UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

FORM 10-Q/A(Amendment No. 1)

|                                                       |                                                                                                                                               
|------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------
|x                                                      | QUARTERLY REPORT
 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                                                      
|                                                       | For the quarterly period ended June 30, 2011                                                                                                  
|                                                       | OR                                                                                                                                            
|o                                                      | TRANSITION REPORT
 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For
 the Transition Period From _________ to ________
|                                                       |                                                                                                                                               
|                                                       | Commission File Number 0-20979                                                                                                                
|                                                       |                                                                                                                                               
|INDUSTRIAL
 SERVICES OF AMERICA, INC.                 
|                                                      
|(Exact Name of Registrant as specified in its Charter)

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

7100 Grade Lane, PO Box 32428 
Louisville, Kentucky 40232
(Address of principal executive offices)

(502) 368-1661
(Registrants Telephone Number, Including Area Code)

Indicate by check mark whether
the registrant (1) has filed all Reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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 x
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, 2011: Common Stock, $0.0033 par value: 6,940,517.

Explanatory Note

This Amendment No. 1 to
Form 10-Q (the “Amendment”) amends Industrial Services of America, Inc. (the “Company”, “our”,
“we”, or “us”) Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (the “Original 10-Q”)
which was filed with the Securities and Exchange Commission (the “Commission”) on August 9, 2011 (the “Original
Filing”). The Company is filing this Amendment to amend the Original 10-Q pursuant to the Commissions comment letter
dated August 22, 2011. We also corrected immaterial rounding and percentage calculation errors found in the MD&A section and
included expanded disclosures in the MD&A section. In addition, in accordance with the rules and
regulations of the SEC, this Amendment includes updated certifications from our Chief Executive Officer and Chief Financial Officer
as Exhibits 31.1 and 31.2.

Except as described above, no other changes
have been made to the Original 10-Q. The Original 10-Q continues to speak as of the date of the Original Filing, and we have not
updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original
Filing. Accordingly, this Amendment should be read in conjunction with the Companys filings made with the Commission subsequent
to the date of the Original Filing.

---



INDUSTRIAL SERVICES OF AMERICA, INC. AND
SUBSIDIARIES

|        |                                                                                                             |         
|------- | ----------------------------------------------------------------------------------------------------------- | --------
|INDEX  
|        |                                                                                                             |         
|        |                                                                                                             | Page No.
|Part I  | Financial
 Information                                                                                      |         
|        |                                                                                                             |         
|        | Condensed
 Consolidated Balance Sheets June 30, 2011 (Unaudited) and December 31, 2010                      | 3       
|        |                                                                                                             |         
|        | Condensed
 Consolidated Statements of Operations - Three Months Ended June 30, 2011 and
 2010 (Unaudited)   | 5       
|        |                                                                                                             |         
|        | Condensed
 Consolidated Statements of Operations - Six Months Ended June 30, 2011 and
 2010 (Unaudited)     | 6       
|        |                                                                                                             |         
|        | Condensed
 Consolidated Statements of Shareholders Equity June 30, 2011 (Unaudited) and
 December 31, 2010 | 7       
|        |                                                                                                             |         
|        | Condensed
 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2011 and
 2010 (Unaudited)     | 8       
|        |                                                                                                             |         
|        | Notes to
 Condensed Consolidated Financial Statements (Unaudited)                                           | 9       
|        |                                                                                                             |         
|        | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                      | 22      
|        |                                                                                                             |         
|Part II | Other
 Information                                                                                          | 31      

---



PART I  FINANCIAL INFORMATION

ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                       |  |                            |        |                    |   |         | 
|------------------------------------------------------------------------------------------------------ |  | -------------------------- | ------ | ------------------ | - | ------- | 
|ASSETS                                                                                                
|                                                                                                       |  |                            |        |                    |   |         | 
|                                                                                                      
|                                                                                                       |  |                            |        |                    |   |         | 
|                                                                                                       |  | June 30, 2011
 (Unaudited) |        | December 31,
 2010 |  
|                                                                                                       |  |                            |        |                    |  
|                                                                                                       |  | (in thousands)             |       
|Current assets                                                                                         |  |                            |       
|Cash and cash equivalents                                                                              |  | $                          | 2,084  |                    | $ | 2,468   | 
|Accounts receivable  trade (after allowance for doubtful accounts of
 $100 thousand in 2011 and 2010) |  |                            | 20,168 |                    |   | 27,449  | 
|Net investment in sales-type leases                                                                    |  |                            | 37     |                    |   | 33      | 
|Inventories                                                                                            |  |                            | 34,166 |                    |   | 34,311  | 
|Deferred income taxes                                                                                  |  |                            | 942    |                    |   | 942     | 
|Prepaid expenses                                                                                       |  |                            | 428    |                    |   | 392     | 
|Employee loans                                                                                         |  |                            | 9      |                    |   | 6       | 
|                                                                                                       |  |                            |        |                    |   |         | 
|Total current assets                                                                                   |  |                            | 57,834 |                    |   | 65,601  | 
|                                                                                                       |  |                            |        |                    |   |         | 
|Net property and equipment                                                                             |  |                            | 26,588 |                    |   | 27,554  | 
|                                                                                                       |  |                            |        |                    |   |         | 
|Other assets                                                                                           |  |                            |        |                    |   |         | 
|Net investment in sales-type leases                                                                    |  |                            | 21     |                    |   | 40      | 
|Notes receivable  related party                                                                       |  |                            | 67     |                    |   | 88      | 
|Goodwill                                                                                               |  |                            | 6,840  |                    |   | 6,840   | 
|Intangible assets, net                                                                                 |  |                            | 5,400  |                    |   | 5,775   | 
|Deposits                                                                                               |  |                            | 2,184  |                    |   | 263     | 
|                                                                                                       |  |                            |        |                    |   |         | 
|Total other assets                                                                                     |  |                            | 14,512 |                    |   | 13,006  | 
|                                                                                                       |  |                            |        |                    |   |         | 
|Total assets                                                                                           |  | $                          | 98,934 |                    | $ | 106,161 | 
|                                                                                                       |  |                            |        |                    |   |         | 

|                                                             
|-------------------------------------------------------------
|                                                             
|                                                             
|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, 2011
 (Unaudited) |        | December 31,
 2010 |  
|                                                                                                                                                                                     |  |                            |        |                    |  
|                                                                                                                                                                                     |  | (in thousands)             |       
|Current liabilities                                                                                                                                                                  |  |                            |       
|Current maturities of long-term debt (Note 4)                                                                                                                                        |  | $                          | 1,883  |                    | $ | 1,824   |  
|Accounts payable                                                                                                                                                                     |  |                            | 5,021  |                    |   | 11,406  |  
|Income tax payable                                                                                                                                                                   |  |                            | 3,365  |                    |   | 2,909   |  
|Interest rate swap agreement liability (Note 4)                                                                                                                                      |  |                            | 579    |                    |   | 650     |  
|Accrued bonuses                                                                                                                                                                      |  |                            | 229    |                    |   | 1,175   |  
|Other current liabilities                                                                                                                                                            |  |                            | 391    |                    |   | 319     |  
|                                                                                                                                                                                     |  |                            |        |                    |   |         |  
|Total current liabilities                                                                                                                                                            |  |                            | 11,468 |                    |   | 18,283  |  
|                                                                                                                                                                                     |  |                            |        |                    |   |         |  
|Long-term liabilities                                                                                                                                                                |  |                            |        |                    |   |         |  
|Long-term debt (Note 4)                                                                                                                                                              |  |                            | 40,165 |                    |   | 43,623  |  
|Deferred income taxes                                                                                                                                                                |  |                            | 3,402  |                    |   | 3,373   |  
|                                                                                                                                                                                     |  |                            |        |                    |   |         |  
|Total long-term liabilities                                                                                                                                                          |  |                            | 43,567 |                    |   | 46,996  |  
|                                                                                                                                                                                     |  |                            |        |                    |   |         |  
|Shareholders equity                                                                                                                                                                 |  |                            |        |                    |   |         |  
|Common stock, $0.0033 par value: 10,000,000 shares authorized,
 7,192,500 shares issued in 2011 and 2010, 6,940,517 and 6,789,917 shares
 outstanding in 2011 and 2010, respectively |  |                            | 24     |                    |   | 24      |  
|Additional paid-in capital                                                                                                                                                           |  |                            | 18,282 |                    |   | 17,852  |  
|Retained earnings                                                                                                                                                                    |  |                            | 26,418 |                    |   | 23,938  |  
|Accumulated other comprehensive loss                                                                                                                                                 |  |                            | (311   | )                  |   | (353    | )
|Treasury stock at cost, 251,983 and 402,583 shares in 2011 and 2010,
 respectively                                                                                                   |  |                            | (514   | )                  |   | (579    | )
|                                                                                                                                                                                     |  |                            |        |                    |   |         |  
|Total shareholders equity                                                                                                                                                           |  |                            | 43,899 |                    |   | 40,882  |  
|                                                                                                                                                                                     |  |                            |        |                    |   |         |  
|Total liabilities and shareholders equity                                                                                                                                           |  | $                          | 98,934 |                    | $ | 106,161 |  
|                                                                                                                                                                                     |  |                            |        |                    |   |         |  

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

4

---



INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2011 AND 2010
(UNAUDITED)

|                                              |  |                                              |        |      |   |        |  
|--------------------------------------------- |  | -------------------------------------------- | ------ | ---- | - | ------ | -
|                                             
|                                              |  |                                              |        |      |   |        |  
|                                              |  | 2011                                         |        | 2010 |  
|                                              |  |                                              |        |      |  
|                                              |  | (in thousands, except per share information) |       
|Revenue from services                         |  | $                                            | 1,290  |      | $ | 1,535  |  
|Revenue from product sales                    |  |                                              | 63,673 |      |   | 91,280 |  
|                                              |  |                                              |        |      |   |        |  
|Total
 Revenue                                |  |                                              | 64,963 |      |   | 92,815 |  
|                                              |  |                                              |        |      |   |        |  
|Cost of goods sold for
 services              |  |                                              | 1,006  |      |   | 1,436  |  
|Cost of goods sold for
 product sales         |  |                                              | 59,775 |      |   | 83,625 |  
|                                              |  |                                              |        |      |   |        |  
|Total
 Cost of goods sold                     |  |                                              | 60,781 |      |   | 85,061 |  
|                                              |  |                                              |        |      |   |        |  
|Selling, general and
 administrative expenses |  |                                              | 2,572  |      |   | 3,564  |  
|                                              |  |                                              |        |      |   |        |  
|                                              |  |                                              |        |      |   |        |  
|Income
 before other income (expense)         |  |                                              | 1,610  |      |   | 4,190  |  
|                                              |  |                                              |        |      |   |        |  
|Other income (expense)                        |  |                                              |        |      |   |        |  
|Interest expense                              |  |                                              | (534   | )    |   | (340   | )
|Interest income                               |  |                                              | 5      |      |   | 9      |  
|Gain on sale of assets                        |  |                                              | 92     |      |   | 50     |  
|Provision for lawsuit settlement              |  |                                              | (175   | )    |   |       |  
|Other income (loss), net                      |  |                                              | (502   | )    |   | 3      |  
|                                              |  |                                              |        |      |   |        |  
|Total other expense                           |  |                                              | (1,114 | )    |   | (278   | )
|                                              |  |                                              |        |      |   |        |  
|                                              |  |                                              |        |      |   |        |  
|Income
 before income taxes                   |  |                                              | 496    |      |   | 3,912  |  
|                                              |  |                                              |        |      |   |        |  
|Income tax provision                          |  |                                              | 183    |      |   | 1,565  |  
|                                              |  |                                              |        |      |   |        |  
|                                              |  |                                              |        |      |   |        |  
|Net
 income                                   |  | $                                            | 313    |      | $ | 2,347  |  
|                                              |  |                                              |        |      |   |        |  
|                                              |  |                                              |        |      |   |        |  
|Basic earnings per share                      |  | $                                            | 0.05   |      | $ | 0.36   |  
|                                              |  |                                              |        |      |   |        |  
|                                              |  |                                              |        |      |   |        |  
|Diluted earnings per share                    |  | $                                            | 0.05   |      | $ | 0.36   |  
|                                              |  |                                              |        |      |   |        |  
|                                              |  |                                              |        |      |   |        |  
|Weighted shares
 outstanding:                 |  |                                              |        |      |   |        |  
|Basic                                         |  |                                              | 6,790  |      |   | 6,463  |  
|                                              |  |                                              |        |      |   |        |  
|Diluted                                       |  |                                              | 6,825  |      |   | 6,490  |  

|                                                             
|-------------------------------------------------------------
|                                                             
|                                                             
|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, 2011 AND 2010
(UNAUDITED)

|                                              |  |                                              |         |      |   |         |  
|--------------------------------------------- |  | -------------------------------------------- | ------- | ---- | - | ------- | -
|                                             
|                                              |  |                                              |         |      |   |         |  
|                                              |  | 2011                                         |         | 2010 |  
|                                              |  |                                              |         |      |  
|                                              |  | (in thousands, except per share information) |        
|Revenue from services                         |  | $                                            | 2,661   |      | $ | 3,070   |  
|Revenue from product sales                    |  |                                              | 168,489 |      |   | 163,914 |  
|                                              |  |                                              |         |      |   |         |  
|Total
 Revenue                                |  |                                              | 171,150 |      |   | 166,984 |  
|                                              |  |                                              |         |      |   |         |  
|Cost of goods sold for
 services              |  |                                              | 2,283   |      |   | 2,787   |  
|Cost of goods sold for
 product sales         |  |                                              | 156,849 |      |   | 150,160 |  
|                                              |  |                                              |         |      |   |         |  
|Total
 Cost of goods sold                     |  |                                              | 159,132 |      |   | 152,947 |  
|                                              |  |                                              |         |      |   |         |  
|Selling, general and
 administrative expenses |  |                                              | 6,351   |      |   | 6,765   |  
|                                              |  |                                              |         |      |   |         |  
|                                              |  |                                              |         |      |   |         |  
|Income
 before other income (expense)         |  |                                              | 5,667   |      |   | 7,272   |  
|                                              |  |                                              |         |      |   |         |  
|Other income (expense)                        |  |                                              |         |      |   |         |  
|Interest expense                              |  |                                              | (1,206  | )    |   | (668    | )
|Interest income                               |  |                                              | 11      |      |   | 17      |  
|Gain on sale of assets                        |  |                                              | 141     |      |   | 234     |  
|Provision for lawsuit settlement              |  |                                              | (175    | )    |   |        |  
|Other income (loss), net                      |  |                                              | (502    | )    |   | (4      | )
|                                              |  |                                              |         |      |   |         |  
|Total other expense                           |  |                                              | (1,731  | )    |   | (421    | )
|                                              |  |                                              |         |      |   |         |  
|                                              |  |                                              |         |      |   |         |  
|Income
 before income taxes                   |  |                                              | 3,936   |      |   | 6,851   |  
|                                              |  |                                              |         |      |   |         |  
|Income tax provision                          |  |                                              | 1,456   |      |   | 2,740   |  
|                                              |  |                                              |         |      |   |         |  
|                                              |  |                                              |         |      |   |         |  
|Net
 income                                   |  | $                                            | 2,480   |      | $ | 4,111   |  
|                                              |  |                                              |         |      |   |         |  
|                                              |  |                                              |         |      |   |         |  
|Basic earnings per share                      |  | $                                            | 0.36    |      | $ | 0.64    |  
|                                              |  |                                              |         |      |   |         |  
|                                              |  |                                              |         |      |   |         |  
|Diluted earnings per share                    |  | $                                            | 0.36    |      | $ | 0.63    |  
|                                              |  |                                              |         |      |   |         |  
|                                              |  |                                              |         |      |   |         |  
|Weighted shares
 outstanding:                 |  |                                              |         |      |   |         |  
|Basic                                         |  |                                              | 6,913   |      |   | 6,456   |  
|                                              |  |                                              |         |      |   |         |  
|Diluted                                       |  |                                              | 6,953   |      |   | 6,475   |  

|                                                             
|-------------------------------------------------------------
|                                                             
|                                                             
|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, 2011                       
|(UNAUDITED)                                          
|                                                     
|                                                     
|                                                     

|                                                            |  |              |  |                            |    |  |   |                   |        |                                      |        |  |   |      |   |                            |          |   |   |      |   |   |        | 
|----------------------------------------------------------- |  | ------------ |  | -------------------------- | -- |  | - | ----------------- | ------ | ------------------------------------ | ------ |  | - | ---- | - | -------------------------- | -------- | - | - | ---- | - | - | ------ | 
|                                                            |  |              |  |                            |    |  |   | Retained
Earnings |        | Accumulated
Other
Comprehensive
Loss |        |  |   |      |   | Total
Shareholders
Equity |         
|                                                            |  | Common
Stock |  | Additional
Paid-in
Capital |    |  |   | Treasury
Stock    |        |                                     
|                                                            |  |              |  |                            |    |  |   |                   |       
|                                                            |  | Shares       |  | Amount                     |    |  |   |                   | Shares |                                      | Cost   |  |  
|(in thousands,
except share information)                    |  |              |  |                            |    |  |   |                   |        |                                      |        |  |   |      |   |                            |         
|Balance
as of December 31, 2010                             |  | 7,192,500    |  | $                          | 24 |  | $ | 17,852            |        | $                                    | 23,938 |  | $ | (353 | ) |                            | (402,583 | ) | $ | (579 | ) | $ | 40,882 | 
|                                                           
|Net unrealized income on derivative instruments, net of tax |  |             |  |                            |   |  |   |                  |        |                                      |       |  |   | 42   |   |                            |         |   |   |     |   |   | 42     | 
|                                                            |  |              |  |                            |    |  |   |                   |        |                                      |        |  |   |      |   |                            |          |   |   |      |   |   |        | 
|Stock bonuses                                               |  |             |  |                            |   |  |   | 430               |        |                                      |       |  |   |     |   |                            | 150,600  |   |   | 65   |   |   | 495    | 
|                                                            |  |              |  |                            |    |  |   |                   |        |                                      |        |  |   |      |   |                            |          |   |   |      |   |   |        | 
|Net income                                                  |  |             |  |                            |   |  |   |                  |        |                                      | 2,480  |  |   |     |   |                            |         |   |   |     |   |   | 2,480  | 
|                                                            |  |              |  |                            |    |  |   |                   |        |                                      |        |  |   |      |   |                            |          |   |   |      |   |   |        | 
|                                                            |  |              |  |                            |    |  |   |                   |        |                                      |        |  |   |      |   |                            |          |   |   |      |   |   |        | 
|Balance as of June 30, 2011                                 |  | 7,192,500    |  | $                          | 24 |  | $ | 18,282            |        | $                                    | 26,418 |  | $ | (311 | ) |                            | (251,983 | ) | $ | (514 | ) | $ | 43,899 | 
|                                                            |  |              |  |                            |    |  |   |                   |        |                                      |        |  |   |      |   |                            |          |   |   |      |   |   |        | 

|                                                            
|------------------------------------------------------------
|                                                            
|                                                            
|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, 2011 AND 2010              
|(UNAUDITED)                                          
|                                                     
|                                                     

|                                                                           |  |                |        |      |   |         |  
|-------------------------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------- | -
|                                                                           |  | 2011           |        | 2010 |  
|                                                                           |  |                |        |      |  
|                                                                           |  | (in thousands) |       
|Cash flows from operating activities                                       |  |                |        |      |   |         |  
|Net income                                                                 |  | $              | 2,480  |      | $ | 4,111   |  
|Adjustments to reconcile net income to net
cash from operating activities: |  |                |        |      |   |         |  
|Depreciation and amortization                                              |  |                | 2,255  |      |   | 1,730   |  
|Stock bonus to employees                                                   |  |                | 495    |      |   | 452     |  
|Loss on sale of property and equipment                                     |  |                | (141   | )    |   | (234    | )
|Change in assets and liability                                             |  |                |        |      |   |         |  
|Receivables                                                                |  |                | 7,281  |      |   | (19,275 | )
|Net investment in sales-type leases                                        |  |                | 16     |      |   | 13      |  
|Inventories                                                                |  |                | 145    |      |   | 611     |  
|Other assets                                                               |  |                | (1,732 | )    |   | (50     | )
|Accounts payable                                                           |  |                | (6,385 | )    |   | 18,064  |  
|Accrued bonuses                                                            |  |                | (946   | )    |   | (764    | )
|Income tax payable                                                         |  |                | 456    |      |   | 794     |  
|Other current liabilities                                                  |  |                | 71     |      |   | 272     |  
|                                                                           |  |                |        |      |   |         |  
|Net cash from operating activities                                         |  |                | 3,995  |      |   | 5,724   |  
|                                                                           |  |                |        |      |   |         |  
|Cash flows from investing activities                                       |  |                |        |      |   |         |  
|Proceeds from sale of property and
equipment                               |  |                | 154    |      |   | 324     |  
|Purchases of property and equipment                                        |  |                | (895   | )    |   | (1,148  | )
|Deposits on equipment                                                      |  |                | (260   | )    |   | (504    | )
|Payments from related party                                                |  |                | 21     |      |   | 20      |  
|                                                                           |  |                |        |      |   |         |  
|Net cash used in investing activities                                      |  |                | (980   | )    |   | (1,308  | )
|                                                                           |  |                |        |      |   |         |  
|Cash flows from financing activities                                       |  |                |        |      |   |         |  
|Payments on capital lease obligation                                       |  |                |       |      |   | (21     | )
|Payments on long-term debt                                                 |  |                | (3,916 | )    |   | (3,925  | )
|Proceeds from long-term debt                                               |  |                | 517    |      |   |        |  
|                                                                           |  |                |        |      |   |         |  
|Net cash used in financing activities                                      |  |                | (3,399 | )    |   | (3,946  | )
|                                                                           |  |                |        |      |   |         |  
|Net (decrease) increase in cash                                            |  |                | (384   | )    |   | 470     |  
|Cash at beginning of year                                                  |  |                | 2,468  |      |   | 713     |  
|                                                                           |  |                |        |      |   |         |  
|                                                                           |  |                |        |      |   |         |  
|Cash at end of year                                                        |  | $              | 2,084  |      | $ | 1,183   |  
|                                                                           |  |                |        |      |   |         |  
|                                                                           |  |                |        |      |   |         |  
|Supplemental disclosure of cash flow
information:                          |  |                |        |      |   |         |  
|Cash paid for interest                                                     |  |                | 1,206  |      |   | 668     |  
|Cash paid for taxes                                                        |  |                | 1,000  |      |   | 1,946   |  

|                                                            
|------------------------------------------------------------
|                                                            
|                                                            
|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, 2011 and the
results of our operations and changes in our cash flow for the periods ended
June 30, 2011 and 2010. Results of operations for the period ended June 30,
2011 are not necessarily indicative of the results that may be expected for the
entire year. Additional information, including the audited December 31, 2010
consolidated financial statements and the Summary of Significant Accounting
Policies, is included in our Annual Report on Form 10-K for the year ended
December 31, 2010 on file with the Securities and Exchange Commission.

Reclassifications

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

Fair Value

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

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

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

Level 2  Financial assets and liabilities with values based on quoted
prices for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly, for

9

---



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 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, 2011 (in thousands):

|                          |  |         |       |         |    |        |   |    |        |  
|------------------------- |  | ------- | ----- | ------- | -- | ------ | - | -- | ------ | -
|                          |  | Level 1 |       | Level 2 |    | Total  |  
|Assets                   
|Cash and
cash equivalents |  | $       | 2,084 |         | $  |       |   | $  | 2,084  |  
|                          |  |         |       |         |    |        |   |    |        |  
|Liabilities               |  |         |       |         |    |        |   |    |        |  
|Long-term
debt            |  | $       |      |         | ($ | 42,048 | ) | ($ | 42,048 | )
|Derivative
contract       |  |         |      |         |    | (579   | ) |    | (579   | )

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,
2011. 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. The valuation for the
July 1, 2010 purchase of Venture Metals, LLC was finalized in the second
quarter of 2011. No changes were made to recorded amounts for goodwill or the
other amortized intangible items based on this valuation.

Subsequent Events

We have evaluated the period from June 30, 2011 through the date the
financial statements herein were issued, for subsequent events requiring
recognition or disclosure in the financial statements and no events were
identified.

10

---



NOTE 2  ESTIMATES

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

NOTE 3  INTANGIBLE ASSETS

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

Intangible assets are considered to have indefinite lives when, based
on an analysis of all of the relevant factors, there is no foreseeable limit to
the period over which the asset is expected to generate cash flows for the
Company. The factors considered in making this determination include the
existence of contractual rights for unlimited terms and the life cycles of the
products and processes that depend on the asset.

We have the following intangible assets as of June 30, 2011:

|                                  |  |                      |       |                          |   |                    |   |   |       | 
|--------------------------------- |  | -------------------- | ----- | ------------------------ | - | ------------------ | - | - | ----- | 
|                                  |  | Gross
Carrying
Value |       | Accumulated
Amortization |   | Net
Carrying
Value |  
|                                  |  |                      |       |                          |   |                    |  
|                                  |  | (in thousands)       |      
|Amortized intangible assets       |  |                      |       |                          |   |                    |   |   |       | 
|Venture Metals, LLC trade
name    |  | $                    | 730   |                          | $ | (146               | ) | $ | 584   | 
|Non-compete agreements            |  |                      | 620   |                          |   | (124               | ) |   | 496   | 
|Venture Metals, LLC customer
list |  |                      | 4,800 |                          |   | (480               | ) |   | 4,320 | 
|                                  |  |                      |       |                          |   |                    |   |   |       | 
|                                  |  |                      |       |                          |   |                    |   |   |       | 
|Total intangible assets           |  | $                    | 6,150 |                          | $ | (750               | ) | $ | 5,400 | 
|                                  |  |                      |       |                          |   |                    |   |   |       | 

We amortize the trade name and non-compete agreements using a method
that reflects the pattern in which the economic benefits are consumed or
otherwise used over a 5-year life as stated in the agreements. We amortize the
customer list on a straight-line basis over a 10-year life as estimated by
management. We incurred amortization expense related to these assets of $375.0
thousand for the six month period ending June 30, 2011. We did not have amortization
expense for the six month period ending June 30, 2010.

11

---



As
of June 30, 2011, we expect amortization expense for these assets for the next
five fiscal years and thereafter to be as follows:

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

NOTE 4  LONG TERM DEBT AND NOTES PAYABLE TO
BANK

On April 12, 2011, we entered into a Loan and Security Agreement (the
Agreement) with Fifth Third Bank (the Bank) pursuant to which the Bank
agreed to provide the Company with a Promissory Note (the Note) in the amount
of $226.9 thousand for the purpose of purchasing operating equipment. The
interest rate is five and 68/100 percent (5.68%). Principal and interest shall
be payable in 48 equal monthly installments, each on the 20th day of each calendar
month of $5,294 commencing on the 20th day of May, 2011, with the entire unpaid
principal amount hereof, together with all accrued and unpaid interest,
charges, fees or other advances, if any, due on or before April 20, 2015. As
security for the Note, we have granted the Bank a first priority security
interest in the equipment purchased with the proceeds of the Note. As of June
30, 2011, the outstanding balance of this loan was $213.1 thousand.

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

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

The July 30, 2010 Credit Agreement, which except as described above,
remains in full force and effect, provided us a revolving credit facility in
the amount of $40.0 million for the purpose of replacing the existing $20.0
million senior revolving credit facility with Branch Banking and Trust Company
(BB&T) and for payment of the $5.0 million note payable to BB&T
(collectively, the Prior Obligations). Proceeds of the new revolving credit
facility in the amount of $33.4 million were used to repay the outstanding
principal balance of the Prior

12

---



Obligations. We used additional proceeds of
the revolving credit facility to pay closing costs and for funding
temporary fluctuations in accounts receivable of most of our customers and
inventory. In addition, we entered into a term loan agreement with the Bank in
the amount of $8.8 million for the purpose of replacing the $6.0 million note
payable secured by our shredder system, the $3.0 million note payable secured
by our rental fleet equipment, and the $610 thousand note payable secured by
our crane.

With respect to the revolving credit facility, the interest rate is one
month LIBOR plus two hundred fifty basis points (2.50%) per annum, adjusted
monthly on the first day of each month. As of June 30, 2011, the interest rate
was 3.00%. We also pay a fee of 0.5% on the unused portion. The revolving
credit facility expires on July 31, 2013. Under the April Amendment to the
revolving credit facility, we are permitted to borrow the lesser of $45.0
million or the borrowing base, consisting of the sum of 80% of eligible
accounts plus 60% of eligible inventory up to $18.0 million. Eligible accounts
are generally those receivables that are less than 90 days from the invoice
date. As security for the revolving credit facility, we provided the Bank a
first priority security interest in the accounts receivable from most of our
customers and in our inventory. We also cross collateralized the revolving line
of credit with the $8.8 million term loan. As of June 30, 2011, the outstanding
balance of the revolving line of credit was $32.8 million.

The $8.8 million term loan provides for an interest rate of 3.25% as of
June 30, 2011. Principal and
interest is payable monthly in consecutive equal installments of $105,000. The
first such payment commenced September 1, 2010 and the final payment of the
then-unpaid balance becomes due and payable in full on July 31, 2013. In
addition, beginning April 30, 2012 (or, if earlier, upon completion of the
Companys financial statements for the fiscal year ending December 31, 2011),
we will make an annual payment equal to 25% of (i) our adjusted earnings before
interest, taxes, depreciation and amortization (EBITDA), minus (ii) our
aggregate cash payments of interest expense and scheduled payments of principal
(including any prepayments of the term loan), minus (iii) any non-financed
capital expenditures, in each case for the Companys prior fiscal year. Any
such payments will be applied to remaining installments of principal under the
term loan in the inverse order of maturity, and to accrued but unpaid interest
thereon. As security for the term loan, we provided the Bank a first priority
security interest in all equipment other than the rental fleet that we own. As
of June 30, 2011, the outstanding balance of the term loan was $7.6 million.

In addition, we provided a first mortgage on the property at the
following locations: 3409 Campground Road, 6709, 7023, 7025, 7101, 7103, 7110,
7124, 7200 and 7210 Grade Lane, Louisville Kentucky, 1565 East Fourth Street,
Seymour, Indiana and 1617 State Road 111, New Albany, Indiana. The Company also
cross collateralized the term loan with the revolving credit facility and all
other existing debt the Company owes to 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 $4.0 million in any
fiscal year. As of June 30, 2011, we were in compliance with all covenants. As
of June 30, 2011, our ratio of debt to adjusted EBITDA was 3.0; our ratio of
adjusted EBITDA to aggregate cash payments of interest expense and scheduled
principal payments was 1.57, and our capital expenditures totaled $1.2 million,
which includes $0.3 million in deposits on equipment.
As of June 30, 2011, we have available $13.9 million under our existing credit
facilities that we can use without causing a breach in these covenants.

13

---



On October 13, 2010, we entered into a Promissory Note (the Note)
with Fifth Third Bank in the amount of $1.3 million for the purpose of
purchasing equipment. The interest rate is equal to five and 20/100 percent
(5.20%) per annum. Principal and interest is payable monthly in consecutive
equal installments of $30.5 thousand with the first such payment commencing
November 15, 2010, and the final unpaid principal amount due, together with all
accrued and unpaid interest, charges, fees, or other advances, if any, to be
paid on October 15, 2014. As security for the Note, we provided the Bank a
first priority security interest in the equipment purchased with the proceeds.
As of June 30, 2011, the outstanding balance of this note was $1.1 million.

We entered into three interest rate swap agreements swapping variable
rates for fixed rates. The first swap agreement covers $5.0 million in debt and
commenced April 7, 2009 and matures on April 7, 2014. The second swap agreement
covers approximately $2.2 million in debt and commenced October 15, 2008 and
matures on May 7, 2013. The third swap agreement covers approximately $483.8
thousand in debt and commenced October 22, 2008 and matures on October 22,
2013. The three swap agreements fix our interest rate at approximately 5.8%. At
June 30, 2011, we recorded the estimated fair value of the liability related to
the three swaps at approximately $580.0 thousand. We entered into the swap
agreements for the purpose of hedging the interest rate market risk for the
respective notional amounts. These swap agreements were not affected by the
debt restructuring with Fifth Third Bank. We maintain a cash account on deposit
with BB&T which serves as collateral for the swap agreements. As of June
30, 2011, the balance in this account was $653.1 thousand.

14

---



Our long term debt as of
June 30, 2011 and December 31, 2010 consisted of the following:

|                                                                                                                                                                                                                                                     |  |                |        |      |   |        | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------ | 
|                                                                                                                                                                                                                                                     |  | 2011           |        | 2010 |  
|                                                                                                                                                                                                                                                     |  |                |        |      |  
|                                                                                                                                                                                                                                                     |  | (unaudited)    |        |      |   |       
|                                                                                                                                                                                                                                                     |  | (in thousands) |       
|                                                                                                                                                                                                                                                     |  |                |        |      |   |        | 
|Revolving credit facility of $40 million with Fifth Third Bank. See
 above description for additional details.                                                                                                                                       |  | $              | 32,778 |      | $ | 35,489 | 
|                                                                                                                                                                                                                                                     |  |                |        |      |   |        | 
|Note payable to Fifth Third Bank in the amount of $8.8 million
 secured by our rental fleet equipment, our shredder system assets, and a
 crane. See above description for additional details.                                                       |  |                | 7,645  |      |   | 8,275  | 
|                                                                                                                                                                                                                                                     |  |                |        |      |   |        | 
|Note payable to Fifth Third Bank in the amount of $1.3 million
 secured by equipment purchased with the proceeds. See above description for
 additional details.                                                                                     |  |                | 1,118  |      |   | 1,271  | 
|                                                                                                                                                                                                                                                     |  |                |        |      |   |        | 
|Loan and Security Agreement payable to Fifth Third Bank in the amount
 of $227 thousand secured by the equipment purchased with the proceeds. See
 above description for additional details.                                                         |  |                | 213    |      |   |       | 
|                                                                                                                                                                                                                                                     |  |                |        |      |   |        | 
|Note payable to Paccar Financial Corp. in the amount of $164 thousand
 secured by one Kenworth truck. Payments are $1,697.68 per month with an
 effective interest rate of 6.5%. The maturity date under this agreement is
 September 2011.          |  |                | 26     |      |   | 36     | 
|                                                                                                                                                                                                                                                     |  |                |        |      |   |        | 
|Note payable to ILS for various assets including tractor trailers,
 trucks and containers. The repayment terms are $20,000 per month for 60
 months at a seven percent (7.0%) interest rate. The maturity date under this
 agreement is August 2012. |  |                | 268    |      |   | 376    | 
|                                                                                                                                                                                                                                                     |  |                |        |      |   |        | 
|                                                                                                                                                                                                                                                     |  |                |        |      |   |        | 
|                                                                                                                                                                                                                                                     |  |                | 42,048 |      |   | 45,447 | 
|Less current maturities                                                                                                                                                                                                                              |  |                | 1,883  |      |   | 1,824  | 
|                                                                                                                                                                                                                                                     |  |                |        |      |   |        | 
|                                                                                                                                                                                                                                                     |  |                |        |      |   |        | 
|                                                                                                                                                                                                                                                     |  | $              | 40,165 |      | $ | 43,623 | 
|                                                                                                                                                                                                                                                     |  |                |        |      |   |        | 

The annual maturities of
long term debt (in thousands) as of June 30, 2011 are as follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2011       |  | $ | 1,883  | 
|2012       |  |   | 1,688  | 
|2013       |  |   | 38,312 | 
|2014       |  |   | 165    | 
|Thereafter |  |   |       | 
|           |  |   |        | 
|           |  |   |        | 
|Total      |  | $ | 42,048 | 
|           |  |   |        | 

15

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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, 2011        |  | RECYCLING      |          | WASTE
 SERVICES |   | OTHER  |   | SEGMENT
 TOTALS |       
|                                               |  |                |          |                 |   |        |   |                 |       
|                                               |  | (in thousands) |         
|Recycling revenues                             |  | $              | 167,324  |                 | $ |       |   | $               |       |   | $ | 167,324  |  
|Equipment sales, service and leasing
 revenues |  |                |         |                 |   | 1,165  |   |                 |       |   |   | 1,165    |  
|Management fees                                |  |                |         |                 |   | 2,661  |   |                 |       |   |   | 2,661    |  
|Cost of goods sold                             |  |                | (156,425 | )               |   | (2,707 | ) |                 |       |   |   | (159,132 | )
|Selling, general, and administrative
 expenses |  |                | (4,202   | )               |   | (385   | ) |                 | (1,764 | ) |   | (6,351   | )
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|Segment profit (loss)                          |  | $              | 6,697    |                 | $ | 734    |   | $               | (1,764 | ) | $ | 5,667    |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|Segment assets                                 |  | $              | 88,689   |                 | $ | 2,179  |   | $               | 8,066  |   | $ | 98,934   |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  

16

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|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|---------------------------------------------- |  | -------------- | -------- | --------------- | - | ------ | - | --------------- | ------ | - | - | -------- | -
|FOR THE SIX MONTHS
 ENDED JUNE 30, 2010        |  | RECYCLING      |          | WASTE
 SERVICES |   | OTHER  |   | SEGMENT
 TOTALS |       
|                                               |  |                |          |                 |   |        |   |                 |       
|                                               |  | (in thousands) |         
|Recycling revenues                             |  | $              | 162,805  |                 | $ |       |   | $               |       |   | $ | 162,805  |  
|Equipment sales, service and leasing
 revenues |  |                |         |                 |   | 1,109  |   |                 |       |   |   | 1,109    |  
|Management fees                                |  |                |         |                 |   | 3,070  |   |                 |       |   |   | 3,070    |  
|Cost of goods sold                             |  |                | (149,711 | )               |   | (3,236 | ) |                 |       |   |   | (152,947 | )
|Selling, general, and administrative
 expenses |  |                | (3,422   | )               |   | (520   | ) |                 | (2,823 | ) |   | (6,765   | )
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|Segment profit (loss)                          |  | $              | 9,672    |                 | $ | 423    |   | $               | (2,823 | ) | $ | 7,272    |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|Segment assets                                 |  | $              | 81,454   |                 | $ | 2,277  |   | $               | 1,925  |   | $ | 85,656   |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|FOR THE THREE
 MONTHSENDED JUNE 30, 2011       |  | RECYCLING      |          | WASTE
 SERVICES |   | OTHER  |   | SEGMENT
 TOTALS |       
|                                               |  |                |          |                 |   |        |   |                 |       
|                                               |  | (in thousands) |         
|Recycling revenues                             |  | $              | 63,086   |                 | $ |       |   | $               |       |   | $ | 63,086   |  
|Equipment sales, service and leasing
 revenues |  |                |         |                 |   | 587    |   |                 |       |   |   | 587      |  
|Management fees                                |  |                |         |                 |   | 1,290  |   |                 |       |   |   | 1,290    |  
|Cost of goods sold                             |  |                | (59,563  | )               |   | (1,218 | ) |                 |       |   |   | (60,781  | )
|Selling, general, and administrative
 expenses |  |                | (2,040   | )               |   | (191   | ) |                 | (341   | ) |   | (2,572   | )
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|Segment profit (loss)                          |  | $              | 1,483    |                 | $ | 468    |   | $               | (341   | ) | $ | 1,610    |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  
|Segment assets                                 |  | $              | 88,689   |                 | $ | 2,179  |   | $               | 8,066  |   | $ | 98,934   |  
|                                               |  |                |          |                 |   |        |   |                 |        |   |   |          |  

17

---



|                                               |  |                |         |                 |   |        |   |                 |        |   |   |         |  
|---------------------------------------------- |  | -------------- | ------- | --------------- | - | ------ | - | --------------- | ------ | - | - | ------- | -
|FOR THE THREE MONTHSENDED JUNE
 30, 2010       |  | RECYCLING      |         | WASTE
 SERVICES |   | OTHER  |   | SEGMENT
 TOTALS |       
|                                               |  |                |         |                 |   |        |   |                 |       
|                                               |  | (in thousands) |        
|Recycling revenues                             |  | $              | 90,736  |                 | $ |       |   | $               |       |   | $ | 90,736  |  
|Equipment sales, service and leasing
 revenues |  |                |        |                 |   | 544    |   |                 |       |   |   | 544     |  
|Management fees                                |  |                |        |                 |   | 1,535  |   |                 |       |   |   | 1,535   |  
|Cost of goods sold                             |  |                | (83,399 | )               |   | (1,662 | ) |                 |       |   |   | (85,061 | )
|Selling, general, and administrative
 expenses |  |                | (1,747  | )               |   | (238   | ) |                 | (1,579 | ) |   | (3,564  | )
|                                               |  |                |         |                 |   |        |   |                 |        |   |   |         |  
|                                               |  |                |         |                 |   |        |   |                 |        |   |   |         |  
|Segment profit (loss)                          |  | $              | 5,590   |                 | $ | 179    |   | $               | (1,579 | ) | $ | 4,190   |  
|                                               |  |                |         |                 |   |        |   |                 |        |   |   |         |  
|                                               |  |                |         |                 |   |        |   |                 |        |   |   |         |  
|Segment assets                                 |  | $              | 81,454  |                 | $ | 2,277  |   | $               | 1,925  |   | $ | 85,656  |  
|                                               |  |                |         |                 |   |        |   |                 |        |   |   |         |  

NOTE 6  INVENTORIES

Our inventories primarily consist of ferrous and non-ferrous, including
stainless steel, scrap metals and are valued at the lower of average purchased
cost or market using the specific identification method. Quantities of
inventories are determined based on our inventory systems and are subject to
periodic physical verification using estimation techniques including
observation, weighing and other industry methods. We 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 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.

Inventory also includes all types of industrial waste handling
equipment and machinery held for resale such as compactors, balers, and
containers. Replacement parts included in inventory are depreciated
over a one-year life. Other inventory includes fuel, cardboard and baling wire.
Inventories as of June 30, 2011 and December 31, 2010 consist of the following:

18

---



|                                                    |  |                 |        |                    |   |                   |  |                    |     |                |   |                 |  |                   |        |       |   |       |  |   |       |  |   |        | 
|--------------------------------------------------- |  | --------------- | ------ | ------------------ | - | ----------------- |  | ------------------ | --- | -------------- | - | --------------- |  | ----------------- | ------ | ----- | - | ----- |  | - | ----- |  | - | ------ | 
|                                                    |  | June
 30, 2011  |        | December
 31, 2010 |  
|                                                    |  |                 |        |                    |  
|                                                    |  | Raw
 Materials  |        | Finished
 Goods    |   | Processing
 Costs |  | Total
 (unaudited) |     | Raw
 Materials |   | Finished
 Goods |  | Processing
 Costs |        | Total |  
|                                                    |  |                 |        |                    |   |                   |  |                    |     |                |   |                 |  |                   |        |       |  
|                                                    |  | (in
 thousands) |       
|Stainless steel,
 ferrous and non-ferrous materials |  | $               | 30,706 |                    | $ | 1,130             |  | $                  | 855 |                | $ | 32,691          |  | $                 | 30,546 |       | $ | 1,203 |  | $ | 1,115 |  | $ | 32,864 | 
|Waste equipment
 machinery                          |  |                 |       |                    |   | 68                |  |                    |    |                |   | 68              |  |                   |       |       |   | 75    |  |   |      |  |   | 75     | 
|Other                                               |  |                 |       |                    |   | 78                |  |                    |    |                |   | 78              |  |                   |       |       |   | 59    |  |   |      |  |   | 59     | 
|                                                    |  |                 |        |                    |   |                   |  |                    |     |                |   |                 |  |                   |        |       |   |       |  |   |       |  |   |        | 
|                                                    |  |                 |        |                    |   |                   |  |                    |     |                |   |                 |  |                   |        |       |   |       |  |   |       |  |   |        | 
|Total inventories
 for sale                         |  |                 | 30,706 |                    |   | 1,276             |  |                    | 855 |                |   | 32,837          |  |                   | 30,546 |       |   | 1,337 |  |   | 1,115 |  |   | 32,998 | 
|                                                    |  |                 |        |                    |   |                   |  |                    |     |                |   |                 |  |                   |        |       |   |       |  |   |       |  |   |        | 
|Replacement parts                                   |  |                 | 1,329  |                    |   |                  |  |                    |    |                |   | 1,329           |  |                   | 1,313  |       |   |      |  |   |      |  |   | 1,313  | 
|                                                    |  |                 |        |                    |   |                   |  |                    |     |                |   |                 |  |                   |        |       |   |       |  |   |       |  |   |        | 
|                                                    |  |                 |        |                    |   |                   |  |                    |     |                |   |                 |  |                   |        |       |   |       |  |   |       |  |   |        | 
|Total inventories                                   |  | $               | 32,035 |                    | $ | 1,276             |  | $                  | 855 |                | $ | 34,166          |  | $                 | 31,859 |       | $ | 1,337 |  | $ | 1,115 |  | $ | 34,311 | 
|                                                    |  |                 |        |                    |   |                   |  |                    |     |                |   |                 |  |                   |        |       |   |       |  |   |       |  |   |        | 

NOTE 7 - LEASE COMMITMENTS

Operating Leases:

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

We lease office space in Dallas, Texas for which monthly payments of
$969 are due through September 2011.

We lease equipment from a related party under an operating lease expiring
in November 2015 for a monthly payment of $10,500.

Future minimum lease payments for operating leases in thousands as of
June 30, 2011 are as follows:

|                               |  |   |       | 
|------------------------------ |  | - | ----- | 
|2011                           |  | $ | 769   | 
|2012                           |  |   | 444   | 
|2013                           |  |   | 126   | 
|2014                           |  |   | 126   | 
|2015                           |  |   | 88    | 
|Thereafter                     |  |   |      | 
|                               |  |   |       | 
|                               |  |   |       | 
|Future
 minimum lease payments |  | $ | 1,553 | 
|                               |  |   |       | 

Total rent expense for the six months ended June 30, 2011 and 2010 was
$557.2 thousand and $444.9 thousand, respectively.

19

---



NOTE 8  PER SHARE DATA

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

Six
months ended June 30, 2011 compared to six months ended June 30, 2010:

|                                                           |  |                                              |       |      |   |       | 
|---------------------------------------------------------- |  | -------------------------------------------- | ----- | ---- | - | ----- | 
|                                                           |  | 2011                                         |       | 2010 |  
|                                                           |  |                                              |       |      |  
|                                                           |  | (in thousands, except per share information) |      
|Basic earnings per share                                   |  |                                              |       |      |   |       | 
|Net income                                                 |  | $                                            | 2,480 |      | $ | 4,111 | 
|                                                           |  |                                              |       |      |   |       | 
|Weighted average shares outstanding                        |  |                                              | 6,913 |      |   | 6,456 | 
|                                                           |  |                                              |       |      |   |       | 
|                                                           |  |                                              |       |      |   |       | 
|Basic earnings per share                                   |  | $                                            | 0.36  |      | $ | 0.64  | 
|                                                           |  |                                              |       |      |   |       | 
|                                                           |  |                                              |       |      |   |       | 
|Diluted earnings per share                                 |  |                                              |       |      |   |       | 
|Net income                                                 |  | $                                            | 2,480 |      | $ | 4,111 | 
|                                                           |  |                                              |       |      |   |       | 
|Weighted average shares outstanding                        |  |                                              | 6,913 |      |   | 6,456 | 
|Add dilutive effect of assumed exercising of stock options |  |                                              | 40    |      |   | 19    | 
|                                                           |  |                                              |       |      |   |       | 
|                                                           |  |                                              |       |      |   |       | 
|Diluted weighted average shares outstanding                |  |                                              | 6,953 |      |   | 6,475 | 
|                                                           |  |                                              |       |      |   |       | 
|                                                           |  |                                              |       |      |   |       | 
|Diluted earnings per share                                 |  | $                                            | 0.36  |      | $ | 0.63  | 
|                                                           |  |                                              |       |      |   |       | 

20

---



Three months ended June 30, 2011 compared to three months ended June
30, 2010:

|                                                           |  |                                              |       |      |   |       | 
|---------------------------------------------------------- |  | -------------------------------------------- | ----- | ---- | - | ----- | 
|                                                           |  | 2011                                         |       | 2010 |  
|                                                           |  |                                              |       |      |  
|                                                           |  | (in thousands, except per share information) |      
|Basic
 earnings per share                                  |  |                                              |       |      |   |       | 
|Net income                                                 |  | $                                            | 313   |      | $ | 2,347 | 
|                                                           |  |                                              |       |      |   |       | 
|Weighted average shares outstanding                        |  |                                              | 6,790 |      |   | 6,463 | 
|                                                           |  |                                              |       |      |   |       | 
|                                                           |  |                                              |       |      |   |       | 
|Basic earnings per share                                   |  | $                                            | 0.05  |      | $ | 0.36  | 
|                                                           |  |                                              |       |      |   |       | 
|                                                           |  |                                              |       |      |   |       | 
|Diluted
 earnings per share                                |  |                                              |       |      |   |       | 
|Net income                                                 |  | $                                            | 313   |      | $ | 2,347 | 
|                                                           |  |                                              |       |      |   |       | 
|Weighted average shares outstanding                        |  |                                              | 6,790 |      |   | 6,463 | 
|Add dilutive effect of assumed exercising of stock options |  |                                              | 35    |      |   | 27    | 
|                                                           |  |                                              |       |      |   |       | 
|                                                           |  |                                              |       |      |   |       | 
|Diluted weighted average shares outstanding                |  |                                              | 6,825 |      |   | 6,490 | 
|                                                           |  |                                              |       |      |   |       | 
|                                                           |  |                                              |       |      |   |       | 
|Diluted earnings per share                                 |  | $                                            | 0.05  |      | $ | 0.36  | 
|                                                           |  |                                              |       |      |   |       | 

NOTE 9  LONG TERM INCENTIVE PLAN

The Companys long term incentive plan makes available up to 2.4
million shares of our common stock for performance-based awards under the plan.
We may grant any of these types of awards: non-qualified and incentive stock
options; stock appreciation rights; and other stock awards including stock
units, restricted stock units, performance shares, performance units, and
restricted stock. The performance goals that we may use for such awards will be
based on any one or more of the following performance measures: cash flow;
earnings; earnings per share; market value added or economic value added;
profits; return on assets; return on equity; return on investment; revenues;
stock price; or total shareholder return.

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

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

On January 11, 2010, we issued 18.0 thousand shares of stock to
management at a per share price of $6.47, and as of February 11, 2010, we
awarded 7.5 thousand shares of our stock to management at a per share price of

21

---



$6.73. The Board of Directors approved the grant on January 6, 2010
when the grant date fair value of the awards was $6.39 per share. On June 8,
2010, we awarded 30.0 thousand shares of our stock to management at a per share
price of $9.51. The grant date fair value of these awards was $3.80 per share.
On November 15, 2010, we awarded 5.0 thousand shares of our stock to management
at a grant date fair value of $10.34 per share. In January 2011, we awarded
60.0 thousand shares of our stock to management and 0.6 thousand shares of our
stock to consultants at various prices.

NOTE 10  LEGAL PROCEEDINGS

On January 4, 2007, Lennox Industries, Inc., a commercial heating and
air-conditioning manufacturer, filed a suit against us captioned Lennox Industries, Inc. v. Industrial Services of America, Inc., Case No. CV-2007-004,
in the Arkansas County, Arkansas Circuit Court in Stuttgart, Arkansas. Lennox
in its Second Amended Complaint alleged 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 termination on
November 17, 2005. Both compensatory and punitive damages were sought by
Lennox.

A jury trial was held from June 20-24, 2011. The punitive damage claim
was withdrawn by Lennox at the conclusion of its case, and Lennox claimed over
$1 million in compensatory damages. On June 24, the jury found in ISAs favor
on five of the six claims. Lennox was awarded $175,000 on the remaining claim,
which we have accrued.

We have litigation from time to time, including employment-related
claims, none of which we currently believe to be material.

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

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

The following discussion and analysis
contains certain financial predictions, forecasts and projections which
constitute forward-looking statements within the meaning of the federal
securities laws. Actual results could differ materially from those financial
predictions, forecasts and projections and there can be no assurance that we
will achieve such financial predictions, forecasts and projections. Factors
that could affect financial predictions, forecasts and projections include the
fluctuations in the commodity price index and any conditions internal to our
major customers, including loss of their accounts and other factors as listed
in our Form 10-K for the year ended December 31, 2010, 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 deliver all scrap ourselves or through third
parties via truck, railcar, and/or barge. Some customers choose to send their
own delivery trucks, which are weighed and loaded at one of our sites based on
the sales order. We purchase ferrous and non-ferrous scrap material primarily
from industrial and

22

---



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 waste services business segment, which includes
management services and waste and recycling equipment sales, service and
leasing.

In July, 2010 we purchased certain Venture Metals, LLC intangibles,
including the customer list and trade name, and entered into a non-compete
agreement to protect our market position. We obtained an independent valuation
for this purchase in 2011. No changes to the values previously recorded were
necessary as a result of the valuation.

We continue to pursue a growth strategy in the waste management
services arena by adding new locations of existing customers as well as
marketing our services to potential customers. Currently, we service
approximately 900 customer locations throughout the United States and we
utilize an active database of over 7,000 vendors to provide timely, thorough
and cost-effective service to our customers.

Although our focus is on the recycling industry, our goal is to remain
dedicated to the management services and equipment industries 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 and New
Albany, Indiana. We do not have operating locations outside the United States.

Liquidity and Capital Resources

As of June 30, 2011 we held cash and cash equivalents of $2.1 million.
We maintain a cash account on deposit with BB&T which serves as collateral
for our swap agreements. As of June 30, 2011, the balance in this account was
$653.1 thousand.

On April 12, 2011, we entered into a Loan and Security Agreement with
Fifth Third Bank (the Bank) pursuant to which the Bank agreed to provide the
Company with a Promissory Note (the Note) in the amount of $226.9 thousand
for the purpose of purchasing operating equipment. The interest rate is five
and 68/100 percent (5.68%). Principal and interest is payable in 48 equal
monthly installments, each on the 20th day of each calendar month of $5,294
commencing on the 20th day of May, 2011, with the entire unpaid principal
amount hereof, together with all accrued and unpaid interest, charges, fees or
other advances, if any, due on or before April 20, 2015. As security for the
Note, we have granted the Bank a first priority security interest in the
equipment purchased with the proceeds of the Note.

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

23

---



Under the original Credit Agreement, we were permitted
    to borrow the lesser of $40.0 million or the borrowing base, consisting of
    the sum of 80% of eligible accounts plus 60% of eligible inventory up to
    $17.0 million. Under the April Amendment, the Bank agreed to increase the
    revolving credit facility to the lesser of $45.0 million or the borrowing
    base, consisting of the sum of 85% of eligible accounts plus 60% of eligible
inventory up to $18.0 million.

In the Credit Agreement, we agreed to certain covenants, including (i)
maintenance of a ratio of debt to adjusted EBITDA for the preceding 12 months
of not more than 3.5 to 1 (or, if measured as of December 31 of any fiscal
year, 4.0 to 1), (ii) maintenance of a ratio of adjusted EBITDA for the
preceding twelve months to aggregate cash payments of interest expense and
scheduled payment of principal in the preceding 12 months of not less than 1.20
to 1, and (iii) a limitation on capital expenditures of $4.0 million in any
fiscal year. As of June 30, 2011, we were in compliance with all covenants. As
of June 30, 2011, our ratio of debt to adjusted EBITDA was 3.0; our ratio of adjusted
EBITDA to aggregate cash payments of interest expense and scheduled principal
payments was 1.57, and our capital expenditures totaled $1.2 million, which
includes $0.3 million in deposits on equipment. As of June 30, 2011, we have
available $13.9 million under our existing credit facilities that we can use
without causing a breach in these covenants.

We have long term debt comprised of the following:

|                             |  |                            |        |                    |   |        | 
|---------------------------- |  | -------------------------- | ------ | ------------------ | - | ------ | 
|                             |  | June 30, 2011
 (unaudited) |        | December 31,
 2010 |  
|                             |  |                            |        |                    |  
|                             |  | (in thousands)             |       
|Non-revolving line of credit |  | $                          |       |                    | $ |       | 
|Revolving line of credit     |  |                            | 32,778 |                    |   | 35,489 | 
|Notes payable                |  |                            | 7,387  |                    |   | 8,134  | 
|                             |  |                            |        |                    |   |        | 
|                             |  |                            |        |                    |   |        | 
|                             |  | $                          | 40,165 |                    | $ | 43,623 | 
|                             |  |                            |        |                    |   |        | 

We expect that existing cash flow from operations and available credit
under our existing credit facilities will be sufficient to meet our cash needs
for the next year and beyond. As of June 30, 2011, we do not have any material
commitments for capital expenditures.

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, |       
|                                              |  |                           |       
|                                              |  | 2011                      |        | 2010 | 
|                                              |  |                           |        |      | 
|Statements
 of Operations Data:               |  |                           |        |      |  |        | 
|Total Revenue                                 |  |                           | 100.0% |      |  | 100.0% | 
|Cost of goods sold                            |  |                           | 93.0%  |      |  | 91.6%  | 
|Selling, general and
 administrative expenses |  |                           | 3.7%   |      |  | 4.1%   | 
|Income before other
 expenses                 |  |                           | 3.3%   |      |  | 4.3%   | 

24

---



Six months ended June 30, 2011 compared to six months ended June 30, 2010

Total revenue increased $4.2 million or 2.5% to $171.2 million in 2011 compared to $167.0 million in 2010.
Recycling revenue increased $4.5 million or 2.8% to $167.3 million in 2011 compared to $162.8 million in 2010. This is primarily due
an increase in the volume of ferrous materials shipments of 20.8 thousand gross tons or 23.2%. Overall average price for all commodities
shipped increased $11.88 per gross ton, or 1.2%, as well. In 2011, new dealer sales in the Recycling segment totaled $18.6 million,
while lost dealer sales totaled only $5.3 million. These increases were partially offset by a decrease in the volume of stainless
steel materials shipments of 31.3 million pounds, or 29.4%, due to a decrease in worldwide stainless steel demand in the second
quarter. Substantially all of our stainless steel sales are to one customer. In response to the overall decrease in demand for
stainless steel, this customer decreased sales orders in the second quarter. The volume of other nonferrous materials shipments
also decreased by 0.5 million pounds, or 3.4%. Sales to existing Recycling segment dealers decreased by $6.5 million, or 4.2%.
Waste Services revenue decreased $0.4 million or 8.5% to $3.8 million in 2011 compared to $4.2 million in 2010 primarily due to
the loss of several large customers in the first and second quarters.

Total cost of goods sold increased $6.2 million
        or 4.0% to $159.1 million 2011 compared to $152.9 million in 2010. Recycling
    cost of goods sold increased $6.7 million or 4.5% to $156.4 million in 2011
    compared to $149.7 million in 2010. This is primarily due to an increase
    in the volume of ferrous materials purchases of 37.8 thousand gross tons,
    or 38.4%, and an increase in the volume of other nonferrous materials purchases
    of 3.4 million pounds, or 21.7% along with the increase in volume of shipments
    noted above. Additional increases in cost of goods sold are as follows:

| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | An increase in direct labor expense of $0.9 million;                                         
| |  | An increase in freight expense of $0.6 million;                                              
| |  | An increase in repair and maintenance expense of $0.7 million;                               
| |  | An increase in fuel, lubricants, torching materials, and hauling expense of $0.4 million; and
| |  | An increase in depreciation expense of $0.3 million.                                         

These increases were partially offset by a
        decrease in the volume of stainless steel materials purchases of 39.6 million pounds, or 36.6%, due to the decrease in worldwide
        stainless steel demand in the second quarter noted above. Overall average price for all commodities purchased decreased $40.92
per gross ton, or 4.7%. Processing fees also decreased $0.5 million.

Waste Services cost of goods sold decreased
        $0.5 million or 16.4% to $2.7 million in 2011 compared to $3.2 million in 2010 primarily due to the loss of the customers mentioned
        above.

Selling, general and administrative expenses
        decreased $0.4 million or 6.1% to $6.4 million in the first six months of 2011 compared to $6.8 million in the same period in 2010.
        As a percentage of revenue, selling, general and administrative expenses were 3.7% in 2011 compared to 4.1% in 2010. The primary
        drivers of the decrease in total expenses were as follows:

| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | A decrease in labor and bonus expense of $1.3 million; and                                          
| |  | A decrease in utilities, insurance, property taxes, repairs and maintenance expense of $0.3 million.

These decreases were partially offset by the
        following:

| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | An increase in depreciation and amortization of $0.3 million;                            
| |  | An increase in operating supplies, fuel, lubricant, and hauling expenses of $0.3 million;
| |  | An increase in consulting, management fees, and directors’ fees of $0.2 million;         
| |  | An increase in legal expenses of $0.1 million.                                           

Other expense increased $1.3 million to other
        expense of $1.7 million in 2011 compared to other expense of $0.4 million in 2010. This was primarily due to an increase in interest
        expense of $0.5 million, a decrease in the gain on sale of assets of $0.1 million, the provision for the legal settlement of $0.2
        million, and an increase in other expense of $0.5 million. This $0.5 million increase in other expense resulted from the need to
        cancel purchase contracts due to the decrease in demand for stainless steel. These contracts required the Company to pay $0.5 million
        in termination fees. The Company chose to terminate these purchase contracts because the purchase contracts cancelled were valued
        at approximately $2.4 million, an amount well above the prevailing market price of the underlying commodities. Because the Company
        can purchase these commodities in the market at lower cost when needed to fill new shipment orders, management determined that
the Company could benefit from market volatility by cancelling these contracts, even after paying the termination fees.

Income tax provision decreased $1.3 million
        to $1.4 million in 2011 compared to $2.7 million in 2010. The effective tax rates in 2011 and 2010 were 37.0% and 40.0%, respectively,
        based on federal and state statutory rates. In 2011, we were able to take advantage of the Domestic Production Activities Deduction
available to US-based manufacturing companies.

25

---



Three months ended June 30, 2011 compared to three months ended June 30, 2010

Total revenue decreased $27.8 million or 30.0% to $65.0 million for the three month
period ending June 30, 2011 as compared to $92.8 million during the same period in 2010. Recycling revenue
decreased $27.6 million or 30.5% to $63.1 million during this period in 2011 compared to $90.7 million during
the same period in 2010. This was primarily due to the drop in worldwide demand in stainless steel in the
second quarter, causing a decrease of 32.3 million pounds, or 62.0%, in the volume of stainless steel
materials shipments and a decrease of 0.7 million pounds, or 8.3%, in the volume of other nonferrous
shipments. Overall average price for all commodities shipped decreased $128.62 per gross ton, or
13.1%. Substantially all of our stainless steel sales are to one customer. In response to the overall
decrease in demand for stainless steel, this customer decreased sales orders in the second quarter.
Overall sales to existing Recycling segment dealers decreased by $31.0 million, or 36.3%. This decrease
was partially offset by an increase in the volume of ferrous shipments of 2.6 thousand gross tons, or 5.0%.
New dealer sales in the Recycling segment totaled $9.1 million, while lost dealer sales totaled only
$3.7 million. Waste Services revenue decreased $0.2 million or 9.7% to $1.9 million during the three
month period ending June 30, 2011 as compared to $2.1 million during the same period in 2010 primarily
due to the loss of several large customers in the first and second quarters.

Total cost of goods sold decreased $24.3 million
        or 28.5% to $60.8 million for the three month period ending June 30, 2011 as compared to $85.1 million during the same period in
        2010. Recycling cost of goods sold decreased $23.8 million or 28.6% to $59.6 million during this period in 2011 compared to $83.4
        million during the same period in 2010. This was primarily due to the second quarter decrease in the volume of stainless steel
        materials purchased of 46.3 million pounds, or 72.7% along with the decrease in the volume of shipments noted above. Overall average
        price for all commodities purchased decreased $317.39 per gross ton, or 31.8%. Processing fees also decreased by $0.2 million in
the second quarter of 2011 as compared to the same period in 2010.

These decreases were partially offset by an
        increase in the volume of ferrous materials purchased of 18.5 thousand gross tons, or 37.6% and an increase in the volume of nonferrous
        materials purchased of 3.5 million pounds, or 47.0%. Additional increases to cost of goods sold include the following:

| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | An increase in direct labor expense of $0.3 million;                                         
| |  | An increase in repair and maintenance expense of $0.3 million;                               
| |  | An increase in fuel, lubricant, torching materials, and hauling expenses of $0.2 million; and
| |  | An increase in depreciation expense of $0.1 million.                                         

Waste Services cost of goods sold decreased
        $0.5 million or 26.7% to $1.2 million for the three month period ending June 30, 2011 as compared to $1.7 million during the same
period in 2010 primarily due to the loss of the customers noted above.

Selling, general and administrative expenses decreased $1.0 million or 27.8% to
$2.6 million in 2011 compared to $3.6 million in 2010. As a percentage of revenue, selling, general and
administrative expenses were 4.0% in 2011 compared to 3.8% in 2010. The primary driver of the decrease
in total expense was a decrease in labor, stock bonus and bonus expense of $1.2 million. This decrease
was partially offset by an increase in depreciation and amortization expense of $0.2 million.

Other expense increased $0.8 million to $1.1 million in 2011 compared to
other expense of $0.3 million in 2010 primarily due to the increase of $0.2 million in interest expense
due to new debt, the provision for the legal settlement of $0.2 million, and the increase of $0.5 million
in other expense. This $0.5 million increase in other expense resulted from the need to cancel purchase
contracts due to the decrease in demand for stainless steel. These contracts required the Company pay
$0.5 million in termination fees. The Company chose to terminate these purchase contracts because the
purchase contracts cancelled were valued at approximately $2.4 million, an amount well above the prevailing
market price of the underlying commodities. Because the Company can purchase these commodities in the
market at lower cost when needed to fill new shipment orders, management determined that the Company
could benefit from market volatility by cancelling these contracts, even after paying the termination fees.

Income tax provision decreased $1.4 million to $0.2 million in 2011 compared to
$1.6 million in 2010. The effective tax rate in 2011 and 2010 was 36.9% and 40.0%, respectively, based on
federal and state statutory rates. In 2011, we were able to take advantage of the Domestic Production
Activities Deduction available to US-based manufacturing companies.

26

---



We used net cash from
investing activities of $1.0 million and $1.3 million for the six month periods
ended June 30, 2011 and 2010, respectively. In 2011, we used $0.2 million for
road and building improvements. We purchased recycling and rental fleet equipment,
shredder system equipment, and office equipment of $0.5 million. The rental
fleet equipment consists of solid waste handling and recycling equipment such
as compactors, waste edge monitors, and balers. It is our intention to continue
to pursue this market. We also purchased two trucks for $0.2 million. We
received $0.2 million from sales of our rental fleet compactors, balers, and
containers. We paid deposits of $0.3 million on machinery and equipment.

We used net cash from
financing activities of $3.4 million and $3.9 million for the six month periods
ended June 30, 2011 and 2010, respectively. In 2011, we made payments on debt
obligations of $3.9 million, and received $0.5 million in proceeds from debt.

Accounts receivable trade
decreased $7.2 million to $20.2 million as of June 30, 2011 compared to $27.4
million as of December 31, 2010. This change is due to decreased demand for
stainless steel in the second quarter and the resulting decrease in shipments
of materials.

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 $0.1 million or 0.4% to $34.2 million as of
June 30, 2011 compared to $34.3 million as of December 31, 2010. With lower
demand for stainless steel causing fewer sales orders in the second quarter, we
decreased purchasing activity and cancelled several purchase contracts, thus
lowering inventory.

Inventory
aging for the period ended June 30, 2011 (Days Outstanding):


|                                                    |  |                 |        |          |   |          |  |          |       |       |   |       |  |   |        | 
|--------------------------------------------------- |  | --------------- | ------ | -------- | - | -------- |  | -------- | ----- | ----- | - | ----- |  | - | ------ | 
|                                                    |  | (in
 thousands) |       
|Description                                         |  | 1 - 30          |        | 31 -
 60 |   | 61 -
 90 |  | Over
 90 |       | Total |  
|                                                    |  |                 |        |          |   |          |  |          |       |       |  
|Stainless steel,
 ferrous and non-ferrous materials |  | $               | 16,506 |          | $ | 4,310    |  | $        | 7,557 |       | $ | 4,318 |  | $ | 32,691 | 
|Replacement parts                                   |  |                 | 1,329  |          |   |         |  |          |      |       |   |      |  |   | 1,329  | 
|Waste equipment
 machinery                          |  |                 | 16     |          |   |         |  |          |      |       |   | 52    |  |   | 68     | 
|Other                                               |  |                 | 78     |          |   |         |  |          |      |       |   |      |  |   | 78     | 
|                                                    |  |                 |        |          |   |          |  |          |       |       |   |       |  |   |        | 
|Total                                               |  | $               | 17,929 |          | $ | 4,310    |  | $        | 7,557 |       | $ | 4,370 |  | $ | 34,166 | 
|                                                    |  |                 |        |          |   |          |  |          |       |       |   |       |  |   |        | 

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


|                                                    |  |                 |        |          |   |          |  |          |       |       |   |       |  |   |        | 
|--------------------------------------------------- |  | --------------- | ------ | -------- | - | -------- |  | -------- | ----- | ----- | - | ----- |  | - | ------ | 
|                                                    |  | (in
 thousands) |       
|Description                                         |  | 1 - 30          |        | 31 -
 60 |   | 61 -
 90 |  | Over
 90 |       | Total |  
|                                                    |  |                 |        |          |   |          |  |          |       |       |  
|Stainless steel,
 ferrous and non-ferrous materials |  | $               | 25,062 |          | $ | 5,450    |  | $        | 1,184 |       | $ | 1,168 |  | $ | 32,864 | 
|Replacement parts                                   |  |                 | 1,313  |          |   |         |  |          |      |       |   |      |  |   | 1,313  | 
|Waste equipment
 machinery                          |  |                 |       |          |   |         |  |          |      |       |   | 75    |  |   | 75     | 
|Other                                               |  |                 | 59     |          |   |         |  |          |      |       |   |      |  |   | 59     | 
|                                                    |  |                 |        |          |   |          |  |          |       |       |   |       |  |   |        | 
|Total                                               |  | $               | 26,434 |          | $ | 5,450    |  | $        | 1,184 |       | $ | 1,243 |  | $ | 34,311 | 
|                                                    |  |                 |        |          |   |          |  |          |       |       |   |       |  |   |        | 

27

---



Inventory in the Over 90
days category as of June 30, 2011 includes several materials that are bought
in bulk for pricing and used sparingly in between blends. We have not used some
material due to decreased demand for stainless steel and other nickel-based
scrap metals in the second quarter. The Company cannot assure that global
demand will improve in the near term.

Accounts payable trade
decreased $6.4 million or 56.0% to $5.0 million as of June 30, 2011 compared to
$11.4 million as of December 31, 2010, primarily due to decreasing purchasing
activity in response to lower demand for metals in the second quarter.

Working capital decreased
$0.9 million to $46.4 million as of June 30, 2011 compared to $47.3 million as
of December 31, 2010. The decrease was primarily driven by the $7.2 million
decrease in accounts receivable, the $0.4 million decrease in cash, and the
$0.1 million decrease in inventories. These decreases were partially offset by
the $6.4 million decrease in accounts payable, the $0.9 million decrease in
accrued bonuses, and $0.5 million increase in income taxes payable.

Deposits increased $2.0
million to $2.2 million as of June 30, 2011 compared to $0.2 million as of
December 31, 2010. The increase was primarily due to a deposit of $1.7 million
for inventory and deposits on equipment of $0.3 million paid in the second
quarter.

Contractual Obligations

The following table
provides information with respect to our known contractual obligations for the
quarter ended June 30, 2011.

|                                |  |                                        |        |                    |   |              |  |              |        |                     |   |     |  |   |   | 
|------------------------------- |  | -------------------------------------- | ------ | ------------------ | - | ------------ |  | ------------ | ------ | ------------------- | - | --- |  | - | - | 
|                                |  | Payments
 due by period (in thousands) |       
|                                |  |                                        |       
|Obligation Description (2)      |  | Total                                  |        | Less
 than
 1 year |   | 1 - 3
 years |  | 3 - 5
 years |        | More
 than
 5 years |  
|                                |  |                                        |        |                    |   |              |  |              |        |                     |  
|                                |  |                                        |        |                    |   |              |  |              |        |                     |   |     |  |   |   | 
|Long-term debt obligations      |  | $                                      | 42,048 |                    | $ | 1,883        |  | $            | 40,000 |                     | $ | 165 |  | $ |  | 
|                                |  |                                        |        |                    |   |              |  |              |        |                     |   |     |  |   |   | 
|Operating lease obligations (1) |  |                                        | 1,553  |                    |   | 769          |  |              | 570    |                     |   | 214 |  |   |  | 
|                                |  |                                        |        |                    |   |              |  |              |        |                     |   |     |  |   |   | 
|                                |  |                                        |        |                    |   |              |  |              |        |                     |   |     |  |   |   | 
|Total                           |  | $                                      | 43,601 |                    | $ | 2,652        |  | $            | 40,570 |                     | $ | 379 |  | $ |  | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We
 lease the Louisville, Kentucky facility from K&R, LLC, the sole member of
 which is Harry Kletter, our chief executive officer, under an operating lease
 expiring December 2012. We have monthly rental payments of $48.5 thousand
 through December 2012. In the event of a change of control, the monthly payments
 become $62.5 thousand.                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | We
 also lease equipment from K&R, LLC for which monthly payments of $10.5
 thousand are due through November 2015.                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | We
 have subleased the Lexington property to an unaffiliated third party for a
 term commencing March 1, 2007 and ending December 31, 2012 for $4.5 thousand
 per month. We currently lease this property from an unrelated party for $4.5
 thousand per month; the lease terminates December 31, 2012. If for any reason
 the sub-lessee defaults, we remain liable for the remainder of the lease
 payments through December 31, 2012.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | We
 also lease office space in Dallas, Texas for which monthly payments of $969
 are due through September 2011.                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(2) | All
 interest commitments under interest-bearing debt are included in this table,
 excluding the interest rate swaps, for which changes
 in value are accounted for in other comprehensive income.                                                                                                                                                                                                                                      

28

---



Long-term
debt, including the current portions thereof, decreased $3.4 million to $42.0
million as of June 30, 2011 compared to $45.4 million as of December 31, 2010.

Impact of Recently Issued Accounting
Standards

In
June 2011, the FASB issued ASU 2011-05, which is an update to Topic 220,
Comprehensive Income. This update eliminates the option of presenting the
components of other comprehensive income as part of the statement of changes in
stockholders equity, requires consecutive presentation of the statement of net
income and other comprehensive income and requires reclassification adjustments
from other comprehensive income to net income to be shown on the financial
statements. ASU 2011-05 is effective for all interim and annual reporting
periods beginning after December 15, 2011, the quarter ending March 31,
2012 for us. We do not expect the adoption of ASU 2011-05 will have a material
impact on our Condensed Consolidated Financial Statements.

In
May 2011, the FASB issued ASU No. 2011-04, which is an update to Topic 820,
Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and International Financial Reporting
Standards (IFRS). The amendments in this ASU generally represent
clarification of Topic 820, but also include instances where a particular
principle or requirement for measuring fair value or disclosing information
about fair value measurements has changed. This update results in common
principles and requirements for measuring fair value and for disclosing
information about fair value measurements in accordance with GAAP and IFRS. The
amendments are effective for interim and annual periods beginning after
December 15, 2011, the quarter ending March 31, 2012 for us, and are to be
applied prospectively. Early application is not permitted. We do not expect the
adoption of ASU 2011-04 will have a material impact on our Condensed
Consolidated Financial Statements.

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.

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

29

---



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

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

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

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

We are exposed to
interest rate risk on our floating rate borrowings.

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

We entered into three
interest rate swap agreements swapping variable rates for fixed rates. The
first swap agreement covers $5.0 million in debt and commenced April 7, 2009
and matures on April 7, 2014. The second swap agreement covers approximately
$2.2 million in debt and commenced October 15, 2008 and matures on May 7, 2013.
The third swap agreement covers approximately $483.8 thousand in debt and
commenced October 22, 2008 and matures on October 22, 2013. The three swap
agreements fix our interest rate at approximately 5.8%. At June 30, 2011, we
recorded the estimated fair value of the liability related to the three swaps
as approximately $580.0 thousand. We entered into the swap agreements for the
purpose of hedging the interest rate market risk for the respective notional
amounts. These swap agreements were not affected by the debt restructuring with
Fifth Third Bank in 2010. We maintain a cash account on deposit with BB&T
which serves as collateral for the swap agreements. As of June 30, 2011, the
balance in this account was $653 thousand.

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

30

---



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, 2011,
 ISAs disclosure controls and procedures were effective for the purpose of
 ensuring that the information required to be disclosed in the reports that
 ISA files under the Exchange Act with the Securities and Exchange Commission
 (1) is recorded, processed, summarized and reported within the time periods
 specified 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, 2011 that have materially affected, or are reasonably likely
 to affect ISAs internal control over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

PART II  OTHER INFORMATION

Item 1.
Legal Proceedings

On
January 4, 2007, Lennox Industries, Inc., a commercial heating and
air-conditioning manufacturer, filed a suit against us captioned Lennox
Industries, Inc. v. Industrial Services of America, Inc., Case No.
CV-2007-004, in the Arkansas County, Arkansas Circuit Court in Stuttgart,
Arkansas. Lennox in its Second Amended Complaint alleged 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 termination on November 17, 2005. Both compensatory and
punitive damages were sought by Lennox.

A
jury trial was held from June 20-24, 2011. The punitive damage claim was
withdrawn by Lennox at the conclusion of its case, and Lennox claimed over $1
million in compensatory damages. On June 24, the jury found in ISAs favor on
five of the six claims. Lennox was awarded $175,000 on the remaining claim,
which we have accrued.

We
have litigation from time to time, including employment-related claims, none of
which we currently believe to be material.

31

---



Item 1A.
Risk Factors

We have had no material
changes from the risk factors reported in our Form 10-K for the year ended
December 31, 2010, as filed with the Securities and Exchange Commission on
March 28, 2011.

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

There were no
unregistered sales of equity securities in the second quarter of 2011. However,
on July 1, 2010, we issued 300,000 shares of our common stock in exchange for
the Venture Metals, LLC (Venture) customer list and name, Ventures execution
of a non-compete agreement, and Ventures agreement to cause Mr. Jones and Mr.
Valentine to provide the company with non-compete agreements. The issuance of
shares to Venture was a private offering exempt from registration under Section
4(2) of the Securities Act of 1933, as amended.

On November 15, 2005, our
Board of Directors authorized a program to repurchase up to 300,000 shares of
our common stock at current market prices. No shares were repurchased in 2011,
2010, or 2009. In 2008, we repurchased 83,411 shares. Prior to 2008, we
repurchased 83,264 shares.

Issuer Purchases of Equity Securities

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

Item 3.
Defaults upon Senior Securities

None.

Item 4.
Removed and Reserved

Item 5.
Other Information

None.

Item 6.
Exhibits

See exhibit index.

32

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SIGNATURES

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

|                         |                                     
|------------------------ | ------------------------------------
|                         | INDUSTRIAL SERVICES OF AMERICA, INC.
|                         |                                     
|Date:  November 28, 2011 | /s/ Harry
 Kletter                  
|                         |                                     
|                         | Chairman and Chief Executive Officer
|                         | (Principal Executive Officer)       
|                         |                                     
|Date:  November 28, 2011 | /s/ Robert D. Coleman               
|                         |                                     
|                         | Chief Financial Officer             

33

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INDEX TO
EXHIBITS

|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|--------------- | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |    | Description
 of Exhibits                                                                                                                                                                                                                                                                                                                                                             
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|10.1            | ** | First Amendment to Credit Agreement, dated November 15, 2010 by and among Industrial Services
of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit 10.1
of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                                             
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|10.2            | ** | Promissory Note, dated October 13, 2010, in the amount of $1,320,240 payable to Fifth Third Bank,
and Loan and Security Agreement, dated October 13, 2010, by and between Fifth Third Bank and Industrial Services of
America, Inc. is incorporated by reference herein to Exhibit 10.2 of ISAs Report on Form 10-Q for the quarter
ended June 30, 2011, as filed on August 9, 2011.
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|10.3            | ** | Exhibit A of First Amendment to Credit Agreement, dated April 14, 2011: Amended and Restated
Revolving Loan Note, dated April 14, 2011, in the amount of $45,000,000 payable to Fifth Third Bank is incorporated
by reference herein to Exhibit 10.3 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                   
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|10.4            | ** | Credit Agreement, dated
      July 30, 2010, by and among Industrial Services of America, Inc., ISA Indiana,
      Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit
    10.4 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                                                   
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|10.5            | ** | Schedules 1.1 through 8.11 of Credit Agreement, dated July 30, 2010, by and among
Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference
herein to Exhibit 10.5 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                                     
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|10.6            | ** | Exhibit A (Advance Request and Borrowing Notice) of Credit Agreement, dated July 30, 2010, by
and among Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference
herein to Exhibit 10.6 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                               
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|10.7            | ** | Exhibit B (Borrowing Base Certificate) of Credit Agreement, dated July 30, 2010, by and
among Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference
herein to Exhibit 10.7 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                         
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|10.8            | ** | Exhibit C-1 (Form of Borrower Security Agreement) of Credit Agreement, dated July 30, 2010, by and among
Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to
Exhibit 10.8 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                              
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|10.9            | ** | Exhibit C-2 (Form of Guarantor Security Agreement) of Credit Agreement, dated July 30, 2010,
by and among Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference
herein to Exhibit 10.9 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                             
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|10.10           | ** | Exhibit D (Compliance Certificate) of Credit Agreement, dated July 30, 2010, by and among Industrial
Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to
Exhibit 10.10 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                            
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|10.11           | ** | Exhibit E (Form of Pledge Agreement) of Credit Agreement, dated July 30, 2010, by and among
Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to
Exhibit 10.11 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                          
|                |    |                                                                                                                                                                                                                                                                                                                                                                                      
|10.12           | ** | Exhibit F (Form of Revolving Loan Note) of Credit Agreement, dated July 30, 2010, by and among
Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to
Exhibit 10.12 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                       

34

---



|        |    |                                                                                                                                                                                                                                                                                                                                         
|------- | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13   | ** | Exhibit G (Form of Term Loan Note) of Credit Agreement, dated July 30, 2010, by and among
Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to
Exhibit 10.13 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.               
|        |    |                                                                                                                                                                                                                                                                                                                                         
|10.14   | ** | Exhibit H (Form of Guaranty) of Credit Agreement, dated July 30, 2010, by and among
Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to
Exhibit 10.14 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                     
|        |    |                                                                                                                                                                                                                                                                                                                                         
|10.15   | ** | Exhibit I (Form of Agreement Regarding Insurance) of Credit Agreement, dated July 30, 2010, by and among
Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to
Exhibit 10.15 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
|        |    |                                                                                                                                                                                                                                                                                                                                         
|10.16   | ** | Exhibit J (Assignment and Assumption) of Credit Agreement, dated July 30, 2010, by and among
Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to
Exhibit 10.16 of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.            
|        |    |                                                                                                                                                                                                                                                                                                                                         
|31.1    |    | Rule 13a-14(a) Certification of Harry Kletter for the Form 10-Q/A for the quarter ended June 30, 2011.                                                                                                                                                                                                                                  
|        |    |                                                                                                                                                                                                                                                                                                                                         
|31.2    |    | Rule 13a-14(a) Certification of Robert D. Coleman for the Form 10-Q/A for the quarter ended June 30, 2011.                                                                                                                                                                                                                              
|        |    |                                                                                                                                                                                                                                                                                                                                         
|32.1    |    | Section 1350 Certification of Harry Kletter and Robert D. Coleman for the Form 10-Q/A for the quarter ended June 30, 2011.                                                                                                                                                                                                              
|        |    |                                                                                                                                                                                                                                                                                                                                         
|101.INS | ** | XBRL Instance Document* is incorporated by reference herein to Exhibit 101.INS of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                                                                                                                            
|        |    |                                                                                                                                                                                                                                                                                                                                         
|101.SCH | ** | XBRL Taxonomy Extension Schema Document* is incorporated by reference herein to Exhibit 101.SCH of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                                                                                                           
|        |    |                                                                                                                                                                                                                                                                                                                                         
|101.CAL | ** | XBRL Taxonomy Extension Calculation Document* is incorporated by reference herein to Exhibit 101.CAL of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                                                                                                      
|        |    |                                                                                                                                                                                                                                                                                                                                         
|101.DEF | ** | XBRL Taxonomy Extension Definitions Document* is incorporated by reference herein to Exhibit 101.DEF of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                                                                                                      
|        |    |                                                                                                                                                                                                                                                                                                                                         
|101.LAB | ** | XBRL Taxonomy Extension Labels Document* is incorporated by reference herein to Exhibit 101.LAB of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                                                                                                           
|        |    |                                                                                                                                                                                                                                                                                                                                         
|101.PRE | ** | XBRL Taxonomy Extension Presentation Document* is incorporated by reference herein to Exhibit 101.PRE of ISAs Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.                                                                                                                                     
|        |    |                                                                                                                                                                                                                                                                                                                                         
|        |    | ** Previously filed.                                                                                                                                                                                                                                                                                                                    

|* | Pursuant to Regulation S-T, this interactive data file is deemed not filed or
part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not
filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35

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