         
|                                                         
|                                                          |  |               |           | Additional
 Paid-in
 Capital |   | Retained
 Earnings |                 | Accumulated
 Other
 Comprehensive
 Loss |           |  |      |            |      
|                                                          |  | Common
 Stock |           |                              |   |                    | Treasury
 Stock |                                         |           | 
|                                                          |  |               |           |                              |   |                    |                 |                                         |           | 
|                                                          |  | Shares        |           | Amount                       |   |                    |                 |                                         | Shares    |  | Cost |            | Total |  
|                                                          |  |               |           |                              |   |                    |                 |                                         |           |  |      |            |       |   |          |   | 
|                                                          |  |               |           |                              |   |                    |                 |                                         |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Balance as of December 31, 2009                           |  |               | 7,192,500 |                              | $ | 23,975             |                 | $                                       | 7,442,346 |  | $    | 15,885,814 |       | $ | (338,829 | ) |  | (763,062 | ) | $ | (1,095,813 | ) | $ | 21,917,493 |  
|                                                          |  |               |           |                              |   |                    |                 |                                         |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Net unrealized loss on derivative instruments, net of tax |  |               |          |                              |   |                   |                 |                                         |          |  |      |           |       |   | (129,828 | ) |  |         |   |   |           |   |   | (129,828   | )
|                                                          |  |               |           |                              |   |                    |                 |                                         |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Stock bonuses                                             |  |               |          |                              |   |                   |                 |                                         | 372,650   |  |      |           |       |   |         |   |  | 55,479   |   |   | 79,286     |   |   | 451,936    |  
|                                                          |  |               |           |                              |   |                    |                 |                                         |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Purchase of intangibles                                   |  |               |          |                              |   |                   |                 |                                         | 1,830,100 |  |      |           |       |   |         |   |  | 300,000  |   |   | 429,900    |   |   | 2,260,000  |  
|                                                          |  |               |           |                              |   |                    |                 |                                         |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Net income                                                |  |               |          |                              |   |                   |                 |                                         |          |  |      | 6,033,085  |       |   |         |   |  |         |   |   |           |   |   | 6,033,085  |  
|                                                          |  |               |           |                              |   |                    |                 |                                         |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|                                                          |  |               |           |                              |   |                    |                 |                                         |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Balance as of September 30, 2010                          |  |               | 7,192,500 |                              | $ | 23,975             |                 | $                                       | 9,645,096 |  | $    | 21,918,899 |       | $ | (468,657 | ) |  | (407,583 | ) | $ | (586,627   | ) | $ | 30,532,686 |  
|                                                          |  |               |           |                              |   |                    |                 |                                         |           |  |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  

|                                                             
|-------------------------------------------------------------
|                                                             
|                                                             
|See accompanying notes to
 consolidated financial statements.
|                                                             
|7                                                            

---



INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)

|                                                                                      |  |      |             |      |   |             |  
|------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                      |  | 2010 |             | 2009 |  
|                                                                                      |  |      |             |      |  
|Cash flows from operating activities                                                  |  |      |             |      |   |             |  
|Net income                                                                            |  | $    | 6,033,085   |      | $ | 3,737,487   |  
|Adjustments to reconcile net income to
 net cash from/(used in) operating activities: |  |      |             |      |   |             |  
|Depreciation and amortization                                                         |  |      | 2,681,078   |      |   | 2,024,559   |  
|Stock distribution to employees                                                       |  |      | 451,936     |      |   | 59,980      |  
|Deferred income taxes                                                                 |  |      |            |      |   | 144,513     |  
|Reduction in provision for doubtful accounts                                          |  |      |            |      |   | (390,000    | )
|Gain on sale of property and equipment                                                |  |      | (256,041    | )    |   | (53,108     | )
|Change in assets and liabilities                                                      |  |      |             |      |   |             |  
|Receivables                                                                           |  |      | (27,658,043 | )    |   | (11,755,542 | )
|Net
 investment in sales-type leases                                                  |  |      | 20,472      |      |   | 40,172      |  
|Inventories                                                                           |  |      | (4,446,027  | )    |   | (7,889,385  | )
|Other
 assets                                                                         |  |      | (722,462    | )    |   | (430,016    | )
|Accounts
 payable                                                                     |  |      | 10,023,047  |      |   | 9,290,956   |  
|Accrued
 bonuses/commissions                                                          |  |      | 289,600     |      |   | 1,284,300   |  
|Income
 taxes payable                                                                 |  |      | 2,075,715   |      |   | 1,881,766   |  
|Other
 current liabilities                                                            |  |      | 113,157     |      |   | (860,632    | )
|                                                                                      |  |      |             |      |   |             |  
|Net cash used in operating activities                                                 |  |      | (11,394,483 | )    |   | (2,914,950  | )
|                                                                                      |  |      |             |      |   |             |  
|Cash flows from investing activities                                                  |  |      |             |      |   |             |  
|Proceeds from sale of property and equipment                                          |  |      | 351,109     |      |   | 86,022      |  
|Purchases of property and equipment                                                   |  |      | (1,870,801  | )    |   | (1,677,756  | )
|Deposits on equipment                                                                 |  |      | (605,711    | )    |   | (341,515    | )
|Payments for shredder system                                                          |  |      |            |      |   | (6,436,584  | )
|Acquisition from Venture Metals                                                       |  |      |            |      |   | (10,607,944 | )
|Payments from related party                                                           |  |      | 30,306      |      |   | 28,687      |  
|                                                                                      |  |      |             |      |   |             |  
|Net
 cash used in investing activities                                                |  |      | (2,095,097  | )    |   | (18,949,090 | )
|                                                                                      |  |      |             |      |   |             |  
|Cash flows from financing activities                                                  |  |      |             |      |   |             |  
|(Payments
     on) proceeds from note payable to BB&T                                 |  |      | (5,000,000  | )    |   | 5,000,000   |  
|Proceeds from Fifth Third Bank                                                        |  |      | 48,800,000  |      |   |            |  
|(Payments on) proceeds from other BB&T debt                                           |  |      | (28,499,373 | )    |   | 19,577,657  |  
|Payments on other long-term debt                                                      |  |      | (434,606    | )    |   | (2,794,070  | )
|Payments on capital lease obligation                                                  |  |      | (20,798     | )    |   | (61,088     | )
|                                                                                      |  |      |             |      |   |             |  
|Net
 cash from financing activities                                                   |  |      | 14,845,223  |      |   | 21,722,499  |  
|                                                                                      |  |      |             |      |   |             |  
|                                                                                      |  |      |             |      |   |             |  
|Net increase/(decrease) in cash                                                       |  |      | 1,355,643   |      |   | (141,541    | )
|                                                                                      |  |      |             |      |   |             |  
|Cash at beginning of period                                                           |  |      | 713,062     |      |   | 1,103,842   |  
|                                                                                      |  |      |             |      |   |             |  
|                                                                                      |  |      |             |      |   |             |  
|Cash at end of period                                                                 |  | $    | 2,068,705   |      | $ | 962,301     |  
|                                                                                      |  |      |             |      |   |             |  
|                                                                                      |  |      |             |      |   |             |  
|Supplemental disclosure of cash flow information                                      |  |      |             |      |   |             |  
|Cash paid for interest                                                                |  | $    | 1,021,949   |      | $ | 702,555     |  
|Cash paid for taxes                                                                   |  | $    | 1,946,341   |      |   | 642,717     |  
|                                                                                      |  |      |             |      |   |             |  
|Supplemental disclosure of noncash investing and financing activities:                |  |      |             |      |   |             |  
|Common stock issued to acquire real estate                                            |  | $    |            |      | $ | 4,000,000   |  
|Common stock issued to acquire intangibles                                            |  | $    | 2,260,000   |      | $ |            |  

|                                                             
|-------------------------------------------------------------
|                                                             
|                                                             
|See accompanying
 notes to consolidated financial statements.
|                                                             
|8                                                            

---



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 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 September 30, 2010 and
the results of our operations and changes in our cash flow for the periods
ended September 30, 2010 and 2009. Results of operations for the period ended
September 30, 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 and various types of derivative instruments. In
addition, we measure certain nonfinancial 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 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

9

---



level 3 financial instruments include certain corporate debt 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 September 30, 2010:

|                           |  |         |           |         |    |            |   |    |            |  
|-------------------------- |  | ------- | --------- | ------- | -- | ---------- | - | -- | ---------- | -
|                           |  | Level 1 |           | Level 2 |    | Total      |  
|Assets                     |  |         |           |         |    |            |  
|Cash and
 cash equivalents |  | $       | 2,068,705 |         |    |            |   | $  | 2,068,705  |  
|                           |  |         |           |         |    |            |   |    |            |  
|Liabilities                |  |         |           |         |    |            |   |    |            |  
|Long-term
 debt            |  |         |           |         | ($ | 49,060,391 | ) | ($ | 49,060,391 | )
|Derivative
 contract       |  |         |           |         | ($ | 781,094    | ) | ($ | 781,094    | )

We
have had no transfers in or out of Levels 1 or 2 fair value measurements. On
July 1, 2010, ISA purchased the Venture Metals, LLC customer list, trade name,
and a non-compete agreement, Level 3 assets (See Note 2  Intangibles). We have had no other activity in Level 3 fair value
measurements for the quarter ending September 30, 2010. For Level 3 assets,
goodwill and other indefinite life intangibles are subject to impairment
analysis each year end under Phase I of the ASC guidance. We use an annual
capitalized earnings computation to evaluate Level 3 assets for impairment.

Subsequent Events

We have evaluated the period from September 30, 2010 through the date
the financial statements herein were issued, for subsequent events requiring
recognition or disclosure in the financial statements and we identified the
following event:

New Promissory Note:

On October 19, 2010, we entered into a Promissory Note (the Note)
with Fifth Third Bank in the amount of $1,320,240 for the purpose of purchasing
equipment. The interest rate is equal to five and 20/100 percent (5.20%) per
annum; provided, however, that (A) such interest rate is based on an interest
rate swap rate for a term approximating the weighted average life of the Note
as quoted in the Bloomberg SWAP Rate report as of the date of the Note and (B)
such interest rate may be adjusted by Fifth Third Bank based upon a
corresponding increase in the interest rate swap rate quoted in such Release as
in effect on the date of the advance. Principal and interest is payable monthly
in consecutive equal installments of $30,511 with the first such payment commencing
November 15, 2010, and the final unpaid principal amount due, together with all
accrued and unpaid interest, charges, fees, or other advances, if any, to be
paid on October 15, 2014. As security for the Note, we provided Fifth Third
Bank a first priority security interest in the equipment purchased with the
proceeds.

10

---



NOTE 2  INTANGIBLES

Purchased intangible assets are initially recorded at cost and finite
life intangible assets are amortized over their useful economic lives on a
straight line basis. Intangible assets having indefinite lives and intangible
assets that are not yet ready for use are not amortized and are reviewed
annually for impairment in accordance with Note 1  Summary of Significant
Accounting Policies  Fair Value.

Intangible assets are considered to have indefinite lives when, based
on an analysis of all of the relevant factors, there is no foreseeable limit to
the period over which the asset is expected to generate cash flows for the
Company. The factors considered in making this determination include the
existence of contractual rights for unlimited terms and the life cycles of the
products and processes that depend on the asset. We are in the process of
finalizing the allocation process related to the intangibles acquired with the
independent third party appraiser. This evaluation will be completed in the fourth quarter.

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 July 30, 2010, we entered into a Credit Agreement (the Credit
Agreement) with Fifth Third Bank pursuant to which Fifth Third Bank agreed to
provide us a revolving credit facility in the amount of $40,000,000 for the
purpose of replacing the existing $20,000,000 senior revolving credit facility
with Branch Banking and Trust Company (BB&T) and for payment of the
$5,000,000 note payable to BB&T (collectively, the Prior Obligations).
Proceeds of the new revolving credit facility in the amount of $33,355,003 were
used to repay the outstanding principal balance of the Prior Obligations. We
used additional proceeds of the revolving credit facility to pay closing costs
and for funding temporary fluctuations in accounts receivable of most of our
customers and inventory. In addition, we entered into a term loan agreement
with Fifth Third Bank in the amount of $8,800,000 for the purpose of replacing
the $6,000,000 note payable secured by our shredder system, the $3,000,000 note
payable secured by our rental fleet equipment, and the $609,900 note payable
secured by our crane.

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. The revolving credit facility expires
on July 31, 2013. Under the revolving credit facility, we are permitted to
borrow the lesser of $40,000,000 or the borrowing base, consisting of the sum
of 85% of eligible accounts plus 60% of eligible inventory up to $17,000,000.
Eligible accounts are generally those receivables that are less than 90 days
from the invoice date. As security for the revolving credit facility, we
provided Fifth Third Bank a first priority security interest in the accounts
receivable from most of our customers and in our inventory. We also cross
collateralized the revolving line of credit with the $8,800,000 term loan. As
of September 30, 2010, the outstanding balance of the revolving line of credit
was $40,000,000.

The $8,800,000 term loan
provides for an interest rate that is the same as the interest rate for the
revolving credit facility. Principal and interest is payable monthly in
consecutive equal installments of $105,000, with the first such payment
commencing September 1, 2010 and the final payment of the then-unpaid balance
due and

11

---



payable in full on July 31, 2013. In addition, beginning April 30, 2011
(or, if earlier, upon completion of the Companys financial statements for the
fiscal year ending December 31, 2010), we will make an annual payment equal to
25% of (i) our adjusted earnings before interest, taxes, depreciation and
amortization (EBITDA), minus (ii) our aggregate cash payments of interest
expense and scheduled payments of principal (including any prepayments of the
term loan), minus (iii) any non-financed capital expenditures, in each case for
the Companys prior fiscal year. Any such payments will be applied to remaining
installments of principal under the term loan in the inverse order of maturity,
and to accrued but unpaid interest thereon. As security for the term loan, we
provided Fifth Third Bank a first priority security interest in all equipment
other than the rental fleet that we own. As of September 30, 2010, the
outstanding balance of the term loan was $8,590,000.

In addition, we provided a first mortgage on the property at the
following locations: 3409 Campground Road, 6709, 7023, 7025, 7101, 7103, 7110,
7124, 7200 and 7210 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 and all
other existing debt the Company owes to Fifth Third Bank.

In the Credit Agreement, we agreed to certain covenants, including (i)
maintenance of a ratio of debt to adjusted EBITDA for the preceding 12 months
of not more than 3.5 to 1 (or, if measured as of December 31 of any fiscal
year, 4.0 to 1), (ii) maintenance of a ratio of adjusted EBITDA for the
preceding twelve months to aggregate cash payments of interest expense and scheduled
payment of principal in the preceding 12 months of not less than 1.20 to 1, and
(iii) a limitation on capital expenditures of $4,000,000 in any fiscal year. As
of September 30, 2010, we were in compliance with all covenants.

See also Subsequent Events under Note 1  Summary
    of Significant Accounting Policies for information regarding a new
    promissory note entered into on October 19, 2010.

We entered into three interest rate swap agreements swapping variable
rates for fixed rates. The first swap agreement covers approximately $5.3
million in debt and commenced April 7, 2009 and matures on April 7, 2014. The
second swap agreement covers approximately $2.4 million in debt and commenced
October 15, 2008 and matures on May 7, 2013. The third swap agreement covers
approximately $522,000 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 September 30, 2010, we recorded the estimated fair value
of the liability related to the three swaps at approximately $781,000. We
entered into the swap agreements for the purpose of hedging the interest rate
market risk for the respective notional amounts. These swap agreements were not
affected by the debt restructuring with Fifth Third Bank. We maintain a cash
account on deposit with BB&T which serves as collateral for the swap
agreements.

Our long term debt as of September 30, 2010 and December 31, 2009
consisted of the following:

|                                                                                                                                                                                                                                                                                                  |  |             |            |      |   |   | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | ---- | - | - | 
|                                                                                                                                                                                                                                                                                                  |  | 2010        |            | 2009 |  
|                                                                                                                                                                                                                                                                                                  |  |             |            |      |  
|                                                                                                                                                                                                                                                                                                  |  | (unaudited) |            |      |   |  
|Revolving credit facility of $40 million with Fifth Third Bank. See
 above description for additional details. This credit facility replaced the
 April 13, 2010 BB&T non-revolving line of credit and revolving credit
 facility discussed below.                                                |  | $           | 40,000,000 |      | $ |  | 
|                                                                                                                                                                                                                                                                                                  |  |             |            |      |   |   | 
|Note payable to Fifth Third Bank the amount of $8.8 million secured
 by our rental fleet equipment, our shredder system assets, and a crane. See
 above description for additional details. This note payable replaced the
 BB&T $6 million, $3 million, and $609,900 notes payable listed below. |  |             | 8,590,000  |      |   |  | 

12

---



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |  |   |            | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---------- |  | - | ---------- | 
|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, then to April 13, 2013 under
 a new BB&T loan agreement, and then was replaced by the Fifth Third
 revolving credit facility effective July 30, 2010. 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%. All
 our assets (except rental fleet equipment) secured 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. The original
 maturity date under this agreement was January 1, 2012. This note extended to
 April 13, 2013 under a new BB&T loan agreement, and was replaced by the
 Fifth Third revolving credit facility effective July 30, 2010.                                                                                                                                                 |  |   |           |  |   | 8,166,917  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |  |   |            | 
|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 were 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. This note was replaced by the Fifth Third note
 payable effective July 30, 2010.                                                                                                                                                                             |  |   |           |  |   | 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 were 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. This note was replaced by the Fifth Third note
 payable effective July 30, 2010.                                                                                                                                                                         |  |   |           |  |   | 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 were principal and
 interest paid monthly beginning December 1, 2008 with one final payment of
 all remaining principal and accrued interest due at maturity in December
 2013. This note was replaced by the Fifth Third note payable effective July
 30, 2010.                                                                                                                                                                                                    |  |   |           |  |   | 555,215    | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |  |   |            | 
|Note payable to Paccar Financial Corp. in the amount of $163,655
 secured by one Kenworth truck. Payments are $1,697.68 per month with an
 effective interest rate of 6.5%. The maturity date under this agreement is
 September 2011.                                                                                                                                                                                                                                                                                                                                                          |  |   | 41,083     |  |   | 112,724    | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |  |   |            | 
|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.                                                                                                                                                                                                                                                                                                                                              |  |   | 429,308    |  |   | 582,273    | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |   | 49,060,391 |  |   | 29,194,370 | 
|Less
 current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |   | 1,517,900  |  |   | 12,539,889 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | $ | 47,542,491 |  | $ | 16,654,481 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |  |   |            | 

13

---



The annual maturities of
long-term debt as of September 30, 2010 are as follows:

|      |  |   |            | 
|----- |  | - | ---------- | 
|2010  |  | $ | 1,517,900  | 
|2011  |  |   | 1,472,491  | 
|2012  |  |   | 6,070,000  | 
|2013  |  |   | 40,000,000 | 
|      |  |   |            | 
|      |  |   |            | 
|Total |  | $ | 49,060,391 | 
|      |  |   |            | 

NOTE 5  SEGMENT INFORMATION

Our operations include two primary segments: Recycling and Waste
Services.

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.

|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|---------------------------------------------- |  | --------- | ------------ | --------------- | - | ---------- | - | --------------- | ---------- | - | - | ------------ | -
|FOR THE
 NINE MONTHS ENDED
 SEPTEMBER 30, 2010 |  | RECYCLING |              | WASTE
 SERVICES |   | OTHER      |   | SEGMENT
 TOTALS |           
|                                               |  |           |              |                 |   |            |   |                 |           
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|Recycling revenues                             |  | $         | 237,093,814  |                 | $ |           |   | $               |           |   | $ | 237,093,814  |  
|Equipment sales, service and leasing
 revenues |  |           |             |                 |   | 1,609,175  |   |                 |           |   |   | 1,609,175    |  
|Management fees                                |  |           |             |                 |   | 4,831,239  |   |                 |           |   |   | 4,831,239    |  
|Cost of goods sold                             |  |           | (217,023,116 | )               |   | (5,105,016 | ) |                 |           |   |   | (222,128,132 | )
|Selling, general and administrative
 expenses  |  |           | (5,255,258   | )               |   | (753,214   | ) |                 | (4,640,880 | ) |   | (10,649,352  | )
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|Segment profit (loss)                          |  | $         | 14,815,440   |                 | $ | 582,184    |   | $               | (4,640,880 | ) | $ | 10,756,744   |  
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|Segment assets                                 |  | $         | 102,505,501  |                 | $ | 2,454,457  |   | $               | 2,325,422  |   | $ | 107,285,380  |  
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  

|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|---------------------------------------------- |  | --------- | ------------ | --------------- | - | ---------- | - | --------------- | ---------- | - | - | ------------ | -
|FOR THE
 NINE MONTHS ENDED
 SEPTEMBER 30, 2009 |  | RECYCLING |              | WASTE
 SERVICES |   | OTHER      |   | SEGMENT
 TOTALS |           
|                                               |  |           |              |                 |   |            |   |                 |           
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|Recycling revenues                             |  | $         | 136,029,879  |                 | $ |           |   | $               |           |   | $ | 136,029,879  |  
|Equipment sales, service and leasing
 revenues |  |           |             |                 |   | 1,593,434  |   |                 |           |   |   | 1,593,434    |  
|Management fees                                |  |           |             |                 |   | 5,720,398  |   |                 |           |   |   | 5,720,398    |  
|Cost of goods sold                             |  |           | (123,725,378 | )               |   | (4,969,014 | ) |                 |           |   |   | (128,694,392 | )
|Selling, general and administrative
 expenses  |  |           | (4,488,417   | )               |   | (1,031,862 | ) |                 | (2,235,741 | ) |   | (7,756,020   | )
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|Segment profit (loss)                          |  | $         | 7,816,084    |                 | $ | 1,312,956  |   | $               | (2,235,741 | ) | $ | 6,893,299    |  
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|Segment assets                                 |  | $         | 63,361,309   |                 | $ | 3,115,724  |   | $               | 3,575,266  |   | $ | 70,052,299   |  
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  

14

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|                                                  |  |           |             |                |   |            |   |                 |            |   |   |             |  
|------------------------------------------------- |  | --------- | ----------- | -------------- | - | ---------- | - | --------------- | ---------- | - | - | ----------- | -
|FOR THE 
 THREE MONTHS ENDED 
 SEPTEMBER 30, 2010 |  | RECYCLING |             | WASTE SERVICES |   | OTHER      |   | SEGMENT
 TOTALS |           
|                                                  |  |           |             |                |   |            |   |                 |           
|                                                  |  |           |             |                |   |            |   |                 |            |   |   |             |  
|Recycling
 revenues                               |  | $         | 74,289,020  |                | $ |           |   | $               |           |   | $ | 74,289,020  |  
|Equipment
 sales, service and leasing revenues    |  |           |            |                |   | 499,691    |   |                 |           |   |   | 499,691     |  
|Management
 fees                                  |  |           |            |                |   | 1,761,589  |   |                 |           |   |   | 1,761,589   |  
|Cost of
 goods sold                               |  |           | (67,312,108 | )              |   | (1,869,219 | ) |                 |           |   |   | (69,181,327 | )
|Selling,
 general and administrative expenses     |  |           | (1,833,582  | )              |   | (232,820   | ) |                 | (1,817,657 | ) |   | (3,884,059  | )
|                                                  |  |           |             |                |   |            |   |                 |            |   |   |             |  
|                                                  |  |           |             |                |   |            |   |                 |            |   |   |             |  
|Segment
 profit (loss)                            |  | $         | 5,143,330   |                | $ | 159,241    |   | $               | (1,817,657 | ) | $ | 3,484,914   |  
|                                                  |  |           |             |                |   |            |   |                 |            |   |   |             |  
|                                                  |  |           |             |                |   |            |   |                 |            |   |   |             |  
|Segment
 assets                                   |  | $         | 102,505,501 |                | $ | 2,454,457  |   | $               | 2,325,422  |   | $ | 107,285,380 |  
|                                                  |  |           |             |                |   |            |   |                 |            |   |   |             |  

|                                                  |  |                |             |                |   |            |   |                 |           |   |   |             |  
|------------------------------------------------- |  | -------------- | ----------- | -------------- | - | ---------- | - | --------------- | --------- | - | - | ----------- | -
|FOR THE 
 THREE MONTHS ENDED 
 SEPTEMBER 30, 2009 |  | ISA
 RECYCLING |             | WASTE SERVICES |   | OTHER      |   | SEGMENT
 TOTALS |          
|                                                  |  |                |             |                |   |            |   |                 |          
|                                                  |  |                |             |                |   |            |   |                 |           |   |   |             |  
|Recycling
 revenues                               |  | $              | 77,877,987  |                | $ |           |   | $               |          |   | $ | 77,877,987  |  
|Equipment
 sales, service and leasing revenues    |  |                |            |                |   | 538,791    |   |                 |          |   |   | 538,791     |  
|Management
 fees                                  |  |                |            |                |   | 1,552,696  |   |                 |          |   |   | 1,552,696   |  
|Cost of
 goods sold                               |  |                | (72,294,051 | )              |   | (1,161,980 | ) |                 |          |   |   | (73,456,031 | )
|Selling,
 general and administrative expenses     |  |                | (1,577,366  | )              |   | (321,661   | ) |                 | (707,449  | ) |   | (2,606,476  | )
|                                                  |  |                |             |                |   |            |   |                 |           |   |   |             |  
|                                                  |  |                |             |                |   |            |   |                 |           |   |   |             |  
|Segment
 profit (loss)                            |  | $              | 4,006,570   |                | $ | 607,846    |   | $               | (707,449  | ) | $ | 3,906,967   |  
|                                                  |  |                |             |                |   |            |   |                 |           |   |   |             |  
|                                                  |  |                |             |                |   |            |   |                 |           |   |   |             |  
|Segment
 assets                                   |  | $              | 63,361,309  |                | $ | 3,115,724  |   | $               | 3,575,266 |   | $ | 70,052,299  |  
|                                                  |  |                |             |                |   |            |   |                 |           |   |   |             |  

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.

15

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Some commodities are in saleable condition at acquisition. We purchase
these commodities in small amounts until we have a truckload of material
available for shipment. Some commodities are not in saleable condition at
acquisition. These commodities must be shredded, torched, sheared 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 $23,517,092 at September 30, 2010 was
comprised only of raw materials. Ferrous inventory of $4,590,019 at September
30, 2010 was comprised of $4,076,375 in raw materials and $513,644 in finished
goods. Non-ferrous inventory of $1,540,705 at September 30, 2010 was comprised
of $471,927 in raw materials and $1,068,778 of finished goods. Replacement
parts inventory for the shredder at September 30, 2010 was $1,118,862.
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. Processing costs
in inventory total $699,298 for the nine months ended September 30, 2010 and
$611,372 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. Other inventory includes cardboard and baling wire. Inventories as
of September 30, 2010 and December 31, 2009 consist of the following:

|                           |  |                     |            |                    |   |            | 
|-------------------------- |  | ------------------- | ---------- | ------------------ | - | ---------- | 
|                           |  | September 30,
 2010 |            | December 31,
 2009 |  
|                           |  | (unaudited)         |            |                   
|                           |  |                     |            |                    |  
|                           |  |                     |            |                    |   |            | 
|Stainless steel alloys     |  | $                   | 23,517,092 |                    | $ | 21,549,014 | 
|Ferrous materials          |  |                     | 4,590,019  |                    |   | 1,587,475  | 
|Non-ferrous materials      |  |                     | 1,540,705  |                    |   | 2,219,137  | 
|Waste equipment machinery  |  |                     | 83,989     |                    |   | 102,032    | 
|Other                      |  |                     | 21,971     |                    |   | 89,122     | 
|                           |  |                     |            |                    |   |            | 
|                           |  |                     |            |                    |   |            | 
|Total inventories for sale |  |                     | 29,753,776 |                    |   | 25,546,780 | 
|                           |  |                     |            |                    |   |            | 
|Shredder replacement parts |  |                     | 1,118,862  |                    |   | 879,831    | 
|                           |  |                     |            |                    |   |            | 
|                           |  |                     |            |                    |   |            | 
|Total inventories          |  | $                   | 30,872,638 |                    | $ | 26,426,611 | 
|                           |  |                     |            |                    |   |            | 

NOTE 7  LEASES AND OTHER 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 make 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 2011.

16

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We also lease other machinery and equipment under operating leases
which expire through January 2011.

|                               |  |   |           | 
|------------------------------ |  | - | --------- | 
|2010                           |  | $ | 650,148   | 
|2011                           |  |   | 636,000   | 
|2012                           |  |   | 159,000   | 
|                               |  |   |           | 
|                               |  |   |           | 
|Future
 minimum lease payments |  | $ | 1,445,148 | 
|                               |  |   |           | 

Total rent expense for the nine months ended September 30, 2010 and
2009 was $675,114 and $831,687, respectively.

Capital Leases:

We made the final payments for the equipment under capital leases in
June 2010. We now own the equipment and no longer have any equipment under
capital leases.

Other Commitments:

As
of September 30, 2010, we had $842,344 committed for the purchase and
installation of sensor sorter units, which amount was paid in full on October
19, 2010 with proceeds from the Promissory Note discussed in Note 1  Summary
of Significant Accounting Policies  Subsequent Events.

NOTE 8  PER SHARE DATA

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

Nine
months ended September 30, 2010 compared to nine months ended September 30,
2009:

|                                                           |  |      |           |      |   |           | 
|---------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|                                                           |  | 2010 |           | 2009 |  
|                                                           |  |      |           |      |  
|Basic earnings per share                                   |  |      |           |      |   |           | 
|Net income                                                 |  | $    | 6,033,085 |      | $ | 3,737,487 | 
|Weighted average shares outstanding                        |  |      | 6,566,879 |      |   | 5,565,593 | 
|                                                           |  |      |           |      |   |           | 
|                                                           |  |      |           |      |   |           | 
|Basic earnings per share                                   |  | $    | 0.92      |      | $ | 0.67      | 
|                                                           |  |      |           |      |   |           | 
|                                                           |  |      |           |      |   |           | 
|Diluted earnings per share                                 |  |      |           |      |   |           | 
|Net income                                                 |  | $    | 6,033,085 |      | $ | 3,737,487 | 
|Weighted average shares outstanding                        |  |      | 6,566,879 |      |   | 5,565,593 | 
|Add dilutive effect of assumed exercising of stock options |  |      | 44,000    |      |   | 4,701     | 
|                                                           |  |      |           |      |   |           | 
|Diluted weighted average shares outstanding                |  |      | 6,610,879 |      |   | 5,570,294 | 
|                                                           |  |      |           |      |   |           | 
|                                                           |  |      |           |      |   |           | 
|Diluted earnings per share                                 |  | $    | 0.91      |      | $ | 0.67      | 
|                                                           |  |      |           |      |   |           | 

17

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Three months ended September 30, 2010 compared to three months ended
September 30, 2009:

|                                                           |  |      |           |      |   |           | 
|---------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|                                                           |  | 2010 |           | 2009 |  
|                                                           |  |      |           |      |  
|Basic
 earnings per share                                  |  |      |           |      |   |           | 
|Net income                                                 |  | $    | 1,922,621 |      | $ | 2,161,214 | 
|Weighted average shares outstanding                        |  |      | 6,784,917 |      |   | 5,850,633 | 
|                                                           |  |      |           |      |   |           | 
|                                                           |  |      |           |      |   |           | 
|Basic earnings per share                                   |  | $    | 0.28      |      | $ | 0.37      | 
|                                                           |  |      |           |      |   |           | 
|                                                           |  |      |           |      |   |           | 
|Diluted earnings per share                                 |  |      |           |      |   |           | 
|Net income                                                 |  | $    | 1,922,621 |      | $ | 2,161,214 | 
|Weighted average shares outstanding                        |  |      | 6,784,917 |      |   | 5,850,633 | 
|Add dilutive effect of assumed exercising of stock options |  |      | 50,563    |      |   | 13,952    | 
|                                                           |  |      |           |      |   |           | 
|Diluted weighted average shares outstanding                |  |      | 6,835,480 |      |   | 5,864,585 | 
|                                                           |  |      |           |      |   |           | 
|                                                           |  |      |           |      |   |           | 
|Diluted earnings per share                                 |  | $    | 0.28      |      | $ | 0.37      | 
|                                                           |  |      |           |      |   |           | 

NOTE 9  LONG TERM INCENTIVE PLAN

At our June 10, 2010 annual shareholders meeting, shareholders approved
the reservation of 1,200,000 additional shares of our common stock under our
long term incentive plan so that the total number of shares reserved increased
from 1,200,000 to 2,400,000. The plan makes available up to 2,400,000 shares of
our common stock for performance-based awards under the plan. 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 30,000 shares of our
stock each to our three independent directors for a total of 90,000 shares at a
per share exercise price of $4.23. As of January 11, 2010, we awarded 18,000
shares of our stock to management at a per share price of $6.47 and as of
February 11, 2010, we awarded 7,500 shares of our stock to management at a per share
price of $6.73. As of June 8, 2010, we awarded 30,000 shares of our stock to
Brian Donaghy at a per share price of $9.51.

NOTE 10  CERTAIN RELATED PARTY TRANSACTIONS

Effective July 1, 2010, the Company amended and restated 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
return on net assets

18

---



(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. Also, as a result of the
supplemental acquisition between the Company and Venture Metals, LLC
(Venture), further discussed below, Mr. Jones is no longer entitled to: (i) a
bonus of up to 45,000 shares of Common Stock per annum based on the Companys
achievement of certain RONA targets, and (ii) a one-time bonus of up to 225,000
shares of Common Stock based on the Companys achievement of certain 5 year
RONA targets as of December 31, 2014.

Effective
July 1, 2010, the Company amended and restated the employment agreement of
Jeffrey Valentine (Mr. 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. Also, as a result of the
supplemental acquisition between the Company and Venture, Mr. Valentine is no
longer entitled to: (i) a bonus of up to 45,000 shares of Common Stock per
annum based on the Companys achievement of certain RONA targets, and (ii) a
one-time bonus of up to 75,000 shares of Common Stock based on the Companys
achievement of certain 5 year RONA targets as of December 31, 2014.

On
June 16, 2010, the Company and Venture agreed to a supplemental acquisition
dated July 1, 2010. Pursuant to this agreement, on April 12, 2010, the Company
paid Venture $1,348,942 for commissions earned and accrued in 2009 using the
line of credit facility and on July 1, 2010, issued to Venture 300,000 shares
of Common Stock, in exchange for Ventures customer list, the Venture name,
Ventures execution of a non-compete agreement, and Ventures agreement to
cause Mr. Jones and Mr. Valentine to provide the company with non-compete
agreements. Based on an independent appraisal, the Company shall deliver up to
an additional 750,000 shares of ISA Common Stock in accordance with the
following:

(a)
Venture shall receive up to ninety thousand (90,000) shares of ISA common stock
per annum commencing in 2011 for calendar year 2010, and thereafter in 2012,
2013, 2014, and 2015 for calendar years 2011, 2012, 2013, and 2014,
respectively, resulting in a maximum of four hundred and fifty thousand
(450,000) shares of ISA common stock over the such period (but in no event
greater than 90,000 shares in any one calendar year) based on satisfaction of
the RONA criteria set forth in Exhibit 10.3 attached hereto and incorporated
herein by reference. Such consideration shall be payable in the form of ISA
common stock in one delivery of a stock certificate, as soon as practicable
following December 31, 2015 subject to applicable withholding and other taxes
and other required deductions;

(b)
Venture shall be entitled to receive additional consideration for the purchase
of assets up to three hundred thousand (300,000) shares of ISA common stock
based on satisfaction of the 5 year (2010-2014) average RONA criteria set forth
in Exhibit 10.3 attached hereto and incorporated herein by reference. Such
consideration shall be payable in the form of Company common stock in one
delivery of a stock certificate, as soon as practicable following December 31,
2014 subject to applicable withholding and other taxes and other required
deductions.

Venture is owned by Mr.
Jones and Mr. Valentine.

We
recorded other liabilities of $4,520,000 for the accrued liability representing
the fair value of the contingent consideration associated with the purchase of
the Venture Metals, LLC intangibles, as discussed in Note 2  Intangibles and Note 10  Certain Related
Party Transactions.

19

---



NOTE 11  LEGAL PROCEEDINGS

We
have litigation from time to time, including employee or former employee
claims, none of which we believe to be material.

ITEM
2: MANAGEMENTS 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 shredding, sorting, shearing, cutting and/or baling. We will also continue
to focus on initiating growth in our management services business segment and
our waste and recycling equipment sales, service and leasing division.

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 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. In July, 2010,
we purchased certain Venture Metals, LLC intangibles, including the customer
list and trade name, and entered into a non-compete agreement to protect our
market position.

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 services to
potential customers. Currently, we service approximately 720 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,

20

---



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 September 30, 2010 we
held cash and cash equivalents of $2,068,705.

On
July 30, 2010, we entered into a Credit Agreement (the Credit Agreement) with
Fifth Third Bank pursuant to which Fifth Third Bank agreed to provide us a
revolving credit facility in the amount of $40,000,000 for the purpose of
replacing the existing $20,000,000 senior revolving credit facility with Branch
Banking and Trust Company (BB&T) and for payment of the $5,000,000 note
payable to BB&T (collectively, the Prior Obligations). Proceeds of the
new revolving credit facility in the amount of $33,355,003 were used to repay
the outstanding principal balance of the Prior Obligations. We used additional
proceeds of the revolving credit facility to pay closing costs and for funding temporary
fluctuations in accounts receivable of most of our customers and inventory. In
addition, we entered into a term loan agreement with Fifth Third Bank in the
amount of $8,800,000 for the purpose of replacing the $6,000,000 note payable
secured by our shredder system, the $3,000,000 note payable secured by our
rental fleet equipment, and the $609,900 note payable secured by our crane.

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. The revolving credit facility expires on July 31,
2013. Under the revolving credit facility, we are permitted to borrow the
lesser of $40,000,000 or the borrowing base, consisting of the sum of 85% of
eligible accounts plus 60% of eligible inventory up to $17,000,000. Eligible
accounts are generally those receivables that are less than 90 days from the
invoice date. As security for the revolving credit facility, we provided Fifth
Third Bank a first priority security interest in the accounts receivable from
most of our customers and in our inventory. We also cross collateralized the
revolving line of credit with the $8,800,000 term loan. As of September 30,
2010, the outstanding balance on the revolving line of credit was $40,000,000.

The
$8,800,000 term loan provides for an interest rate that is the same as the
interest rate for the revolving credit facility. Principal and interest is
payable monthly in consecutive equal installments of $105,000, with the first
such payment commencing September 1, 2010 and the final payment of the
then-unpaid balance due and payable in full on July 31, 2013. In addition,
beginning April 30, 2011 (or, if earlier, upon completion of the Companys
financial statements for the fiscal year ending December 31, 2010), we will
make an annual payment equal to 25% of (i) our adjusted earnings before
interest, taxes, depreciation and amortization (EBITDA), minus (ii) our
aggregate cash payments of interest expense and scheduled payments of principal
(including any prepayments of the term loan), minus (iii) any non-financed
capital expenditures, in each case for the Companys prior fiscal year. Any
such payments will be applied to remaining installments of principal under the
term loan in the inverse order of maturity, and to accrued but unpaid interest
thereon. As security for the term loan, we provided Fifth Third Bank a first
priority security interest in all equipment other than the rental fleet that we
own. As of September 30, 2010, the outstanding balance on the term loan was
$8,590,000.

In
addition, we provided a first mortgage on the property at the following
locations: 3409 Campground Road, 6709, 7023, 7025, 7101, 7103, 7110, 7124, 7200
and 7210 Grade Lane, Louisville Kentucky, 1565 East Fourth Street, Seymour,
Indiana and 1617 State Road 111, New Albany, Indiana. The Company also cross

21

---



collateralized
the term loan with the revolving credit facility and all other existing debt
the Company owes to Fifth Third Bank.

In
the Credit Agreement, we agreed to certain covenants, including (i) maintenance
of a ratio of debt to adjusted EBITDA for the preceding 12 months of not more
than 3.5 to 1 (or, if measured as of December 31 of any fiscal year, 4.0 to 1),
(ii) maintenance of a ratio of adjusted EBITDA for the preceding twelve months
to aggregate cash payments of interest expense and scheduled payment of
principal in the preceding 12 months of not less than 1.20 to 1, and (iii) a
limitation on capital expenditures of $4,000,000 in any fiscal year.

On
October 19, 2010, we entered into a Promissory Note (the Note) with Fifth
Third Bank in the amount of $1,320,240 for the purpose of purchasing equipment.
The interest rate is equal to five and 20/100 percent (5.20%) per annum;
provided, however, that (A) such interest rate is based on an interest rate
swap rate for a term approximating the weighted average life of the Note as
quoted in the Bloomberg SWAP Rate report as of the date of the Note and (B)
such interest rate may be adjusted by Fifth Third Bank based upon a
corresponding increase in the interest rate swap rate quoted in such Release as
in effect on the date of the advance. Principal and interest is payable monthly
in consecutive equal installments of $30,511 with the first such payment
commencing November 15, 2010, and the final unpaid principal amount due,
together with all accrued and unpaid interest, charges, fees, or other
advances, if any, to be paid on October 15, 2014. As security for the Note, we
provided Fifth Third Bank a first priority security interest in the equipment
purchased with the proceeds.

We have long term debt
comprised of the following:

|                              |  |                     |            |                    |   |            | 
|----------------------------- |  | ------------------- | ---------- | ------------------ | - | ---------- | 
|                              |  | September 30,
 2010 |            | December 31,
 2009 |  
|                              |  |                     |           
|                              |  | (unaudited)         |            |                   
|                              |  |                     |            |                    |  
|Non-revolving line of
 credit |  | $                   |           |                    | $ | 11,517,440 | 
|Revolving line of credit      |  |                     | 40,000,000 |                    |   | 8,166,917  | 
|Notes payable                 |  |                     | 9,060,391  |                    |   | 9,510,013  | 
|                              |  |                     |            |                    |   |            | 
|Total debt                    |  | $                   | 49,060,391 |                    | $ | 29,194,370 | 
|                              |  |                     |            |                    |   |            | 

As of September 30, 2010, we
were in compliance with all restrictive covenants related to our debt.

We
expect that existing cash flow from operations and available credit under our
restructured credit facilities and other alternative financing will be
sufficient to meet our cash needs for the next year and beyond. As of September
30, 2010, we had $842,344 committed for the purchase and installation of sensor
sorter units, which was paid in full on October 19, 2010 with proceeds from the
Note discussed above.

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:

|                                              |  |                                 |   |      |       |   | 
|--------------------------------------------- |  | ------------------------------- | - | ---- | ----- | - | 
|                                              |  | Nine months ended September 30, |  
|                                              |  |                                 |  
|                                              |  | 2010                            |   | 2009 |      
|                                              |  |                                 |   |      |      
|Statements
 of Operations Data:               |  |                                 |   |      |      
|Total Revenue                                 |  | 100.0                           | % |      | 100.0 | % | 
|Cost of goods sold                            |  | 91.2                            | % |      | 89.8  | % | 
|Selling, general and
 administrative expenses |  | 4.2                             | % |      | 5.4   | % | 
|Income before other
 expenses                 |  | 4.6                             | % |      | 4.8   | % | 

22

---



Nine
months ended September 30, 2010 compared to nine months ended September 30,
2009

Total
revenue increased $100,190,517 or 70.0% to $243,534,228 in 2010 compared to
$143,343,711 in 2009. Recycling revenue increased $101,063,935 or 74.3% to
$237,093,814 in 2010 compared to $136,029,879 in 2009. This is primarily due to
the improvements and expansions of our Grade Lane facilities made in late 2009
and the increased production from the shredder, which began production in July
2009, along with a 3.3% increase in volume of stainless steel materials shipments,
a 122.4% increase in volume of ferrous materials shipments, a 16.1% increase in
volume of other nonferrous materials shipments, and an average increase in cost
of commodities shipped of 53.4%. Waste Services revenue decreased $873,418 or
11.9% to $6,440,414 in 2010 compared to $7,313,832 in 2009 primarily due to the
year-over-year decrease in customer locations, as well as a $153,004 decrease
in rental revenue, partially offset by a $147,702 increase in equipment and
parts sales and service and repairs revenue.

Total
cost of goods sold increased $93,348,562 or 75.1% to $222,128,133 in 2010
compared to $128,694,392 in 2009. Recycling cost of goods sold increased
$93,297,738 or 75.4% to $217,023,116 in 2010 compared to $123,725,378 in 2009.
This is primarily due to the increases in volume of shipments and commodity
prices noted above. Waste Services cost of goods sold increased $136,002 or
2.7% to $5,105,016 in 2010 compared to $4,969,014 in 2009 primarily due to an
increase of $118,295 in cost of equipment and parts sales, service and repairs,
hauling, and commissions.

Selling,
general and administrative expenses increased $2,893,332 or 37.3% to
$10,649,352 in 2010 compared to $7,756,020 in 2009. As a percentage of revenue,
selling, general and administrative expenses were 4.4% in 2010 compared to 5.4%
in 2009. The primary drivers of the increase in total expenses are an increase
in stock bonus and bonus expense of $1,917,895, an increase in
labor/management-related expenses (labor and associated taxes, consulting,
management fees, employment fees and employee training, and insurance benefits)
of $424,629, an increase in legal fees, insurance expense, compliance and
reporting expenses, bank charges, and property taxes of $266,534, an increase
in operating supplies and computer software and equipment of $176,044, an
increase in repairs/maintenance and fuel/lubricants expenses of $103,077, and
amortization expense of $67,500, partially offset by a decrease in lease/rent,
accounting, and bad debt expenses of $136,330.

Other
expense increased $37,447 to other expense of $701,601 in 2010 compared to
other expense of $664,154 in 2009. This was primarily due to an increase in
interest expense of $319,694, partially offset by an increase in the gain on
sale of assets of $202,932 and an increase in other income of $83,296.

Income
tax provision increased $1,530,399 to $4,022,057 in 2010 compared to $2,491,658
in 2009. The effective tax rate in 2010 and 2009 was 40.0% based on federal and
state statutory rates.

Three
months ended September 30, 2010 compared to three months ended September 30,
2009

Total
revenue decreased $3,419,174 or 4.3% to $76,550,300 in 2010 compared to
$79,969,474 in 2009. Recycling revenue decreased $3,588,967 or 4.6% to
$74,289,020 in 2010 compared to $77,877,987 in 2009. This is primarily due to a
decrease in stainless steel shipments of 35.9%, partially offset by an increase
in ferrous shipments of 66.3%, an increase in nonferrous shipments of 4.6%, and
an average increase in cost of commodities shipped of 32.7%. Waste Services
revenue increased $169,793 or 8.1% to $2,261,280 in 2010 compared to $2,091,487
in 2009 primarily due to a $236,894 increase in cardboard revenue due to
increased cardboard prices. This increase was partially offset by a $79,953
decrease in management fee revenue, and a $61,069 decrease in rental revenue.

23

---



Total
cost of goods sold decreased $4,274,704 or 5.8% to $69,181,327 in 2010 compared
to $73,456,031 in 2009. Recycling cost of goods sold decreased $4,981,943 or 6.9%
to $67,312,108 in 2010 compared to $72,294,051 in 2009. This is primarily due
to the decrease in volume of shipments noted above, partially offset by the
increase in commodity prices noted above. Waste Services cost of goods sold
increased $707,238 or 60.9% to $1,869,218 in 2010 compared to $1,161,980 in
2009 primarily due to a decrease of $462,027 in bankruptcy-related write offs
in 2010 compared to 2009 and the increase in cardboard prices.

Selling,
general and administrative expenses increased $1,277,583 or 49.0% to $3,884,059
in 2010 compared to $2,606,476 in 2009. As a percentage of revenue, selling,
general and administrative expenses were 5.1% in 2010 compared to 3.3% in 2009.
The primary drivers of the increase in total expense are increases in stock
bonus and bonus expense of $1,021,892, labor/management-related expenses (labor
and associated taxes, consulting, management fees, employment fees and employee
training, and insurance benefits) of $116,808, operating supplies, computer
software and equipment, and fuel and lubricants of $106,813, and amortization
expense of $67,500, partially offset by decreases in repairs and maintenance
and accounting of $32,609.

Other
expense decreased $24,398 to other expense of $280,546 in 2010 compared to
other expense of $304,944 in 2009 primarily due to an increase in other income
of $46,519, partially offset by a decrease in gain on sale of assets of
$20,244.

Income
tax provision decreased $159,062 to $1,281,747 in 2010 compared to $1,440,809
in 2009. The effective tax rate in 2010 and 2009 was 40.0% based on federal and
state statutory rates.

Financial
condition at September 30, 2010 compared to December 31, 2009

Cash
and cash equivalents increased $1,355,643 to $2,068,705 as of September 30,
2010 compared to $713,062 as of December 31, 2009.

Intangibles
increased from $0 to $6,712,500 due to the purchase of the Venture Metals, LLC
customer list and trade name, and the non-compete agreement with Venture and
its owners, totaling $6,780,000. This increase was reduced by $67,500 due to
amortization.

Net
cash used in operating activities of $11,394,483 for the nine months ended
September 30, 2010 is primarily due to increases in accounts receivable,
inventories and other assets, partially offset by increases in accounts payable
and income tax payable. The increases in accounts receivable and accounts
payable are due to a combination of increased shipments, purchases, and
commodity prices.

We
used net cash in investing activities of $2,095,097 for the nine months ended
September 30, 2010. We used $456,073 for road and building improvements. We
purchased recycling and rental fleet equipment, shredder system equipment, and
shear parts for a total of $1,274,495. 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 $113,576 on accounting software and computer equipment. We also purchased
vehicles for $26,657. We received $351,109 from sales of our rental fleet
compactors, balers, containers, and trucks. We paid deposits of $605,711 on
machinery and equipment.

Net
cash from financing activities of $14,845,223 for the nine months ended
September 30, 2010 is due to the new debt from Fifth Third Bank of $48,800,000,
partially offset by payments of $33,499,373 to pay off the BB&T debt, and
payments on other debt and capital lease obligations of $434,606 and $20,798,
respectively.

Accounts
receivable trade increased $27,658,043 to $36,170,369 as of September 30, 2010
compared to

24

---



$8,512,326
as of December 31, 2009. This change is due to a combination of increased
shipments due to the shredder operations being fully functional in 2010 and an
increase in commodity prices.

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 increased $4,446,027 or 16.8% to $30,872,638 as of
September 30, 2010 compared to $26,426,611 as of December 31, 2009. The primary
reason for the increase was that the average cost of commodities shipped out of
inventory year-to-date was higher than the average cost of commodities
purchased year-to-date and the volume of purchases were higher than the volume
of shipments for the year and quarter.

Inventory
aging for the period ended September 30, 2010 (Days Outstanding):

|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|--------------------------------------------------------------------------- |  | ---- | ---------- | ----- | - | --------- |  | -------- | --------- | ----- | - | --------- |  | - | ---------- | 
|Description                                                                 |  | 1-30 |            | 31-60 |   | 61-90     |  | Over
 90 |           | Total |  
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|Stainless steel alloys                                                      |  | $    | 14,762,378 |       | $ | 7,268,233 |  | $        | 399,353   |       | $ | 1,087,128 |  | $ | 23,517,092 | 
|Ferrous materials                                                           |  |      | 1,883,301  |       |   | 161,575   |  |          | 27,114    |       |   | 2,518,029 |  |   | 4,590,019  | 
|Non-ferrous materials                                                       |  |      | 1,366,410  |       |   | 85,117    |  |          | 12,934    |       |   | 76,244    |  |   | 1,540,705  | 
|Waste equipment machinery                                                   |  |      | 18,189     |       |   | 10,850    |  |          |          |       |   | 54,950    |  |   | 83,989     | 
|Other                                                                       |  |      | 21,971     |       |   |          |  |          |          |       |   |          |  |   | 21,971     | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|Total inventories for sale                                                  |  |      | 18,052,249 |       |   | 7,525,775 |  |          | 439,401   |       |   | 3,736,351 |  |   | 29,753,776 | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|Shredder replacement parts                                                  |  |      | 1,118,862  |       |   |          |  |          |          |       |   |          |  |   | 1,118,862  | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|                                                                            |  | $    | 19,171,111 |       | $ | 7,525,775 |  | $        | 439,401   |       | $ | 3,736,351 |  | $ | 30,872,638 | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|Inventory aging for the
 period 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  | 
|Waste equipment machinery                                                   |  |      | 9,670      |       |   |          |  |          |          |       |   | 92,362    |  |   | 102,032    | 
|Other                                                                       |  |      | 89,122     |       |   |          |  |          |          |       |   |          |  |   | 89,122     | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|Total inventories for sale                                                  |  |      | 15,152,419 |       |   | 2,855,042 |  |          | 5,237,603 |       |   | 2,301,716 |  |   | 25,546,780 | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|Shredder replacement parts                                                  |  |      | 879,831    |       |   |          |  |          |          |       |   |          |  |   | 879,831    | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|                                                                            |  | $    | 16,032,250 |       | $ | 2,855,042 |  | $        | 5,237,603 |       | $ | 2,301,716 |  | $ | 26,426,611 | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 

Accounts
payable trade increased $10,023,047 or 214.0% to $14,707,433 as of September
30, 2010 compared to $4,684,386 as of December 31, 2009, primarily due to a
62.8% increase in commodity prices.

Working
capital increased $37,252,394 to $48,571,079 as of September 30, 2010 compared
to $11,318,685 as of December 31, 2009. The increase was primarily driven by
the $27.7 million increase in accounts receivable, the $4.4 million increase in
inventory, the debt restructuring, which reclassified $16.0 million in current

25

---



maturities
to long-term debt, and the $1.4 million increase in cash. These increases were
partially offset by the $10.0 million increase in accounts payable, and the $1.7
million increase in income taxes payable.

Contractual
Obligations

The
following table provides information with respect to our known contractual
obligations for the quarter ended September 30, 2010.

|                                 |  |       |            |                     |   |            |  |            |           |                      |   |            |  |   |   | 
|-------------------------------- |  | ----- | ---------- | ------------------- | - | ---------- |  | ---------- | --------- | -------------------- | - | ---------- |  | - | - | 
|Obligation Description           |  | Total |            | Less
 
 than 1 year |   | 1-3
 years |  | 3-5
 years |           | More
 
 than 5 years |  
|                                 |  |       |            |                     |   |            |  |            |           |                      |  
|Long-Term Debt Obligations       |  | $     | 49,060,391 |                     | $ | 1,517,900  |  | $          | 7,542,491 |                      | $ | 40,000,000 |  | $ |  | 
|                                 |  |       |            |                     |   |            |  |            |           |                      |   |            |  |   |   | 
|Operating Lease
 Obligations (1) |  |       | 1,445,148  |                     |   | 650,148    |  |            | 795,000   |                      |   |           |  |   |  | 
|                                 |  |       |            |                     |   |            |  |            |           |                      |   |            |  |   |   | 
|                                 |  |       |            |                     |   |            |  |            |           |                      |   |            |  |   |   | 
|Total                            |  | $     | 50,505,539 |                     | $ | 2,168,048  |  | $          | 8,337,491 |                      | $ | 40,000,000 |  | $ |  | 
|                                 |  |       |            |                     |   |            |  |            |           |                      |   |            |  |   |   | 

(1)
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 2011.

Long-term
debt, including the current portions thereof, increased $14,866,021 to
$49,060,391 as of September 30, 2010 compared to $34,194,370 as of December 31,
2009.

Impact of Recently Issued Accounting Standards

In
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
guidance amends and expands the disclosure requirements in the previously issued
guidance on accounting for derivative instruments and hedging activities and
was effective for fiscal years and interim periods beginning after November 15,
2008, the year beginning January 1, 2009 for us. The February 2010 update was
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 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 revised 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.

26

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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.

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.

We
are exposed to interest rate risk on our floating rate borrowings. On July 30,
2010, we entered into a Credit Agreement (the Credit Agreement) with Fifth
Third Bank pursuant to which Fifth Third Bank agreed to provide us a revolving
credit facility in the amount of $40,000,000 for the purpose of replacing the
existing $20,000,000 senior revolving credit facility with Branch Banking and
Trust Company (BB&T) and for payment of the $5,000,000 note payable to
BB&T (collectively, the Prior Obligations). Proceeds of the new revolving
credit facility in the amount of $33,355,003 were used to repay the outstanding
principal balance of the Prior Obligations. We used additional proceeds of the
revolving credit facility to pay closing costs and for funding temporary
fluctuations in accounts receivable of most of our customers and inventory. In
addition, we entered into a term loan agreement with Fifth Third Bank in the
amount of $8,800,000 for the purpose of replacing the $6,000,000 note payable
secured by our shredder system, the $3,000,000 note payable secured by our
rental fleet equipment, and the $609,900 note payable secured by our crane.
Based on our average anticipated borrowings under our credit 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.

27

---



We
entered into three interest rate swap agreements swapping variable rates for
fixed rates. The first swap agreement covers approximately $5.3 million in debt
and commenced April 7, 2009 and matures on April 7, 2014. The second swap
agreement covers approximately $2.4 million in debt and commenced October 15,
2008 and matures on May 7, 2013. The third swap agreement covers approximately
$522,000 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 September 30, 2010, we recorded the estimated fair value of the liability
related to the three swaps as approximately $781,000. 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. These swap agreements
    were not affected by the debt restructuring with Fifth Third Bank. We maintain
    a cash account on deposit with BB&T which serves as collateral for the
    swap agreements.

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: 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
September 30, 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) Changes to internal
control over financial reporting

There
were no changes in ISAs internal control over financial reporting during the
three months ended September 30, 2010 that have materially affected, or are
reasonably likely to affect ISAs internal control over financial reporting.

PART II  OTHER INFORMATION

Item
1. Legal
Proceedings

Lennox
Industries, Inc. v. Industrial Services of America, Inc., case No. CV-2007-004 is pending in the
Circuit Court of Arkansas County, at Stuttgart, Arkansas. Lennox Industries,
Inc. (hereafter Lennox) has reduced its legal theories against ISA in a
Second Amended Complaint. It now alleges breach of contract, negligence, and
breach of fiduciary duty arising from ISAs 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.

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, however, one or both of
these developments will likely occur in early to mid-2011. ISA is vigorously
defending

28

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all
of Lennoxs claims. It is our position that the claims are legally and
factually 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
July 1, 2010, we issued 300,000 shares of stock in exchange for the Venture
Metals, LLC (Venture) customer list and name, Ventures execution of a
non-compete agreement, and Ventures agreement to cause Mr. Jones and Mr.
Valentine to provide the company with non-compete agreements. The issuance of
shares to Venture was exempt under Section 4(2) of the Securities Act of 1933,
as amended.

On
November 15, 2005, our Board of Directors authorized a program to repurchase up
to 300,000 shares of our common stock at current market prices. No shares were
repurchased in 2010 or 2009. In 2008, we repurchased 83,411 shares. In 2007, we
repurchased 60,000 shares. In 2006, we repurchased 8,264 shares, and in 2005 we
repurchased 15,000 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  |  |                                     | 29,630 |                                | $ | 5.5215                                                                               |  |                                                                                    | 112,893 |  |  | 187,107 | 
|        |  |                                     |        |                                |   |                                                                                      |  |                                                                                    |         |  |  |         | 
|Jun-08  |  |                                     | 14,781 |                                | $ | 7.6113                                                                               |  |                                                                                    | 127,674 |  |  | 172,326 | 
|        |  |                                     |        |                                |   |                                                                                      |  |                                                                                    |         |  |  |         | 
|Sept-08 |  |                                     | 39,000 |                                | $ | 6.5268                                                                               |  |                                                                                    | 166,674 |  |  | 133,326 | 

Item
3. Defaults upon
Senior Securities

None.

Item
4. Removed and
Reserved

Item
5. Other Information

None.

Item
6. Exhibits

See exhibit index.

29

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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:
 November 10, 2010 |  | /s/ Harry Kletter                           
|                         |  |                                             
|                         |  | Chairman
 and Chief Executive Officer       
|                         |  | (Principal
 Executive and Financial Officer)
|                         |  |                                             
|Date:
 November 10, 2010 |  | /s/ Alan Schroering                         
|                         |  |                                             
|                         |  | Chief
 Financial Officer                    

30

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INDEX TO EXHIBITS

|                 |  |                                                                                                                              
|---------------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Exhibit 
 Number |  | Description of Exhibits                                                                                                      
|                 |  |                                                                                                                              
|                 |  |                                                                                                                              
|31.1             |  | Rule 13a-14(a)
 Certification of Harry Kletter for the Form 10-Q for the quarter ended
 September 30, 2010.                  
|                 |  |                                                                                                                              
|31.2             |  | Rule 13a-14(a)
 Certification of Alan Schroering for the Form 10-Q for the quarter ended
 September 30, 2010.                
|                 |  |                                                                                                                              
|32.1             |  | Section 1350 Certification
 of Harry Kletter and Alan Schroering for the Form 10-Q for the quarter ended
 September 30, 2010.

31

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