|                                                          
|----------------------------------------------------------
|FORM 10-Q                                                 
|                                                          
|SECURITIES
 AND EXCHANGE COMMISSION                       
|WASHINGTON, DC 20549                                      
|                                                          
|x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
|SECURITIES EXCHANGE ACT
 OF 1934                          
|For the quarterly period ended March 31, 2011OR           
|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 March 31, 2011: 6,940,517.

---



INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

INDEX

|        |                                                                                                              |  |          | 
|------- | ------------------------------------------------------------------------------------------------------------ |  | -------- | 
|Part I  | Financial Information                                                                                        |  | Page
No.
|        |                                                                                                              |  |         
|        | Condensed
 Consolidated Balance Sheets
 March 31, 2011 (Unaudited) and December 31, 2010                     |  | 3        | 
|        |                                                                                                              |  |          | 
|        | Condensed
 Consolidated Statements of
 Operations - Three Months Ended
 March 31, 2011 and 2010 (Unaudited)  |  | 5        | 
|        |                                                                                                              |  |          | 
|        | Condensed
 Consolidated Statements of Shareholders Equity
 March 31, 2011 (Unaudited) and December 31, 2010 |  | 6        | 
|        |                                                                                                              |  |          | 
|        | Condensed
 Consolidated Statements of
 Cash Flows  Three Months Ended
 March 31, 2011 and 2010 (Unaudited)  |  | 7        | 
|        |                                                                                                              |  |          | 
|        | Notes to
 Condensed Consolidated
 Financial Statements (Unaudited)                                           |  | 8        | 
|        |                                                                                                              |  |          | 
|        | Managements
 Discussion and Analysis
 of Financial Condition and Results
 of Operations                     |  | 19       | 
|        |                                                                                                              |  |          | 
|Part II | Other
 Information                                                                                           |  | 27       | 

---



PART I  FINANCIAL INFORMATION

ITEM 1: CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.

INDUSTRIAL SERVICES OF AMERICA, INC. AND
SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

|                                                                                                       |  |                            |         |                   |   |         | 
|------------------------------------------------------------------------------------------------------ |  | -------------------------- | ------- | ----------------- | - | ------- | 
|                                                                                                       |  |                            |         |                   |   |         | 
|                                                                                                       |  |                            |         |                   |   |         | 
|                                                                                                       |  | March
31, 2011
(Unaudited) |         | December
31,
2010 |  
|                                                                                                       |  |                            |         |                   |   |         | 
|                                                                                                       |  | (in
thousands)             |        
|Current assets                                                                                         |  |                            |         |                   |   |         | 
|Cash and cash equivalents                                                                              |  | $                          | 2,209   |                   | $ | 2,468   | 
|Accounts receivable  trade (after allowance for doubtful accounts of
 $100 thousand in 2011 and 2010) |  |                            | 30,706  |                   |   | 27,449  | 
|Net investment in sales-type leases                                                                    |  |                            | 35      |                   |   | 33      | 
|Inventories                                                                                            |  |                            | 35,667  |                   |   | 34,311  | 
|Deferred income taxes                                                                                  |  |                            | 942     |                   |   | 942     | 
|Other                                                                                                  |  |                            | 423     |                   |   | 398     | 
|                                                                                                       |  |                            |         |                   |   |         | 
|Total current assets                                                                                   |  |                            | 69,982  |                   |   | 65,601  | 
|                                                                                                       |  |                            |         |                   |   |         | 
|Net property and equipment                                                                             |  |                            | 26,981  |                   |   | 27,554  | 
|                                                                                                       |  |                            |         |                   |   |         | 
|Other assets                                                                                           |  |                            |         |                   |   |         | 
|Net investment in sales-type leases                                                                    |  |                            | 31      |                   |   | 40      | 
|Notes receivable  related party                                                                       |  |                            | 78      |                   |   | 88      | 
|Goodwill                                                                                               |  |                            | 6,840   |                   |   | 6,840   | 
|Intangible assets, net                                                                                 |  |                            | 5,587   |                   |   | 5,775   | 
|Other assets                                                                                           |  |                            | 224     |                   |   | 263     | 
|                                                                                                       |  |                            |         |                   |   |         | 
|Total other assets                                                                                     |  |                            | 12,760  |                   |   | 13,006  | 
|                                                                                                       |  |                            |         |                   |   |         | 
|Total assets                                                                                           |  | $                          | 109,723 |                   | $ | 106,161 | 
|                                                                                                       |  |                            |         |                   |   |         | 

| |                                                              |  
| | ------------------------------------------------------------ | -
| |                                                              |  
| | See accompanying notes to consolidated financial statements. | 3

---



INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETSCONTINUED

LIABILITIES AND STOCKHOLDERS EQUITY

|                                                                                                                                                                                     |  |                            |         |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ------- | ----------------- | - | ------- | -
|                                                                                                                                                                                     |  |                            |         |                   |  
|                                                                                                                                                                                     |  |                            |         |                   |  
|                                                                                                                                                                                     |  | March
31, 2011
(Unaudited) |         | December
31,
2010 |  
|                                                                                                                                                                                     |  |                            |         |                   |  
|                                                                                                                                                                                     |  | (in
thousands)             |        
|Current liabilities                                                                                                                                                                  |  |                            |         |                   |   |         |  
|Current maturities of long-term debt (Note 4)                                                                                                                                        |  | $                          | 1,827   |                   | $ | 1,824   |  
|Accounts payable                                                                                                                                                                     |  |                            | 11,807  |                   |   | 11,406  |  
|Income tax payable                                                                                                                                                                   |  |                            | 3,182   |                   |   | 2,909   |  
|Interest rate swap agreement liability (Note 4)                                                                                                                                      |  |                            | 567     |                   |   | 650     |  
|Accrued bonuses                                                                                                                                                                      |  |                            | 713     |                   |   | 1,175   |  
|Other current liabilities                                                                                                                                                            |  |                            | 418     |                   |   | 319     |  
|                                                                                                                                                                                     |  |                            |         |                   |   |         |  
|Total current liabilities                                                                                                                                                            |  |                            | 18,514  |                   |   | 18,283  |  
|                                                                                                                                                                                     |  |                            |         |                   |   |         |  
|Long-term liabilities                                                                                                                                                                |  |                            |         |                   |   |         |  
|Long-term debt (Note 4)                                                                                                                                                              |  |                            | 44,209  |                   |   | 43,623  |  
|Deferred income taxes                                                                                                                                                                |  |                            | 3,407   |                   |   | 3,373   |  
|                                                                                                                                                                                     |  |                            |         |                   |   |         |  
|Total long-term liabilities                                                                                                                                                          |  |                            | 47,616  |                   |   | 46,996  |  
|                                                                                                                                                                                     |  |                            |         |                   |   |         |  
|Shareholders equity                                                                                                                                                                 |  |                            |         |                   |   |         |  
|Common stock, $0.0033 par value: 10,000,000 shares authorized,
 7,192,500 shares issued in 2011 and 2010, 6,940,517 and 6,454,938 shares
 outstanding in 2011 and 2010, respectively |  |                            | 24      |                   |   | 24      |  
|Additional paid-in capital                                                                                                                                                           |  |                            | 18,282  |                   |   | 17,852  |  
|Retained earnings                                                                                                                                                                    |  |                            | 26,105  |                   |   | 23,938  |  
|Accumulated other comprehensive loss                                                                                                                                                 |  |                            | (304    | )                 |   | (353    | )
|Treasury stock at cost, 251,983 and 737,562 shares in 2011 and 2010,
 respectively                                                                                                   |  |                            | (514    | )                 |   | (579    | )
|                                                                                                                                                                                     |  |                            |         |                   |   |         |  
|Total shareholders equity                                                                                                                                                           |  |                            | 43,593  |                   |   | 40,882  |  
|                                                                                                                                                                                     |  |                            |         |                   |   |         |  
|Total liabilities and shareholders equity                                                                                                                                           |  | $                          | 109,723 |                   | $ | 106,161 |  
|                                                                                                                                                                                     |  |                            |         |                   |   |         |  

| |                                                              |  
| | ------------------------------------------------------------ | -
| |                                                              |  
| | See accompanying notes to consolidated financial statements. | 4

---



INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 2011 AND 2010
(UNAUDITED)

|                                             |  |                                              |         |      |   |        |  
|-------------------------------------------- |  | -------------------------------------------- | ------- | ---- | - | ------ | -
|                                             |  |                                              |         |      |  
|                                             |  |                                              |         |      |   |        |  
|                                             |  | 2011                                         |         | 2010 |  
|                                             |  |                                              |         |      |  
|                                             |  | (in thousands, except per share information) |        
|Revenue from services                        |  | $                                            | 1,371   |      | $ | 1,535  |  
|Revenue from product sales                   |  |                                              | 104,816 |      |   | 72,634 |  
|                                             |  |                                              |         |      |   |        |  
|Total Revenue                                |  |                                              | 106,187 |      |   | 74,169 |  
|                                             |  |                                              |         |      |   |        |  
|Cost of goods sold for services              |  |                                              | 1,277   |      |   | 1,351  |  
|Cost of goods sold for product sales         |  |                                              | 97,075  |      |   | 66,535 |  
|                                             |  |                                              |         |      |   |        |  
|Total Cost of goods sold                     |  |                                              | 98,352  |      |   | 67,886 |  
|                                             |  |                                              |         |      |   |        |  
|Selling, general and administrative expenses |  |                                              | 3,780   |      |   | 3,201  |  
|                                             |  |                                              |         |      |   |        |  
|                                             |  |                                              |         |      |   |        |  
|Income before other income (expense)         |  |                                              | 4,055   |      |   | 3,082  |  
|                                             |  |                                              |         |      |   |        |  
|Other income (expense)                       |  |                                              |         |      |   |        |  
|Interest expense                             |  |                                              | (671    | )    |   | (329   | )
|Interest income                              |  |                                              | 6       |      |   | 8      |  
|Gain on sale of assets                       |  |                                              | 49      |      |   | 185    |  
|Other income (loss), net                     |  |                                              |        |      |   | (7     | )
|                                             |  |                                              |         |      |   |        |  
|Total other income (expense)                 |  |                                              | (616    | )    |   | (143   | )
|                                             |  |                                              |         |      |   |        |  
|                                             |  |                                              |         |      |   |        |  
|Income before income taxes                   |  |                                              | 3,439   |      |   | 2,939  |  
|                                             |  |                                              |         |      |   |        |  
|Income tax provision                         |  |                                              | 1,272   |      |   | 1,176  |  
|                                             |  |                                              |         |      |   |        |  
|                                             |  |                                              |         |      |   |        |  
|Net income                                   |  | $                                            | 2,167   |      | $ | 1,763  |  
|                                             |  |                                              |         |      |   |        |  
|                                             |  |                                              |         |      |   |        |  
|Basic earnings per share                     |  | $                                            | 0.31    |      | $ | 0.27   |  
|                                             |  |                                              |         |      |   |        |  
|                                             |  |                                              |         |      |   |        |  
|Diluted earnings per share                   |  | $                                            | 0.31    |      | $ | 0.27   |  
|                                             |  |                                              |         |      |   |        |  
|                                             |  |                                              |         |      |   |        |  
|Weighted shares outstanding:                 |  |                                              |         |      |   |        |  
|Basic                                        |  |                                              | 6,885   |      |   | 6,450  |  
|                                             |  |                                              |         |      |   |        |  
|Diluted                                      |  |                                              | 6,928   |      |   | 6,488  |  
|                                             |  |                                              |         |      |   |        |  
|                                             |  |                                              |         |      |  

See accompanying notes to consolidated financial statements.


5

---



INDUSTRIAL SERVICES OF AMERICA, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
THREE MONTHS ENDED MARCH 31, 2011
(UNAUDITED)

|                                                             |  |              |           |                             |   |                   |        |                                      |        |                |   |                            |  |   |      |   |  |          |   |   |      |   |   |        | 
|------------------------------------------------------------ |  | ------------ | --------- | --------------------------- | - | ----------------- | ------ | ------------------------------------ | ------ | -------------- | - | -------------------------- |  | - | ---- | - |  | -------- | - | - | ---- | - | - | ------ | 
|                                                             |  |              |           |                             |   |                   |        |                                      |        |                |   |                            |  |   |      |   | 
|                                                             |  |              |           |                             |   |                   |        |                                      |        |                |   |                            |  |   |      |   |  |          |   |   |      |   |   |        | 
|                                                             |  | Common Stock |           | Additional 
Paid-in
Capital |   | Retained
Earnings |        | Accumulated
Other
Comprehensive
Loss |        | Treasury Stock |   | Total
Shareholders
Equity | 
|                                                             |  |              |           |                             |   |                   |       
|                                                             |  | Shares       |           | Amount                      |   |                   | Shares |                                      | Cost   |                |  
|                                                             |  |              |           |                             |   |                   |        |                                      |        |                |   |                            |  |   |      |   | 
|(in thousands, except share information)                     |  |              |           |                             |   |                   |        |                                      |        |                |  
|Balance as of December
 31, 2010                             |  |              | 7,192,500 |                             | $ | 24                |        | $                                    | 17,853 |                | $ | 23,938                     |  | $ | (353 | ) |  | (402,583 | ) | $ | (579 | ) | $ | 40,883 | 
|                                                             |  |              |           |                             |   |                   |        |                                      |        |                |   |                            |  |   |      |   |  |          |   |   |      |   |   |        | 
|Net unrealized income on derivative
 instruments, net of tax |  |              |          |                             |   |                  |        |                                      |       |                |   |                           |  |   | 49   |   |  |         |   |   |     |   |   | 49     | 
|                                                             |  |              |           |                             |   |                   |        |                                      |        |                |   |                            |  |   |      |   |  |          |   |   |      |   |   |        | 
|Stock bonuses                                                |  |              |          |                             |   |                  |        |                                      | 429    |                |   |                           |  |   |     |   |  | 150,600  |   |   | 65   |   |   | 494    | 
|                                                             |  |              |           |                             |   |                   |        |                                      |        |                |   |                            |  |   |      |   |  |          |   |   |      |   |   |        | 
|Net income                                                   |  |              |          |                             |   |                  |        |                                      |       |                |   | 2,167                      |  |   |     |   |  |         |   |   |     |   |   | 2,167  | 
|                                                             |  |              |           |                             |   |                   |        |                                      |        |                |   |                            |  |   |      |   |  |          |   |   |      |   |   |        | 
|                                                             |  |              |           |                             |   |                   |        |                                      |        |                |   |                            |  |   |      |   |  |          |   |   |      |   |   |        | 
|Balance as of March 31,
 2011                                |  |              | 7,192,500 |                             | $ | 24                |        | $                                    | 18,282 |                | $ | 26,105                     |  | $ | (304 | ) |  | (251,983 | ) | $ | (514 | ) | $ | 43,593 | 
|                                                             |  |              |           |                             |   |                   |        |                                      |        |                |   |                            |  |   |      |   |  |          |   |   |      |   |   |        | 
|                                                             |  |              |           |                             |   |                   |        |                                      |        |                |   |                            |  |   |      |   |  |          |   |   |      |   |   |        | 
|                                                             |  |              |           |                             |   |                   |        |                                      |        |                |   |                            |  |   |      |   | 

See accompanying notes to consolidated financial
statements.


6

---



INDUSTRIAL SERVICES OF AMERICA,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)

|                                                                            |  |                |        |      |   |         |  
|--------------------------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------- | -
|                                                                            |  |                |        |      |  
|                                                                            |  |                |        |      |   |         |  
|                                                                            |  | 2011           |        | 2010 |  
|                                                                            |  |                |        |      |  
|                                                                            |  | (in thousands) |       
|Cash flows from operating
 activities                                       |  |                |        |      |   |         |  
|Net income                                                                  |  | $              | 2,167  |      | $ | 1,763   |  
|Adjustments to reconcile net income to net
 cash from operating activities: |  |                |        |      |   |         |  
|Depreciation and amortization                                               |  |                | 1,119  |      |   | 864     |  
|Stock bonus to employees                                                    |  |                | 494    |      |   | 167     |  
|Loss on sale of property and equipment                                      |  |                | (49    | )    |   | (185    | )
|Change in assets and liability                                              |  |                |        |      |   |         |  
|Receivables                                                                 |  |                | (3,257 | )    |   | (15,520 | )
|Net investment in sales-type leases                                         |  |                | 8      |      |   | 7       |  
|Inventories                                                                 |  |                | (1,357 | )    |   | 6,574   |  
|Other assets                                                                |  |                | 137    |      |   | 109     |  
|Accounts payable                                                            |  |                | 401    |      |   | 9,675   |  
|Accrued bonuses                                                             |  |                | (462   | )    |   | 337     |  
|Income tax payable                                                          |  |                | 272    |      |   | 540     |  
|Other current liabilities                                                   |  |                | 100    |      |   | (22     | )
|                                                                            |  |                |        |      |   |         |  
|Net cash (used in) from operating
 activities                               |  |                | (427   | )    |   | 4,309   |  
|                                                                            |  |                |        |      |   |         |  
|Cash flows from investing
 activities                                       |  |                |        |      |   |         |  
|Proceeds from sale of property and
 equipment                               |  |                | 54     |      |   | 274     |  
|Purchases of property and equipment                                         |  |                | (331   | )    |   | (525    | )
|Deposits on equipment                                                       |  |                | (154   | )    |   | (70     | )
|Payments from related party                                                 |  |                | 10     |      |   | 10      |  
|                                                                            |  |                |        |      |   |         |  
|Net cash used in investing activities                                       |  |                | (421   | )    |   | (311    | )
|                                                                            |  |                |        |      |   |         |  
|Cash flows from financing
 activities                                       |  |                |        |      |   |         |  
|Payments on capital lease obligation                                        |  |                |       |      |   | (18     | )
|Payments on long-term debt                                                  |  |                | (4,101 | )    |   | (4,644  | )
|Proceeds from long-term debt                                                |  |                | 4,690  |      |   | 1,087   |  
|                                                                            |  |                |        |      |   |         |  
|Net cash from (used in) financing
 activities                               |  |                | 589    |      |   | (3,575  | )
|                                                                            |  |                |        |      |   |         |  
|Net (decrease) increase in cash                                             |  |                | (259   | )    |   | 423     |  
|Cash at beginning of year                                                   |  |                | 2,468  |      |   | 713     |  
|                                                                            |  |                |        |      |   |         |  
|                                                                            |  |                |        |      |   |         |  
|Cash at end of year                                                         |  | $              | 2,209  |      | $ | 1,136   |  
|                                                                            |  |                |        |      |   |         |  
|                                                                            |  |                |        |      |   |         |  
|Supplemental disclosure of cash flow
 information:                          |  |                |        |      |   |         |  
|Cash paid for interest                                                      |  |                | 671    |      |   | 329     |  
|Cash paid for taxes                                                         |  |                | 1,000  |      |   | 635     |  
|                                                                            |  |                |        |      |   |         |  
|                                                                            |  |                |        |      |  

See accompanying notes to
consolidated financial statements.


7

---



INDUSTRIAL SERVICES OF AMERICA, INC. AND
SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with U. S. generally accepted accounting
principles (GAAP) for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U. S. generally accepted
accounting principles for complete consolidated financial statements. The
information furnished includes all adjustments, which are, in the opinion of
management, necessary to present fairly our financial position as of March 31,
2011 and the results of our operations and changes in our cash flow for the
periods ended March 31, 2011 and 2010. Results of operations for the period
ended March 31, 2011 are not necessarily indicative of the results that may be
expected for the entire year. Additional information, including the audited
December 31, 2010 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, 2010 on file with the Securities and Exchange
Commission.

Reclassifications

We have reclassified certain cash flow items within the accompanying
Condensed Consolidated Financial Statements of Cash Flows and Notes to
Condensed Consolidated Financial Statements for the prior year in order to be
comparable with the current presentation. These reclassifications had no effect
on previously reported income.

Fair Value

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

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

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

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

8

---



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 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 in thousands at March 31, 2011:

|                           |  |         |       |         |   |         |   |   |         |  
|-------------------------- |  | ------- | ----- | ------- | - | ------- | - | - | ------- | -
|                           |  | Level 1 |       | Level 2 |   | Total   |  
|Assets                     |  |         |       |         |   |         |   |   |         |  
|Cash and
 cash equivalents |  | $       | 2,209 |         | $ |        |   | $ | 2,209   |  
|                           |  |         |       |         |   |         |   |   |         |  
|Liabilities                |  |         |       |         |   |         |   |   |         |  
|Long-term
 debt            |  | $       |      |         | $ | (46,036 | ) | $ | (46,036 | )
|Derivative
 contract       |  |         |       |         |   | (567    | ) |   | (567    | )

We have had no transfers in or out of Levels 1 or 2 fair value
measurements, and no activity in Level 3 fair value measurements for the
quarter ending March 31, 2011. For Level 3 assets, goodwill is subject to
impairment analysis each year 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 March 31, 2011 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 events:

Promissory Note payable to Fifth Third Bank:On April 12, 2011, Industrial Services of America,
Inc. (the Company) entered into a Loan and Security Agreement (the
Agreement) with Fifth Third Bank (the Bank) pursuant to which the Bank
agreed to provide the Company with a Promissory Note (the Note) in the amount
of $226.9 thousand for the purpose of purchasing operating equipment. See Note 4  Long Term Debt
and Notes Payable to Bank for additional details relating to this loan.

9

---



First Amendment to Credit Agreement with
Fifth Third Bank:On April 14, 2011, Industrial Services of America,
Inc. and ISA Indiana, Inc. (the Companies) entered into a First Amendment to
Credit Agreement (the April Amendment) with Fifth Third Bank (the Bank)
which amended the July 30, 2010 Credit Agreement as follows: (i) increased the
maximum revolving commitment and the maximum amount of eligible inventory
advances in the calculation of the borrowing base, (ii) changed the due date of
the first excess cash flow payment, and (iii) amended certain other provisions
of the Credit Agreement and certain of the other loan documents. See Note 4 
Long Term Debt and Notes Payable to Bank for additional details relating to
this amendment.

NOTE 2  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 3  INTANGIBLE ASSETS

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
have the following intangible assets as of March 31, 2011:

|                                  |  |                        |       |                           |   |                      |   |   |       | 
|--------------------------------- |  | ---------------------- | ----- | ------------------------- | - | -------------------- | - | - | ----- | 
|                                  |  | Gross
 Carrying
 Value |       | Accumulated
 Amortization |   | Net
 Carrying
 Value |  
|                                  |  |                        |       |                           |   |                      |  
|                                  |  | (in thousands)         |      
|Amortized intangible assets       |  |                        |       |                           |   |                      |   |   |      
|Venture Metals, LLC trade name    |  | $                      | 730   |                           | $ | (110                 | ) | $ | 620   | 
|Venture Metals, LLC customer list |  |                        | 620   |                           |   | (93                  | ) |   | 527   | 
|Non-compete agreements            |  |                        | 4,800 |                           |   | (360                 | ) |   | 4,440 | 
|                                  |  |                        |       |                           |   |                      |   |   |       | 
|                                  |  |                        |       |                           |   |                      |   |   |       | 
|Total intangible assets           |  | $                      | 6,150 |                           | $ | (563                 | ) | $ | 5,587 | 
|                                  |  |                        |       |                           |   |                      |   |   |       | 

10

---



We amortize the trade name and customer list using a method that
reflects the pattern in which the economic benefits are consumed or otherwise
used over a 5-year life as stated in the agreements. We amortize the
non-compete agreements on a straight-line basis over a 10-year life as
estimated by management. We incurred amortization expense related to these
assets of $187.5 thousand for the quarter ended March 31, 2011. We did not have
amortization expense for the quarter ended March 31, 2010.

As
of March 31, 2011, we expect amortization expense for these assets for the next
five fiscal years and thereafter to be as follows:

|           |  |                              |       |              |   |                        |   |   |       | 
|---------- |  | ---------------------------- | ----- | ------------ | - | ---------------------- | - | - | ----- | 
|Year       |  | Balance -
 Beginning of Year |       | Amortization |   | Balance -
 End of Year |  
|           |  |                              |       |              |   |                        |  
|           |  | (in thousands)               |      
|2011       |  | $                            | 5,775 |              | $ | (750                   | ) | $ | 5,025 | 
|2012       |  |                              | 5,025 |              |   | (750                   | ) |   | 4,275 | 
|2013       |  |                              | 4,275 |              |   | (750                   | ) |   | 3,525 | 
|2014       |  |                              | 3,525 |              |   | (750                   | ) |   | 2,775 | 
|2015       |  |                              | 2,775 |              |   | (615                   | ) |   | 2,160 | 
|Thereafter |  |                              | 2,160 |              |   | (2,160                 | ) |   |      | 

NOTE 4  LONG TERM DEBT AND NOTES PAYABLE TO
BANK

On April 12, 2011, we entered into a Loan and Security Agreement (the
Agreement) with Fifth Third Bank (the Bank) pursuant to which the Bank agreed
to provide the Company with a Promissory Note (the Note) in the amount of
$226.9 thousand for the purpose of purchasing operating equipment. The interest
rate is five and 68/100 percent (5.68%); provided, however that (A) such
interest rate is based on an interest rate swap rate for a term approximating
the weighted average life of this Note as quoted in the Bloomberg SWAP Rate
report as of the date of this Note and (B) such interest rate may be adjusted
by the Bank based upon a corresponding increase in the interest rate swap rate
quoted in such report as in effect on the date of the advance. Principal and
interest shall be payable in 48 equal monthly installments, each on the 20 day
of each calendar month of $5,294 commencing on the 20 day of May, 2011, with
the entire unpaid principal amount hereof, together with all accrued and unpaid
interest, charges, fees or other advances, if any, due on or before April 20,
2015. As security for the Note, we have granted the Bank a first priority
security interest in the equipment purchased with the proceeds of the Note.

On April 14, 2011, we entered into a new First Amendment to Credit
Agreement (the April Amendment) with Fifth Third Bank (the Bank) which
amended the July 30, 2010 Credit Agreement (discussed below) as follows: (i)
increased the maximum revolving commitment and the maximum amount of eligible
inventory advances in the calculation of the borrowing base, (ii) changed the
due date of the first excess cash flow payment to April 30, 2012, and (iii)
amended certain other provisions of the Credit Agreement and certain of the
other loan documents.

Under the Credit Agreement, we were permitted to borrow the lesser of
$40.0 million or the borrowing base, consisting of the sum of 80% of eligible
accounts plus 60% of eligible inventory up to $17.0 million. Under the April
Amendment, the Bank agreed to increase the revolving credit facility to the
lesser of $45.0 million or the borrowing base, consisting of the sum of 80% of
eligible accounts plus 60% of eligible inventory up to $18.0 million.

11

---



On July 30, 2010, we entered into a Credit Agreement (the Credit
Agreement) with Fifth Third Bank pursuant to which Fifth Third Bank provided
us a revolving credit facility in the amount of $40.0 million for the purpose
of replacing the existing $20.0 million senior revolving credit facility with
Branch Banking and Trust Company (BB&T) and for payment of the $5.0
million note payable to BB&T (collectively, the Prior Obligations).
Proceeds of the new revolving credit facility in the amount of $33.4 million
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 $8.8 million for the purpose of
replacing the $6.0 million note payable secured by our shredder system, the $3.0
million note payable secured by our rental fleet equipment, and the $610
thousand 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. As of March 31, 2011, the interest rate
was 3.00%. We also pay a fee of 0.5% on the unused portion. The revolving
credit facility expires on July 31, 2013. Under the April Amendment to the
revolving credit facility, we are permitted to borrow the lesser of $45.0
million or the borrowing base, consisting of the sum of 80% of eligible
accounts plus 60% of eligible inventory up to $18.0 million. 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 $8.8 million term loan. As of March 31, 2011, the
outstanding balance of the revolving line of credit was $36.5 million.

The $8.8 million term loan provides for an interest rate of 3.25% as of
March 31, 2011. Principal and
interest is payable monthly in consecutive equal installments of $105 thousand.
The first such payment commenced September 1, 2010 and the final payment of the
then-unpaid balance becomes due and payable in full on July 31, 2013. In
addition, beginning April 30, 2012 (or, if earlier, upon completion of the
Companys financial statements for the fiscal year ending December 31, 2011),
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 March 31, 2011, the outstanding balance of the term loan was $8.0
million.

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 $4.0 million in any fiscal year. As of
March 31, 2011, we were in compliance with all covenants.

12

---



Prior to entering into the April Amendment, on November 15, 2010, we
entered into a prior First Amendment to Credit Agreement (the November
Amendment) with Fifth Third Bank which amended the July 30, 2010 Credit
Agreement. Under the original Credit Agreement, the Company was permitted to
borrow the lesser of $40.0 million or the borrowing base, consisting of the sum
of 80% of eligible accounts plus 60% of eligible inventory up to $17.0 million.
Under the November Amendment, the Bank agreed to temporarily increase the
revolving credit facility to the lesser of $44.5 million or the borrowing base,
consisting of the sum of 85% of eligible accounts plus 60% of eligible
inventory up to $17.0 million. The increase in availability and percentage of
eligible accounts expired on December 16, 2010, at which time the terms of the
Credit Agreement continued in full force and effect, until modified by the
April Amendment.

On October 19, 2010, we entered into a Promissory Note (the Note)
with Fifth Third Bank in the amount of $1.3 million for the purpose of
purchasing equipment. The interest rate is equal to five and 20/100 percent
(5.20%) per annum. Principal and interest is payable monthly in consecutive
equal installments of $30.5 thousand 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. As of March 31, 2011, the outstanding balance of this note was $1.2
million.

On August 2, 2007, we entered into an asset purchase agreement for $1.3
million funded primarily by a note payable to ILS, the sole member of which is
Brian Donaghy, our president and chief operating officer, whereby we pay $20.0
thousand per month for 60 months for various assets including tractor trailers,
trucks and containers. The note payable reflects a seven percent (7.0%)
interest payment on the outstanding balance plus principal amortization. We
also paid ILS $100.0 thousand cash as a portion of the purchase price at the
time of execution of the asset purchase agreement. We recorded a note payable
of $1.0 million with an outstanding balance at March 31, 2011 of $323 thousand.

We entered into three interest rate swap agreements swapping variable
rates for fixed rates. The first swap agreement covers $5.1 million in debt and
commenced April 7, 2009 and matures on April 7, 2014. The second swap agreement
covers approximately $2.3 million in debt and commenced October 15, 2008 and
matures on May 7, 2013. The third swap agreement covers approximately $497.0
thousand in debt and commenced October 22, 2008 and matures on October 22,
2013. The three swap agreements fix our interest rate at approximately 5.8%. At
March 31, 2011, we recorded the estimated fair value of the liability related
to the three swaps as approximately $567.0 thousand. 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. As of March
31, 2011, the balance in this account was $653.0 thousand.

13

---



Our long term
debt as of March 31, 2011 and December 31, 2010 consisted of the following:

|                                                                                                                                                                                                                                                  |  |                |        |      |   |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------ | 
|                                                                                                                                                                                                                                                  |  | 2011           |        | 2010 |  
|                                                                                                                                                                                                                                                  |  |                |        |      |  
|                                                                                                                                                                                                                                                  |  | (unaudited)    |        |      |  
|                                                                                                                                                                                                                                                  |  | (in thousands) |       
|Revolving
credit facility of $40 million with Fifth Third Bank. See above description
for additional details.                                                                                                                                     |  | $              | 36,528 |      | $ | 35,489 | 
|                                                                                                                                                                                                                                                  |  |                |        |      |   |        | 
|Note payable
to Fifth Third Bank in 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.                                                      |  |                | 7,960  |      |   | 8,275  | 
|                                                                                                                                                                                                                                                  |  |                |        |      |   |        | 
|Note payable
to Fifth Third Bank in the amount of $1,320,240 secured by equipment
purchased with the proceeds. See above description for additional details.                                                                                      |  |                | 1,194  |      |   | 1,271  | 
|                                                                                                                                                                                                                                                  |  |                |        |      |   |        | 
|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.               |  |                | 31     |      |   | 36     | 
|                                                                                                                                                                                                                                                  |  |                |        |      |   |        | 
|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
(7.0%) interest rate. The maturity date under this agreement is August 2012. |  |                | 323    |      |   | 376    | 
|                                                                                                                                                                                                                                                  |  |                |        |      |   |        | 
|                                                                                                                                                                                                                                                  |  |                |        |      |   |        | 
|                                                                                                                                                                                                                                                  |  |                | 46,036 |      |   | 45,447 | 
|Less current
maturities                                                                                                                                                                                                                           |  |                | 1,827  |      |   | 1,824  | 
|                                                                                                                                                                                                                                                  |  |                |        |      |   |        | 
|                                                                                                                                                                                                                                                  |  |                |        |      |   |        | 
|                                                                                                                                                                                                                                                  |  | $              | 44,209 |      | $ | 43,623 | 
|                                                                                                                                                                                                                                                  |  |                |        |      |   |        | 

The annual
maturities of long term debt (in thousands) as of March 31, 2011 are as follows:

| |            |  |   |        | 
| | ---------- |  | - | ------ | 
| | 2011       |  | $ | 1,827  | 
| | 2012       |  |   | 1,687  | 
| | 2013       |  |   | 42,313 | 
| | 2014       |  |   | 209    | 
| | Thereafter |  |   |       | 
| |            |  |   |        | 
| |            |  |   |        | 
| | Total      |  | $ | 46,036 | 
| |            |  |   |        | 

14

---



NOTE 5  SEGMENT INFORMATION

The Companys 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 THREE
MONTHS ENDED
MARCH 31, 2011     |  | RECYCLING      |         | WASTE
SERVICES |   | OTHER  |   | SEGMENT
TOTALS |       
|                                              |  |                |         |                |   |        |   |                |       
|                                              |  | (in thousands) |        
|Recycling revenues                            |  | $              | 104,238 |                | $ |       |   | $              |       |   | $ | 104,238 |  
|Equipment sales, service
and leasing revenues |  |                |        |                |   | 578    |   |                |       |   |   | 578     |  
|Management fees                               |  |                |        |                |   | 1,371  |   |                |       |   |   | 1,371   |  
|Cost of goods sold                            |  |                | (96,862 | )              |   | (1,490 | ) |                |       |   |   | (98,352 | )
|Selling, general, and
administrative expenses |  |                | (2,162  | )              |   | (194   | ) |                | (1,424 | ) |   | (3,780  | )
|                                              |  |                |         |                |   |        |   |                |        |   |   |         |  
|                                              |  |                |         |                |   |        |   |                |        |   |   |         |  
|Segment profit (loss)                         |  | $              | 5,214   |                | $ | 265    |   | $              | (1,424 | ) | $ | 4,055   |  
|                                              |  |                |         |                |   |        |   |                |        |   |   |         |  
|                                              |  |                |         |                |   |        |   |                |        |   |   |         |  
|Segment assets                                |  | $              | 99,094  |                | $ | 2,430  |   | $              | 8,199  |   | $ | 109,723 |  
|                                              |  |                |         |                |   |        |   |                |        |   |   |         |  

15

---



|                                              |  |                |         |                |   |        |   |                |        |   |   |         |  
|--------------------------------------------- |  | -------------- | ------- | -------------- | - | ------ | - | -------------- | ------ | - | - | ------- | -
|FOR THE THREE
MONTHS ENDED
MARCH 31, 2010     |  | RECYCLING      |         | WASTE
SERVICES |   | OTHER  |   | SEGMENT
TOTALS |       
|                                              |  |                |         |                |   |        |   |                |       
|                                              |  | (in thousands) |        
|Recycling revenues                            |  | $              | 72,069  |                | $ |       |   | $              |       |   | $ | 72,069  |  
|Equipment sales, service
and leasing revenues |  |                |        |                |   | 565    |   |                |       |   |   | 565     |  
|Management fees                               |  |                |        |                |   | 1,535  |   |                |       |   |   | 1,535   |  
|Cost of goods sold                            |  |                | (66,312 | )              |   | (1,574 | ) |                |       |   |   | (67,886 | )
|Selling, general, and
administrative expenses |  |                | (1,675  | )              |   | (282   | ) |                | (1,244 | ) |   | (3,201  | )
|                                              |  |                |         |                |   |        |   |                |        |   |   |         |  
|                                              |  |                |         |                |   |        |   |                |        |   |   |         |  
|Segment profit (loss)                         |  | $              | 4,082   |                | $ | 244    |   | $              | (1,244 | ) | $ | 3,082   |  
|                                              |  |                |         |                |   |        |   |                |        |   |   |         |  
|                                              |  |                |         |                |   |        |   |                |        |   |   |         |  
|Segment assets                                |  | $              | 69,992  |                | $ | 2,510  |   | $              | 3,056  |   | $ | 75,558  |  
|                                              |  |                |         |                |   |        |   |                |        |   |   |         |  

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 using the specific identification method. Quantities of
inventories are determined based on our inventory systems and are subject to
periodic physical verification using estimation techniques including
observation, weighing and other industry methods. We would recognize inventory
impairment when the market value, based upon current market pricing, falls
below recorded value or when the estimated volume is less than the recorded
volume of the inventory. We would record the loss in cost of goods sold in the
period during which we identified the loss.

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

Inventory also includes all types of industrial waste handling
equipment and machinery held for resale such as compactors, balers, and
containers. Shredder replacement parts included in Inventory are depreciated
over a one-year life. Other inventory includes misc equipment, fuel, cardboard
and baling wire. Inventories as of March 31, 2011 and December 31, 2010
consisted of the following:

16

---



|                           |  |                |        |                   |   |                  |  |                   |     |               |   |                |  |                  |        |       |   |       |  |   |       |  |   |       
|-------------------------- |  | -------------- | ------ | ----------------- | - | ---------------- |  | ----------------- | --- | ------------- | - | -------------- |  | ---------------- | ------ | ----- | - | ----- |  | - | ----- |  | - | ------
|                           |  | March 31, 2011 |        | December 31, 2010
|                           |  |                |        |                  
|                           |  | Raw
Materials  |        | Finished
Goods    |   | Processing
Costs |  | Total
(unaudited) |     | Raw
Materials |   | Finished
Goods |  | Processing
Costs |        | Total
|                           |  |                |        |                   |   |                  |  |                   |     |               |   |                |  |                  |        |      
|                           |  | (in thousands)
|Stainless steel alloys     |  | $              | 25,942 |                   | $ |                 |  | $                 | 215 |               | $ | 26,157         |  | $                | 24,455 |       | $ |      |  | $ | 259   |  | $ | 24,714
|Ferrous materials          |  |                | 4,965  |                   |   | 2                |  |                   | 550 |               |   | 5,517          |  |                  | 5,561  |       |   | 2     |  |   | 733   |  |   | 6,296 
|Non-ferrous materials      |  |                | 1,260  |                   |   | 1,135            |  |                   | 69  |               |   | 2,464          |  |                  | 530    |       |   | 1,201 |  |   | 123   |  |   | 1,854 
|Waste equipment machinery  |  |                |       |                   |   | 52               |  |                   |    |               |   | 52             |  |                  |       |       |   | 75    |  |   |      |  |   | 75    
|Other                      |  |                |       |                   |   | 47               |  |                   |    |               |   | 47             |  |                  |       |       |   | 59    |  |   |      |  |   | 59    
|                           |  |                |        |                   |   |                  |  |                   |     |               |   |                |  |                  |        |       |   |       |  |   |       |  |   |       
|                           |  |                |        |                   |   |                  |  |                   |     |               |   |                |  |                  |        |       |   |       |  |   |       |  |   |       
|Total inventories for sale |  |                | 32,167 |                   |   | 1,236            |  |                   | 834 |               |   | 34,237         |  |                  | 30,546 |       |   | 1,337 |  |   | 1,115 |  |   | 32,998
|                           |  |                |        |                   |   |                  |  |                   |     |               |   |                |  |                  |        |       |   |       |  |   |       |  |   |       
|Shredder replacement parts |  |                | 1,430  |                   |   |                 |  |                   |    |               |   | 1,430          |  |                  | 1,313  |       |   |      |  |   |      |  |   | 1,313 
|                           |  |                |        |                   |   |                  |  |                   |     |               |   |                |  |                  |        |       |   |       |  |   |       |  |   |       
|                           |  |                |        |                   |   |                  |  |                   |     |               |   |                |  |                  |        |       |   |       |  |   |       |  |   |       
|Total inventories          |  | $              | 33,597 |                   | $ | 1,236            |  | $                 | 834 |               | $ | 35,667         |  | $                | 31,859 |       | $ | 1,337 |  | $ | 1,115 |  | $ | 34,311
|                           |  |                |        |                   |   |                  |  |                   |     |               |   |                |  |                  |        |       |   |       |  |   |       |  |   |       

NOTE 7 - LEASE COMMITMENTS

Operating Leases:

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

We 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.

We lease a crane from a related party under an operating lease expiring
in November 2015 for a monthly payment of $5,500.

Future minimum lease payments for operating leases in thousands as of
March 31, 2011 are as follows:

|                              |  |   |       | 
|----------------------------- |  | - | ----- | 
|2011                          |  | $ | 708   | 
|2012                          |  |   | 543   | 
|2013                          |  |   | 66    | 
|2014                          |  |   | 66    | 
|2015                          |  |   | 55    | 
|Thereafter                    |  |   |      | 
|                              |  |   |       | 
|                              |  |   |       | 
|Future
minimum lease payments |  | $ | 1,438 | 
|                              |  |   |       | 

17

---



Total rent
expense for the three months ended March 31, 2011 and 2010 was $279.4 thousand
and $213.5 thousand, respectively.

NOTE 8  PER SHARE DATA

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

Three months ended March 31, 2011 compared to three months ended March
31, 2010:

|                                                            |  |                                              |       |      |   |       | 
|----------------------------------------------------------- |  | -------------------------------------------- | ----- | ---- | - | ----- | 
|                                                            |  | 2011                                         |       | 2010 |  
|                                                            |  |                                              |       |      |  
|                                                            |  | (in thousands, except per share information) |      
|Basic
 earnings per share                                   |  |                                              |      
|Net income                                                  |  | $                                            | 2,167 |      | $ | 1,763 | 
|                                                            |  |                                              |       |      |   |       | 
|Weighted average shares outstanding                         |  |                                              | 6,885 |      |   | 6,450 | 
|                                                            |  |                                              |       |      |   |       | 
|                                                            |  |                                              |       |      |   |       | 
|Basic earnings per share                                    |  | $                                            | 0.31  |      | $ | 0.27  | 
|                                                            |  |                                              |       |      |   |       | 
|                                                            |  |                                              |       |      |   |       | 
|Diluted earnings per share                                  |  |                                              |       |      |   |       | 
|Net income                                                  |  | $                                            | 2,167 |      | $ | 1,763 | 
|                                                            |  |                                              |       |      |   |       | 
|Weighted average shares outstanding                         |  |                                              | 6,885 |      |   | 6,450 | 
|Add dilutive effect of assumed exercising
 of stock options |  |                                              | 43    |      |   | 38    | 
|                                                            |  |                                              |       |      |   |       | 
|                                                            |  |                                              |       |      |   |       | 
|Diluted weighted average shares outstanding                 |  |                                              | 6,928 |      |   | 6,488 | 
|                                                            |  |                                              |       |      |   |       | 
|                                                            |  |                                              |       |      |   |       | 
|Diluted earnings per share                                  |  | $                                            | 0.31  |      | $ | 0.27  | 
|                                                            |  |                                              |       |      |   |       | 

NOTE 9  LONG TERM INCENTIVE PLAN

The Companys long term incentive plan makes available up to 2.4
million 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.

18

---



As of July 1, 2009, we awarded options to purchase 30.0 thousand shares
of our stock each to our three independent directors for a total of 90.0
thousand shares at a per share exercise price of $4.23. We recorded expense
related to these stock options of $95.1 thousand in 2009.

On January 11, 2010, we issued 18.0 thousand shares of stock to
management at a per share price of $6.47, and as of February 11, 2010, we
awarded 7.5 thousand shares of our stock to management at a per share price of
$6.73. The Board of Directors approved the grant on January 6, 2010. On June 8,
2010, we awarded 30.0 thousand shares of our stock to management at a per share
price of $9.51. On November 15, 2010, we awarded 5.0 thousand shares of our
stock to management at a per share price of $10.34. In January 2011, we awarded
60.0 thousand shares of our stock to management and 0.6 thousand shares of our
stock to consultants at various prices.

NOTE 10  LEGAL PROCEEDINGS

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

We filed a Motion for Summary Judgment in October, 2009, which the
court denied in February, 2010. Discovery by the parties is still ongoing. A
jury trial is currently set for June 20, 2011. We are vigorously defending all
of Lennoxs claims as we believe the claims to be without merit.

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

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

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

The following discussion and analysis
contains certain financial predictions, forecasts and projections which
constitute forward-looking statements within the meaning of the federal
securities laws. Actual results could differ materially from those financial
predictions, forecasts and projections and there can be no assurance that we will
achieve such financial predictions, forecasts and projections. Factors that
could affect financial predictions, forecasts and projections include the
fluctuations in the commodity price index and any conditions internal to our
major customers, including loss of their accounts and other factors as listed
in our Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission.

19

---



General

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

In 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 900 customer locations throughout the United States and Canada,
and we utilize an active database of over 7,000 vendors to provide timely,
thorough and cost-effective service to our customers.

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

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

Liquidity and Capital Resources

As of March 31, 2011 we held cash and cash equivalents of $2.2 million.
We maintain a cash account on deposit with BB&T which serves as collateral
for our swap agreements. As of March 31, 2011, the balance in this account was
$653 thousand.

On April 12, 2011, we entered into a Loan and Security Agreement (the
Agreement) with Fifth Third Bank (the Bank) pursuant to which the Bank
agreed to provide the Company with a Promissory Note (the Note) in the amount
of $226.9 thousand for the purpose of purchasing operating equipment. The
interest rate is five and 68/100 percent (5.68%); provided, however that (A)
such interest rate is based on an interest rate swap rate for a term
approximating the weighted average life of this Note as quoted in the Bloomberg
SWAP Rate report as of the date of this Note and (B) such interest rate may be
adjusted by the Bank based upon a corresponding increase in the interest rate
swap rate quoted in such report as in effect on the date of the advance.
Principal and interest shall be payable in 48 equal monthly installments, each
on the 20 day of each calendar month of $5,294 commencing on the 20 day of May, 2011, with the entire unpaid principal amount hereof, together with all
accrued and unpaid interest, charges, fees or other advances, if any, due on or
before April 20, 2015. As security for the Note, we have granted the Bank a
first priority security interest in the equipment purchased with the proceeds
of the Note.

20

---



On April 14, 2011, we entered into a First Amendment to Credit
Agreement (the April Amendment) with Fifth Third Bank (the Bank) which
amends the July 30, 2010 Credit Agreement as follows: (i) increased the maximum
revolving commitment and the maximum amount of eligible inventory advances in
the calculation of the borrowing base, (ii) changed the due date of the first
excess cash flow payment to April 30, 2012, and (iii) amended certain other
provisions of the Credit Agreement and certain of the other loan documents.

Under the original Credit Agreement, we were permitted to borrow the
lesser of $40.0 million or the borrowing base, consisting of the sum of 80% of
eligible accounts plus 60% of eligible inventory up to $17.0 million. Under the
April Amendment, the Bank agreed to increase the revolving credit facility to
the lesser of $45.0 million or the borrowing base, consisting of the sum of 80%
of eligible accounts plus 60% of eligible inventory up to $18.0 million.

We have long term debt comprised of the following:

|                              |  |                            |        |                    |   |        | 
|----------------------------- |  | -------------------------- | ------ | ------------------ | - | ------ | 
|                              |  | March 31,
 2011(unaudited) |        | December 31,
 2010 |  
|                              |  |                            |        |                    |   |       
|                              |  | (in thousands)             |       
|Non-revolving line of
 credit |  | $                          |       |                    | $ |       | 
|Revolving line of credit      |  |                            | 36,528 |                    |   | 35,489 | 
|Notes payable                 |  |                            | 9,508  |                    |   | 9,958  | 
|                              |  |                            |        |                    |   |       
|                              |  | $                          | 46,036 |                    | $ | 45,447 | 
|                              |  |                            |        |                    |   |       

As of March 31, 2011, we were in compliance with all restrictive
covenants related to our debt.

We expect that existing cash flow from operations, available credit
under our existing credit facilities, and other alternative financing will be
sufficient to meet our cash needs for the next year and beyond. As of March 31,
2011, we had commitments for capital expenditures for $226.9 thousand to
purchase additional operating equipment.

21

---



Results of Operations

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

|                                              |  |                    |       |      |  |       |  
|--------------------------------------------- |  | ------------------ | ----- | ---- |  | ----- | -
|                                              |  | Three months ended |      
|                                              |  | March 31,          |      
|                                              |  |                    |      
|                                              |  | 2011               |       | 2010 | 
|                                              |  |                    |       |      | 
|Statements
 of Operations Data:               |  |                    |       |      |  |       |  
|Total Revenue                                 |  |                    | 100.0 | %    |  | 100.0 | %
|Cost of
 goods sold                           |  |                    | 92.6  | %    |  | 91.5  | %
|Selling,
 general and administrative expenses |  |                    | 3.6   | %    |  | 4.3   | %
|Income
 before other income/expenses          |  |                    | 3.8   | %    |  | 4.2   | %

Three months ended March 31, 2011 compared to three months ended March
31, 2010

Total revenue increased $32.0 million or 43.1% to $106.2 million in the
first quarter of 2011 compared to $74.2 million in the same period in 2010.
Recycling revenue increased $32.1 million or 44.5% to $104.2 million in 2011
compared to $72.1 million in 2010. This is primarily due to an increase of 1.8%
in volume of stainless steel shipments, a 52.9% increase in volume of ferrous
shipments and a 10.9% increase in volume of non-ferrous shipments, and an
average increase in price of 10.9%. Waste Services revenue decreased $0.1
million or 7.2% to $2.0 million in 2011 compared to $2.1 million in 2010,
primarily due to a $0.3 million decrease in management revenue partially offset
by a $0.1 million increase in cardboard revenue due to higher cardboard prices
at the beginning of 2011 as compared to the beginning of 2010.

Total cost of goods sold increased $30.5 million or 44.9% to $98.4
million in the first quarter of 2011 compared to $67.9 million in 2010.
Recycling cost of goods sold increased $30.6 million or 46.2% to $96.9 million
in 2011 compared to $66.3 million in the same period in 2010. This is primarily
due to the increases in shipments noted above and 30.7% higher commodity
purchase prices. Waste services cost of goods sold decreased $0.1 million or
5.3% to $1.5 in 2011 compared to $1.6 million in 2010 primarily due to a $0.1
million decrease in management services costs, which relates to the decrease in
management revenue above.

Selling, general and administrative expenses increased $0.6 million or
18.8% to $3.8 million in the first quarter of 2011 compared to $3.2 million in
the same period in 2010. As a percentage of revenue, selling, general and
administrative expenses were 3.6% in 2011 compared to 4.3% in 2010. The primary
drivers of the increase in total expenses are as follows:


| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | An increase
 in depreciation and amortization of $0.3 million;                            
| |  | An increase
 in operating supplies, fuel, lubricant, and hauling expenses of $0.2 million;
| |  | An increase
 in legal expenses of $0.2 million;                                           
| |  | An increase
 in consulting and management fee expenses of $0.2 million;                   
| |  | An increase
 in utilities expense of $0.1 million;                                        
| |  | An increase
 in property and license taxes and fees of $0.1 million; and                  
| |  | An increase
 in repairs and maintenance expense of $0.1 million.                          

22

---



These increases were partially offset by the following:


| |   |                                                        
| | - | -------------------------------------------------------
| |  | A decrease
 in lease/rent expense of $0.4 million; and 
| |  | A decrease
 in labor and bonus expense of $0.1 million.

Other expense increased $0.5 million to other expense of $0.6 million
in 2011 compared to other expense of $0.1 million in 2010. This was primarily
due to an increase in interest expense of $0.4 million and a decrease in the
gain on sale of assets of $0.1 million.

Income tax provision increased $0.1 million to $1.3 million in 2011
compared to $1.2 million in 2010. The effective tax rates in 2011 and 2010 were
37.0% and 40.0%, respectively, based on federal and state statutory rates.

Financial condition at March 31, 2011 compared to December 31, 2010

Cash and cash equivalents decreased $0.3 million to $2.2 million as of
March 31, 2011 compared to $2.5 million as of December 31, 2010.

Net cash used in operating activities was $0.4 million for the three
months ended March 31, 2011. This was primarily due to the combination of
increased sales, purchases, and pricing, resulting in an increase of $0.4
million in accounts payable, an increase of $1.4 million in inventories, a $3.3
million increase in accounts receivable, and a $0.5 million decrease in accrued
bonuses.

We used net cash from investing activities of $0.4 million for the
three months ended March 31, 2011. We used $12 thousand for road and building
improvements. We purchased recycling and rental fleet equipment, shredder
system equipment, and an enclosure for the sorter for $0.3 million. The rental
fleet equipment consists of solid waste handling and recycling equipment such
as monitors, compactors, containers and balers. It is our intention to continue
to pursue this market. Additionally, we spent $25 thousand on office furniture
and a server. We received $54 thousand from sales of our rental fleet
compactors, and pre-crushers. We paid deposits of $0.2 million on machinery and
equipment.

Net cash from financing activities was $0.6 million for the three
months ended March 31, 2011, which is primarily due to advances of $4.7 million
offset by payments on debt of $4.1 million.

Accounts receivable trade increased $3.3 million or 11.9% to $30.7
million as of March 31, 2011 compared to $27.4 million as of December 31, 2010.
This change is due to increased sales in the first quarter and the timing of
customer payments.

Inventories consist principally of stainless steel, ferrous and
nonferrous scrap materials and waste equipment machinery held for resale. We
value inventory at the lower of cost or market. Inventory increased $1.4 million
or 4.0% to $35.7 million as of March 31, 2011 compared to $34.3 million as of
December 31, 2010. The primary reason for the increase in inventory was that
the volume of purchases of ferrous and non ferrous materials was higher than
the volume of shipments of these materials in the first quarter.

23

---



Inventory
aging for the period ended March 31, 2011 (Days Outstanding):

|                            |  |                |        |         |   |         |  |         |     |       |   |       |  |   |        | 
|--------------------------- |  | -------------- | ------ | ------- | - | ------- |  | ------- | --- | ----- | - | ----- |  | - | ------ | 
|                            |  | (in thousands) |       
|Description                 |  | 1 - 30         |        | 31 - 60 |   | 61 - 90 |  | Over 90 |     | Total |  
|                            |  |                |        |         |   |         |  |         |     |       |  
|Stainless
 steel alloys     |  | $              | 21,590 |         | $ | 1,274   |  | $       | 748 |       | $ | 2,545 |  | $ | 26,157 | 
|Ferrous
 materials          |  |                | 5,151  |         |   | 256     |  |         | 21  |       |   | 89    |  |   | 5,517  | 
|Non-ferrous
 materials      |  |                | 2,177  |         |   | 133     |  |         | 26  |       |   | 128   |  |   | 2,464  | 
|Shredder
 replacement parts |  |                | 1,430  |         |   |        |  |         |    |       |   |      |  |   | 1,430  | 
|Waste
 equipment machinery  |  |                | 2      |         |   | 2       |  |         |    |       |   | 48    |  |   | 52     | 
|Other                       |  |                | 47     |         |   |        |  |         |    |       |   |      |  |   | 47     | 
|                            |  |                |        |         |   |         |  |         |     |       |   |       |  |   |        | 
|Total                       |  | $              | 30,397 |         | $ | 1,665   |  | $       | 795 |       | $ | 2,810 |  | $ | 35,667 | 
|                            |  |                |        |         |   |         |  |         |     |       |   |       |  |   |        | 

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

|                            |  |                |        |         |   |         |  |         |       |       |   |       |  |   |        | 
|--------------------------- |  | -------------- | ------ | ------- | - | ------- |  | ------- | ----- | ----- | - | ----- |  | - | ------ | 
|                            |  | (in thousands) |       
|Description                 |  | 1 - 30         |        | 31 - 60 |   | 61 - 90 |  | Over 90 |       | Total |  
|                            |  |                |        |         |   |         |  |         |       |       |  
|Stainless
 steel alloys     |  | $              | 19,030 |         | $ | 4,607   |  | $       | 900   |       | $ | 177   |  | $ | 24,714 | 
|Ferrous
 materials          |  |                | 4,572  |         |   | 691     |  |         | 234   |       |   | 799   |  |   | 6,296  | 
|Non-ferrous
 materials      |  |                | 1,460  |         |   | 152     |  |         | 50    |       |   | 192   |  |   | 1,854  | 
|Shredder
 replacement parts |  |                | 1,313  |         |   |        |  |         |      |       |   |      |  |   | 1,313  | 
|Waste
 equipment machinery  |  |                |       |         |   |        |  |         |      |       |   | 75    |  |   | 75     | 
|Other                       |  |                | 59     |         |   |        |  |         |      |       |   |      |  |   | 59     | 
|                            |  |                |        |         |   |         |  |         |       |       |   |       |  |   |        | 
|Total                       |  | $              | 26,434 |         | $ | 5,450   |  | $       | 1,184 |       | $ | 1,243 |  | $ | 34,311 | 
|                            |  |                |        |         |   |         |  |         |       |       |   |       |  |   |        | 

Accounts payable trade increased $0.4 million or 3.5% to $11.8 million
as of March 31, 2011 compared to $11.4 million as of December 31, 2010,
primarily due to increased purchases in the first quarter and the timing of
payments made to our vendors.

Working capital increased $4.2 million to $51.5 million as of March 31,
2011 compared to $47.3 million as of December 31, 2010. The increase was
primarily driven by the $3.3 million increase in accounts receivable, the $1.4
million increase in inventory, and the $0.5 million decrease in accrued bonuses.
These increases were partially offset by the $0.4 million increase in accounts
payable and the $0.3 million increase in income taxes payable.

Contractual Obligations

The following table provides information with respect to our known
contractual obligations for the quarter ended March 31, 2011:

24

---



|                                 |  |                                       |        |                   |   |             |  |             |        |                    |   |     |  |   |   | 
|-------------------------------- |  | ------------------------------------- | ------ | ----------------- | - | ----------- |  | ----------- | ------ | ------------------ | - | --- |  | - | - | 
|                                 |  | Payments due by period (in thousands) |       
|                                 |  |                                       |       
|Obligation Description           |  | Total                                 |        | Less than
 1 year |   | 1 - 3 years |  | 3 - 5 years |        | More than
 5 years |  
|                                 |  |                                       |        |                   |   |             |  |             |        |                    |  
|                                 |  |                                       |        |                   |   |             |  |             |        |                    |   |     |  |   |   | 
|Long-term
 debt obligations      |  | $                                     | 46,036 |                   | $ | 1,827       |  | $           | 44,000 |                    | $ | 209 |  | $ |  | 
|                                 |  |                                       |        |                   |   |             |  |             |        |                    |   |     |  |   |   | 
|Operating
 lease obligations (1) |  |                                       | 1,438  |                   |   | 708         |  |             | 609    |                    |   | 121 |  |   |  | 
|                                 |  |                                       |        |                   |   |             |  |             |        |                    |   |     |  |   |   | 
|                                 |  |                                       |        |                   |   |             |  |             |        |                    |   |     |  |   |   | 
|Total                            |  | $                                     | 47,474 |                   | $ | 2,535       |  | $           | 44,609 |                    | $ | 330 |  | $ |  | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 $48.5 thousand
 through December 2012. In the event of a change of control, the monthly
 payments become $62.5 thousand.                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | We
 also lease equipment from K&R, LLC for which monthly payments of $5.5
 thousand are due through November 2015.                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | We
 have subleased the Lexington property to an unaffiliated third party for a
 term commencing March 1, 2007 and ending December 31, 2012 for $4.5 thousand
 per month. We currently lease this property from an unrelated party for $4.5
 thousand 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 $1 thousand are due
 through September 2011.                                                                                                                                                                                                                                                   

Long-term debt, including the current portions thereof, increased $0.6
million to $46.0 as of March 31, 2011 compared to $45.4 million as of December
31, 2010.

Impact of Recently Issued Accounting Standards

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

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.

25

---



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.

Our floating rate borrowings expose us to interest rate risk.

Based on our average anticipated borrowings under our credit agreements
in fiscal 2011, a hypothetical increase or decrease in the LIBOR rate by 1%
would increase or decrease interest expense on our variable borrowings by 1% of
the outstanding balance, with a corresponding change in cash flows.

We entered into three interest rate swap agreements swapping variable
rates for fixed rates. The first swap agreement covers $5.1 million in debt and
commenced April 7, 2009 and matures on April 7, 2014. The second swap agreement
covers approximately $2.3 million in debt and commenced October 15, 2008 and
matures on May 7, 2013. The third swap agreement covers approximately $497.0
thousand in debt and commenced October 22, 2008 and matures on October 22,
2013. The three swap agreements fix our interest rate at approximately 5.8%. At
March 31, 2011, we recorded the estimated fair value of the three swaps as
approximately $567.0 thousand. 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 in 2010. We maintain a cash account on deposit with BB&T which
serves as collateral for the swap agreements. As of March 31, 2010, the balance
in this account was $653.0 thousand.

26

---



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 March 31, 2011, 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 March 31, 2011 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | On January 4, 2007, Lennox Industries, Inc., a commercial heating and
 air-conditioning manufacturer, filed a suit against us captioned Lennox
 Industries, Inc. v. Industrial Services of America, Inc., Case No.
 CV-2007-004 in the Arkansas County, Arkansas Circuit court in Stuttgart,
 Arkansas. Lennox in its Second Amended Complaint currently alleges breach of
 contract, negligence, and breach of fiduciary duty arising from our alleged
 miscategorization of Lennoxs scrap metal and mismanagement of the scrap
 metal recycling operations at three Lennox plants during the contract period
 April 18, 2001 through November 2005.

27

---



|         |                                                                                                                                                                                                                                                                                                                                                                                                                
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | We filed a Motion for Summary Judgment in October, 2009, which the
 court denied in February, 2010. Discovery by the parties is still ongoing. A
 jury trial is currently set for June 20, 2011. We are vigorously defending
 all of Lennoxs claims as we believe the claims to be without merit.                                                                                                             
|         |                                                                                                                                                                                                                                                                                                                                                                                                                
|         | We have other litigation from time to time, including employee or former
 employee claims, none of which we believe to be material.                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                                                                                                                
|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, 2010, as filed with the Securities
 and Exchange Commission on March 28, 2011.                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                                                                                                                                                                
|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 2011, 2010, or 2009. In 2008, we repurchased
 83,411 shares. Prior to 2008, we repurchased 83,264 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. | Reserved.                       
|        |                                 
|Item 5. | Other
 Information              
|        | None.                           

28

---



|        |                    
|------- | -------------------
|Item 6. | Exhibits           
|        |                    
|        | See exhibit
 index.

29

---



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                   |                                              | 
|------------------ | -------------------------------------------- | 
|                   | INDUSTRIAL
 SERVICES OF AMERICA, INC.       
|                   |                                              | 
|                   |                                              | 
|Date: May 2,
 2011 | /s/
 Harry Kletter                           | 
|                   |                                              | 
|                   | Chairman and
 Chief Executive Officer        | 
|                   | (Principal
 Executive and Financial Officer) | 
|                   |                                              | 
|                   |                                              | 
|Date: May 2,
 2011 | /s/
 Alan L. Schroering                      | 
|                   |                                              | 
|                   | Chief
 Financial Officer                     | 

30

---



INDEX TO EXHIBITS

|                 |  |                                                                                                                                                                                                                                                                                                                                                                         
|---------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 
 Number |  | Description
 of Exhibits                                                                                                                                                                                                                                                                                                                                                
|                 |  |                                                                                                                                                                                                                                                                                                                                                                         
|                 |  |                                                                                                                                                                                                                                                                                                                                                                         
|10.1             |  | Promissory Note, dated April 12, 2011, in
 the amount of $226,855 payable to Fifth Third Bank.                                                                                                                                                                                                                                                                          
|                 |  |                                                                                                                                                                                                                                                                                                                                                                         
|10.2             |  | Loan and Security Agreement, dated April
 12, 2011, by and between Fifth Third Bank and Industrial Services of America,
 Inc.                                                                                                                                                                                                                                           
|                 |  |                                                                                                                                                                                                                                                                                                                                                                         
|10.3             |  | First Amendment to Credit Agreement, dated
 April 14, 2011, by and among Industrial Services of America, Inc., ISA
 Indiana, Inc., and Fifth Third Bank.                                                                                                                                                                                                                
|                 |  |                                                                                                                                                                                                                                                                                                                                                                         
|10.4             |  | Reaffirmation and Amendment of Guaranty and
 Reaffirmation of Security, dated April 14, 2011, by and among Fifth Third
 Bank, ISA Indiana Real Estate, LLC, ISA Logistics LLC, ISA Real Estate, LLC,
 7021 Grade Lane LLC, 7124 Grade Lane LLC, 7200 Grade Lane LLC, Computerized
 Waste Systems, LLC, ISA Recycling LLC, and Waste Equipment Sales &
 Service Co., LLC.
|                 |  |                                                                                                                                                                                                                                                                                                                                                                         
|10.5             |  | Amended and Restated Revolving Loan Note,
 dated April 14, 2011, in the amount of $45,000,000 payable to Fifth Third
 Bank.                                                                                                                                                                                                                                             
|                 |  |                                                                                                                                                                                                                                                                                                                                                                         
|31.1             |  | Rule 13a-14(a) Certification of Harry
 Kletter for the Form 10-Q for the quarter ended March 31, 2011.                                                                                                                                                                                                                                                                  
|                 |  |                                                                                                                                                                                                                                                                                                                                                                         
|31.2             |  | Rule 13a-14(a) Certification of Alan
 Schroering for the Form 10-Q for the quarter ended March 31, 2011.                                                                                                                                                                                                                                                                
|                 |  |                                                                                                                                                                                                                                                                                                                                                                         
|32.1             |  | Section 1350 Certification of Harry Kletter
 and Alan Schroering for the Form 10-Q for the quarter ended March 31, 2011.                                                                                                                                                                                                                                                

31

---