|                                                          
|----------------------------------------------------------
|FORM 10-Q                                                 
|                                                          
|SECURITIES
 AND EXCHANGE COMMISSION                       
|WASHINGTON, DC 20549                                      
|                                                          
|xQUARTERLY REPORT PURSUANT TO SECTION
 13 OR 15(d) OF THE 
|SECURITIES EXCHANGE ACT OF 1934                           
|For the quarterly period ended June 30, 2010              
|OR                                                        
|oTRANSITION 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 June 30, 2010: 6,484,917.                                                                                                                                                                                                                                                                       

---



INDUSTRIAL SERVICES OF AMERICA, INC. AND
SUBSIDIARIES

INDEX

|        |                                                                                                              |  |         
|------- | ------------------------------------------------------------------------------------------------------------ |  | --------
|        |                                                                                                              |  | Page No.
|Part I  | Financial
 Information                                                                                       |  |         
|       
|        | Condensed
 Consolidated Balance Sheets 
 June 30, 2010 (Unaudited) and December 31, 2009                     |  | 3       
|       
|        | Condensed
 Consolidated Statements of 
 Operations - Three Months Ended 
 June 30, 2010 and 2009 (Unaudited) |  | 5       
|       
|        | Condensed
 Consolidated Statements of 
 Operations - Six Months Ended 
 June 30, 2010 and 2009 (Unaudited)   |  | 6       
|       
|        | Condensed
 Consolidated Statements of Shareholders Equity 
 June 30, 2010 (Unaudited) and December 31, 2009 |  | 7       
|       
|        | Condensed
 Consolidated Statements of 
 Cash Flows - Six Months Ended 
 June 30, 2010 and 2009 (Unaudited)   |  | 8       
|       
|        | Notes to
 Condensed Consolidated 
 Financial Statements (Unaudited)                                          |  | 9       
|       
|        | Managements
 Discussion and Analysis 
 of Financial Condition and Results 
 of Operations                   |  | 20      
|       
|Part II | Other
 Information                                                                                           |  | 29      

---



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

|                                                                                                      |  |                             |            |                    |   |            | 
|----------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | ------------------ | - | ---------- | 
|                                                                                                      |  | June 30,
 2010
 (Unaudited) |            | December 31,
 2009 |  
|                                                                                                      |  |                             |            |                    |  
|Current assets                                                                                        |  |                             |            |                    |   |            | 
|Cash and cash equivalents                                                                             |  | $                           | 1,182,999  |                    | $ | 713,062    | 
|Accounts receivable - trade (after
 allowance for doubtful accounts of
 $100,000 in 2010 and in 2009) |  |                             | 27,787,638 |                    |   | 8,512,326  | 
|Net investment in sales-type leases                                                                   |  |                             | 30,535     |                    |   | 27,928     | 
|Inventories                                                                                           |  |                             | 25,815,495 |                    |   | 26,426,611 | 
|Deferred income taxes                                                                                 |  |                             | 538,045    |                    |   | 538,045    | 
|Other                                                                                                 |  |                             | 342,575    |                    |   | 322,847    | 
|                                                                                                      |  |                             |            |                    |   |            | 
|                                                                                                      |  |                             |            |                    |   |            | 
|Total current assets                                                                                  |  |                             | 55,697,287 |                    |   | 36,540,819 | 
|                                                                                                      |  |                             |            |                    |   |            | 
|Net property and equipment                                                                            |  |                             | 26,612,692 |                    |   | 26,994,539 | 
|                                                                                                      |  |                             |            |                    |   |            | 
|                                                                                                      |  |                             |            |                    |   |            | 
|Other Assets                                                                                          |  |                             |            |                    |   |            | 
|Goodwill                                                                                              |  |                             | 2,567,046  |                    |   | 2,567,046  | 
|Net investment in sales-type leases                                                                   |  |                             | 57,351     |                    |   | 73,300     | 
|Notes receivable  related party                                                                      |  |                             | 109,014    |                    |   | 129,079    | 
|Other assets                                                                                          |  |                             | 612,800    |                    |   | 368,834    | 
|                                                                                                      |  |                             |            |                    |   |            | 
|                                                                                                      |  |                             | 3,346,211  |                    |   | 3,138,259  | 
|                                                                                                      |  |                             |            |                    |   |            | 
|                                                                                                      |  |                             |            |                    |   |            | 
|                                                                                                      |  | $                           | 85,656,190 |                    | $ | 66,673,617 | 
|                                                                                                      |  |                             |            |                    |   |            | 

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

---



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

|                                                                                                                                                                                           |  |                             |            |                    |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ---------- | ------------------ | - | ---------- | -
|                                                                                                                                                                                           |  | June 30,
 2010
 (Unaudited) |            | December 31,
 2009 |  
|                                                                                                                                                                                           |  |                             |            |                    |  
|Current liabilities                                                                                                                                                                        |  |                             |            |                    |   |            |  
|Current maturities of long term
 debt (Note 4)                                                                                                                                             |  | $                           | 1,478,788  |                    | $ | 12,539,889 |  
|Current maturities of capital
 lease obligation                                                                                                                                            |  |                             |           |                    |   | 20,798     |  
|Accounts payable                                                                                                                                                                           |  |                             | 22,748,694 |                    |   | 4,684,386  |  
|Income tax payable                                                                                                                                                                         |  |                             | 1,312,028  |                    |   | 517,828    |  
|Note payable to BB&T (Note
 4)                                                                                                                                                             |  |                             |           |                    |   | 5,000,000  |  
|Interest rate swap agreement
 liability (Note 4)                                                                                                                                           |  |                             | 723,609    |                    |   | 564,715    |  
|Accrued bonuses                                                                                                                                                                            |  |                             | 750,000    |                    |   | 1,513,800  |  
|Other current liabilities                                                                                                                                                                  |  |                             | 651,944    |                    |   | 380,718    |  
|                                                                                                                                                                                           |  |                             |            |                    |   |            |  
|Total current liabilities                                                                                                                                                                  |  |                             | 27,665,063 |                    |   | 25,222,134 |  
|                                                                                                                                                                                           |  |                             |            |                    |   |            |  
|Long-term liabilities                                                                                                                                                                      |  |                             |            |                    |   |            |  
|Long-term debt (Note 4)                                                                                                                                                                    |  |                             | 28,790,618 |                    |   | 16,654,481 |  
|Deferred income taxes                                                                                                                                                                      |  |                             | 2,815,952  |                    |   | 2,879,509  |  
|                                                                                                                                                                                           |  |                             |            |                    |   |            |  
|                                                                                                                                                                                           |  |                             | 31,606,570 |                    |   | 19,533,990 |  
|                                                                                                                                                                                           |  |                             |            |                    |   |            |  
|Stockholders equity                                                                                                                                                                       |  |                             |            |                    |   |            |  
|Common stock, $0.0033 par
 value, 10,000,000 shares authorized,
 and 7,192,500 shares issued in 2010 and 2009, 6,484,917 and
 6,429,438 shares outstanding in 2010
 and 2009, respectively |  |                             | 23,975     |                    |   | 23,975     |  
|Additional paid-in capital                                                                                                                                                                 |  |                             | 7,814,996  |                    |   | 7,442,346  |  
|Retained earnings                                                                                                                                                                          |  |                             | 19,996,278 |                    |   | 15,885,814 |  
|Accumulated other comprehensive loss                                                                                                                                                       |  |                             | (434,165   | )                  |   | (338,829   | )
|Treasury stock, 707,583 and 763,062 shares
 at average cost in 2010 and 2009, respectively                                                                                                 |  |                             | (1,016,527 | )                  |   | (1,095,813 | )
|                                                                                                                                                                                           |  |                             |            |                    |   |            |  
|                                                                                                                                                                                           |  |                             | 26,384,557 |                    |   | 21,917,493 |  
|                                                                                                                                                                                           |  |                             |            |                    |   |            |  
|                                                                                                                                                                                           |  | $                           | 85,656,190 |                    | $ | 66,673,617 |  
|                                                                                                                                                                                           |  |                             |            |                    |   |            |  

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

---



|                                                     
|-----------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
|                                                     
|CONDENSED CONSOLIDATED STATEMENTS OF
 OPERATIONS     
|THREE MONTHS ENDED JUNE 30, 2010 AND 2009            
|(UNAUDITED)                                          

|                                            |  |      |            |      |   |            |  
|------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                            |  | 2010 |            | 2009 |  
|                                            |  |      |            |      |  
|                                            |  |      |            |      |   |            |  
|Revenue from services                       |  | $    | 1,534,517  |      | $ | 1,522,134  |  
|Revenue from product sales                  |  |      | 91,280,445 |      |   | 37,602,180 |  
|                                            |  |      |            |      |   |            |  
|Total revenue                               |  |      | 92,814,962 |      |   | 39,124,314 |  
|                                            |  |      |            |      |   |            |  
|Cost of goods sold for services             |  |      | 1,436,049  |      |   | 1,153,059  |  
|Cost of goods sold for product sales        |  |      | 83,625,249 |      |   | 33,820,184 |  
|                                            |  |      |            |      |   |            |  
|Total cost of goods sold                    |  |      | 85,061,298 |      |   | 34,973,243 |  
|                                            |  |      |            |      |   |            |  
|Selling, general and administrative expense |  |      | 3,564,271  |      |   | 2,439,883  |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Income before other income (expense)        |  |      | 4,189,393  |      |   | 1,711,188  |  
|                                            |  |      |            |      |   |            |  
|Other income (expense)                      |  |      |            |      |   |            |  
|Interest expense                            |  |      | (339,642   | )    |   | (213,161   | )
|Interest income                             |  |      | 9,478      |      |   | 6,917      |  
|Gain on sale of assets                      |  |      | 49,500     |      |   | 7,222      |  
|Other income                                |  |      | 3,270      |      |   | 24,851     |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      | (277,394   | )    |   | (174,171   | )
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Income before income taxes                  |  |      | 3,911,999  |      |   | 1,537,017  |  
|                                            |  |      |            |      |   |            |  
|Income tax provision                        |  |      | 1,564,799  |      |   | 614,807    |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Net income                                  |  | $    | 2,347,200  |      | $ | 922,210    |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Basic earnings per share                    |  | $    | 0.36       |      | $ | 0.17       |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Diluted earnings per share                  |  | $    | 0.36       |      | $ | 0.17       |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Weighted shares outstanding:                |  |      |            |      |   |            |  
|Basic                                       |  |      | 6,462,513  |      |   | 5,477,844  |  
|                                            |  |      |            |      |   |            |  
|                                            |  |      |            |      |   |            |  
|Diluted                                     |  |      | 6,489,908  |      |   | 5,477,844  |  
|                                            |  |      |            |      |   |            |  

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

---



|                                                     
|-----------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
|                                                     
|CONDENSED CONSOLIDATED STATEMENTS OF
 OPERATIONS     
|SIX MONTHS ENDED JUNE 30, 2010 AND 2009              
|(UNAUDITED)                                          

|                                            |  |      |             |      |   |            |  
|------------------------------------------- |  | ---- | ----------- | ---- | - | ---------- | -
|                                            |  | 2010 |             | 2009 |  
|                                            |  |      |             |      |  
|                                            |  |      |             |      |   |            |  
|Revenue from services                       |  | $    | 3,069,650   |      | $ | 4,167,702  |  
|Revenue from product sales                  |  |      | 163,914,278 |      |   | 59,206,535 |  
|                                            |  |      |             |      |   |            |  
|Total revenue                               |  |      | 166,983,928 |      |   | 63,374,237 |  
|                                            |  |      |             |      |   |            |  
|Cost of goods sold for services             |  |      | 2,786,452   |      |   | 3,415,987  |  
|Cost of goods sold for product sales        |  |      | 150,160,354 |      |   | 51,822,374 |  
|                                            |  |      |             |      |   |            |  
|Total cost of goods sold                    |  |      | 152,946,806 |      |   | 55,238,361 |  
|                                            |  |      |             |      |   |            |  
|Selling, general and administrative expense |  |      | 6,765,293   |      |   | 5,149,544  |  
|                                            |  |      |             |      |   |            |  
|                                            |  |      |             |      |   |            |  
|Income before other income (expense)        |  |      | 7,271,829   |      |   | 2,986,332  |  
|                                            |  |      |             |      |   |            |  
|Other income (expense)                      |  |      |             |      |   |            |  
|Interest expense                            |  |      | (668,611    | )    |   | (351,666   | )
|Interest income                             |  |      | 17,307      |      |   | 22,160     |  
|Gain on sale of assets                      |  |      | 234,148     |      |   | 10,972     |  
|Other expense                               |  |      | (3,899      | )    |   | (40,676    | )
|                                            |  |      |             |      |   |            |  
|                                            |  |      | (421,055    | )    |   | (359,210   | )
|                                            |  |      |             |      |   |            |  
|                                            |  |      |             |      |   |            |  
|                                            |  |      |             |      |   |            |  
|Income before income taxes                  |  |      | 6,850,774   |      |   | 2,627,122  |  
|                                            |  |      |             |      |   |            |  
|Income tax provision                        |  |      | 2,740,310   |      |   | 1,050,849  |  
|                                            |  |      |             |      |   |            |  
|                                            |  |      |             |      |   |            |  
|Net income                                  |  | $    | 4,110,464   |      | $ | 1,576,273  |  
|                                            |  |      |             |      |   |            |  
|                                            |  |      |             |      |   |            |  
|Basic earnings per share                    |  | $    | 0.64        |      | $ | 0.29       |  
|                                            |  |      |             |      |   |            |  
|                                            |  |      |             |      |   |            |  
|Diluted earnings per share                  |  | $    | 0.63        |      | $ | 0.29       |  
|                                            |  |      |             |      |   |            |  
|                                            |  |      |             |      |   |            |  
|Weighted shares outstanding:                |  |      |             |      |   |            |  
|Basic                                       |  |      | 6,456,053   |      |   | 5,420,709  |  
|                                            |  |      |             |      |   |            |  
|                                            |  |      |             |      |   |            |  
|Diluted                                     |  |      | 6,474,903   |      |   | 5,420,709  |  
|                                            |  |      |             |      |   |            |  

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

---



|                                                
|------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.            
|AND SUBSIDIARIES                                
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS
 EQUITY
|SIX MONTHS ENDED JUNE 30, 2010                  
|(UNAUDITED)                                     
|                                                
|                                                

|                                                           |  |               |           |                              |   |                    |  |   |                 |                                         |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|---------------------------------------------------------- |  | ------------- | --------- | ---------------------------- | - | ------------------ |  | - | --------------- | --------------------------------------- | ---- | ---------- | ----- | - | -------- | - |  | -------- | - | - | ---------- | - | - | ---------- | -
|                                                           |  |               |           |                              |   |                    |  |   |                 | Accumulated
 Other
 Comprehensive
 Loss |      |            |       |   |          |   | 
|                                                           |  | Common
 Stock |           | Additional
 Paid-in
 Capital |   | Retained
 Earnings |  |   | Treasury
 Stock |                                         |      |           
|                                                           |  |               |           |                              |   |                    |  |   |                 |                                        
|                                                           |  | Shares        |           | Amount                       |   |                    |  |   | Shares          |                                         | Cost |            | Total |  
|                                                           |  |               |           |                              |   |                    |  |   |                 |                                         |      |            |       |   |          |   | 
|                                                           |  |               |           |                              |   |                    |  |   |                 |                                         |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Balance as
 of December 31, 2009                           |  |               | 7,192,500 |                              | $ | 23,975             |  | $ | 7,442,346       |                                         | $    | 15,885,814 |       | $ | (338,829 | ) |  | (763,062 | ) | $ | (1,095,813 | ) | $ | 21,917,493 |  
|Net unrealized loss on derivative
 instruments, net of tax |  |               |          |                              |   |                   |  |   |                |                                         |      |           |       |   | (95,336  | ) |  |         |   |   |           |   |   | (95,336    | )
|Stock bonuses                                              |  |               |          |                              |   |                   |  |   | 372,650         |                                         |      |           |       |   |         |   |  | 55,479   |   |   | 79,286     |   |   | 451,936    |  
|Net income                                                 |  |               |          |                              |   |                   |  |   |                |                                         |      | 4,110,464  |       |   |         |   |  |         |   |   |           |   |   | 4,110,464  |  
|                                                           |  |               |           |                              |   |                    |  |   |                 |                                         |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|                                                           |  |               |           |                              |   |                    |  |   |                 |                                         |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  
|Balance as
 of June 30, 2010                               |  |               | 7,192,500 |                              | $ | 23,975             |  | $ | 7,814,996       |                                         | $    | 19,996,278 |       | $ | (434,165 | ) |  | (707,583 | ) | $ | (1,016,527 | ) | $ | 26,384,557 |  
|                                                           |  |               |           |                              |   |                    |  |   |                 |                                         |      |            |       |   |          |   |  |          |   |   |            |   |   |            |  

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

---



|                                                     
|-----------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES
|                                                     
|CONDENSED CONSOLIDATED STATEMENTS OF CASH
 FLOWS     
|SIX MONTHS ENDED JUNE 30, 2010 AND 2009              
|(UNAUDITED)                                          

|                                                                                      |  |      |             |      |   |             |  
|------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                      |  | 2010 |             | 2009 |  
|                                                                                      |  |      |             |      |  
|Cash flows from operating activities                                                  |  |      |             |      |   |             |  
|Net income                                                                            |  | $    | 4,110,464   |      | $ | 1,576,273   |  
|Adjustments to reconcile net income to net
 cash from/(used in) operating activities: |  |      |             |      |   |             |  
|                                                                                      |  |      |             |      |   |             |  
|Depreciation and amortization                                                         |  |      | 1,730,269   |      |   | 1,229,425   |  
|Stock distribution to employees                                                       |  |      | 451,936     |      |   | 59,980      |  
|Deferred income taxes                                                                 |  |      |            |      |   | 212,426     |  
|Reduction in provision for doubtful
 accounts                                         |  |      |            |      |   | (390,000    | )
|Gain on sale of property and equipment                                                |  |      | (234,148    | )    |   | (10,972     | )
|Change in assets and liabilities                                                      |  |      |             |      |   |             |  
|Receivables                                                                           |  |      | (19,275,312 | )    |   | (17,422,243 | )
|Net investment in sales-type leases                                                   |  |      | 13,342      |      |   | 26,264      |  
|Inventories                                                                           |  |      | 611,116     |      |   | 2,786,595   |  
|Other assets                                                                          |  |      | (49,902     | )    |   | (189,887    | )
|Accounts payable                                                                      |  |      | 18,064,308  |      |   | 6,018,500   |  
|Accrued bonuses                                                                       |  |      | (763,800    | )    |   | (880,800    | )
|Income taxes payable                                                                  |  |      | 794,200     |      |   | 446,441     |  
|Other current liabilities                                                             |  |      | 271,226     |      |   | 689,236     |  
|                                                                                      |  |      |             |      |   |             |  
|Net cash from/(used in) operating activities                                          |  |      | 5,723,699   |      |   | (5,848,762  | )
|                                                                                      |  |      |             |      |   |             |  
|Cash flows from investing activities                                                  |  |      |             |      |   |             |  
|Proceeds from sale of property and
 equipment                                         |  |      | 324,013     |      |   | 43,750      |  
|Purchases of property and equipment                                                   |  |      | (1,147,834  | )    |   | (1,822,048  | )
|Deposits on equipment                                                                 |  |      | (504,244    | )    |   | 23,350      |  
|Payments for shredder system                                                          |  |      |            |      |   | (3,400,972  | )
|Acquisition from Venture Metals                                                       |  |      |            |      |   | (10,607,944 | )
|Payments from related party                                                           |  |      | 20,065      |      |   | 18,993      |  
|                                                                                      |  |      |             |      |   |             |  
|Net cash used in investing activities                                                 |  |      | (1,308,000  | )    |   | (15,744,871 | )
|                                                                                      |  |      |             |      |   |             |  
|Cash flows from financing activities                                                  |  |      |             |      |   |             |  
|Proceeds from note payable to BB&T                                                    |  |      |            |      |   | 5,000,000   |  
|Payments on capital lease obligation                                                  |  |      | (20,798     | )    |   | (40,725     | )
|Proceeds from long-term debt                                                          |  |      |            |      |   | 18,042,330  |  
|Payments on note payable to BB&T                                                      |  |      | (133,843    | )    |   |            |  
|Payments on long-term debt                                                            |  |      | (3,791,121  | )    |   | (1,867,717  | )
|                                                                                      |  |      |             |      |   |             |  
|Net cash (used in)/from financing activities                                          |  |      | (3,945,762  | )    |   | 21,133,888  |  
|                                                                                      |  |      |             |      |   |             |  
|                                                                                      |  |      |             |      |   |             |  
|Net increase/(decrease) in cash                                                       |  |      | 469,937     |      |   | (459,745    | )
|                                                                                      |  |      |             |      |   |             |  
|Cash at beginning of period                                                           |  |      | 713,062     |      |   | 1,103,842   |  
|                                                                                      |  |      |             |      |   |             |  
|                                                                                      |  |      |             |      |   |             |  
|Cash at end of period                                                                 |  | $    | 1,182,999   |      | $ | 644,097     |  
|                                                                                      |  |      |             |      |   |             |  
|                                                                                      |  |      |             |      |   |             |  
|Supplemental disclosure of cash flow
 information                                     |  |      |             |      |   |             |  
|Cash paid for interest                                                                |  | $    | 668,661     |      | $ | 351,666     |  
|Cash paid for taxes                                                                   |  |      | 1,946,110   |      |   | 652,310     |  
|                                                                                      |  |      |             |      |   |             |  
|Supplemental disclosure of noncash
 investing and financing activities:               |  |      |             |      |   |             |  
|Common stock issued to acquire real estate                                            |  | $    |            |      | $ | 800,000     |  

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

---



INDUSTRIAL SERVICES OF AMERICA, INC. AND
SUBSIDIARIES

NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Basis of Presentation

The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U. S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U. S. generally accepted accounting
principles for complete consolidated financial statements. The information
furnished includes all adjustments, which are, in the opinion of management,
necessary to present fairly our financial position as of June 30, 2010 and the
results of our operations and changes in our cash flow for the periods ended
June 30, 2010 and 2009. Results of operations for the period ended June 30,
2010 are not necessarily indicative of the results that may be expected for the
entire year. Additional information, including the audited December 31, 2009
consolidated financial statements and the Summary of Significant Accounting
Policies, is included in our Annual Report on Form 10-K for the year ended
December 31, 2009 on file with the Securities and Exchange Commission.

Fair Value

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

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

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

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

Level 3 
Financial assets and liabilities with values based on prices or valuation
techniques that require inputs that are both unobservable in the market and
significant to the overall fair value measurement. These inputs reflect
managements judgment about the assumptions that a market participant would use
in pricing the asset or liability, and are based on the best available
information, some of which is internally developed. Examples of

9

---



level 3
financial instruments include certain corporate debt with little or no market
activity and a resulting lack of price transparency.

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

We use the
fair value methodology outlined in the related accounting standard to value the
assets and liabilities for cash, debt and derivatives. All of our cash is
defined as Level 1 and all our debt and derivative contracts are defined as
Level 2. In accordance with this guidance, the following table represents our
fair value hierarchy for Level 1 and Level 2 financial instruments at June 30,
2010:

|                           |  |         |           |         |    |            |   |    |            |  
|-------------------------- |  | ------- | --------- | ------- | -- | ---------- | - | -- | ---------- | -
|                           |  | Level 1 |           | Level 2 |    | Total      |  
|Assets                     |  |         |           |         |    |            |   |    |            |  
|Cash and
 cash equivalents |  | $       | 1,135,651 |         |    |            |   | $  | 1,135,651  |  
|                           |  |         |           |         |    |            |   |    |            |  
|Liabilities                |  |         |           |         |    |            |   |    |            |  
|Long-term
 debt            |  |         |           |         | ($ | 30,637,353 | ) | ($ | 30,637,353 | )
|Derivative
 contract       |  |         |           |         | ($ | 723,609    | ) | ($ | 723,609    | )

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 June 30, 2010. For Level 3
assets, goodwill is subject to impairment analysis each year end under
Phase I of the ASC guidance. We use an annual capitalized earnings
computation to evaluate Level 3 assets for impairment.

Subsequent Events

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

Debt Restructuring:


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


With respect
to the revolving credit facility, the interest rate is one month LIBOR plus two
hundred fifty basis points (2.50%) per annum, adjusted monthly on the first day
of each month. The revolving credit facility expires on July 31, 2013. Under
the revolving credit facility, we are permitted to borrow the lesser of
$40,000,000 or the borrowing base, consisting of the sum of 80% of eligible
accounts plus 60% of eligible inventory up to

10

---



$15,000,000.
Eligible accounts are generally those receivables that are less than 90 days
from the invoice date. As security for the revolving credit facility, we
provided Fifth Third Bank a first priority security interest in the accounts
receivable from most of our customers and in our inventory. We also cross
collateralized the revolving line of credit with the $8,800,000 term loan.

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

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 the Bank.

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

NOTE 2  STOCK DIVIDEND

On May 3,
2010, the Board of Directors declared a 3-for-2 stock split effected by a 50%
stock dividend. The stock dividend was issued to holders of record as of May
17, 2010, and paid June 1, 2010. All share numbers and share prices in these
Notes have been adjusted to reflect the impact of this stock split.

NOTE 3  ESTIMATES

In preparing
the condensed consolidated financial statements in accordance with U. S.
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X, management
must make estimates and assumptions. These estimates and assumptions affect the
amounts reported for assets, liabilities, revenues and expenses, as well as
affecting the disclosures provided. Future results could differ from the
current estimates.

NOTE 4  LONG TERM DEBT AND NOTES PAYABLE TO
BANK

On April 13,
2010, the Company entered into a Loan Agreement with Branch Banking and Trust
Company (the Bank) and BB&T Bankcard Corporation pursuant to which the
Bank agreed to provide the Company a revolving credit facility in the amount of
$20,000,000 for the purpose of replacing the Companys existing

11

---



$12,000,000
promissory note to the Bank dated February 11, 2009 and the Companys existing
$10,000,000 senior revolving credit facility with the Bank dated December 22,
2006. In addition, the Company, the Bank and certain other parties entered into
a Modification and Cross-Collateralization Agreement (the Modification
Agreement) pursuant to which the Company and the Bank modified the Companys
existing $5,000,000 term loan to the Bank dated June 9, 2009. Proceeds of the
new revolving credit facility in the amount of $17.7 million were used to repay
the outstanding principal balance of the $12,000,000 promissory note and the
amount outstanding under the prior credit facility and to pay closing costs. As
of June 30, 2010, the outstanding balance of the restructured debt was
$16,443,272.

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

The $5,000,000
term loan provides for an interest rate that is the same as the interest rate
for the revolving credit facility. Accrued interest is payable monthly, with
the first such payment commencing on May 13, 2010. The outstanding balance
under the term loan plus accrued interest is payable in monthly installments in
accordance with a 9.5 year amortization schedule, with a final scheduled
payment of $3.1 million of principal due at maturity of the note on April 7,
2014. As security for the modified term loan, the Company provided the Bank a
first priority security interest in all equipment other than the rental fleet
that the Company owns. In addition, the Company provided a first mortgage on
the property at the following locations: 3409 Campground Road, 6709, 7023,
7025, 7101, 7103 and 7110 Grade Lane, Louisville Kentucky, 1565 East Fourth
Street, Seymour, Indiana and 1617 State Road 111, New Albany, Indiana. The
Company also cross collateralized the term loan with the revolving credit
facility, the rental fleet loan, the $500,000 purchasing credit card commitment
and all other existing debt the Company owes to the Bank. As of June 30, 2010,
the outstanding balance of the term loan was $4,866,157.

In the Loan
Agreement, the Company agreed to certain covenants, including the maintenance
of minimum tangible net worth of $16,000,000 as of December 31, 2009
(increasing by 40% of after tax net income annually, plus 100% of new equity
issued by the Company), maintenance of a ratio of earnings before interest,
taxes, depreciation and amortization (EBITDA) to the sum of the preceding 12
months interest expense plus projected principal payments on long-term debt in
the next succeeding 12 months of not less than 1.25 to 1, and maintenance of a
ratio of debt to tangible net worth of not more than 3.5 to 1. As of June 30,
2010, we were in compliance with these covenants.

We entered
into three interest rate swap agreements swapping variable rates for fixed
rates. The first swap agreement covers $5.5 million in debt and commenced April
7, 2009 and matures on April 7, 2014. The second swap agreement covers
approximately $2.5 million in debt and commenced October 15, 2008 and matures
on May 7, 2013. The third swap agreement covers approximately $535,000 in debt
and commenced October 22, 2008 and matures on October 22, 2013. The three swap
agreements fix our interest rate at approximately 5.8%. At June 30, 2010, we
recorded the estimated fair value of the liability related to the three swaps
at approximately $724,000. We entered into the swap agreements for the purpose
of hedging the interest rate market risk for the respective notional amounts.

12

---



See also
Subsequent Events under Note 1  Summary of Significant Accounting Policies for
information regarding a new credit agreement entered into on July 30, 2010
pursuant to which the Loan Agreement with BB&T described above was paid
off.

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |             |            |      |   |            | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | ---- | - | ---------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 2010        |            | 2009 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |             |            |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | (unaudited) |            |      |  
|Non-revolving line of credit with BB&T effective February 11, 2009
 in the amount of $12,000,000 with an original maturity date of February 11,
 2010, which was extended to March 24, 2010, and then to April 13, 2013 under
 the new loan agreement (see below). Interest was payable monthly starting
 March 11, 2009, and the note bore interest at the adjusted LIBOR rate of one
 month LIBOR plus 2.25% per annum with a floor of 4%. All our assets (except
 rental fleet equipment) secured this note.                                                  |  | $           |           |      | $ | 11,517,440 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |             |            |      |   |            | 
|Revolving credit facility of $10 million with BB&T secured by all
 assets except for rental fleet equipment with a variable interest rate of
 Libor plus 2.25% and no required monthly principal payments. The original
 maturity date under this agreement was January 1, 2012, extended to April 13,
 2013 under the new loan agreement.                                                                                                                                                                                                                       |  |             |           |      |   | 8,166,917  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |             |            |      |   |            | 
|Revolving credit facility of $20 million with BB&T and BB&T
 Bankcard Corporation secured by accounts receivable and inventory with a
 variable interest rate of Libor plus 2.50% per annum with a floor of 3.50%
 and no required monthly principal payments. The credit facility expires on
 April 13, 2013.                                                                                                                                                                                                                                                   |  |             | 16,443,272 |      |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |             |            |      |   |            | 
|Note payable to BB&T in the amount of $5 million secured by all
 equipment except for rental fleet equipment and certain real property with a
 variable interest rate of Libor plus 2.50% per annum with a floor of 3.50%.
 The repayment terms are principal and interest paid monthly commencing on May
 13, 2010 with one final payment of all remaining principal and accrued
 interest due at maturity date on April 7, 2014. (Prior to restructuring in
 April, 2010, this credit facility was considered short-term and was not
 included in this table.) |  |             | 4,866,157  |      |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |             |            |      |   |            | 
|Note payable to BB&T in the amount of $3 million secured by our
 rental fleet equipment with a fixed interest rate of 5.65%. The repayment
 terms are principal and interest paid monthly commencing on November 7, 2008
 with one final payment of all remaining principal and accrued interest due at
 maturity on May 7, 2013.                                                                                                                                                                                                                                |  |             | 2,473,516  |      |   | 2,598,526  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |             |            |      |   |            | 
|Note payable to BB&T in the amount of $6.0 million secured by our
 shredder system assets with a fixed interest rate of 5.89%. The repayment
 terms are principal and interest paid monthly commencing on November 7, 2008
 with one final payment of all remaining principal and accrued interest due at
 maturity on April 7, 2014.                                                                                                                                                                                                                            |  |             | 5,428,494  |      |   | 5,661,275  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |             |            |      |   |            | 
|Note payable to BB&T in the amount of $609,900 secured by a crane
 with a fixed interest rate of 5.89%. The repayment terms are principal and
 interest paid monthly beginning December 1, 2008 with one final payment of
 all remaining principal and accrued interest due at maturity in December
 2013.                                                                                                                                                                                                                                                       |  |             | 530,602    |      |   | 555,215    | 

13

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|                                                                                                                                                                                                                                                   |  |   |            |  |   |            | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---------- |  | - | ---------- | 
|Note payable to Paccar
 Financial Corp. in the amount of $163,655 secured by two Kenworth trucks.
 Payments are $3,395.36 per month with an effective interest rate of 6.5%. The
 maturity date under this agreement is September 2011.            |  |   | 46,176     |  |   | 112,724    | 
|                                                                                                                                                                                                                                                   |  |   |            |  |   |            | 
|Note payable to ILS for
 various assets including tractor trailers, trucks and containers. The
 repayment terms are $20,000 per month for 60 months at a seven percent (7%)
 interest rate. The maturity date under this agreement is August 2012. |  |   | 481,188    |  |   | 582,273    | 
|                                                                                                                                                                                                                                                   |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                   |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                   |  |   | 30,269,406 |  |   | 29,194,370 | 
|Less current maturities                                                                                                                                                                                                                            |  |   | 1,478,788  |  |   | 12,539,889 | 
|                                                                                                                                                                                                                                                   |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                   |  | $ | 28,790,618 |  | $ | 16,654,481 | 
|                                                                                                                                                                                                                                                   |  |   |            |  |   |            | 

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

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2010       |  | $ | 1,478,788  | 
|2011       |  |   | 1,548,088  | 
|2012       |  |   | 3,027,960  | 
|2013       |  |   | 21,133,263 | 
|Thereafter |  |   | 3,081,307  | 
|           |  |   |            | 
|           |  |   |            | 
|Total      |  | $ | 30,269,406 | 
|           |  |   |            | 

NOTE 5  SEGMENT INFORMATION

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

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

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

|                                              |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|--------------------------------------------- |  | --------- | ------------ | --------------- | - | ---------- | - | --------------- | ---------- | - | - | ------------ | -
|FOR THE
 SIX MONTHS ENDED
 JUNE 30, 2010      |  | RECYCLING |              | WASTE
 SERVICES |   | OTHER      |   | SEGMENT
 TOTALS |           
|                                              |  |           |              |                 |   |            |   |                 |           
|                                              |  |           |              |                 |   |            |   |                 |           
|Recycling revenues                            |  | $         | 162,804,794  |                 | $ |           |   | $               |           |   | $ | 162,804,794  |  
|Equipment sales, service and leasing revenues |  |           |             |                 |   | 1,109,484  |   |                 |           |   |   | 1,109,484    |  
|Management fees                               |  |           |             |                 |   | 3,069,650  |   |                 |           |   |   | 3,069,650    |  
|Cost of goods sold                            |  |           | (149,711,008 | )               |   | (3,235,798 | ) |                 |           |   |   | (152,946,806 | )
|Selling, general and administrative expenses  |  |           | (3,421,676   | )               |   | (520,394   | ) |                 | (2,823,223 | ) |   | (6,765,293   | )
|                                              |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|                                              |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|Segment profit (loss)                         |  | $         | 9,672,110    |                 | $ | 422,942    |   | $               | (2,823,223 | ) | $ | 7,271,829    |  
|                                              |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|                                              |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|Segment assets                                |  | $         | 81,453,921   |                 | $ | 2,277,586  |   | $               | 1,924,683  |   | $ | 85,656,190   |  
|                                              |  |           |              |                 |   |            |   |                 |            |   |   |              |  

14

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|                                              |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|--------------------------------------------- |  | --------- | ----------- | --------------- | - | ---------- | - | --------------- | ---------- | - | - | ----------- | -
|FOR THE
 SIX MONTHS ENDED
 JUNE 30, 2009      |  | RECYCLING |             | WASTE
 SERVICES |   | OTHER      |   | SEGMENT
 TOTALS |           
|                                              |  |           |             |                 |   |            |   |                 |           
|                                              |  |           |             |                 |   |            |   |                 |           
|Recycling revenues                            |  | $         | 58,151,892  |                 | $ |           |   | $               |           |   | $ | 58,151,892  |  
|Equipment sales, service and leasing revenues |  |           |            |                 |   | 1,054,643  |   |                 |           |   |   | 1,054,643   |  
|Management fees                               |  |           |            |                 |   | 4,167,702  |   |                 |           |   |   | 4,167,702   |  
|Cost of goods sold                            |  |           | (51,431,327 | )               |   | (3,807,034 | ) |                 |           |   |   | (55,238,361 | )
|Selling, general and administrative expenses  |  |           | (2,911,051  | )               |   | (703,558   | ) |                 | (1,534,935 | ) |   | (5,149,544  | )
|                                              |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|                                              |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|Segment profit (loss)                         |  | $         | 3,809,514   |                 | $ | 711,753    |   | $               | (1,534,935 | ) | $ | 2,986,332   |  
|                                              |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|                                              |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|Segment assets                                |  | $         | 52,358,983  |                 | $ | 3,099,151  |   | $               | 3,389,240  |   | $ | 58,847,374  |  
|                                              |  |           |             |                 |   |            |   |                 |            |   |   |             |  

|                                              |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|--------------------------------------------- |  | --------- | ----------- | --------------- | - | ---------- | - | --------------- | ---------- | - | - | ----------- | -
|FOR THE
 THREE MONTHS ENDED
 JUNE 30, 2010    |  | RECYCLING |             | WASTE
 SERVICES |   | OTHER      |   | SEGMENT
 TOTALS |           
|                                              |  |           |             |                 |   |            |   |                 |           
|                                              |  |           |             |                 |   |            |   |                 |           
|Recycling revenues                            |  | $         | 90,735,560  |                 | $ |           |   | $               |           |   | $ | 90,735,560  |  
|Equipment sales, service and leasing revenues |  |           |            |                 |   | 544,885    |   |                 |           |   |   | 544,885     |  
|Management fees                               |  |           |            |                 |   | 1,534,517  |   |                 |           |   |   | 1,534,517   |  
|Cost of goods sold                            |  |           | (83,399,034 | )               |   | (1,662,264 | ) |                 |           |   |   | (85,061,298 | )
|Selling, general and administrative expenses  |  |           | (1,746,901  | )               |   | (237,937   | ) |                 | (1,579,433 | ) |   | (3,564,271  | )
|                                              |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|                                              |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|Segment profit (loss)                         |  | $         | 5,589,625   |                 | $ | 179,201    |   | $               | (1,579,433 | ) | $ | 4,189,393   |  
|                                              |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|                                              |  |           |             |                 |   |            |   |                 |            |   |   |             |  
|Segment assets                                |  | $         | 81,453,921  |                 | $ | 2,277,586  |   | $               | 1,924,683  |   | $ | 85,656,190  |  
|                                              |  |           |             |                 |   |            |   |                 |            |   |   |             |  

|                                              |  |                |             |                 |   |            |   |               |           |   |   |             |  
|--------------------------------------------- |  | -------------- | ----------- | --------------- | - | ---------- | - | ------------- | --------- | - | - | ----------- | -
|FOR THE
 THREE MONTHS ENDED
 JUNE 30, 2009    |  | ISA
 RECYCLING |             | WASTE
 SERVICES |   | OTHER      |   | SEGMENTTOTALS |          
|                                              |  |                |             |                 |   |            |   |               |          
|                                              |  |                |             |                 |   |            |   |               |          
|Recycling revenues                            |  | $              | 37,100,257  |                 | $ |           |   | $             |          |   | $ | 37,100,257  |  
|Equipment sales, service and leasing revenues |  |                |            |                 |   | 501,923    |   |               |          |   |   | 501,923     |  
|Management fees                               |  |                |            |                 |   | 1,522,134  |   |               |          |   |   | 1,522,134   |  
|Cost of goods sold                            |  |                | (33,627,397 | )               |   | (1,345,846 | ) |               |          |   |   | (34,973,243 | )
|Selling, general and administrative expenses  |  |                | (1,184,538  | )               |   | (327,034   | ) |               | (928,311  | ) |   | (2,439,883  | )
|                                              |  |                |             |                 |   |            |   |               |           |   |   |             |  
|                                              |  |                |             |                 |   |            |   |               |           |   |   |             |  
|Segment profit (loss)                         |  | $              | 2,288,322   |                 | $ | 351,177    |   | $             | (928,311  | ) | $ | 1,711,188   |  
|                                              |  |                |             |                 |   |            |   |               |           |   |   |             |  
|                                              |  |                |             |                 |   |            |   |               |           |   |   |             |  
|Segment assets                                |  | $              | 52,358,983  |                 | $ | 3,099,151  |   | $             | 3,389,240 |   | $ | 58,847,374  |  
|                                              |  |                |             |                 |   |            |   |               |           |   |   |             |  

15

---



NOTE 6  INVENTORIES

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

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

Stainless
steel inventory of $20,159,259 at June 30, 2010 was comprised only of raw
materials. Ferrous inventory of $2,268,303 at June 30, 2010 was comprised of
$2,078,080 in raw materials and $190,223 in finished goods. Non-ferrous
inventory of $2,421,120 at June 30, 2010 was comprised of $903,680 in raw
materials and $1,517,440 of finished goods. Replacement parts inventory for the
shredder at June 30, 2010 was $882,682. Stainless steel inventory of
$21,549,014 at December 31, 2009 was comprised only of raw materials. Ferrous
inventory of $1,587,475 at December 31, 2009 was comprised of $269,344 in raw
materials and $1,318,131 of finished goods. Non-ferrous inventory of $2,219,137
at December 31, 2009 was comprised of $653,019 in raw materials and $1,566,118
of finished goods. Replacement parts inventory for the shredder at December 31,
2009 was $879,831. Processing costs in inventory total $619,530 for the six
months ended June 30, 2010 and $611,372 for the year ended December 31, 2009.

Inventory also
includes all types of industrial waste handling equipment and machinery held
for resale such as compactors, balers, and containers. Other inventory includes
cardboard and baling wire. Inventories as of June 30, 2010 and December 31,
2009 consist of the following:

|                           |  |                            |            |                    |   |            | 
|-------------------------- |  | -------------------------- | ---------- | ------------------ | - | ---------- | 
|                           |  | June 30, 2010
 (unaudited) |            | December 31,
 2009 |  
|                           |  |                            |            |                    |  
|Stainless steel alloys     |  | $                          | 20,159,259 |                    | $ | 21,549,014 | 
|Ferrous materials          |  |                            | 2,268,303  |                    |   | 1,587,475  | 
|Non-ferrous materials      |  |                            | 2,421,120  |                    |   | 2,219,137  | 
|Shredder replacement parts |  |                            | 882,682    |                    |   | 879,831    | 
|Waste equipment machinery  |  |                            | 54,950     |                    |   | 102,032    | 
|Other                      |  |                            | 29,181     |                    |   | 89,122     | 
|                           |  |                            |            |                    |   |            | 
|                           |  |                            |            |                    |   |            | 
|Total inventories          |  | $                          | 25,815,495 |                    | $ | 26,426,611 | 
|                           |  |                            |            |                    |   |            | 

16

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NOTE
7 - LEASE COMMITMENTS

Operating Leases:

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

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

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

|                               |  |   |          
|------------------------------ |  | - | ---------
|2010                           |  | $ | 649,261  
|2011                           |  |   | 636,000  
|2012                           |  |   | 318,000  
|Thereafter                     |  |   |         
|                               |  |   |          
|                               |  |   |          
|Future
 minimum lease payments |  | $ | 1,603,261
|                               |  |   |          

Total rent expense for the six months ended June 30, 2010 and 2009 was
$444,891 and $567,625, respectively.

Capital Leases:

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

NOTE 8  PER SHARE
DATA

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

Six months ended June 30, 2010 compared to six months ended June 30,
2009:

|                                                           |  |      |           |      |   |          
|---------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                           |  | 2010 |           | 2009
|                                                           |  |      |           |     
|Basic
 earnings per share                                  |  |      |           |      |   |          
|Net income                                                 |  | $    | 4,110,464 |      | $ | 1,576,273
|Weighted average shares outstanding                        |  |      | 6,456,053 |      |   | 5,420,709
|                                                           |  |      |           |      |   |          
|                                                           |  |      |           |      |   |          
|Basic earnings per share                                   |  | $    | 0.64      |      | $ | 0.29     
|                                                           |  |      |           |      |   |          
|                                                           |  |      |           |      |   |          
|Diluted
 earnings per share                                |  |      |           |      |   |          
|Net income                                                 |  | $    | 4,110,464 |      | $ | 1,576,273
|                                                           |  |      |           |      |   |          
|Weighted average shares outstanding                        |  |      | 6,456,053 |      |   | 5,420,709
|Add dilutive effect of assumed exercising of stock options |  |      | 18,850    |      |   |         
|                                                           |  |      |           |      |   |          
|Diluted weighted average shares Outstanding                |  |      | 6,474,903 |      |   | 5,420,709
|                                                           |  |      |           |      |   |          
|                                                           |  |      |           |      |   |          
|Diluted earnings per share                                 |  | $    | 0.63      |      | $ | 0.29     
|                                                           |  |      |           |      |   |          

17

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

|                                                           |  |      |           |      |   |           | 
|---------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|                                                           |  | 2010 |           | 2009 |  
|                                                           |  |      |           |      |  
|Basic
 earnings per share                                  |  |      |           |      |   |           | 
|Net income                                                 |  | $    | 2,347,200 |      | $ | 922,210   | 
|Weighted average shares outstanding                        |  |      | 6,462,513 |      |   | 5,477,844 | 
|                                                           |  |      |           |      |   |           | 
|                                                           |  |      |           |      |   |           | 
|Basic earnings per share                                   |  | $    | 0.36      |      | $ | 0.17      | 
|                                                           |  |      |           |      |   |           | 
|                                                           |  |      |           |      |   |           | 
|Diluted
 earnings per share                                |  |      |           |      |   |           | 
|Net income                                                 |  | $    | 2,347,200 |      | $ | 922,210   | 
|                                                           |  |      |           |      |   |           | 
|Weighted average shares outstanding                        |  |      | 6,489,908 |      |   | 5,477,844 | 
|Add dilutive effect of assumed exercising of stock options |  |      | 27,395    |      |   |          | 
|                                                           |  |      |           |      |   |           | 
|Diluted weighted average shares outstanding                |  |      | 6,489,908 |      |   | 5,477,844 | 
|                                                           |  |      |           |      |   |           | 
|                                                           |  |      |           |      |   |           | 
|Diluted earnings per share                                 |  | $    | 0.36      |      | $ | 0.17      | 
|                                                           |  |      |           |      |   |           | 

NOTE 9  LONG TERM INCENTIVE PLAN

At our June 10, 2010 annual shareholders meeting, shareholders approved
the reservation of 1,200,000 additional shares of our common stock under our
long term incentive plan so that the total number of shares reserved increased
from 1,200,000 to 2,400,000. The plan makes available up to 2,400,000 shares of
our common stock for performance-based awards under the plan. We may grant any
of these types of awards: non-qualified and incentive stock options; stock
appreciation rights; and other stock awards including stock units, restricted
stock units, performance shares, performance units, and restricted stock. The
performance goals that we may use for such awards will be based on any one or
more of the following performance measures: cash flow; earnings; earnings per
share; market value added or economic value added; profits; return on assets;
return on equity; return on investment; revenues; stock price; or total
shareholder return.

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

As of July 1, 2009, we awarded options to purchase 30,000 shares of our
stock each to our three independent directors for a total of 90,000 shares at a
per share exercise price of $4.23. As of January 11, 2010, we awarded 18,000
shares of our stock to management at a per share price of $6.47 and as of
February 11, 2010, we awarded 7,500 shares of our stock to management at a per
share price of $6.73. As of June 8, 2010, we awarded 30,000 shares of our stock
to Brian Donaghy at a per share price of $9.51.

NOTE 10  CERTAIN RELATED PARTY TRANSACTIONS

Effective April 1, 2010, Industrial Services of America, Inc. (the
Company) and K&R, LLC (K&R) entered into an agreement (the
Amendment) which amends a consulting agreement which the parties had entered
into on January 2, 1998 (the Prior Agreement). Under the Prior Agreement, the
Company engaged K&R as a

18

---



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

Effective April 1, 2010, the Company amended and restated the
employment agreement of Brian Donaghy (Mr. Donaghy), the Companys President
and Chief Operating Officer, to (a) extend the term to June 30, 2015, and (b)
provide for (i) an annual bonus based on the Companys achievement of certain
return on net asset (RONA) targets pursuant to incentive plans to be
established by the Company, to be payable in cash or partly in Common Stock at
the election of Mr. Donaghy, (ii) a bonus of up to 15,000 shares of Common
Stock per annum based on the Companys achievement of certain RONA targets, and
(iii) a one-time bonus of up to 225,000 shares of Common Stock based on the
Companys achievement of certain 5 year RONA targets as measured on December
31, 2014.

Effective July 1, 2010, the Company amended and restated the employment
agreement of Steve Jones (Mr. Jones), the Companys Vice President of Operations
-- ISA Alloys, to (a) extend the term to June 30, 2015, and (b) replace the
annual bonus of a cash payment equal to 7.5% of the amount determined for each
fiscal year of the segment profit of ISA Alloys minus selling, general and
administrative expenses applicable to the ISA Alloys segment with (i) an annual
bonus based on the Companys achievement of certain RONA targets pursuant to
incentive plans to be established by the Company, to be payable in cash or
partly in Common Stock, at the election of Mr. Jones. Also, as a result of the
amendment to the asset purchase agreement between the Company and Venture
Metals, LLC (Venture), further discussed below, Mr. Jones is no longer
entitled to: (i) a bonus of up to 45,000 shares of Common Stock per annum based
on the Companys achievement of certain RONA targets, and (ii) a one-time bonus
of up to 225,000 shares of Common Stock based on the Companys achievement of
certain 5 year RONA targets as of December 31, 2014.

Effective July 1, 2010, the Company amended and restated the employment
agreement of Jeffrey Valentine (Mr. Valentine), the Companys General Manager
of ISA Alloys, to (a) extend the term to June 30, 2015, and (b) replace the
annual bonus of a cash payment equal to 7.5% of the amount determined for each
fiscal year of the segment profit of ISA Alloys minus selling, general and
administrative expenses applicable to the ISA Alloys segment with (i) an annual
cash bonus based on the Companys achievement of certain RONA targets pursuant
to an incentive plan to be established by the Company. Also, as a result of the
amendment to the asset purchase agreement between the Company and Venture, Mr.
Valentine is no longer entitled to: (i) a bonus of up to 45,000 shares of
Common Stock per annum based on the Companys achievement of certain RONA
targets, and (ii) a one-time bonus of up to 75,000 shares of Common Stock based
on the Companys achievement of certain 5 year RONA targets as of December 31,
2014.

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

19

---



(a) Venture
shall receive up to ninety thousand (90,000) shares of ISA common stock per
annum commencing in 2011 for calendar year 2010, and thereafter in 2012, 2013,
2014, 2015 and 2016 for calendar years 2011, 2012, 2013, 2014 and 2015,
respectively, resulting in a maximum of four hundred and fifty thousand
(450,000) shares of ISA common stock over the such period (but in no event
greater than 90,000 shares in any one calendar year) based on satisfaction of
the return on net assets (RONA) criteria set forth in Exhibit 10.3 attached
hereto and incorporated herein by reference. Such consideration shall be
payable in the form of ISA common stock in one delivery of a stock certificate,
as soon as practicable following December 31, 2015 subject to applicable
withholding and other taxes and other required deductions;

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

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

ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

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

General

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

In 2009, we expanded into the stainless steel recycling market for
super alloys and high temperature metals by purchasing inventories and related
equipment from Venture Metals, LLC and hiring two of its key executives. We buy
and sell stainless steel and high-temperature alloys to steel mills like North
American Stainless, our primary customer. The Venture Metals asset purchase is
the latest in a series of actions we have undertaken to position ourselves for
strategic growth. The multi-million-dollar shredder project, completed in June
2009, expands our processing capacity, offers specialty grades of scrap and
improves end-product quality. The shredder began operations on July 1, 2009. In
the last quarter of 2009, we improved the Grade Lane location

20

---



and added a new entrance for our ISA Alloys operations, which we moved
from the Camp Ground Road location to 7100 Grade Lane in November 2009. In
2010, we hired an Alloys Operations Manager to aid in the expansion of
specialty alloys within our recycling segment, specifically in the area of
aerospace alloys.

We continue to pursue a growth strategy in the waste management
services arena by adding new locations of existing customers as well as
marketing our services to potential customers. Currently, we service approximately
720 customer locations throughout the United States and we utilize an active
database of over 6,500 vendors to provide timely, thorough and cost-effective
service to our customers.

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

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

Liquidity and Capital Resources

As of June 30, 2010 we held cash and cash equivalents of $1,182,999.

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

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

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

21

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

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

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

With respect to the revolving credit facility, the interest rate is one
month LIBOR plus two hundred fifty basis points (2.50%) per annum, adjusted
monthly on the first day of each month. The revolving credit facility expires on
July 31, 2013. Under the revolving credit facility, we are permitted to borrow
the lesser of $40,000,000 or the borrowing base, consisting of the sum of 80%
of eligible accounts plus 60% of eligible inventory up to $15,000,000. Eligible
accounts are generally those receivables that are less than 90 days from the
invoice date. As security for the revolving credit facility, we provided Fifth
Third Bank a first priority security interest in the accounts receivable from
most of our customers and in our inventory. We also cross collateralized the
revolving line of credit with the $8,800,000 term loan.

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

In addition, we provided a first mortgage on the property at the
following locations: 3409 Campground Road,

22

---



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 the Bank.

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

We have long term debt comprised of the following:

|                              |  |                            |            |                    |   |            | 
|----------------------------- |  | -------------------------- | ---------- | ------------------ | - | ---------- | 
|                              |  | June 30, 2010
 (unaudited) |            | December 31,
 2009 |  
|                              |  |                            |            |                    |  
|                              |  |                            |            |                    |  
|Non-revolving line of
 credit |  | $                          |           |                    | $ | 11,517,440 | 
|Revolving line of credit      |  |                            | 16,443,272 |                    |   | 8,166,917  | 
|Notes payable                 |  |                            | 13,826,134 |                    |   | 9,510,013  | 
|                              |  |                            |            |                    |   |            | 
|Total debt                    |  | $                          | 30,269,406 |                    | $ | 29,194,370 | 
|                              |  |                            |            |                    |   |            | 

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

We expect that existing cash flow from operations and available credit
under our restructured credit facilities and other alternative financing will
be sufficient to meet our cash needs for the next year and beyond. As of June
30, 2010, we have $1,141,029 committed for the purchase and installation of
sensor sorter units to be funded by our line of credit.

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:

|                                              |  |                           |   |      |       |   | 
|--------------------------------------------- |  | ------------------------- | - | ---- | ----- | - | 
|                                              |  | Six months ended June 30, |  
|                                              |  |                           |  
|Statements
 of Operations Data:               |  | 2010                      |   | 2009 |      
|                                              |  |                           |   |      |      
|Total Revenue                                 |  | 100.0                     | % |      | 100.0 | % | 
|Cost of goods sold                            |  | 91.6                      | % |      | 87.2  | % | 
|Selling, general and
 administrative expenses |  | 4.1                       | % |      | 8.1   | % | 
|Income before other
 expenses                 |  | 4.4                       | % |      | 4.7   | % | 

Six months ended June 30, 2010 compared to six months ended June 30,
2009

Total revenue increased $103,609,691 or 163.5%
    to $166,983,928 in 2010 compared to $63,374,237 in 2009. Recycling revenue
    increased $104,652,902 or 180.0% to $162,804,794 in 2010 compared to $58,151,892
    in 2009. This is primarily due to the improvements and expansions of our
    Grade Lane facilities made in late 2009 and the increased production from
    the shredder, which began production in July 2009, along with a 39.2% increase
    in volume of stainless steel materials shipments, a 175.3% increase in volume
    of ferrous materials shipments, a 24.1% increase in volume of other nonferrous
    materials shipments, partially offset by an average increase in cost of commodities
    shipped of 78.8%. Waste Services revenue decreased $1,043,211 or 20.0% to
    $4,179,134 in 2010 compared to $5,222,345 in 2009 primarily due to the net
    loss of approximately

23

---



1,300 customer locations, as well as an $88,623 decrease in rental revenue
and VISA rebates, partially offset by a $123,870 increase in equipment and
parts sales and service and repairs revenue.

Total cost of goods sold increased $97,708,445 or 176.9% to
$152,946,806 in 2010 compared to $55,238,361 in 2009. Recycling cost of goods
sold increased $98,279,681 or 191.1% to $149,711,008 in 2009 compared to
$51,431,327 in 2009. This is primarily due to the increase in volume of
shipments noted above, and partially due to the increase in commodity prices
noted above. Waste Services cost of goods sold decreased $571,236 or 15.0% to
$3,235,798 in 2010 compared to $3,807,034 in 2009 primarily due to the decrease
in customer locations and a $29,488 decrease in rental, hauling, and wire
costs, partially offset by an increase of $91,425 in cost of equipment and
parts sales, service and repairs, and commissions.

Selling, general and administrative expenses increased
    $1,615,749 or 31.4% to $6,765,293 in 2010 compared to $5,149,544 in 2009.
    As a percentage of revenue, selling, general and administrative expenses
    were 4.1% in 2010 compared to 8.1% in 2009. The primary drivers of the increase
    in total expense are an increase in stock bonus and bonus expense of $896,003,
    an increase in labor/management-related expenses  (labor, consulting, management
    fees, employee training, and insurance benefits)  of $292,781, an increase
    in legal fees, insurance expense, and compliance and reporting expenses
    of $234,349, and an increase in operating supplies and computer software
    and equipment of  $119,633, partially offset by a decrease in bad debt expense
    of $57,715.

Other expense increased $61,845 to other expense of $421,055 in 2010 compared
to other expense of $359,210 in 2009. This was primarily due to an increase in
interest expense of $316,945, partially offset by an increase in the gain on
sale of assets of $223,176.

Income tax provision decreased $1,689,461 to $2,740,310 in 2010
compared to $1,050,849 in 2009. The effective tax rate in 2010 and 2009 was
40.0% based on federal and state statutory rates.

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

Total revenue increased $53,690,648 or 137.2% to
    $92,814,962 in 2010 compared to $39,124,314 in 2009. Recycling revenue increased
    $53,635,303 or 144.6% to $90,735,560 in 2010 compared to $37,100,257 in 2009.
    This is primarily due to the improvements and expansions of our Grade Lane
    facilities made in late 2009, the increased production from the
shredder, which began production in July 2009, and an increase in stainless
steel shipments of 13.1%, an increase in ferrous shipments of 164.0% and an
increase in other nonferrous shipments of 8.7% and an average increase in cost
of commodities shipped of 91.6%. Waste Services revenue increased $55,345 or
2.7% to $2,079,402 in 2010 compared to $2,024,057 in 2009 primarily due to a
$72,755 increase in equipment sales and service and repairs revenue, partially
offset by a $40,307 decrease in rental revenue.

Total cost of goods sold increased $50,088,055
    or 143.2% to $85,061,298 in 2010 compared to $34,973,243 in 2009. Recycling
    cost of goods sold increased $49,771,637 or 148.0% to $83,399,034 in 2010
    compared to $33,627,397 in 2009. This is primarily due to the increase in
    volume of shipments noted above, and partially due to  the increase in
    commodity prices noted above. Waste Services cost of goods sold increased
    $316,418 or 23.5% to $1,662,264 in 2010 compared to $1,345,846 in 2009 primarily
    due to a decrease of $357,204 in bankruptcy-related write offs in 2010 compared
    to 2009 and an increase of $46,022 in the cost of equipment sales and service
    and repairs, partially offset by the decrease in customer locations.

Selling, general and administrative expenses increased $1,124,388 or
46.1% to $3,564,271 in 2010 compared to $2,439,883 in 2009. As a percentage of
revenue, selling, general and administrative expenses were 3.8% in 2010
compared to 6.2% in 2009. The primary drivers of the increase in total expense
are increases in stock bonus and bonus expense of $621,303, and
labor/management-related expenses (labor, consulting, management

24

---



fees, employee training and insurance benefits) of $303,598.

Other expense increased $103,223 to other expense of $277,394 in 2010
compared to other expense of $174,171 in 2009 primarily due to the increase in
interest expense due to new debt.

Income tax provision increased $949,992 to $1,564,799 in 2010 compared
to $614,807 in 2009. The effective tax rate in 2010 and 2009 was 40.0% based on
federal and state statutory rates.

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

Cash and cash equivalents increased $469,937 to $1,182,999 as of June
30, 2010 compared to $713,062 as of December 31, 2009.

Net cash from operating activities of $5,723,699
    for the six months ended June 30, 2010 is primarily due to an increase in
    accounts receivable, partially offset by the increase in accounts payable
    and the decrease in inventory. The increases in accounts receivable and accounts
    payable are due to a combination of increased shipments, purchases, and commodity
prices.

We used net cash from investing activities of $1,308,000
    for the six months ended June 30, 2010. We used $254,047 for road and building
improvements. We purchased recycling and rental fleet equipment, shredder
system equipment, and shearer parts of $751,496. The rental fleet equipment
consists of solid waste handling and recycling equipment such as compactors,
containers and balers. It is our intention to continue to pursue this market.
Additionally, we spent $115,634 on accounting software and computer equipment.
We also purchased one truck and upgraded another for $26,657. We received
$234,500 from sales of our rental fleet compactors, balers, and containers and
$89,513 from the sale of one of our trucks. We paid deposits of $504,244 on
machinery and equipment.

We used net cash from financing activities of $3,945,762 for the six
months ended June 30, 2010 due to the payments on debt and capital lease
obligations of $3,924,946 and $20,798, respectively.

Accounts receivable trade increased $19,275,312 to $27,787,638 as of
June 30, 2010 compared to $8,512,326 as of December 31, 2009. This change is
due to a combination of increased shipments and an increase in commodity
prices.

Inventories consist principally of stainless steel, ferrous and
nonferrous scrap materials and waste equipment machinery held for resale. We
value inventory at the lower of cost or market. Inventory decreased $611,116 or
2.3% to $25,815,495 as of June 30, 2010 compared to $26,426,611 as of December
31, 2009. The primary reason for the decrease was that the average cost of
commodities shipped out of inventory year-to-date was higher than the average
cost of commodities purchased year-to-date.

25

---



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

|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|--------------------------------------------------------------------------- |  | ---- | ---------- | ----- | - | --------- |  | -------- | --------- | ----- | - | --------- |  | - | ---------- | 
|Description                                                                 |  | 1-30 |            | 31-60 |   | 61-90     |  | Over
 90 |           | Total |  
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|Stainless steel alloys                                                      |  | $    | 16,114,860 |       | $ | 2,555,900 |  | $        | 834,754   |       | $ | 653,745   |  | $ | 20,159,259 | 
|Ferrous materials                                                           |  |      | 1,765,372  |       |   | 284,056   |  |          | 123,064   |       |   | 95,811    |  |   | 2,268,303  | 
|Non-ferrous materials                                                       |  |      | 1,886,893  |       |   | 291,748   |  |          | 80,457    |       |   | 162,022   |  |   | 2,421,120  | 
|Shredder replacement parts                                                  |  |      | 882,682    |       |   |          |  |          |          |       |   |          |  |   | 882,682    | 
|Waste equipment machinery                                                   |  |      |           |       |   |          |  |          |          |       |   | 54,950    |  |   | 54,950     | 
|Other                                                                       |  |      | 29,181     |       |   |          |  |          |          |       |   |          |  |   | 29,181     | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|                                                                            |  | $    | 20,678,988 |       | $ | 3,131,704 |  | $        | 1,038,275 |       | $ | 966,528   |  | $ | 25,815,495 | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|Inventory
 aging for the period ended December 31, 2009 (Days Outstanding):
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|Description                                                                 |  | 1-30 |            | 31-60 |   | 61-90     |  | Over
 90 |           | Total |  
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|Stainless steel alloys                                                      |  | $    | 11,738,653 |       | $ | 2,564,183 |  | $        | 5,170,224 |       | $ | 2,075,954 |  | $ | 21,549,014 | 
|Ferrous materials                                                           |  |      | 1,513,849  |       |   | 47,151    |  |          | 19,834    |       |   | 6,641     |  |   | 1,587,475  | 
|Non-ferrous materials                                                       |  |      | 1,801,125  |       |   | 243,708   |  |          | 47,545    |       |   | 126,759   |  |   | 2,219,137  | 
|Shredder replacement parts                                                  |  |      | 879,831    |       |   |          |  |          |          |       |   |          |  |   | 879,831    | 
|Waste equipment machinery                                                   |  |      | 9,670      |       |   |          |  |          |          |       |   | 92,362    |  |   | 102,032    | 
|Other                                                                       |  |      | 89,122     |       |   |          |  |          |          |       |   |          |  |   | 89,122     | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 
|                                                                            |  | $    | 16,032,250 |       | $ | 2,855,042 |  | $        | 5,237,603 |       | $ | 2,301,716 |  | $ | 26,426,611 | 
|                                                                            |  |      |            |       |   |           |  |          |           |       |   |           |  |   |            | 

Accounts payable trade increased $18,064,308 or 385.6% to $22,748,694
as of June 30, 2010 compared to $4,684,386 as of December 31, 2009, primarily
due to increased purchases and an increase in commodity prices.

Working capital increased $16,713,539 to $28,032,224 as of June 30,
2010 compared to $11,318,685 as of December 31, 2009. The increase was
primarily driven by the $19.3 million increase in accounts receivable, the debt
restructuring, which reclassified $16.1 million in current maturities to
long-term debt, and the $0.8 million decrease in the bonus accrual. These
increases were partially offset by the $18.1 million increase in accounts
payable, the $0.8 million increase in income taxes payable, and the $0.6
million decrease in inventory.

Contractual Obligations

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

|                                 |  |       |            |                   |   |            |  |            |            |                    |   |           |  |   |   | 
|-------------------------------- |  | ----- | ---------- | ----------------- | - | ---------- |  | ---------- | ---------- | ------------------ | - | --------- |  | - | - | 
|Obligation Description           |  | Total |            | Less
 than 1 year |   | 1-3
 years |  | 3-5
 years |            | More
 than 5 years |  
|                                 |  |       |            |                   |   |            |  |            |            |                    |   |           |  |   |   | 
|                                 |  |       |            |                   |   |            |  |            |            |                    |   |           |  |   |   | 
|Long-Term Debt Obligations       |  | $     | 30,269,406 |                   | $ | 1,478,788  |  | $          | 21,019,319 |                    | $ | 7,771,299 |  | $ |  | 
|                                 |  |       |            |                   |   |            |  |            |            |                    |   |           |  |   |   | 
|Operating Lease
 Obligations (1) |  |       | 1,603,261  |                   |   | 649,261    |  |            | 954,000    |                    |   |          |  |   |  | 
|                                 |  |       |            |                   |   |            |  |            |            |                    |   |           |  |   |   | 
|                                 |  |       |            |                   |   |            |  |            |            |                    |   |           |  |   |   | 
|Total                            |  | $     | 31,872,667 |                   | $ | 2,128,049  |  | $          | 21,973,319 |                    | $ | 7,771,299 |  | $ |  | 
|                                 |  |       |            |                   |   |            |  |            |            |                    |   |           |  |   |   | 

26

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(1)
We lease the Louisville, Kentucky facility from K&R, LLC, the sole member
of which is Harry Kletter, our chief executive officer, under an operating
lease expiring December 2012. We have monthly rental payments of $48,500
through December 2012. In the event of a change of control, the monthly
payments become $62,500. We have subleased the Lexington property to an
unaffiliated third party for a term commencing March 1, 2007 and ending
December 31, 2012 for $4,500 per month. We currently lease this property from
an unrelated party for $4,500 per month; the lease terminates December 31,
2012. If for any reason the sub-lessee defaults, we remain liable for the
remainder of the lease payments through December 31, 2012.

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

Long-term debt, including the current portions thereof, increased
$1,075,036 to $30,269,406 as of June 30, 2010 compared to $29,194,370 as of
December 31, 2009.

Impact of Recently Issued Accounting
Standards

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

In May 2009, the FASB issued authoritative guidance on subsequent
events, but this guidance was amended by new authoritative guidance issued in
February, 2010. The original guidance required the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
datethat is, whether that date represents the date the financial statements
were issued or were available to be issued. The new guidance removes the
requirement for an SEC filer to disclose a date in both issued and revised
financial statements. This amendment removes potential conflicts with SEC
requirements. The original guidance became effective for interim and annual
periods ending after June 15, 2009, the quarter ending June 30, 2009 for us,
and the amendment became effective upon issuance of the final update in
February, 2010.

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

The FASB issued authoritative guidance on accounting for variable
interest entities (VIE) in June 2009 with an update issued in December 2009.
This guidance is effective for reporting periods beginning after November 15,
2009, the year ending December 2010 for us. This guidance changes the process
for how an enterprise determines which party consolidates a VIE, to a primarily
qualitative analysis. The party that consolidates the VIE (the primary
beneficiary) is defined as the party with (1) the power to direct activities of
the VIE that most significantly affect the VIEs economic performance and (2)
the obligation to absorb losses of the VIE or the right to receive benefits
from the VIE. Upon adoption, reporting enterprises must reconsider their
conclusions on whether an entity should be consolidated and should a change
result, the effect on net assets will be recorded

27

---



as a cumulative effect adjustment to retained earnings. The adoption of
this new guidance did not impact our financial position or results of
operations.

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

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

We are exposed to interest rate risk on our floating rate borrowings.
On April 13, 2010, we entered into a Loan Agreement with BB&T and BB&T
Bankcard Corporation pursuant to which the Bank agreed to provide the Company a
revolving credit facility in the amount of $20,000,000 for the purpose of
replacing the Companys existing $12,000,000 promissory note to the Bank and
the Companys existing $10,000,000 senior revolving credit facility with the
Bank. In addition, Company, the Bank and certain other parties entered into a
Modification and Cross-Collateralization Agreement pursuant to which the
Company and the Bank modified the Companys existing $5,000,000 term loan to the
Bank. Proceeds of the new revolving credit facility in the amount of $17.7
million were used to repay the outstanding principal balance of the $12,000,000
promissory note and the amount outstanding under the prior credit facility and
to pay closing costs. See Note 4  Long Term Debt in the Notes to Condensed
Consolidated Financial Statements for additional information on the new loan
agreement and modification of the $5,000,000 term loan. Based on our average
anticipated borrowings under our credit agreements in fiscal 2010, a
hypothetical increase or decrease in the LIBOR rate by 1% would increase or
decrease interest expense on our variable borrowings by 1% of the outstanding
balance, with a corresponding change in cash flows.

We entered into three interest rate swap agreements swapping variable
rates for fixed rates. The first swap agreement covers $5.5 million in debt and
commenced April 7, 2009 and matures on April 7, 2014. The second

28

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swap agreement covers approximately $2.5 million in debt and commenced
October 15, 2008 and matures on May 7, 2013. The third swap agreement covers
approximately $535,000 in debt and commenced October 22, 2008 and matures on
October 22, 2013. The three swap agreements fix our interest rate at
approximately 5.8%. At June 30, 2010, we recorded the estimated fair value of
the liability related to the three swaps as approximately $724,000. Accounting
rules require us to recognize all derivatives on the balance sheet at estimated
fair value. We have designated these agreements as a cash flow hedge.

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

ITEM 4: 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 June 30, 2010, ISAs disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that ISA files under the Exchange Act with the
Securities and Exchange Commission (1) is recorded, processed, summarized and
reported within the time periods specific in the SECs rules and forms, and (2)
is accumulated and communicated to ISAs management, including our principal
executive and principal financial officers, as appropriate to allow timely
decisions regarding the required disclosure.

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

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

PART II  OTHER
INFORMATION

Item 1. Legal Proceedings

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

We filed a Motion for Summary Judgment in October, 2009, which the
court denied in February, 2010. Discovery by the parties is still ongoing.
There are currently no dates set for either a mediation or a jury trial. We are
vigorously defending all of Lennoxs claims as we believe the claims to be
without merit.

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Item 1A. Risk Factors

We have had no material changes from the risk factors reported in our
Form 10-K for the year ended December 31, 2009, as filed with the Securities
and Exchange Commission on March 22, 2010.

Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds

On November 15, 2005, our Board of Directors authorized a program to
repurchase up to 300,000 shares of our common stock at current market prices.
No shares were repurchased in 2010 or 2009. In 2008, we repurchased 83,411
shares. In 2007, we repurchased 60,000 shares. In 2006, we repurchased 8,264
shares, and in 2005 we repurchased 15,000 shares.

Issuer Purchases of Equity Securities

|        |  |                                     |  |                                |  |                                                                                      |  |                                                                                    | 
|------- |  | ----------------------------------- |  | ------------------------------ |  | ------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------- | 
|Period  |  | Total
 Number
 of Shares
 Purchased |  | Average
 Price
 Paid per Share |  | Total
 Number of Shares
 Purchased as part of
 Publicly Announced Plans
 or Programs |  | Maximum
 Number of
 Shares that may yet
 be Purchased Under
 the Plans or Programs
|        |  |                                     |  |                                |  |                                                                                      |  |                                                                                   
|Mar-08  |  | 29,630                              |  | $ 5.5215                       |  | 112,893                                                                              |  | 187,107                                                                           
|        |  |                                     |  |                                |  |                                                                                      |  |                                                                                    | 
|Jun-08  |  | 14,781                              |  | $ 7.6113                       |  | 127,674                                                                              |  | 172,326                                                                           
|        |  |                                     |  |                                |  |                                                                                      |  |                                                                                    | 
|Sept-08 |  | 39,000                              |  | $ 6.5268                       |  | 166,674                                                                              |  | 133,326                                                                           

Item 3. Defaults upon Senior Securities

None.

Item 4. Removed and Reserved

Item 5. Other Information

None.

Item 6. Exhibits

See exhibit index.

30

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SIGNATURES

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

|      |                 |                                            
|----- | --------------- | -------------------------------------------
|      |                 | INDUSTRIAL SERVICES OF AMERICA, INC.       
|      |                 |                                            
|Date: | August 9,
 2010 | /s/ Harry Kletter                          
|      |                 |                                            
|      |                 | Chairman and Chief Executive Officer       
|      |                 | (Principal Executive and Financial Officer)
|      |                 |                                            
|Date: | August 9,
 2010 | /s/ Alan Schroering                        
|      |                 |                                            
|      |                 | Chief Financial Officer                    

31

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INDEX TO EXHIBITS

|                |  |                                                                                                                                                                                                                                                                                                                          
|--------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Description of Exhibits                                                                                                                                                                                                                                                                                                  
|                |  |                                                                                                                                                                                                                                                                                                                          
|                |  |                                                                                                                                                                                                                                                                                                                          
|10.1            |  | Amended and Restated Executive Employment Agreement, dated July 1,
 2010, by and between ISA and Steve Jones.                                                                                                                                                                                                            
|                |  |                                                                                                                                                                                                                                                                                                                          
|10.2            |  | Amended and Restated Executive Employment Agreement, dated July 1,
 2010, by and between ISA and Jeff Valentine.                                                                                                                                                                                                         
|                |  |                                                                                                                                                                                                                                                                                                                          
|10.3            |  | Amendment to the Asset Purchase Agreement of Venture Metals, LLC,
 dated July 1, 2010, by and between ISA and Venture Metals, LLC, of Florida.                                                                                                                                                                           
|                |  |                                                                                                                                                                                                                                                                                                                          
|10.4            |  | Credit Agreement, dated July 30, 2010, by and among Industrial
 Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank.                                                                                                                                                                                       
|                |  |                                                                                                                                                                                                                                                                                                                          
|10.5            |  | Schedule 5.22 to Credit Agreement.                                                                                                                                                                                                                                                                                       
|                |  |                                                                                                                                                                                                                                                                                                                          
|10.6            |  | Revolving Loan Note, dated July 30, 2010, in the amount of
 $40,000,000 payable to Fifth Third Bank.                                                                                                                                                                                                                     
|                |  |                                                                                                                                                                                                                                                                                                                          
|10.7            |  | Term Loan Note, dated July 30, 2010, in the amount of $8,800,000
 payable to Fifth Third Bank.                                                                                                                                                                                                                           
|                |  |                                                                                                                                                                                                                                                                                                                          
|10.8            |  | Security Agreement, dated as of July 30, 2010, by and among Fifth
 Third Bank, Computerized Waste Systems, LLC, ISA Indiana Real Estate, LLC,
 ISA Logistics LLC, ISA Real Estate LLC, ISA Recycling, LLC, Waste Equipment
 Sales & Service Co., LLC, 7021 Grade Lane LLC, 7124 Grade Lane LLC, and
 7200 Grade Lane LLC.
|                |  |                                                                                                                                                                                                                                                                                                                          
|10.9            |  | Guaranty, dated as of July 30, 2010, by Computerized Waste Systems,
 LLC, ISA Indiana Real Estate, LLC, ISA Logistics LLC, ISA Real Estate LLC,
 ISA Recycling, LLC, Waste Equipment Sales & Service Co., LLC, 7021 Grade
 Lane LLC, 7124 Grade Lane LLC, and 7200 Grade Lane LLC.                                       
|                |  |                                                                                                                                                                                                                                                                                                                          
|10.10           |  | Pledge Agreement, dated as of July 30, 2010, between Industrial
 Services of America, Inc. and Fifth Third Bank.                                                                                                                                                                                                         
|                |  |                                                                                                                                                                                                                                                                                                                          
|31.1            |  | Rule 13a-14(a) Certification of Harry Kletter for the Form 10-Q for
 the quarter ended June 30, 2010.                                                                                                                                                                                                                    
|                |  |                                                                                                                                                                                                                                                                                                                          
|31.2            |  | Rule 13a-14(a) Certification of Alan Schroering for the Form 10-Q for
 the quarter ended June 30, 2010.                                                                                                                                                                                                                  
|                |  |                                                                                                                                                                                                                                                                                                                          
|32.1            |  | Section 1350 Certification of Harry Kletter and Alan Schroering for
 the Form 10-Q for the quarter ended June 30, 2010.                                                                                                                                                                                                  

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