|                                                 
|-------------------------------------------------
|UNITED
 STATES SECURITIES AND EXCHANGE COMMISSION
|Washington, DC 20549                             
|                                                 
|FORM
 10-K/A                                     
|(Amendment No. 1)                                
|                                                 

|                                                        |                                                                                          
|------------------------------------------------------- | -----------------------------------------------------------------------------------------
|x                                                       | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934    
|                                                        |                                                                                          
|For Fiscal Year Ended December 31, 2010                
|                                                        |                                                                                          
|o                                                       | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT OF 1934
|                                                        |                                                                                          
|For the transition period from __________ to __________

|                                                      
|------------------------------------------------------
|Commission File No.: 0-20979                          
|                                                      
|                                                      
|                                                      
|INDUSTRIAL
 SERVICES OF AMERICA, INC.                 
|(Exact name of registrant as specified in its charter)

|                                                                                                |         |                                        |  |  |            | 
|----------------------------------------------------------------------------------------------- | ------- | -------------------------------------- |  |  | ---------- | 
|                                                                                                | Florida |                                        |  |  | 59-0712746 | 
|                                                                                                |         |                                        |  |  |            | 
|(State or other jurisdiction of
 incorporation or organization)                                 |         | (I.R.S. Employer 
 Identification No.)
|                                                                                                |         |                                       
|7100 Grade Lane
 P.O. Box 32428
 Louisville, Kentucky
 (Address of Principal Executive Offices) |         | 40232
 (Zip Code)                     

|                                                                  
|------------------------------------------------------------------
|Registrants Telephone Number, Including Area Code:(502)
 368-1661
|                                                                  
|Securities registered pursuant to Section 12(b) of the Act: None  
|                                                                  
|Securities registered pursuant to Section 12(g) of the Act:       
|                                                                  
|Common Stock, $0.0033 par value
 (Title of class)                 

|                                                                                                                                                                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Indicate
 by check mark if the registrant is a well-known seasoned issuer, as defined
 in Rule 405 of the Securities
 Act.          Yes o No x                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                
|Indicate
 by check mark if the registrant is not required to file reports pursuant to
 Section 13 or Section 15(d) of the
 Act.          Yes o No x                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                
|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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
 S-K is not contained herein, and will not be contained, to the best of
 registrants knowledge, in definitive proxy or information statements
 incorporated by reference in Part III of this Form 10-K or any amendment to
 this Form 10-K.          o                                                           

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|                                                                                                                                                                                                                                                                                                        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                  
|Aggregate market value of the 4,032,067
 shares of voting Common Stock held by non-affiliates of the registrant at the
 closing sales price on June 30, 2010: $45,078,498.                                                                        
|                                                                                                                                                                                                                                                  
|Number of shares of Common Stock,
 $0.0033 par value, outstanding as of the close of business on March 28, 2011:
 6,580,038.                                                                                                                      
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                  
|DOCUMENTS INCORPORATED BY REFERENCE                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                  
|Portions of the registrants definitive Proxy Statement for the 2011
 Annual Meeting of Shareholders are incorporated by reference into Item 10
 through Item 14 of Part III of this report. Certain Exhibits are also
 incorporated by reference.

EXPLANATORY NOTE

This
Amendment No. 1 to Form 10-K (this Amendment) amends the Annual
Report on Form 10-K for the fiscal year ended December 31, 2010 (the
2010 Form 10-K), originally filed on March 28, 2011 (the Original
Filing), of Industrial Services of America, Inc. (the Company, our, we,
or us). The Amended 10-K is being filed to amend the Original 10-K pursuant
to the SEC comment letters dated June 21, 2011 and August 22, 2011. We
also corrected the inventory aging information for 2010 in the MD&A. 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 Filing, the
Original Filing 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 SEC subsequent to the date of the Original Filing.

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PART
I

|        |          
|------- | ---------
|Item 1. | Business.

General

Industrial
Services of America, Inc. (herein ISA, the Company, we, us, our, or
other similar terms), is a Louisville, Kentucky-based recycler of stainless
steel, ferrous, and non-ferrous scrap and provider of waste services. Although
we have two principal business segments, recycling and waste services, we are
primarily focusing our attention now and in the future towards our recycling
business. The recycling segment collects, purchases, processes and sells
stainless steel, ferrous and non-ferrous scrap metal to steel mini-mills,
integrated steel makers, foundries and refineries. We purchase ferrous and
non-ferrous scrap metal primarily from industrial and commercial generators of
steel, iron, aluminum, copper, stainless steel and other metals as well as from
scrap dealers and retail customers who deliver these materials directly to our
facilities. We process scrap metal through our shredding, sorting, shearing,
cutting, and baling operations. Within the recycling segment, our alloys
division specializes in the purchasing, processing and sale of stainless steel,
nickel-based and high-temperature alloys. Our non-ferrous scrap recycling
operations consist primarily of collecting, sorting and processing various
grades of copper, aluminum and brass.

The waste
services segment provides waste management services including contract
negotiations with service providers, centralized billing, invoice auditing and
centralized dispatching. Waste services also rents, leases, sells, and services
waste handling and recycling equipment.

Although
our focus is on the recycling industry, our goal is to remain dedicated to the
waste services industry as well, while sustaining steady growth at an
acceptable profit, adding to our net worth, and providing positive returns for
our 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.

Available Information

We make
available, free of charge, through our website www.isa-inc.com, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, proxy statements, and amendments to those reports as soon as reasonably
practicable after we have electronically filed with the Securities and Exchange
Commission. We also make available on our website our audit committee charter,
our Business Ethics Policy and Code of Conduct and our Code of Ethics for the
CEO, CFO and senior financial officers. Please note that our Internet address
is included in this annual report on Form 10-K as an inactive textual reference
only. Information contained on our website www.isa-inc.com is not
incorporated by reference into this annual report on Form 10-K and should not
be considered a part of this report.

ISA Recycling Operating Division

Since
October 2005, we have focused much of our attention on our recycling business
segment. We sell processed ferrous and non-ferrous scrap material, including
stainless steel, to end-users such as steel mini-mills, integrated steel makers
and foundries and refineries. We purchase ferrous and non-ferrous scrap
material primarily from industrial and commercial generators of steel, iron,
aluminum, copper, stainless steel and other metals as well as from other scrap
dealers who deliver these materials directly to our facilities. We process
these materials by sorting, shearing, cutting, shredding and/or baling. We also
remain dedicated to initiating growth in our waste management business segment,
which includes management services and waste and recycling equipment sales, service
and leasing.

In 2010, we
hired an Alloys Operations Manager to aid in the expansion of specialty alloys
within our recycling segment, specifically in the area of aerospace alloys. In
July 2010 we purchased certain Venture Metals, LLC intangibles, including the
customer list and trade name, and entered into a non-compete agreement to
protect our market position.

Ferrous Operations

Ferrous
Scrap Purchasing - We purchase ferrous scrap from two
primary sources: (i) industrial and commercial generators of steel and iron;
and (ii) scrap dealers, peddlers, and other generators and collectors who sell
us steel and iron scrap, known as obsolete scrap. Market demand and the
composition, quality, size and weight of the materials are the primary factors
that determine prices paid to these material providers.

3

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Ferrous
Scrap Processing - We prepare ferrous scrap material
for resale through a variety of methods including sorting, shearing, cutting,
shredding and baling. We produce a number of differently sized, shaped and
graded products depending upon customer specifications and market demand.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Sorting - After
 purchasing ferrous scrap material, we inspect it to determine how we should
 process it to maximize profitability. In some instances, we may sort scrap
 material and sell it without further processing. We separate scrap material
 for further processing according to its size, composition and grade by using
 conveyor systems, front-end loaders, crane-mounted electromagnets and claw-like
 grapples.                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Shearing or Cutting
 - Pieces of oversized ferrous scrap material, such as obsolete steel girders
 and used pipe, which are too large for other processing are cut with hand
 torches, crane-mounted alligator shears or stationary guillotine shears.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Shredding
  We shred large pieces of ferrous scrap material, such as automobiles and
 major appliances, in our shredder by hammermill action into pieces of a
 workable size that pass through magnetic separators to separate metal from synthetic
 foam, fabric, rubber, stone, dirt, etc. The metal we recover from the
 shredding process we sell directly to customers or reuse in some other metal
 blend. The substantially non-metallic residue by-product is usually referred
 to as automobile shredder residue (ASR) or shredder fluff. We dispose of
 the non-metal components, which can reduce the volume of the scrap as much as
 25.0%, in a landfill. We began using the shredder system July 1, 2009.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Baling - We
 process light-gauge ferrous materials such as clips, sheet iron and
 by-products from industrial and commercial processes, such as stampings,
 clippings and excess trimmings, by baling these materials into large, uniform
 blocks. We use cranes and conveyors to feed the material into a hydraulic
 press, which compresses the material into uniform blocks.                                                                                                                                                                                                                                                                                                                                             

Ferrous
Scrap Sales - We sell processed ferrous scrap material
to end-users such as steel mini-mills, integrated steel makers and foundries,
and brokers who aggregate materials for other large users. Most customers
purchase processed ferrous scrap material through negotiated spot sales
contracts, which establish the quantity purchased for the month and the
pricing. The price we charge for ferrous scrap materials depends upon market supply
and demand, as well as quality and grade of the scrap material. We deliver all
scrap ourselves or using third party carriers via truck, railcar, and/or barge.
Some customers choose to send their own delivery trucks. These trucks are
weighed and loaded at one of our sites based on the sales order.

Non-Ferrous Operations

Non-Ferrous
Scrap Purchasing - We purchase non-ferrous scrap from
two primary sources: (i) industrial and commercial non-ferrous scrap material
providers who generate or sell waste aluminum, copper, stainless steel, other
nickel-bearing metals, brass and other metals; and (ii) peddlers, scrap
dealers, generators and collectors who deliver directly to our facilities
material that they collect from a variety of sources. We also collect
non-ferrous scrap from sources other than those that are delivered directly to
our processing facilities by placing retrieval boxes at these sources. We
subsequently transport the boxes to our processing facilities.

Non-Ferrous
Scrap Processing - We prepare non-ferrous scrap
metals, principally aluminum, copper, brass and stainless steel to sell by
sorting, shearing, cutting, shredding or baling.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Sorting - Our
 sorting operations separate and identify non-ferrous scrap by using front-end
 loaders, grinders, hand torches and spectrometers. Our ability to identify
 metallurgical composition maximizes margins and profitability. We sort
 non-ferrous scrap material for further processing according to type, grade,
 size and chemical composition. Throughout the sorting process, we determine
 whether the material requires further processing before we sell it.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Shearing or Cutting
 - Pieces of oversized non-ferrous scrap material, which are too large for
 other processing methods, are cut with alligator shears.                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Shredding
  We shred large pieces of nonferrous scrap material, such as steel drums,
 copper and aluminum cable, tubing, sheet metal, extrusions, and baled
 aluminum, in our shredder by hammermill action into pieces of a workable size
 that pass through magnetic separators to separate metal from synthetic foam,
 fabric, rubber, stone, dirt, etc. The metal we recover from the shredding
 process we sell directly to customers or reuse in some other             

4

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| |   |                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | metal blend. We dispose of the non-metal components, which can reduce
 the volume of the scrap as much as 25.0%, in a landfill. We began using the
 shredder system July 1, 2009.                                                                                             
| |   |                                                                                                                                                                                                                                                                               
| |  | Baling - We
 process non-ferrous metals such as aluminum cans, sheet and siding by baling
 these materials into large uniform blocks. We use front-end loaders and
 conveyors to feed the material into a hydraulic press, which compresses the
 material into uniform blocks.

Non-Ferrous
Scrap Sales - We sell processed non-ferrous scrap
material to end-users such as foundries, aluminum sheet and ingot
manufacturers, copper refineries and smelters, steel mini-mills, integrated
steel makers, steel foundries and refineries, and brass and bronze ingot
manufacturers. Prices for the majority of non-ferrous scrap materials change
based upon the daily publication of spot and futures prices on COMEX or the
London Metals Exchange. We deliver all scrap ourselves or using third party
carriers via truck, railcar, and/or barge. Some customers choose to send their
own delivery trucks. These trucks are weighed and loaded at one of our sites
based on the sales order.

Waste Services Operations

Our Waste
Services operations are in the business of commercial, retail and industrial
waste and recycling management services (operating under the commercial waste
services or CWS) and commercial and industrial waste and recycling handling
equipment sales, rental and maintenance (operating under the name waste
equipment sales and service company or WESSCO). CWS offers a total package
concept to commercial, retail and industrial customers for their
waste and recycling management needs. Combining waste reduction and diversion,
and waste equipment technology, CWS creates waste and recycling
programs tailored to each customers needs. The services we offer include
locating and contracting with a hauling company and recycler at a
reasonable cost for each participating location. CWS does not own
waste-transporting trucks or landfills. We do not operate or partner with any of
the national hauling or recycling companies, and none of these companies own
us. We are able to maintain a neutral position for the benefit of our
customers. We have designed and developed proprietary computer software that
provides our personnel with relevant information on each customers locations,
as well as pertinent information on service providers, disposal rates, costs of
equipment, including installation and shipping, disposal rates and recycling
prices. This software has allowed us to build a database for serving our
customers that have locations nationwide as well as in Canada. This software
enables us to generate detailed monthly customized billing reports, and price
tracking to accommodate our customers needs.

Our
commercial waste services division provides our customers evaluation,
management, monitoring, auditing, cost reduction and containment of
non-hazardous solid waste removal and recycling activities. CWS has an active
network of 1,049 hauling, landfill, recycling and equipment manufacturing and
maintenance service providers throughout the United States and Canada. Through
this network, we are able to provide pricing estimates for current and
potential customers. CWS customer service representatives have access to this
information through the computer software designed and developed to enhance the
value offered to our customers. Through this information retrieval system and
database, customer service representatives review and audit the accuracy of
recent billings for hauling, landfill and recycling rates.

By offering
competitively priced waste and recycling handling equipment from a number of
different manufacturers, WESSCO is able to tailor equipment packages for
individual customer needs. We do not manufacture any equipment, but we do
refurbish, recondition and add options when necessary. We sell, rent and repair
all types of industrial and commercial waste and recycling handling equipment
such as compactors, balers and containers.

Total
Package Concept

Our
management services division has third party service providers providing timely
service for waste removal and recycling services for our customers. Our
recycling division purchases ferrous and nonferrous materials, cardboard and
paper on a daily basis. The products or services have value to the customer on
a standalone basis. These services make up the total package concept.

Company
Background

ISA was
incorporated in October 1953 in Florida under the name Alson Manufacturing,
Inc. From the date of incorporation through January 5, 1975, Alson designed and
manufactured various forms of electrical products. In 1979, the Board of
Directors and the shareholders of Alson commenced liquidation of all the
tangible assets of Alson. On October 27, 1983, Harry Kletter, our Chairman of
the Board and Chief Executive Officer, acquired 629,250 shares of ISA Common
Stock. The existing directors resigned and five new directors were elected.

5

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On July 1,
1984, we began a solid waste handling and disposal equipment sales organization
under the name Waste Equipment Sales and Services Company, which we refer to as
WESSCO. On January 1, 1985, we merged with Computerized Waste Systems, Inc., a
Massachusetts corporation. CWS was a corporation specializing in offering solid
waste management consultations for large multi-location companies involved in
the retail, restaurant and industrial sectors. At the time of the merger, CWS
was concentrating on large retail chains, but has changed its emphasis to include
commercial and industrial customers. This strategy created an additional target
market for us. Subsequent to the merger with CWS, we moved the CWS headquarters
from Springfield, Massachusetts to Louisville, Kentucky. At the time of the
merger, much of the customer base and marketing efforts were concentrated in
the Northeast. With the move to Louisville, we began to expand our marketing
efforts, which are now nationwide.

On July 1,
1997, we acquired the assets of a non-ferrous scrap metal recycling facility
located at 7100 Grade Lane, Louisville, Kentucky, thus expanding our recycling
product lines.

In January
1998, we acquired the business of a ferrous scrap and corrugated paper
recycling facility located at 7100 Grade Lane, Louisville, Kentucky. This
acquisition was the beginning of our ferrous scrap metal, non-ferrous scrap
metal and corrugated paper processing segment known as ISA Recycling.

On June 1,
1998, we acquired all of the business, property, rights and assets of a ferrous
and non-ferrous scrap metal recycling facility located in North Vernon,
Indiana. On July 8, 2002, we acquired a five-acre tract at 1565 East 4th
Street, Seymour Indiana. In the fourth quarter of 2002, we moved our metal
recycling facilities from North Vernon, Indiana to Seymour, Indiana.

On February
15, 2005 we added a location in Lexington, Kentucky. We were using this
property as a transfer station for ferrous and nonferrous material. There were
no processing operations at this facility. We discontinued operations at this
location in the first quarter of 2007 and currently sublease the location to an
unaffiliated party.

During
2007, we added a location in New Albany, Indiana across the Ohio River from
Louisville, Kentucky, the site of our headquarters. We use this property as a
transfer station for nonferrous material.

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

During
2008, we added a location near our Grade Lane site. We purchased the former
Allied System truck terminal at 6709 Grade Lane. The 20,182 square foot
facility sits on a 4.4 acre asphalted parking area. ISA Logistics and WESSCO
occupy this property, relocated from the main Louisville location, creating
room for the new shredder and related maintenance equipment. In September,
2009, we completed the widening of Grade Lane to three lanes along our
property, allowing traffic to move more freely and safely. The road
improvements accommodate our growth from the $10 million shredder project. The
shredder began operations on July, 1, 2009. It shreds ferrous and non ferrous
scrap for domestic and international consumers. We can also use the shredder
for a disaster plan by handling materials prior to landfill disposal and
recycling purposes.

In January,
2009, we expanded into the stainless steel and high-temperature alloys
recycling business by purchasing inventories from Ventures Metals, LLC for
$9,109,059, agreeing to lease its processing equipment and facilities on Camp
Ground Road in Louisville, Kentucky and in Mobile, Alabama, and hiring two
executives to head up a new ISA Alloys division, one of whom has since left the
Company. On April 2, 2009, we completed the acquisition of the Camp Ground Road
property consisting of 5.67 acres plus improvements from Luca Investments, LLC,
an affiliate of Venture Metals, for a purchase price of $2,067,041, comprised
of $1,267,041 in cash and 300,000 shares of our common stock, valued at $2.67
per share on April 2, 2009. On April 13, 2009, we concluded the purchase of the
fixed assets of Venture Metals, LLC for $1,498,885, less the rental we paid at
$15,000 per month from February 11, 2009 through April 2, 2009 for use of the
fixed assets.

In March,
2009, we transformed the Camp Ground Road location into a full-service
recycling material receiving facility. We use this property as a transfer
station for ferrous and nonferrous material. In June 2009, we closed the
Mobile, Alabama office.

In
September, 2009, we purchased two tracts of real estate on Grade Lane near the
current Grade Lane site through the acquisition of all outstanding membership
interests in 7124 Grade Lane LLC and 7200 Grade Lane LLC, each a Kentucky

6

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limited liability company, owned by Harry Kletter Family Limited Partnership, a
Kentucky limited partnership. Mr. Kletter is our chairman and chief executive
officer and the general partner of Harry Kletter Family Limited Partnership.
One tract (7124 Grade Lane) contains the shredder, and the other tract (7200
Grade Lane) provides a new entrance for the shredder and ISA Alloys. We built
new scales on this site, and ISA Alloys uses the space to store inventory. With
respect to the purchase of the membership interests in 7200 Grade Lane LLC, we
provided to the limited partnership 550,871 shares at $4.27 per share for a
purchase price of $2,349,997 and with respect to the purchase of the membership
interests in 7124 Grade Lane LLC, we provided to the limited partnership
199,220 shares at $4.27 per share for a purchase price of $850,003.

In
November, 2009, we moved the ISA Alloys division from the Camp Ground Road
location to 7100 Grade Lane.

In 2010, we
hired an Alloys Operations Manager to aid in the expansion of specialty alloys
within our recycling segment, specifically in the area of aerospace alloys. In
July, 2010, we purchased certain Venture Metals, LLC intangibles, including the
customer list and trade name, and entered into a non-compete agreement to
protect our market position.

Industry
Background

The waste
collection and disposal business in the United States is a multi-billion dollar
industry. The size of this industry has increased for the past several years
and should continue to increase as landfill space decreases. Although society
and industry have developed an increased awareness of environmental issues and
recycling has increased, waste production also continues to increase. Because
of environmental concerns, new regulations and cost factors, it has become
difficult to obtain the necessary permits to build any new landfills.
Management believes that with the consolidation taking place in the waste
industry, it will become increasingly difficult for a customer to receive a
fair price. We are, therefore, in a position to represent the best interest of
the customer, and we believe this fact can only enhance our business.

In addition
to increasing landfill costs, regulatory measures and more stringent control of
material bound for disposal are making the management of solid waste an
increasingly difficult problem. The United States Environmental Protection
Agency is expected to continue the present trend of restricting the amount of
potentially recyclable material bound for landfills. Many states have passed,
or are contemplating, measures that would require industrial and commercial
companies to recycle a minimum percentage of their waste stream and restrict
the percentage of recyclable materials in any commercial load of waste
material. Many states have already passed restrictive regulations requiring a
plan for the reduction of waste or the segregation of recyclable materials from
the waste stream at the source. ISA management believes that these restrictions
may create additional marketing opportunities as waste disposal needs become
more specialized. Some large industrial and commercial companies have hired
in-house staff to handle the solid waste management and recycling
responsibilities, but have found that without adequate resources and staff
support, in-house handling of these responsibilities may not be an effective
alternative. We offer these establishments a solution to this increasing
burden.

Competition

The metal
recycling business is highly competitive and is subject to significant changes
in economic and market conditions. The weaker economy, the reduction in
automobile production, and fewer construction projects have resulted in a
reduced supply of scrap metal available. Pricing and proximity to a metal
source are the major competitive factors in the metal recycling business. We
compete for the purchase and sale of scrap metal with large, well-financed
recyclers of scrap metal as well as smaller metal facilities and
brokers/dealers. Although we continue to expand our facilities and increase our
processing efficiencies, including the completion of the shredder system in
2009, certain of our competitors have greater financial, marketing and physical
resources. There can be no assurance that we will be able to obtain our desired
market share based on the competitive nature of this industry.

On a
commercial/industrial waste management level, we have competition from a
variety of sources. Much of it is from companies that concentrate their efforts
on a regional level and two of the major national waste haulers.

We have
faced increased competition from national hauling and recycling companies in
recent years. The large national hauling and recycling companies often attempt
to handle all locations for a national chain customer. This scenario poses a
potential conflict of interest since these hauling companies and recyclers can
attain greater profitability from increases in hauling and disposal revenues
and fluctuations in recycling prices. In addition to having an economic
incentive in allowing customers to have more hauls than needed, light loads,
and higher hauling and disposal rates, the national hauling companies do not
have operations in every community. The major hauling and recycling companies
have operating companies in many cities, but none of them has operations in
every city. Therefore, for many cities, they must obtain bids from local
hauling, disposal and recycling companies that may perceive them to be
competitors. We have

7

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encountered a reluctance from independent hauling and recycling
companies to support services in areas not serviced by these national
companies. We have positioned ourselves to work with the national and
independent haulers and recyclers to efficiently service our customers on a
nationwide basis.

Along with
positioning ourselves to efficiently service our customers,our management services
division methods of competition include offering our clients competitive
pricing, superior customer service and industry expertise. We are known for our
exemplary service to our clients and timely payments to our vendors. We are
able to offer management programs and tailor-made reports for our clients
specific needs.

There is
also competition from some equipment manufacturers. The primary interest of
these companies is selling, leasing and renting equipment and offering
management services in order to secure these sales or leases. There is a cost
involved in using the equipment and the money saved must justify the amount spent
on this equipment.

Dependence
on Major Customer

Sales to
North American Stainless, our largest customer, represented approximately 63.8%
and 68.6% of our net sales for the years ended December 31, 2010 and 2009,
respectively. Our cash flow experiences a significant decline between the time
we acquire scrap metal for processing and the time we receive payment for these
goods. The loss of North American Stainless as a customer would negatively
impact our revenues and profitability and could materially and adversely affect
our results of operations and financial condition.

Employees

As of
December 31, 2010, we had one hundred eighty-five (185) full-time employees as
follows: recycling 98, management services 7, sales/leasing 4, drivers 17,
maintenance 22, and administration/information technology 37. None of our
employees are a member of a union.

Effect
of State and Federal Environmental Regulations

Any
environmental regulatory liability relating to our operations is generally borne
by the customers with whom we contract and the service providers in their
capacity as transporters, disposers and recyclers. Our policy is to use our
best efforts to secure indemnification for environmental liability from our
customers and service providers. Although we believe that our business model
adequately protects us from potential environmental liability, we also continue
to use our best efforts to be in compliance with federal, state and local
environmental laws, including but not limited to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, the
Hazardous Materials Transportation Act, as amended, the Resource Conservation
and Recovery Act, as amended, the Clean Air Act, as amended, and the Clean
Water Act. Such compliance has not historically constituted a material expense
to us.

The
collection and disposal of solid waste and rendering of related environmental
services as well as recycling operations and issues are subject to federal,
state and local requirements, which regulate health, safety, the environment,
zoning and land-use. Federal, state and local regulations vary, but generally
govern hauling, disposal and recycling activities and the location and use of
facilities and also impose restrictions to prohibit or minimize air and water
pollution. In addition, governmental authorities have the power to enforce
compliance with these regulations and to obtain injunctions or impose fines in
the case of violations, including criminal penalties. The EPA and various other
federal, state and local environmental, health and safety agencies and
authorities, including the Occupational Safety and Health Administration of the
U.S. Department of Labor administer those regulations.

We strive
to conduct our operations in compliance with applicable laws and regulations.
While such amounts expended in the past or that we anticipate spending in the
future have not had and are not expected to have a material adverse effect on
our financial condition or operations, the possibility remains that
technological, regulatory or enforcement developments, the results of
environmental studies or other factors could materially alter this expectation.

Each state
in which we operate has its own laws and regulations governing solid waste
disposal, water and air pollution and, in most cases, releases and cleanup of
hazardous substances and liability for such matters. Several states have
enacted laws that will require counties to adopt comprehensive plans to reduce,
through waste planning, composting, recycling, or other programs, and the
volume of solid waste landfills. Several states have recently enacted these
laws. Legislative and regulatory measures to mandate or encourage waste
reduction at the source and waste recycling also are under consideration by
Congress and the EPA.

8

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Finally,
various states have enacted, or are considering enacting, laws that restrict
the disposal within the state of solid or hazardous wastes generated outside
the state. While courts have declared unconstitutional laws that overtly
discriminate against out of state waste, courts have upheld some laws that are
less overtly discriminatory. Challenges to other such laws are pending. The
outcome of pending litigation and the likelihood that jurisdictions will adopt
other such laws that will survive constitutional challenge are uncertain.

|         |             
|-------- | ------------
|ITEM 1A. | RISK FACTORS

Risk Factors

This Annual
Report on Form 10-K includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including, in
particular, certain statements about our plans, strategies and prospects.
Although we believe that our plans, intentions and expectations reflected in or
suggested by such forward-looking statements are reasonable, we cannot assure
you that such plans, intentions or expectations will be achieved. Important
factors that could cause our actual results to differ materially from our
forward-looking statements include those set forth in this Risk Factors
section. All forward-looking statements attributable to us or any persons
acting on our behalf are expressly qualified in their entirety by the
cautionary statements set forth below. Unless the context requires otherwise, all
references to the company, we, us or our include Industrial Services of
America, Inc. and subsidiaries.

If any of
the following risks, or other risks not presently known to us or that we
currently believe to not be significant, develop into actual events, then our
business, financial condition, results of operations, cash flows or prospects
could be materially adversely affected.

Risks Related to Our
Operations

Our business has increasing involvement in
stainless steel, ferrous, non-ferrous and fiber recycling. Changes in prices,
demand, including foreign demand, regulation, economic slowdowns or increased
competition could result in a reduction of our revenue and consequent decrease
in our common stock price.

The metal
recycling business is highly competitive and is subject to significant changes
in economic and market conditions. The weaker economy and the reduction in
automobile production and construction projects have resulted in a reduced
supply of scrap metal available. Pricing and proximity to a metal source are
the major competitive factors in the metal recycling business. Many companies
offer or are engaged in the development of products or the provisions of
services that may be or are competitive with our current products or services.
Although we continue to expand our facilities and increase our processing
efficiencies, including the completion of the shredder system in 2009, certain
of our competitors have greater financial, technical, manufacturing, marketing,
distribution, assets, and other resources than we possess in the stainless
steel, ferrous, non-ferrous and fiber recycling businesses. In addition, the
industry is constantly changing as a result of consolidation that may create
additional competitive pressures in our business environment. There can be no
assurance that we will be able to obtain our desired market share based on the
competitive nature of this industry.

Volatility
in market prices of our scrap metal recycling inventory may adversely affect
our business.

We make
certain assumptions regarding future demand and net realizable value in order
to assess that we record our stainless steel, ferrous, non-ferrous and fiber
recycling inventory properly at the lower of cost or market. We base our assumptions
on historical experience, current market conditions and current replacement
costs. If the anticipated future selling prices of scrap metal and finished
steel products should decline due to the cyclicality of the business or
otherwise, we would re-assess the recorded net realizable value of such
inventory and make any adjustments we feel necessary in order to reduce the
value of such inventory (and increase cost of goods sold) to the lower of cost
or market.

An
increase in the price of fuel may adversely affect our business.

Our
operations are dependent upon fuel, which we generally purchase in the open
market on a daily basis. Direct fuel costs include the cost of fuel and other
petroleum-based products used to operate our shredder, fleet of cranes and
heavy equipment. We are also susceptible to increases in indirect fuel costs
which include fuel surcharges from vendors. During 2007 and 2008, we
experienced increases in the cost of fuel and other petroleum-based products,
although these prices decreased in later 2008 and 2009. A portion of these
increases we passed on to our customers. However, because of the competitive
nature of the industry, there can be no assurance that we will be able to pass
on current or future increases in fuel prices to our customers. Fuel costs
increased in 2010 compared to 2009, and due to a decline in offshore oil
production and continued political instability and other uncertainties in
oil-producing countries, fuel prices are predicted to increase again throughout
2011. A significant increase in fuel costs could adversely affect our business.

9

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We
could incur substantial costs in order to comply with, or to address any
violations under, environmental laws that could significantly increase our
operating expenses and reduce our operating income.

Our
operations are subject to various environmental statutes and regulations,
including laws and regulations addressing materials used in the processing of
our products. In addition, certain of our operations are subject to federal,
state and local environmental laws and regulations that impose limitations on
the discharge of pollutants into the air and water and establish standards for
the treatment, storage and disposal of solid and hazardous wastes. Failure to maintain
or achieve compliance with these laws and regulations or with the permits
required for our operations could result in substantial operating costs and
capital expenditures, in addition to fines and civil or criminal sanctions,
third party claims for property damage or personal injury, cleanup costs or
temporary or permanent discontinuance of operations. Certain of our facilities
have been in operation for many years and, over time, we and other predecessor
operators of these facilities have generated, used, handled and disposed of
hazardous and other regulated wastes. Environmental liabilities could exist,
including cleanup obligations at these facilities or at off-site locations
where we disposed of materials from our operations, which could result in
future expenditures that we cannot currently quantify and which could reduce
our profits.

Our
financial statements are based upon estimates and assumptions that may differ
from actual results.

We have
prepared our financial statements in accordance with U.S. generally accepted
accounting principles and necessarily include amounts based on estimates and
assumptions we made. Actual results could differ from these amounts.
Significant items subject to such estimates and assumptions include the carrying
value of long-lived assets, valuation allowances for accounts receivable, lower
of cost or market, liabilities for potential litigation, claims and
assessments, and liabilities for environmental remediation and deferred taxes.

We depend on our senior management team and
the loss of any member could prevent us from implementing our business
strategy.

Our success
is dependent on the management and leadership skills of our senior management
team. We have entered into employment agreements with our president and chief
operating officer, Brian Donaghy, our executive vice president of ISA
Recycling, Daniel Gascoyne, our vice president of ISA Recycling, James Wiseman
III, and our operations manager of ISA Alloys, Terry Hancock. The loss of any members
of our management team or the failure to attract and retain additional
qualified personnel could prevent us from implementing our business strategy
and continuing to grow our business at a rate necessary to maintain future
profitability.

The
concentration of our customers could have a material adverse effect on our
results of operations and financial condition.

Sales to
North American Stainless, our largest customer, represented approximately 63.8%
and 68.6% of our net sales for the years ended December 31, 2010 and 2009,
respectively. Our cash flow experiences a significant decline between the time
we acquire scrap metal for processing and the time we receive payment for these
goods. The loss of this or other significant customers or our inability to
collect accounts receivable would negatively impact our revenues and
profitability and could materially and adversely affect our results of
operations and financial condition.

Our
exposure to credit risk could have a material adverse effect on our results of
operations and financial condition.

Our
business is subject to the risks of nonpayment and nonperformance by our
customers. Downturns in the economy in 2008 led to bankruptcy filings by many
of our customers, which caused us to recognize additional allowances for
doubtful accounts receivable in previous years. While we believe our allowance
for doubtful accounts is adequate, changes in economic conditions or any
weakness in the steel and metals industries could cause potential credit losses
from our significant customers, which could adversely impact our future
earnings or financial condition.

Our
debt may increase our vulnerability to economic or business downturns.

We are
vulnerable to higher interest rates because interest expense on certain of our
borrowings is based on margins over a variable base rate. We may experience
material increases in our interest expense as a result of increases in general
interest rate levels. If we were to breach covenants in our lending facilities,
our lenders could exercise their remedies related to any material breaches,
including acceleration of our payments and taking action with respect to their
loan security.

10

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From time
to time, we have relied upon and will rely on borrowings under various credit
facilities and from other lenders to operate our business. However, the recent
financial crisis has adversely affected many financial institutions and, as a result,
such financial institutions have ceased or reduced the amount of lending they
have made available to their customers. As a result, we may not have the
ability to borrow from other lenders to operate our business.

Seasonal
changes may adversely affect our business and operations.

Our
operations may be adversely affected by periods of inclement weather, which
could decrease the collection and shipment volume of recycling materials.

Risks Related to Our
Common Stock

Future sales of our common stock could
depress our market price and diminish the value of your investment.

Future
sales of shares of our common stock could adversely affect the prevailing
market price of our common stock. If our existing shareholders sell a large
number of shares, or if we issue a large number of shares, the market price of
our common stock could significantly decline. Moreover, the perception in the
public market that our existing shareholders and in particular members of the
Kletter family might sell shares of common stock could depress the market for
our common stock.

The market price for our common stock may be
volatile.

In recent
periods, there has been volatility in the market price for our common stock. In
addition, the market price of our common stock could fluctuate substantially in
the future in response to a number of factors, including the following:

| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our quarterly operating results
 or the operating results of our companies in the waste management or ferrous,
 non-ferrous and fiber recycling industry;
| |   |                                                                                                                                                          
| |  | changes in general conditions
 in the economy, the financial markets or the ferrous, non-ferrous and fiber
 recycling industry;                          
| |   |                                                                                                                                                          
| |  | loss of significant customers
 and                                                                                                                       
| |   |                                                                                                                                                          
| |  | increases in materials and
 other costs.                                                                                                                 

In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to their
operating performance. These broad market fluctuations may materially adversely
affect our stock price, regardless of our operating results.

|        |            
|------- | -----------
|Item 2. | Properties.

The
following table outlines our principle properties:

|                                       |  |                  |  |                                          |  |        
|-------------------------------------- |  | ---------------- |  | ---------------------------------------- |  | -------
|Property Address                       |  | Lease or own     |  | Segment                                  |  | Acreage
|                                       |  |                  |  |                                          |  |        
|6709 Grade
 Lane, Louisville, KY       |  | Own              |  | Recycling                                |  | 4.491  
|7021-7103
 Grade Lane, Louisville, KY  |  | Own              |  | Recycling                                |  | 2.53   
|7020/7100
 Grade Lane, Louisville, KY  |  | Lease
 (K&R) (1) |  | Recycling, 
 Waste Services, 
 and Other |  | 14.23  
|7110 Grade Lane,
 Louisville, KY       |  | Own              |  | Recycling                                |  | 10.723 
|7124 Grade
 Lane, Louisville, KY       |  | Own              |  | Recycling                                |  | 5.12   
|7200-7210
 Grade Lane, Louisville, KY  |  | Own              |  | Recycling                                |  | 15.52  
|3409 Camp
 Ground Road, Louisville, KY |  | Own              |  | Recycling                                |  | 5.67   
|1565 E. 4th
 Street, Seymour, IN       |  | Own              |  | Recycling                                |  | 5.003  
|1617 State
 Road 111, New Albany, IN   |  | Own              |  | Recycling                                |  | 1.3    

|    |                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On February 16, 1998 our Board of Directors ratified and formalized
 an existing relationship in connection with our leasing of facilities from
 K&R, LLC. K&R is our affiliate because our Chief Executive Officer
 and principal shareholder, Harry Kletter, owns 100.0% of K&R. The rent
 beginning January 1, 2008 became $582,000 per

11

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | annum, payable at the beginning of each month in an amount equal to
 $48,500. This fixed minimum rent adjusts each five years, including for each
 of the option periods, in accordance with the consumer price index. The fixed
 minimum rent also increases to $750,000 per annum, in an amount equal to
 $62,500 per month in the event of our change in control. We must pay, as
 additional rent, all real estate taxes, insurance, utilities, maintenance and
 repairs, replacements (including replacement of roofs if necessary) and other
 expenses. The K&R lease provides for our indemnification of K&R for
 all damages arising out of our use of or the condition of the leased premises
 excepting therefrom K&Rs negligence. In an addendum to the K&R lease
 as of January 1, 2005, the rent was increased $4,000 as a result of the
 improvements made to the property in 2004. For years 2005 through 2010, the
 payments to K&R by the Company of $4,000 for additional rent and the
 monthly payment from K&R to the Company of $3,898 for a promissory note
 were offset.

These properties total 63.287 acres, which provides adequate space
necessary to perform administrative and retail operation processes and store
inventory. All facilities are well-maintained and insured. We do not expect any
major land or building additions will be needed to increase capacity in the
foreseeable future for our operations.

Lease
and Sublease Agreements  Lexington

We have
subleased the Lexington property to an unaffiliated party for a term that
commenced March 1, 2007 and ends December 31, 2012 for $4,500 per month. We
currently lease this property from an unrelated party for $4,500 per month; the
lease terminates December 31, 2012. If for any reason the sublessee defaults,
we remain liable for the remainder of the lease payments through December 31,
2012.

Property
Purchase  Camp Ground Road, Louisville, Kentucky

On January
13, 2009, we entered into an inventory purchase agreement with Venture Metals,
LLC, one of the terms of which provided us with the right to retain the use of
the property located at 3409 Camp Ground Road, Louisville, Kentucky, for a
period not to exceed two years for a monthly rental of $15,000. The property
consists of 5.67 acres with a 7,875 square foot building to be used for our
aluminum scrap business located thereon. We currently employ certain of the
principal owners of Venture Metals. In March, 2009, we transformed the Camp
Ground Road location into a full-service recycling material receiving facility.

Property
Purchase  Grade Lane, Louisville, Kentucky

On
September 10, 2009 we completed the acquisition of all outstanding membership
interests in 7124 Grade Lane LLC and 7200 Grade Lane LLC, each a Kentucky
limited liability company, owned by Harry Kletter Family Limited Partnership, a
Kentucky limited partnership. Mr. Kletter is our chairman and chief executive
officer and the general partner of Harry Kletter Family Limited Partnership.

7124
Grade Lane LLC and 7200 Grade Lane LLC own properties at 7124 Grade Lane and
7200 Grade Lane, Louisville, Kentucky, respectively. Prior to the consummation
of the acquisition of the interests in the limited liability companies on
September 10, 2009, Harry Kletter Family Limited Partnership owned all the
membership interests in each of 7124 Grade Lane LLC and 7200 Grade Lane LLC. We
acquired these membership interests, and in effect the properties, due to their
strategic location adjacent to 7100 Grade Lane, Louisville, Kentucky where we
have our principal operations and headquarters and recently completed the
construction of a new shredder system and part of the installation rests on the
property.

The transaction received approval of our audit committee, a disinterested
majority of our board of directors, and a majority of the outstanding shares of
our common stock by written consent, excluding the shares owned by Mr. Kletter.

|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.

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

We filed a
Motion for Summary Judgment in October, 2009, which the court denied in
February, 2010. Discovery by the parties is still ongoing. A jury trial is
currently set for June 20, 2011. As of December 31, 2010, the amount of relief

12

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sought for punitive and compensatory damages was undetermined. We are
vigorously defending all of Lennoxs claims as we believe the claims to be
without merit.

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

|        |          
|------- | ---------
|Item 4. | Reserved.

PART
II

|        |                                                                                                        
|------- | -------------------------------------------------------------------------------------------------------
|Item 5. | Market for ISAs Common Equity, Related
 Stockholder Matters and Issuer Purchases of Equity Securities.

Effective
August 29, 1996, the $.0033 par value ISA common stock became listed on the
Small Cap Market (the Small Cap Market) of the NASDAQ Stock Market under the
symbol IDSA. On May 3, 2010, the Board of Directors declared a 3-for-2 stock
split effected by a 50% stock dividend. The stock dividend was issued to
holders of record as of May 17, 2010, and paid June 1, 2010. All share numbers
and prices in this Form 10-K have been adjusted to reflect the impact of this
stock split. High and low sales price of the common stock price is summarized
as follows:

|              |  |      |       |      |   |       |  |     |      |      |   |      |  |   |       |  |   |      | 
|------------- |  | ---- | ----- | ---- | - | ----- |  | --- | ---- | ---- | - | ---- |  | - | ----- |  | - | ---- | 
|Quarter Ended |  | 2010 |       | 2009 |   | 2008  | 
|              |  |      |       |      |   |       | 
|              |  | High |       | Low  |   | High  |  | Low |      | High |   | Low  | 
|              |  |      |       |      |   |       |  |     |      |      |   |      | 
|March 31      |  | $    | 11.93 |      | $ | 6.20  |  | $   | 5.19 |      | $ | 2.40 |  | $ | 7.51  |  | $ | 4.00 | 
|June 30       |  | $    | 15.27 |      | $ | 9.23  |  | $   | 4.77 |      | $ | 2.47 |  | $ | 11.83 |  | $ | 5.88 | 
|September 30  |  | $    | 21.18 |      | $ | 10.00 |  | $   | 6.02 |      | $ | 4.04 |  | $ | 13.00 |  | $ | 5.53 | 
|December 31   |  | $    | 16.55 |      | $ | 9.61  |  | $   | 7.89 |      | $ | 5.47 |  | $ | 6.92  |  | $ | 2.91 | 

There were
approximately 175 shareholders of record as of December 31, 2010.

Our Board
of Directors did not declare any dividends in 2010 or 2009.

Under our
loan agreement with Fifth Third Bank, ISA may make restricted payments
constituting dividends if, and to the extent, that each of the following
conditions has been met (i) our Board of Directors has approved them; (ii) such
restricted payments made in any fiscal year do not exceed $750,000; (iii) if,
after giving effect to such restricted payments, revolving loan availability is
equal to or greater than an aggregate amount equal to $1,000,000; (iv) after
giving effect to the proposed restricted payments, no default or event of
default has occurred and is continuing as of the date such restricted payment
occurs, and (v) ISA is in compliance with the financial covenants on a pro
forma basis, after giving effect to such restricted payment.

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. We did not
repurchase any shares in 2010 or 2009.

Unregistered sales of equity securities and
use of proceeds

The following is a sale of unregistered securities that occurred
during the fiscal year ended December 31, 2010 or subsequently, that was not
previously disclosed in a quarterly report on Form 10-Q or in a current report
on Form 8-K.

On July 1,
2010, we issued 300,000 shares of our common stock to Venture Metals, LLC
(Venture), a company owned by Messers. Jones and Valentine, employees at the
time of the transaction, in exchange for the Venture customer list and name,
Ventures execution of a non-compete agreement, and Ventures agreement to
cause Mr. Jones and Mr. Valentine to provide the company with non-compete
agreements. The issuance of shares to Venture was exempt under Section 4(2) of
the Securities Act of 1933, as amended, because it: (1) did not involve a
public offering and was made without general solicitation or advertising; and
(2) Venture previously represented to us that it is an accredited investor,
and that the securities were acquired for investment purposes only and not with
a view to, or for resale in connection with, any distribution thereof.

13

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|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

Selected
Financial Data

|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------ |  | - | ------ | 
|                                                                         |  | 2010 |         | 2009 |   | 2008    |  | 2007 |         | 2006 |  
|                                                                         |  |      |         |      |   |         |  |      |         |      |  
|(Amounts in Thousands, Except Per Share
 Data)                           |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|Year ended December 31:                                                  |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|Total revenue                                                            |  | $    | 343,005 |      | $ | 181,052 |  | $    | 100,042 |      | $ | 76,956 |  | $ | 62,082 | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|Net income                                                               |  | $    | 8,053   |      | $ | 5,285   |  | $    | 1,528   |      | $ | 2,564  |  | $ | 2,188  | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|Earnings                                                                 |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|per common share:                                                        |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|Basic                                                                    |  | $    | 1.22    |      | $ | 0.91    |  | $    | 0.28    |      | $ | 0.47   |  | $ | 0.41   | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|Diluted                                                                  |  | $    | 1.21    |      | $ | 0.91    |  | $    | 0.28    |      | $ | 0.47   |  | $ | 0.40   | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|Cash dividends declared per common share                                 |  | $    |        |      | $ |        |  | $    | 0.0667  |      | $ | 0.0667 |  | $ |       | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|At year end:                                                             |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|                                                                        
|Total assets                                                             |  | $    | 106,162 |      | $ | 66,674  |  | $    | 28,791  |      | $ | 26,285 |  | $ | 19,332 | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|Long-term debt and capital lease
 obligations, net of current maturities |  | $    | 43,623  |      | $ | 16,654  |  | $    | 8,531   |      | $ | 8,495  |  | $ | 2,858  | 
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 

|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of
 Financial Condition and Results of Operation.

The following discussion and analysis should be read in conjunction
with the information set forth under Item 6, Selected Financial Data and our
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. Please see Item 1A, Risk Factors for
items that could affect our financial predictions, forecasts and projections.

General

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

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

14

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

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

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

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

Liquidity
and Capital Resources

As of
December 31, 2010, we held cash and cash equivalents of $2,468,284. We maintain
a cash account on deposit with BB&T which serves as collateral for our swap
agreements. As of December 31, 2010, the balance in this account was $875,000.

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

With
respect to the revolving credit facility, the interest rate is one month LIBOR
plus two hundred fifty basis points (2.50%) per annum, adjusted monthly on the
first day of each month. As of March 1, 2011, the interest rate was 3.125%. We
also pay a fee of 0.5% on the unused portion. The revolving credit facility
expires on July 31, 2013. Under the revolving credit facility, we are permitted
to borrow the lesser of $40,000,000 or the borrowing base, consisting of the
sum of 85% of eligible accounts plus 60% of eligible inventory up to
$17,000,000. Eligible accounts are generally those receivables that are less
than 90 days from the invoice date. As security for the revolving credit
facility, we provided Fifth Third Bank a first priority security interest in
the accounts receivable from most of our customers and in our inventory. We
also cross collateralized the revolving line of credit with the $8,800,000 term
loan. As of December 31, 2010, the outstanding balance on the revolving line of
credit was $35,488,877.

The
$8,800,000 term loan provides for an interest rate that is the same as the
interest rate for the revolving credit facility. Principal and interest is
payable monthly in consecutive equal installments of $105,000. 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, 2011 (or, if earlier, upon completion of the Companys
financial statements for the fiscal year ending December 31, 2010), we will
make an annual payment equal to 25% of (i) our adjusted earnings before
interest, taxes, depreciation and amortization (EBITDA), minus (ii) our
aggregate cash payments of interest expense and scheduled payments of principal
(including any prepayments of the term loan), minus (iii) any non-financed
capital expenditures, in each case for the Companys prior fiscal year. Any
such payments will be applied to remaining installments of principal under the
term loan in the inverse order of maturity, and to accrued but unpaid interest
thereon. As security for the term loan, we provided Fifth Third Bank a first
priority security interest in all equipment other than the rental fleet that we
own. As of December 31, 2010, the outstanding balance on the term loan was
$8,275,000.

In
addition, we provided a first mortgage on the property at the following
locations: 3409 Campground Road, 6709, 7023, 7025, 7101, 7103, 7110, 7124, 7200
and 7210 Grade Lane, Louisville Kentucky, 1565 East Fourth Street, Seymour,
Indiana and 1617 State Road 111, New Albany, Indiana. The Company also cross
collateralized the term loan with the revolving credit facility and all other
existing debt the Company owes to Fifth Third Bank.

15

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In the
Credit Agreement, we agreed to certain covenants, including (i) maintenance of
a ratio of debt to adjusted EBITDA for the preceding 12 months of not more than
3.5 to 1 (or, if measured as of December 31 of any fiscal year, 4.0 to 1), (ii)
maintenance of a ratio of adjusted EBITDA for the preceding twelve months to
aggregate cash payments of interest expense and scheduled payment of principal
in the preceding 12 months of not less than 1.20 to 1, and (iii) a limitation
on capital expenditures of $4,000,000 in any fiscal year. As of December 31,
2010, we were in compliance with all covenants. For the year ended December 31,
2010, our ratio of debt to adjusted EBITDA was 2.54, our ratio of adjusted
EBITDA to aggregate cash payments of interest expense and scheduled principal
payments was 4.15, and our capital expenditures totaled $3,972,460. As of
December 31, 2010, we have available $4,511,123 under our existing credit
facilities that we can use without causing a breach in these covenants.

On November
15, 2010, we entered into a First Amendment to Credit Agreement (the
Amendment) with Fifth Third Bank which amends the July 30, 2010 Credit
Agreement. Under the Credit Agreement, the Company is permitted to borrow the
lesser of $40,000,000 or the borrowing base, consisting of the sum of 80% of
eligible accounts plus 60% of eligible inventory up to $17,000,000. Under the
Amendment, the Bank agreed to temporarily increase the revolving credit
facility to the lesser of $44,500,000 or the borrowing base, consisting of the
sum of 85% of eligible accounts plus 60% of eligible inventory up to
$17,000,000. The increase in availability and percentage of eligible accounts
expired on December 16, 2010, at which time the terms of the Credit Agreement
continued in full force and effect.

On October
19, 2010, we entered into a Promissory Note (the Note) with Fifth Third Bank
in the amount of $1,320,240 for the purpose of purchasing equipment. The
interest rate is equal to five and 20/100 percent (5.20%) per annum; provided,
however, that (A) such interest rate is based on an interest rate swap rate for
a term approximating the weighted average life of the Note as quoted in the
Bloomberg SWAP Rate report as of the date of the Note and (B) such interest
rate may be adjusted by Fifth Third Bank based upon a corresponding increase in
the interest rate swap rate quoted in such Release as in effect on the date of
the advance. Principal and interest is payable monthly in consecutive equal
installments of $30,511 with the first such payment commencing November 15,
2010, and the final unpaid principal amount due, together with all accrued and
unpaid interest, charges, fees, or other advances, if any, to be paid on
October 15, 2014. As security for the Note, we provided Fifth Third Bank a
first priority security interest in the equipment purchased with the proceeds.
As of December 31, 2010, the outstanding balance on the promissory note was
$1,270,505.

On August
2, 2007, we entered into an asset purchase agreement for $1,300,000 funded
primarily by a note payable to ILS, the sole member of which is Brian Donaghy,
our president and chief operating officer, whereby we pay $20,000 per month for
60 months for various assets including tractor trailers, trucks and containers.
The note payable reflects a seven percent (7.0%) interest payment on the
outstanding balance plus principal amortization. We also paid ILS $100,000 cash
as a portion of the purchase price at the time of execution of the asset
purchase agreement. We recorded a note payable of $1,010,040 with an
outstanding balance at December 31, 2010 of $376,514.

During
2010, we paid $3,876,053 for improvements, property and equipment. We paid
$523,202 for land and building improvements. In the recycling segment we paid
$2,697,889 for cranes, balers, scales, welders, conveyor belts, and other
operating equipment. In the equipment sales, leasing and service segment, we
purchased $491,463 in rental equipment that we located at customer sites. This
rental fleet equipment consists of solid waste handling and recycling equipment
such as compactors, pre-crushers, containers and balers. It is our intention to
continue to pursue this market. We purchased $136,842 in office equipment and
$26,657 in vehicles. We paid deposits of $193,101 on machinery and equipment.

We expect
that existing cash flow from operations, available credit under our existing
credit facilities, and other alternative financing will be sufficient to meet
our cash needs for the next year and beyond. We do not have any material
capital expenditure commitments as of December 31, 2010.

Critical
Accounting Policies

In
preparing financial statements in conformity with accounting principles
generally accepted in the United States, we make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. We believe that we consistently apply judgments and estimates and that
such consistent application results in financial statements and accompanying
notes that fairly represent all periods presented. However, any errors in these
judgments and estimates may have a material impact on our statement of
operations and financial condition. Critical accounting policies, as defined by
the Securities and Exchange Commission, are those that are most important to
the portrayal of our financial condition and results of operations and require
our most difficult and subjective judgments and estimates of matters that are
inherently uncertain.

16

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Estimates

In
preparing the consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America, 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. Examples of estimates include the allowance
for doubtful accounts, estimates associated with annual goodwill impairment
tests, and estimates of deferred income tax and liabilities. The
Company also uses estimates when assessing fair values of assets and
liabilities acquired in business acquisitions as well as any fair value and any
related impairment charges related to the carrying value of machinery and
equipment, and other long-lived assets. Despite the Companys intention to
establish accurate estimates and use reasonable assumptions, actual results may
differ from these estimates.

Revenue
recognition

We
recognize revenues from processed ferrous and non-ferrous scrap metal sales
when title passes to the customer, which generally is upon delivery of the
related materials. We recognize revenues from services as the service is
performed. We accrue sales adjustments related to price and weight differences
and allowances for uncollectible receivables against revenues as incurred.

Accounts
receivable and allowance for doubtful accounts receivable

Accounts
receivable consist primarily of amounts due from customers from product and
brokered sales. The allowance for doubtful accounts receivable totaled $100,000
at December 31, 2010 and December 31, 2009. Our determination of the allowance
for doubtful accounts receivable includes a number of factors, including the
age of the balance, past experience with the customer account, changes in
collection patterns and general industry conditions and overall economic
conditions impacting industry and customers.

Potential
credit losses from our significant customers could adversely affect our results
of operations or financial condition. General weakness in the steel and metals
sectors in the past led to bankruptcy filings by many of our customers, which
caused us to recognize additional allowances for doubtful accounts receivable.
While we believe our allowance for doubtful accounts is adequate, changes in
economic conditions or any weakness in the steel and metals industries could
adversely impact our future earnings.

Inventory

Our
inventories primarily consist of stainless steel, ferrous and non-ferrous scrap
metals that we value at the lower of average purchased cost or market. We also
carry replacement parts in inventory, which we depreciate over a one-year life
as these parts are used within a one-year period due to the high-volume and
intensity of the shredder process. We determine quantities of inventories based
on our inventory systems, which are subject to periodic physical verification
using estimation techniques including observation, weighing and other industry
methods. Prices of commodities we own may be volatile. We are exposed to risks
associated with fluctuations in the market price for both ferrous and
non-ferrous metals, which are at times volatile. We attempt to mitigate this
risk by seeking to rapidly turn our inventories.

We make
certain assumptions regarding future demand and net realizable value in order
to assess that inventory is properly recorded at the lower of cost or market.
We base our assumptions on historical experience, current market conditions and
current replacement costs. If the anticipated future selling prices of scrap
metal and finished steel products should decline, we would re-assess the
recorded net realizable value of our inventory and make any adjustments we feel
necessary in order to reduce the value of our inventory (and increase cost of
goods sold) to the lower of cost or market.

As of
January 4, 2010, we began using the specific identification method of valuing
inventory. See Inventories under Note 1  Summary of Significant Accounting
Policies in the Notes to Consolidated Financial Statements for additional
details on this change.

Property
and Equipment

We carry
the value of land on our books at cost. We report premises and equipment at
cost less accumulated depreciation and amortization. We charge depreciation and
amortization for financial reporting purposes to operating expense using the
straight-line method over the estimated useful lives of the assets. We
depreciate some assets over a one year period. Estimated useful lives are up to
40 years for buildings and leasehold improvements, 1 to 10 years for office and
operating equipment, and 5 years for rental equipment. Our determination of
estimated useful life includes past

17

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experience and normal deterioration. We include maintenance and repairs
in selling, general and administrative expenses. We include gains and losses on
disposition of premises and equipment in gain (loss) on sale of assets.

Valuation of long-lived assets and goodwill

We
regularly review the carrying value of certain long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be realizable. If an evaluation is required, we compare the estimated
future undiscounted cash flows associated with the asset to the assets
carrying amount to determine if an impairment of such asset is necessary. The
effect of any impairment would be to expense the difference between the fair
value of such asset and its carrying value. During the year ended December 31,
2010, we determined no impairment existed.

We review
goodwill at least annually for impairment based on the fair value method
prescribed in FASBs authoritative guidance entitled Goodwill. At December
31, 2010, we determined, based on current industry and other market information
that no impairment existed. See also Note 13  Purchase of Inventory, Fixed
Assets, and Intangible Assets of Venture Metals, LLC in the Notes to
Consolidated Financial Statements.

Intangibles

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

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. See also Note 13  Purchase of Inventory, Fixed
Assets, and Intangible Assets of Venture Metals, LLC in the Notes to
Consolidated Financial Statements.

Derivative
Instruments

Beginning
in 2008, we have utilized derivative instruments in the form of interest rate
swaps to assist in managing our interest rate risk. We do not enter into any
interest rate swap derivative instruments for trading purposes. We account for
the interest rate swaps in accordance with FASBs authoritative guidance
entitled Accounting for Derivative Instruments and Hedging Activities, as
amended, which requires us to include the change in fair value of the interest
rate swap in other comprehensive income.

Income
Taxes

We account
for income taxes under the asset and liability method. We recognize deferred
tax assets and liabilities for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carry-forwards. We measure deferred tax assets and liabilities using
enacted tax rates expected to apply to taxable income in the years in which we
expect to recover or settle those temporary differences. We recognize the
effect on deferred tax assets and liabilities of a change in tax rates in income
in the period that includes the enactment date.

18

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Results of Operations

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

|                                              |  |      |        |      |  |       |   |  |       |  
|--------------------------------------------- |  | ---- | ------ | ---- |  | ----- | - |  | ----- | -
|Year ended December 31,                       |  | 2010 |        | 2009 |  | 2008  |  
|                                              |  |      |        |      |  |       |  
|                                              |  |      |        |      |  |       |   |  |       |  
|Consolidated Statements of Income Data:       |  |      |        |      |  |       |   |  |       |  
|Total
 revenue                                |  |      | 100.00 | %    |  | 100.0 | % |  | 100.0 | %
|Total cost
 of goods sold                     |  |      | 92.0   | %    |  | 88.8  | % |  | 86.6  | %
|Selling,
 general and administrative expenses |  |      | 4.0    | %    |  | 5.8   | % |  | 10.0  | %
|Income
 before other income (expense)         |  |      | 4.0    | %    |  | 5.4   | % |  | 3.5   | %

The 3.2%
increase in cost of goods sold percentage of revenue in 2010 as compared to
2009 is due to increased processing fees, utility expense, and repairs and
maintenance relating to the shredder. The shredder was placed in production in
July, 2009, so only one half of 2009 included such expenses. A full year of
these expenses is included in 2010.

Accumulated
Other Comprehensive Income (Loss)

Comprehensive
income is net income plus certain other items that are recorded directly to
shareholders equity. Amounts included in other accumulated comprehensive loss
for our derivative instruments are recorded net of the related income tax
effects. Refer to Note 1  Derivative and Hedging Activities in the Notes to
Consolidated Financial Statements for additional information about our
derivative instruments. The following table gives further detail regarding the
composition of other accumulated comprehensive income (loss) at December 31,
2010 and 2009.

|                                                                             |  |   |          |  
|---------------------------------------------------------------------------- |  | - | -------- | -
|Total accumulated other comprehensive income
 (loss) at 1/1/09               |  | $ | (475,342 | )
|Net unrealized gain on
 derivative instruments, net of tax during 2009       |  |   | 136,513  |  
|                                                                             |  |   |          |  
|Total accumulated other
 comprehensive income (loss), net of tax at 12/31/09 |  |   | (338,829 | )
|Net unrealized (loss) on
 derivative instruments, net of tax during 2010     |  |   | (14,533  | )
|                                                                             |  |   |          |  
|Total accumulated other comprehensive income
 (loss) at 12/31/10             |  | $ | (353,362 | )
|                                                                             |  |   |          |  

Year
Ended December 31, 2010 Compared to Year Ended December 31, 2009

Total
revenue increased $161,953,635 or 89.5% to $343,005,315 in 2010 compared to
$181,051,680 in 2009. Recycling revenue increased $162,825,978 or 94.8% to
$334,667,090 in 2010 compared to $171,841,112 in 2009.This change was
primarily due to a 54.3 million pound, or 33.9%, increase in the volume of
stainless steel shipments, a 95.5 thousand gross ton, or 96.8%, increase in the
volume of ferrous shipments, and a 1.6 million pound, or 5.2%, increase in the
volume of nonferrous shipments. In 2010, sales to existing Recycling
dealers increased by approximately $153.0 million, or 98.3%. New dealer sales
in 2010 totaled approximately $24.4 million, while lost dealer sales totaled
only $4.4 million in 2009. Overall average commodity prices for materials
shipped increased $112.26 per gross ton, or 13.3%. Waste Services revenue
decreased $872,343 or 9.5% to $8,338,225 in 2010 compared to $9,210,568 in 2009.
This decrease was primarily due to a decrease in management revenue of
$1,458,118 caused by the permanent loss of two major customers due to
bankruptcy and a net decrease in sales to other customers, partially offset by
several new customers in 2010 and an increase in cardboard revenue of $410,181
due to an increase in average cardboard prices throughout 2010.

Total cost
of goods sold increased $154,961,319 or 96.4% to $315,720,294 in 2010 compared
to $160,758,975 in 2009. Recycling cost of goods sold increased $154,998,791 or
100.3% to $309,480,805 in 2010 compared to $154,482,014 in 2009. This increase
was primarily due to an increase in the volume of purchases of stainless steel
of 37.1 million pounds, or 20.1%, of ferrous purchases of 121.3 thousand gross
tons, or 115.3%, and of nonferrous purchases of 6.4 million pounds, or 22.5%
along with the increased volume of shipments noted above. Overall average
commodity prices for materials purchased increased $57.43 per gross ton, or
7.3%. Other increases in cost of goods sold were as follows:

| |   |                                                              
| | - | -------------------------------------------------------------
| |  | An increase
 of $6,177,507 in processing costs;              
| |  | An increase
 of $1,222,568 in labor expenses;                
| |  | An increase
 of $830,683 in repairs and maintenance expenses;
| |  | An increase
 of $741,597 in depreciation expense;            
| |  | An increase
 of $669,694 in utilities expenses; and          

19

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| |   |                                                       
| | - | ------------------------------------------------------
| |  | An increase
 of $209, 274 in fuel and lubricant costs.

These
increases were partially offset by a decrease in bonus expense of $1,327,677.

Waste
Services cost of goods sold decreased $37,472 or 0.6% to $6,239,489 in 2010
compared to $6,276,961 in 2009. We have reclassified certain expenses in our
income statement to more accurately reflect segment performance and we have
reclassified cost of goods sold and selling, general and administrative
expenses for the year ended December 31, 2008 to be consistent with current
presentation. These reclassifications had no effect on previously reported net
income.

We make
certain assumptions regarding future demand, current replacement costs and net
realizable value in order to assess that we have properly recorded inventory at
the lower of cost or market. We base our assumptions on historical experience,
current market conditions and current replacement costs. Due to declines in the
anticipated future selling prices of scrap metal and finished steel products,
we recorded non-cash net realizable value inventory adjustments of $1.2 million
in the fourth quarter of 2008 to reduce the value of our inventory (and increase
cost of goods sold) to the lower of cost or market. No such adjustment was
necessary in 2010 or 2009.

Selling,
general and administrative (SG&A) expenses increased $3,249,020 or 31.0% to
$13,736,685 in 2010 compared to $10,487,665 in 2009. The increase in SG&A
expenses was primarily due to the following:

| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | a net
 increase in stock bonuses, stock options, and cash bonuses of $1,832,774;         
| |  | an increase
 in the management fee, consulting fees, and compliance expenses of $351,053;
| |  | an increase
 in amortization of $375,000;                                                
| |  | an increase
 in sales and service managers and supervisors labor expenses of $252,393;   
| |  | an increase
 in insurance expense of $119,209;                                           
| |  | an increase
 in fuel and lubricants and hauling expenses of $104,439;                    
| |  | an increase
 in operating supplies of $101,082; and                                      
| |  | an increase
 in benefits of $82,706.                                                     

As a percentage of total revenue, selling, general and administrative
expenses were 4.0% in 2010 compared to 5.8% in 2009.

Interest
expense increased $376,810 or 34.4% to $1,473,037 in 2010 compared to
$1,096,227 in 2009 due to an increase in long term debt in 2010 compared to
2009. The increase in debt, mainly the revolving credit facility with Fifth
Third Bank, allows for funding temporary fluctuations in accounts receivable
and inventory. We also purchased additional equipment using debt facilities.

Other
income was $40,133 in 2010 compared to other loss of ($29,322) in 2009, an
increase of $69,455, as outlined in the table below describing the significant
components for each year.

On January
14, 2009, a Jefferson County, Kentucky Circuit Court jury awarded AAR
approximately $990,000 primarily for a breach of the agreement that required us
to provide referrals to AAR. We reserved for the loss in an approximate amount
of $990,000 in the other expense section of our financial statements for the
year ended December 31, 2008 since the referrals were primarily related to
prior years, and we paid the settlement amount of $990,000 in February 2009. We
paid an additional $65,597 for legal and court costs associated with this case
in the first quarter of 2009.

Significant
components of other income (expense) were as follows:

|                                   |  |                               |        |      |   |         |  
|---------------------------------- |  | ----------------------------- | ------ | ---- | - | ------- | -
|                                   |  | Fiscal Year Ended December 31 |       
|                                   |  |                               |       
|Description Other Income (Expense) |  | 2010                          |        | 2009 |  
|                                   |  |                               |        |      |  
|                                   |  |                               |        |      |   |         |  
|Additional
 settlement to AAR      |  | $                             |       |      | $ | (65,597 | )
|Other                              |  |                               | 40,133 |      |   | 36,275  |  
|                                  
|Total other
 income, net           |  | $                             | 40,133 |      | $ | (29,322 | )
|                                   |  |                               |        |      |   |         |  

The income
tax provision is 35.5% for the year ended December 31, 2010 compared to 39.8%
for the year ended December 31, 2009 based on federal and state statutory
rates. We received a tax credit for the purchase of the shredder equipment as
well as a Domestic Production Activity Deduction in 2010. Refer to Note 4 
Income Taxes in the Notes to Consolidated Financial Statements.

20

---



Financial
Condition at December 31, 2010 compared to December 31, 2009

Cash and
cash equivalents increased $1,755,222 to $2,468,284 as of December 31, 2010
compared to $713,062 at December 31, 2009.

We used net
cash from operating activities of $5,824,339 for the year ending December 31,
2010, compared to using net cash from operating activities of $5,552,475 for
the same period in 2009.

We used net
cash from investing activities of $3,652,158 for the year ending December 31,
2010 compared to $19,584,027 for the same period in 2009. The difference of
$15,931,869 was primarily due to $11,874,985 related to the acquisition of
Venture Metals, LLC land, fixed assets, goodwill, and inventory in 2009, and
$6,526,555 spent on the shredder system in 2009, partially offset by an
increase of $2,736,683 in purchases of and deposits on other property, plant,
and equipment in 2010 compared to 2009.

Net cash
from financing activities decreased $13,514,003 to $11,231,719 for the year
ending December 31, 2010 compared to $24,745,722 for the same period in 2009.
The primary source of the net cash decrease was an increase in payments on
long-term debt totaling $33,781,867 in 2010 compared to $2,356,747 in 2009.
This decrease was offset by an increase in borrowings totaling $45,034,384 in
2010 compared to $27,183,240 in 2009. There were no cash dividends paid or
common stock repurchases in 2010 or 2009.

Trade
accounts receivable after allowances for doubtful accounts increased
$18,936,820 or 222.5% to $27,449,146 as of December 31, 2010 compared to
$8,512,326 as of December 31, 2009. This change was primarily due to the
increased volume of stainless steel and ferrous shipments in the fourth
quarter.

Recycling
accounts receivable increased $17,412,540 or 231.5% to $24,932,813 as of
December 31, 2010 compared to $7,520,273 as of December 31, 2009. This change
was primarily due to stainless steel sales and the timing of the receipt of
payment related to these sales as well as an increase in the volume of
stainless steel and ferrous shipments in the fourth quarter. On average, the
volume of stainless steel shipments in pounds increased 360.1% and ferrous
shipments in gross tons increased 51.3% in the fourth quarter of 2010 compared
to the same period in 2009. On average, stainless steel prices increased 42.0%
and ferrous sales prices increased 13.5% in the fourth quarter of 2010 compared
to the same period in 2009. On average, the volume of nonferrous shipments in
pounds decreased 16.8% in the fourth quarter of 2010 compared to the fourth
quarter of 2009. On average, nonferrous sales prices increased 37.3% in the
fourth quarter of 2010 compared to the same period in 2009.

Waste
Services accounts receivable increased $159,620 or 16.3% to $1,140,517 as of
December 31, 2010 compared to $980,897 as of December 31, 2009. This increase
relates to larger write offs of bankruptcy related customer accounts in 2009, a
lower portion of the allowance for doubtful accounts allocated to Waste
Services in 2010 after collecting or writing off accounts, as well as the
timing of the receipt of payments.

Inventories
for sale consist principally of stainless steel alloys, ferrous and nonferrous
scrap materials and waste equipment machinery held for resale. We value
inventory at the lower of cost or market. We use the replacement parts included in inventory
within a one-year period as these parts wear out quickly due to the high-volume
and intensity of the shredder function. We depreciate these replacement parts
over a one-year life. Inventory increased $7,884,020 or 29.8% to
$34,310,631 as of December 31, 2010 compared to $26,426,611 as of December 31,
2009. The primary reason for the significant increase in inventory was an
increase in the volume of stainless steel purchases of 20.1%, an increase in
the volume of ferrous purchases of 115.3%, and an increase in the volume of
nonferrous purchases of 22.5% in 2010 as compared to 2009. Inventories as of
December 31, 2010 and December 31, 2009 consisted of the following:

21

---



|                            |  |                    |            |                    |   |            | 
|--------------------------- |  | ------------------ | ---------- | ------------------ | - | ---------- | 
|                            |  | December 31,
 2010 |            | December 31,
 2009 |  
|                            |  |                    |            |                    |  
|                            |  |                    |            |                    |   |            | 
|Stainless
 steel alloys     |  | $                  | 24,714,342 |                    | $ | 21,549,014 | 
|Ferrous materials           |  |                    | 6,296,255  |                    |   | 1,587,475  | 
|Non-Ferrous
 materials      |  |                    | 1,853,424  |                    |   | 2,219,137  | 
|Waste
 equipment machinery  |  |                    | 75,064     |                    |   | 102,032    | 
|Other                       |  |                    | 59,040     |                    |   | 89,122     | 
|                            |  |                    |            |                    |   |            | 
|                            |  |                    |            |                    |   |            | 
|Total
 inventories for sale |  |                    | 32,998,125 |                    |   | 25,546,780 | 
|                            |  |                    |            |                    |   |            | 
|Replacement
 parts          |  |                    | 1,312,506  |                    |   | 879,831    | 
|                            |  |                    |            |                    |   |            | 
|                            |  |                    |            |                    |   |            | 
|Total
 inventories          |  | $                  | 34,310,631 |                    | $ | 26,426,611 | 
|                            |  |                    |            |                    |   |            | 

As of
December 31, 2010, stainless steel inventory consisted of 31,818,693 pounds at
a unit cost of $0.777 per pound, which includes processing costs. As of
December 31, 2009, stainless steel inventory consisted of 26,086,771 pounds at
a unit cost of $0.826 per pound. As of December 31, 2010, ferrous inventory
consisted of 15,866 gross tons at a unit cost, including processing costs, of $396.8
per gross ton. As of December 31, 2009, ferrous inventory consisted of 5,835
gross tons at a unit cost, including processing costs, of $272.061 per gross
ton. As of December 31, 2010, nonferrous inventory consisted of 1,769,283
pounds with a unit cost, including processing costs, of $1.048 per pound. As of
December 31, 2009, nonferrous inventory consisted of 1,835,719 pounds at a unit
cost, including processing costs, of $1.209 per pound.

We make
certain assumptions regarding future demand and net realizable value in order
to assess that inventory is properly recorded at the lower of cost or market.
We base our assumptions on historical experience, current market conditions and
current replacement costs. Due to declines in the anticipated future selling
prices of scrap metal and finished steel products, we recorded non-cash net
realizable value (NRV) inventory adjustments of $1.2 million in the fourth
quarter 2008 to reduce the value of our inventory (and increase cost of goods
sold) to the lower of cost or market. Such an adjustment was not necessary in
2010 or 2009.

|     |  |                 |  |            |            |           |   |         |  |   |            | 
|---- |  | --------------- |  | ---------- | ---------- | --------- | - | ------- |  | - | ---------- | 
|Year |  | Inventory Type  |  | Pounds     |            | Unit Cost |   | Amount  | 
|     |  |                 |  |            |            |           |   |         |  |   |            | 
|     |  |                 |  |            |            |           |   |         |  |   |            | 
|2010 |  | Stainless Steel |  |            | 31,818,693 |           | $ | 0.777   |  | $ | 24,714,342 | 
|2009 |  | Stainless Steel |  |            | 26,086,771 |           | $ | 0.826   |  | $ | 21,549,014 | 
|     |  |                 |  |            |            |           |   |         |  |   |            | 
|Year |  | Inventory Type  |  | Gross Tons |            | Unit Cost |   | Amount  | 
|     |  |                 |  |            |            |           |   |         |  |   |            | 
|     |  |                 |  |            |            |           |   |         |  |   |            | 
|2010 |  | Ferrous         |  |            | 15,866     |           | $ | 396.840 |  | $ | 6,296,255  | 
|2009 |  | Ferrous         |  |            | 5,835      |           | $ | 272.061 |  | $ | 1,587,475  | 
|     |  |                 |  |            |            |           |   |         |  |   |            | 
|     |  |                 |  |            |            |           |   |         |  |   |            | 
|Year |  | Inventory Type  |  | Pounds     |            | Unit Cost |   | Amount  | 
|     |  |                 |  |            |            |           |   |         |  |   |            | 
|     |  |                 |  |            |            |           |   |         |  |   |            | 
|2010 |  | Nonferrous      |  |            | 1,769,283  |           | $ | 1.048   |  | $ | 1,853,424  | 
|2009 |  | Nonferrous      |  |            | 1,835,719  |           | $ | 1.209   |  | $ | 2,219,137  | 

22

---



Inventory Aging for the year ended December
31, 2010 (Days Outstanding)

|                        |  |      |            |       |   |           |  |         |           |       |   |           |  |   |            | 
|----------------------- |  | ---- | ---------- | ----- | - | --------- |  | ------- | --------- | ----- | - | --------- |  | - | ---------- | 
|Description             |  | 1-30 |            | 31-60 |   | 61-90     |  | Over 90 |           | Total |  
|                        |  |      |            |       |   |           |  |         |           |       |  
|                        |  |      |            |       |   |           |  |         |           |       |   |           |  |   |            | 
|Stainless
 steel alloys |  | $    | 19,030,222 |       | $ | 4,607,007 |  | $       | 900,036   |       | $ | 177,077   |  | $ | 24,714,342 | 
|Equipment
 & parts      |  |      |           |       |   |          |  |         |          |       |   | 75,064    |  |   | 75,064     | 
|Replacement
 parts      |  |      | 1,312,506  |       |   |          |  |         |          |       |   |          |  |   | 1,312,506  | 
|Ferrous
 Materials      |  |      | 4,571,768  |       |   | 690,601   |  |         | 234,569   |       |   | 799,317   |  |   | 6,296,255  | 
|Non-ferrous
 materials  |  |      | 1,459,379  |       |   | 152,300   |  |         | 49,449    |       |   | 192,296   |  |   | 1,853,424  | 
|Other                   |  |      | 59,040     |       |   |          |  |         |          |       |   |          |  |   | 59,040     | 
|                        |  |      |            |       |   |           |  |         |           |       |   |           |  |   |            | 
|                        |  |      |            |       |   |           |  |         |           |       |   |           |  |   |            | 
|                        |  | $    | 26,432,915 |       | $ | 5,449,908 |  | $       | 1,184,054 |       | $ | 1,243,754 |  | $ | 34,310,631 | 

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

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

Accounts
payable trade increased $6,721,148 or 143.5% to $11,405,534 as of December 31,
2010 compared to $4,684,386 as of December 31, 2009. Recycling accounts payable
increased $6,156,545 or 196.1% to $9,296,689 as of December 31, 2010 compared
to $3,140,144 as of December 31, 2009. This increase was primarily due to the
increases in the volumes of purchases for stainless steel of 152.41%, for
ferrous materials of 90.9%, and for nonferrous materials of 21.6% in the fourth
quarter of 2010 as compared to the same period in 2009, as well as the overall
average commodity purchase prices for these materials increased by 78.0%. Our
accounts payable payment policy in the recycling segment is consistent between
years.

Waste
Services accounts payable increased $6,673 or 0.5% to $1,304,316 as of December
31, 2010 compared to $1,297,643 as of December 31, 2009. This change was due to
market conditions and the timing of payments.

Working
capital increased $35,999,704 to $47,318,389 as of December 31, 2010 compared
to $11,318,685 as of December 31, 2009. Increases in net accounts receivable of
$18,936,820 and in inventories of $7,884,020, and decreases in the current
maturities of long-term debt of $10,715,662 and the note payable to BB&T of
$5,000,000 were positive contributors to working capital in 2010, offset by
increases in accounts payable of $6,721,148 and income tax payable of
$2,391,546. During 2010, we used these positive working capital contributors to
purchase or make deposits on property and equipment of $4,069,154.

Contractual Obligations

The
following table provides information with respect to our known contractual
obligations for the year ended December 31, 2010:

|                                 |  |                        |            |                   |   |           |  |           |           |                    |   |            |  |  |   | 
|-------------------------------- |  | ---------------------- | ---------- | ----------------- | - | --------- |  | --------- | --------- | ------------------ | - | ---------- |  |  | - | 
|                                 |  | Payments due by period |           
|                                 |  |                        |           
|Obligation Description           |  | Total                  |            | Less
 than 1 year |   | 1-3 years |  | 3-5 years |           | More
 than 5 years |  
|                                 |  |                        |            |                   |   |           |  |           |           |                    |  
|Long-term
 debt obligations      |  | $                      | 45,446,886 |                   | $ | 1,824,197 |  | $         | 7,835,822 |                    | $ | 35,786,867 |  |  |  | 
|Capital
 lease obligations (1)   |  |                        |           |                   |   |          |  |           |          |                    |   |           |  |  |  | 
|Operating
 lease obligations (2) |  |                        | 1,281,351  |                   |   | 645,351   |  |           | 636,000   |                    |   |           |  |  |  | 
|Total                            |  | $                      | 46,728,237 |                   | $ | 2,469,548 |  | $         | 8,471,822 |                    | $ | 35,786,867 |  |  |  | 

|    |                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We leased various pieces of equipment that qualified for capital
 lease treatment. These lease arrangements required monthly lease payments
 that expired at various dates through June 2010. We now own the equipment.

23

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | We lease the Louisville, Kentucky facility from a related party under
 an operating lease expiring December 2012 with automatic annual renewals
 thereafter unless one party provides written notice to the other party of its
 intent not to renew at least six months in advance of the next renewal date.
 We have monthly rental payments of $48,500 through December 2012. In the
 event of a change of control, the monthly payments become $62,500. See Item
 2. Properties  Related Parties Agreements.
|   
|    | We
also lease equipment from K&R, LLC for which monthly payments of $5,500 are
due through November 2015.                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    | We
lease a management services operations facility and various pieces of equipment
in Dallas, Texas for which monthly payments of $969 are due through September
2011.                                                                                                                                                                                                                                                                                                                                          
|   
|    | We
have subleased the Lexington property to an unaffiliated third party for a term
commencing March 1, 2007 and ending December 31, 2012 for $4,500 per month. We
currently lease this property from an unrelated party for $4,500 per month,
which terminates December 31, 2012. If for any reason the sublessee defaults,
we remain liable for the remainder of the lease payments through December 31,
2012.                                                                                                 
|   
|    | 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.                                                                                                                                                                                                                                                                                                                 

Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008

Total
revenue increased $81,009,189 or 81.0% to $181,051,680 in 2009 compared to
$100,042,491 in 2008. Recycling revenue increased $92,295,550 or 116.0% to
$171,841,112 in 2009 compared to $79,545,562 in 2008.This change was
primarily due to the acquisition of Venture Metals, LLC stainless steel
recycling business and a 21.7% increase in the volume of ferrous shipments,
partially offset by a 10.6% decrease in the volume of nonferrous shipments and
a 29.5% decrease in average price per ton over the course of 2009. In
the fourth quarter of 2008, demand and prices decreased due to reduced demand
for scrap and recycled metal arising from weaker economic conditions, which led
to a reduction in ferrous sales volumes and average nonferrous selling prices.
Waste Services revenue decreased $11,286,361 or 55.1% to $9,210,568 in 2009
compared to $20,496,929 in 2008. This decrease was primarily due to a 1,410
unit decrease in the number of customer locations managed in 2009 compared to
2008. The majority of these lost locations resulted from the loss of two major
customers, Circuit City and Mervyns, both of which declared bankruptcy and
closed in late 2008.

Total cost
of goods sold increased $74,171,449 or 85.7% to $160,758,975 in 2009 compared
to $86,587,526 in 2008. Recycling cost of goods sold increased $85,284,669 or
123.4% to $154,482,014 in 2009 compared to $69,197,345 in 2008. This increase
is primarily due to the acquisition of Venture Metals, LLC stainless steel
recycling business and the bonus accrual of $1,348,942 relating to its
employees, along with increases in the volume of ferrous shipments of 21.7% and
purchases of 24.4%, partially offset by decreases in the volume of nonferrous
shipments of 10.6% and purchases of 20.3% and a decrease in average cost per
ton of 26.2%. In addition, weak demand and the impact of declines in
anticipated future selling prices which outpaced the decline in inventory
costs, resulted in our recording a non-cash net realizable value (NRV)
inventory write-down of $1.2 million in 2008. No such write-down was necessary
in 2009. Waste Services cost of goods sold decreased $11,113,220 or 63.9% to
$6,276,961 in 2009 compared to $17,390,181 in 2008. This change was primarily
due to the loss of two large customers in late 2008 and decreases in equipment
costs, such as containers and compactors, purchased for resale, and decreases
in baling wire costs. We have reclassified certain expenses in our income
statement to more accurately reflect segment performance and we have
reclassified cost of goods sold and selling, general and administrative
expenses for the year ended December 31, 2008 to be consistent with current
presentation. These reclassifications had no effect on previously reported net
income. We did not reclass any expenses for the year ended December 31, 2007.

We make
certain assumptions regarding future demand, current replacement costs and net
realizable value in order to assess that we have properly recorded inventory at
the lower of cost or market. We base our assumptions on historical experience,
current market conditions and current replacement costs. Due to declines in the
anticipated future selling prices of scrap metal and finished steel products,
we recorded non-cash net realizable value inventory adjustments of $1.2 million
in the fourth quarter of 2008 to reduce the value of our inventory (and
increase cost of goods sold) to the lower of cost or market. No such adjustment
was necessary in 2009.

Selling,
general and administrative (SG&A) expenses increased $489,135 or 4.9% to
$10,487,665 in 2009 compared to $9,998,530 in 2008. The increase in SG&A
expenses was primarily due to the acquisition of Venture Metals, LLC stainless
steel recycling business. Other recycling expenses had a slight decrease of
$17,432 or 0.3% to $5,161,654 in 2009

24

---



as compared to $5,179,086 in 2008. The largest expenses relating to the
stainless steel recycling business include the following:

| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | labor,
 benefits and employment-related expenses (such as employment taxes, fees,
 training, and uniforms) of $777,735; and
| |  | license
 taxes and fees of $164,358.                                                                                       

The
SG&A expenses relating to the WESSCO portion of Waste Services also
increased by $265,761 or 63.5% to $684,176 in 2009 as compared to $418,415 in
2008. This increase relates to the following:

| |   |                                                        
| | - | -------------------------------------------------------
| |  | an increase
 of $207,762 in sales manager compensation;
| |  | an increase
 of $40,517 in bad debt expense; and       
| |  | an increase
 of $25,960 in commissions.                

The
increases in total SG&A are partially offset by a decrease in the CWS
portion of Waste Services SG&A expenses of $807,559 or 55.4% to $649,124 in
2009 as compared to $1,456,683 in 2008. This decrease relates to the following:

| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a decrease
 of $371,490 in labor, benefits, employment-related expenses (such as
 employment taxes, fees, training, and uniforms) and consulting fees; and
| |  | a decrease
 of $390,000 in bad debt expense.                                                                                                              

The
SG&A expense for the corporate office also decreased by $69,641 or 2.4% to
$2,874,705 in 2009 as compared to $2,944,346 in 2008. The decrease relates to
the following:

| |   |                                                   
| | - | --------------------------------------------------
| |  | a decrease
 of $128,207 in IT allocations;        
| |  | a decrease
 of $98,591 in compliance expenses; and
| |  | a decrease
 of $68,753 in legal expenses.         

Increases
of $130,385 for compensation of managers and consulting fees and $95,071 in
stock option expenses partially offset these decreases.

As a
percentage of total revenue, selling, general and administrative expenses were
5.8% in 2009 compared to 10.0% in 2008.

Interest
expense increased $723,783 or 194.3% to $1,096,227 in 2009 compared to $372,444
in 2008 due to an increase in long term debt in 2009 compared to 2008. The increase
in debt relates to the following:

| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | the purchase
 of inventory, fixed assets, and land from Venture Metals, LLC;                              
| |  | the
 completion of the shredder project, including the widening of Grade Lane;                            
| |  | improvements
 made to the Camp Ground Road property;                                                      
| |  | additional
 purchases, such as a new scale; and                                                           
| |  | improvements
 made to the two tracts of land purchased from the Harry Kletter Family
 Limited Partnership.

Other
income/(loss) was ($29,322) in 2009 compared to other income of $336,802 in
2008, a decrease of $366,124, as outlined below in the table below describing
the significant components for each year.

On January
14, 2009, a Jefferson County, Kentucky Circuit Court jury awarded AAR
approximately $990,000 primarily for a breach of the agreement that required us
to provide referrals to AAR. We reserved for the loss in an approximate amount
of $990,000 in the other expense section of our financial statements for the
year ended December 31, 2008 since the referrals were primarily related to
prior years, and we paid the settlement amount of $990,000 in February 2009. We
paid an additional $65,597 for legal and court costs associated with this case
in the first quarter of 2009.

25

---



Significant
components of other income (expense) are as follows:

|                                        |  |                               |         |      |   |         | 
|--------------------------------------- |  | ----------------------------- | ------- | ---- | - | ------- | 
|                                        |  | Fiscal Year Ended December 31 |        
|                                        |  |                               |        
|Description Other Income (Expense)      |  | 2009                          |         | 2008 |  
|                                        |  |                               |         |      |  
|                                        |  |                               |         |      |  
|Additional
 settlement to AAR           |  | $                             | (65,597 | )    | $ |        | 
|Change in accrual
 for note payable     |  |                               |        |      |   | 156,400 | 
|Insurance
 claim                        |  |                               |        |      |   | 117,306 | 
|Change in
 accrual for accounts payable |  |                               |        |      |   | 31,441  | 
|Flexible
 spending forfeitures          |  |                               |        |      |   | 13,741  | 
|Other                                   |  |                               | 36,275  |      |   | 17,914  | 
|                                        |  |                               |         |      |   |         | 
|Total other
 income, net                |  | $                             | (29,322 | )    | $ | 336,802 | 

The
income tax provision is 39.8% for the year ended December 31, 2009 compared to
40.1% for the year ended December 31, 2008 based on federal and state statutory
rates.

Financial Condition
at December 31, 2009 compared to December 31, 2008

Cash and
cash equivalents decreased $390,780 to $713,062 as of December 31, 2009
compared to $1,103,842 at December 31, 2008.

We used net
cash from operating activities of $5,522,475 for the year ending December 31,
2009, compared to increasing net cash from operating activities of $7,775,227
for the same period in 2008. The difference of $13,327,702 was primarily due to
the following:

| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase
 in net accounts receivable of $4,700,842;                                                                                                               
| |  | an increase in inventory (other than the purchase of Venture Metals,
 LLC inventory, which is reflected below in net cash from investing
 activities) of $12,946,204;
| |  | an increase
 in other assets of $166,247;                                                                                                                            
| |  | a decrease
 in the accrual for legal settlements of $987,828; and                                                                                                    
| |  | a decrease
 in the interest rate swap agreement liability of $227,521.                                                                                               

Increases in
deferred income taxes of $2,898,599, accounts payable of $982,491, and accrued
bonuses of $1,459,300, partially offset these other items.

We used net
cash from investing activities of $19,584,027 for the year ending December 31,
2009 compared to $7,782,698 for the same period in 2008. The difference of
$11,801,329 was primarily due to $11,874,985 related to the acquisition of
Venture Metals, LLC land, fixed assets, goodwill, and inventory, and $6,526,555
spent on the shredder system in 2009 compared to $4,374,826 spent in 2008,
partially offset by a decrease of $2,238,143 in purchases of and deposits on
other property, plant, and equipment in 2009 compared to 2008.

Net cash
from financing activities increased $25,136,094 to $24,745,722 for the year
ending December 31, 2009 compared to ($390,372) for the same period in 2008.
The primary sources of the net cash increase were an increase in proceeds from
long term debt totaling $14,650,218 in 2009 compared to $8,773,555 in 2008, and
a decrease in payments on long-term debt to $2,356,747 in 2009 from $8,138,375
in 2008. Additionally, in 2009, we received proceeds from a short-term note and
net borrowings from a line of credit agreement that totaled $12,533,022
compared to $0 in 2008. Finally, there were no cash dividends paid or common
stock repurchases in 2009 compared to cash dividends paid of $364,190 and
common stock repurchases of $527,687 in 2008.

Trade accounts
receivable after allowances for doubtful accounts increased $4,700,842 or
123.3% to $8,512,326 as of December 31, 2009 compared to $3,811,484 as of
December 31, 2008. This change was primarily due to the acquisition of Venture
Metals, LLC and their net accounts receivable balance of approximately $2.2
million at year end as well as the increased volume of ferrous shipments in the
fourth quarter.

Recycling
accounts receivable increased $5,435,571 or 260.7% to $7,520,273 as of December
31, 2009 compared to $2,084,702 as of December 31, 2008. This change was
primarily due to stainless steel sales and the timing of the receipt of payment
related to these sales as well as an increase in the volume of ferrous
shipments in the fourth quarter. On average, the volume of ferrous shipments in
gross tons increased 21.7% in the fourth quarter of 2009 compared to the same
period in 2008. On average, ferrous sales prices decreased 41.9% in the fourth
quarter of 2009 compared to the same period in 2008.

26

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On average, the volume of nonferrous shipments in pounds decreased
10.6% in the fourth quarter of 2009 compared to the fourth quarter of 2008. On
average, nonferrous sales prices decreased 38.6% in the fourth quarter of 2009
compared to the same period in 2008.

Waste
Services accounts receivable decreased $733,539 or 42.8% to $980,897 as of
December 31, 2009 compared to $1,714,436 as of December 31, 2008. Two of Waste
Services larger customers declared bankruptcy in late 2008, and we increased
our allowance for doubtful accounts by $390,000 as a result of these
bankruptcies. We decreased the allowance for doubtful accounts by $390,000 in
2009 as we either collected or wrote off doubtful accounts.

Inventories
for sale consist principally of stainless steel alloys, ferrous and nonferrous
scrap materials and waste equipment machinery held for resale. We value
inventory at the lower of cost or market. We use the replacement parts included in inventory
within a one-year period as these parts wear out quickly due to the high-volume
and intensity of the shredder function. We depreciate these replacement parts
over a one-year life. Inventory increased $22,065,263 or 504.5% to
$26,426,611 as of December 31, 2009 compared to $4,371,348 as of December 31,
2008. The primary reason for the significant increase in inventory is the
stainless steel alloy inventory introduced in 2009 as compared to 2008, as
noted below. Inventories as of December 31, 2009 and December 31, 2008
consisted of the following:

|                            |  |                    |            |                    |   |           | 
|--------------------------- |  | ------------------ | ---------- | ------------------ | - | --------- | 
|                            |  | December 31,
 2009 |            | December 31,
 2008 |  
|                            |  |                    |            |                    |  
|                            |  |                    |            |                    |   |           | 
|Stainless
 steel alloys     |  | $                  | 21,549,014 |                    | $ |          | 
|Ferrous
 materials          |  |                    | 1,587,475  |                    |   | 2,162,149 | 
|Non-Ferrous
 materials      |  |                    | 2,219,137  |                    |   | 2,033,154 | 
|Waste
 equipment machinery  |  |                    | 102,032    |                    |   | 95,675    | 
|Other                       |  |                    | 89,122     |                    |   | 80,370    | 
|                            |  |                    |            |                    |   |           | 
|                            |  |                    |            |                    |   |           | 
|Total
 inventories for sale |  |                    | 25,546,780 |                    |   | 4,371,348 | 
|                            |  |                    |            |                    |   |           | 
|Replacement
 parts          |  |                    | 879,831    |                    |   |          | 
|                            |  |                    |            |                    |   |           | 
|                            |  |                    |            |                    |   |           | 
|Total
 inventories          |  | $                  | 26,426,611 |                    | $ | 4,371,348 | 
|                            |  |                    |            |                    |   |           | 

As of
December 31, 2009, stainless steel inventory consisted of 26,086,771 pounds at
a unit cost of $0.826 per pound, which includes processing costs. As of
December 31, 2009, ferrous inventory consisted of 5,835 gross tons at a unit
cost, including processing costs, of $272.061 per gross ton. As of December 31,
2008, ferrous inventory consisted of 11,374 gross tons at a unit cost,
including processing costs, of $190.096 per gross ton. As of December 31, 2009,
nonferrous inventory consisted of 1,835,719 pounds with a unit cost, including
processing costs, of $1.209 per pound. As of December 31, 2008, nonferrous
inventory consisted of 3,720,330 pounds at a unit cost, including processing
costs, of $0.546 per pound.

We make
certain assumptions regarding future demand and net realizable value in order
to assess that inventory is properly recorded at the lower of cost or market.
We base our assumptions on historical experience, current market conditions and
current replacement costs. Due to declines in the anticipated future selling
prices of scrap metal and finished steel products, we recorded non-cash net
realizable value (NRV) inventory adjustments of $1.2 million in the fourth
quarter 2008 to reduce the value of our inventory (and increase cost of goods
sold) to the lower of cost or market. Such an adjustment was not necessary in
2009.

|     |  |                 |  |  |            |  |           |           |        |   |            | 
|---- |  | --------------- |  |  | ---------- |  | --------- | --------- | ------ | - | ---------- | 
|Year |  | Inventory Type  |  |  | Pounds     |  | Unit Cost |           | Amount |  
|     |  |                 |  |  |            |  |           |           |        |  
|     |  |                 |  |  |            |  |           |           |        |   |            | 
|2009 |  | Stainless Steel |  |  | 26,086,771 |  | $         | 0.826     |        | $ | 21,549,014 | 
|     |  |                 |  |  |            |  |           |           |        |   |            | 
|Year |  | Inventory Type  |  |  | Gross Tons |  |           | Unit Cost |        |   | Amount     | 
|     |  |                 |  |  |            |  |           |           |        |   |            | 
|     |  |                 |  |  |            |  |           |           |        |   |            | 
|2009 |  | Ferrous         |  |  | 5,835      |  | $         | 272.061   |        | $ | 1,587,475  | 
|2008 |  | Ferrous         |  |  | 11,374     |  | $         | 190.096   |        | $ | 2,162,149  | 

27

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|     |  |                |  |  |           |  |   |           |  |   |           | 
|---- |  | -------------- |  |  | --------- |  | - | --------- |  | - | --------- | 
|Year |  | Inventory Type |  |  | Pounds    |  |   | Unit Cost |  |   | Amount    | 
|     |  |                |  |  |           |  |   |           |  |   |           | 
|2009 |  | Nonferrous     |  |  | 1,835,719 |  | $ | 1.209     |  | $ | 2,219,137 | 
|2008 |  | Nonferrous     |  |  | 3,720,330 |  | $ | 0.546     |  | $ | 2,033,154 | 

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

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

Inventory aging for the year ended December
31, 2008 (Days Outstanding):

|                       |  |      |           |       |   |         |  |         |         |       |   |         |  |   |           | 
|---------------------- |  | ---- | --------- | ----- | - | ------- |  | ------- | ------- | ----- | - | ------- |  | - | --------- | 
|Description            |  | 1-30 |           | 31-60 |   | 61-90   |  | Over 90 |         | Total |  
|                       |  |      |           |       |   |         |  |         |         |       |  
|                       |  |      |           |       |   |         |  |         |         |       |   |         |  |   |           | 
|Equipment
 & parts     |  | $    | 95,675    |       | $ |        |  | $       |        |       | $ |        |  | $ | 95,675    | 
|Ferrous
 Materials     |  |      | 1,364,091 |       |   | 376,684 |  |         | 326,874 |       |   | 94,500  |  |   | 2,162,149 | 
|Non-ferrous
 materials |  |      | 990,843   |       |   | 217,591 |  |         | 294,992 |       |   | 529,728 |  |   | 2,033,154 | 
|Other                  |  |      | 80,370    |       |   |        |  |         |        |       |   |        |  |   | 80,370    | 
|                       |  |      |           |       |   |         |  |         |         |       |   |         |  |   |           | 
|                       |  |      |           |       |   |         |  |         |         |       |   |         |  |   |           | 
|                       |  | $    | 2,530,979 |       | $ | 594,275 |  | $       | 621,866 |       | $ | 624,228 |  | $ | 4,371,348 | 

Accounts
payable trade increased $982,491 or 26.5% to $4,684,386 as of December 31, 2009
compared to $3,701,895 as of December 31, 2008. Recycling accounts payable
increased $2,436,872 or 365.2% to $3,140,144 as of December 31, 2009 compared
to $667,272 as of December 31, 2008. This increase was primarily due to the
acquisition of Venture Metals, LLC. Also, although the volume of ferrous
materials purchased increased by 24.4%, the volume of nonferrous materials
purchased decreased by 20.3% and the overall commodity purchases prices for
both ferrous and nonferrous materials decreased by 26.2%. Our accounts payable
payment policy in the recycling segment was consistent between years.

Waste
Services accounts payable decreased $1,717,601 or 57.0% to $1,297,643 as of
December 31, 2009 compared to $3,015,244 as of December 31, 2008. This change
was due to the loss of two large customers near the end of 2008 as well as
market conditions and the timing of payments.

Working
capital increased $8,329,813 to $11,318,685 as of December 31, 2009 compared to
$2,988,872 as of December 31, 2008. Increases in net accounts receivable of
$4,700,842, inventories of $22,055,263, and other assets of $195,945, decreases
in the liability for legal settlements of $987,828 and the liability for the
interest rate swap agreement of $227,521 were positive contributors to working
capital in 2009, offset by a decrease in deferred income taxes of $374,292, and
increases in current maturities of long-term debt of $11,682,026, short-term
notes payable of $5,000,000, accrued liabilities of $1,459,300, and accounts
payable of $982,491. During 2009, we used these positive working capital
contributors to purchase property, equipment, goodwill and inventory of
$19,504,167.

Inflation and
Prevailing Economic Conditions

To date,
inflation has not and is not expected to have a significant impact on our
operation in the near term. We have no long-term fixed-price contracts and we
believe we will be able to pass through most cost increases resulting from
inflation to our customers. We are susceptible to the cyclical nature of the
commodity business. In response to these economic conditions, we have expanded the
recycling area of the business and continue to focus on the management
consulting area of the business and are working to liquidate inventories while
we make efforts to enhance gross margins.

28

---



Impact of Recently
Issued Accounting Standards

In June
2009, the FASB issued the FASB Accounting Standards Codification (ASC).
Effective September 2009, the ASC became the single source for all
authoritative generally accepted accounting principles (GAAP) recognized by the
FASB and is required to be applied to financial statements issued for interim
and annual periods ending after September 15, 2009, the quarter ending
September 30, 2009 for us. The ASC did not change GAAP and did not impact our
consolidated financial statements.

In December
2007, FASB issued authoritative guidance on business combinations that applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, which for us is January 1, 2009. The objective of this
guidance is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. This statement
requires us as an acquirer of the assets of Venture Metals to recognize the
assets acquired, the liabilities assumed, and any non-controlling interest in
Venture Metals at the acquisition date, measured at their fair values as of that
date, with limited exceptions specified in the statement.

Effective
January 1, 2008, we adopted FASBs authoritative guidance on fair value
measurements for financial assets and liabilities. This guidance was updated in
January, 2010 by Topic 820, Fair Value Measurements and Disclosures 
Improving Disclosures about Fair Value Measurements, effective for interim and
annual reporting periods beginning after December 15, 2009, the year ending
December 31, 2010 for us. We carry certain of our financial assets and
liabilities at fair value on a recurring basis. These financial assets and
liabilities are composed of trading account assets, investment securities
available for sale and various types of derivative instruments. In addition, we
measure certain assets, such as goodwill and other long-lived assets, at fair
value on a non-recurring basis to evaluate those assets for potential
impairment. Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.

In
accordance with accounting standards, which we adopted effective January 1,
2008, we categorize our financial assets and liabilities into the following
fair value hierarchy:

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

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

Level 3 
Financial assets and liabilities with values based on prices or valuation
techniques that require inputs that are both unobservable in the market and
significant to the overall fair value measurement. These inputs reflect
managements judgment about the assumptions that a market participant would use
in pricing the asset or liability, and are based on the best available
information, some of which is internally developed. Examples of 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. All of our Goodwill and Intangible assets are defined as Level 3. In
accordance with this guidance, the following table represents our fair value
hierarchy for financial instruments at December 31, 2010:

29

---



|                                 |  |         |           |         |   |             |   |       |           |  |   |             |  
|-------------------------------- |  | ------- | --------- | ------- | - | ----------- | - | ----- | --------- |  | - | ----------- | -
|                                 |  | Level 1 |           | Level 2 |   | Level 3     |   | Total |          
|Assets                           |  |         |           |         |   |             |   |       |           |  |   |             |  
|Cash and
 cash equivalents       |  | $       | 2,468,284 |         | $ |            |   | $     |          |  | $ | 2,468,284   |  
|Goodwill                         |  |         |          |         |   |            |   |       | 6,840,046 |  |   | 6,840,046   |  
|Intangible
 assets               |  |         |          |         |   |            |   |       | 5,775,000 |  |   | 5,775,000   |  
|                                 |  |         |           |         |   |             |   |       |           |  |   |             |  
|Liabilities                      |  |         |           |         |   |             |   |       |           |  |   |             |  
|Long term
 debt                  |  | $       |          |         | $ | (45,446,886 | ) | $     |          |  | $ | (45,446,886 | )
|Derivative
 contract, net of tax |  |         |          |         |   | (650,202    | ) |       |          |  |   | (650,202    | )

We have had
no transfers in or out of Levels 1 or 2 fair value measurements. On July 1,
2010, ISA purchased the Venture Metals, LLC customer list, trade name, and a
non-compete agreement, Level 3 assets. The Company is in the process of
obtaining a valuation. Based on preliminary estimates, we recorded additional
goodwill of $4,273,000 and decreased the value of total net intangibles by
$630,000 as of December 31, 2010. We have had no other activity in Level 3 fair
value measurements for the year ending December 31, 2010. For Level 3 assets,
goodwill of $2,567,046 was subject to impairment analysis under Phase 1 of the
ASC guidance. We use an annual capitalized earnings computation to evaluate
Level 3 assets for impairment. No impairment was recorded. The additional
goodwill of $4,273,000 recorded in the 3rd quarter of 2010 will also
be subject to this analysis going forward.

In March
2008, the FASB issued authoritative guidance on disclosures about derivative
instruments and hedging activities and updated this guidance in February 2010
through guidance entitled Technical Corrections to Various Topics. The March
2008 guidance amends and expands the disclosure requirements in the previously
issued guidance on accounting for derivative instruments and hedging activities
and is effective for fiscal years and interim periods beginning after November
15, 2008, the year beginning January 1, 2009 for us. The February 2010 update
is effective for the first reporting period beginning after issuance, the year
ending December 31, 2009 for us. We have included the required disclosures in
Note 3 of our Consolidated Financial Statements.

In April
2009, the FASB issued authoritative guidance entitled Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability has
Significantly Decreased and Identifying Transactions That Are Not Orderly and
Recognition and Presentation of Other-Than-Temporary Impairments. These two
documents were issued to provide additional guidance about (1) measuring the
fair value of financial instruments when the markets become inactive and quoted
prices may reflect distressed transactions, and (2) recording impairment
charges on investments in debt instruments. Additionally, the FASB issued
authoritative guidance entitled Interim Disclosures about Fair Value of
Financial Instruments to require disclosures of fair value of certain
financial instruments in interim financial statements. The adoption of this
guidance does not materially impact our financial statements. This guidance
became effective for financial statements issued for interim and annual
reporting periods ending after June 15, 2009, the quarter ending June 30, 2009
for us.

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

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

The FASB
issued authoritative guidance on accounting for variable interest entities
(VIE) in June 2009 with an update issued in December 2009. This guidance is
effective for reporting periods beginning after November 15, 2009, the year
ending December 2010 for us. This guidance changes the process for how an
enterprise determines which party consolidates a VIE, to a primarily
qualitative analysis. The party that consolidates the VIE (the primary
beneficiary) is defined as the party with (1) the power to direct activities of
the VIE that most significantly affect the VIEs economic

30

---



performance and (2) the obligation to absorb losses of the VIE or the
right to receive benefits from the VIE. Upon adoption, reporting enterprises
must reconsider their conclusions on whether an entity should be consolidated
and should a change result, the effect on net assets will be recorded as a
cumulative effect adjustment to retained earnings. The adoption of this new
guidance did not impact our financial position or results of operations.

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

|         |                                                             
|-------- | ------------------------------------------------------------
|Item 7A. | 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 stainless steel, ferrous and nonferrous metal, and other
commodities. The timing and magnitude of industry cycles are difficult to
predict and general economic conditions impact the cycles. 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, an adverse impact on our financial results may occur if
selling prices fall more quickly than we can adjust purchase prices or if
levels of inventory have an anticipated net realizable value that is below
average cost.

Our
floating rate borrowings expose us to interest rate risk.

In a prior
year, we entered into three interest rate swap agreements swapping variable
rates for fixed rates. The first swap agreement covers approximately $5.2
million in debt and commenced April 7, 2009 and matures on April 7, 2014. The
second swap agreement covers approximately $2.4 million in debt and commenced
October 15, 2008 and matures on May 7, 2013. The third swap agreement covers
approximately $510,000 in debt and commenced October 22, 2008 and matures on
October 22, 2013. The three swap agreements fix our interest rate at
approximately 5.8%. At December 31, 2010, we recorded the estimated fair value
of the liability related to the three swaps at approximately $650,000. We
entered into the swap agreements for the purpose of hedging the interest rate
market risk for the respective notional amounts. These swap agreements were not
affected by the debt restructuring with Fifth Third Bank. We maintain a cash
account on deposit with BB&T which serves as collateral for the swap
agreements. See Note 3  Notes Payable to Bank in the Notes to Consolidated
Financial Statements for an outline of the notional amounts relating to these
agreements.

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

|        |                                                           
|------- | ----------------------------------------------------------
|Item 8. | Consolidated Financial Statements and
 Supplementary Data.

Our
consolidated financial statements required to be included in this Item 8 are
set forth in Item 15 of this report.

|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
 Accountants on Accounting and Financial Disclosure.

None

31

---



|         |                         
|-------- | ------------------------
|Item 9A. | 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 December 31, 2010, ISAs disclosure controls and
 procedures were effective for the purpose of ensuring that the information
 required to be disclosed in the reports that ISA files under the Exchange Act
 with the Securities and Exchange Commission (1) is recorded, processed,
 summarized and reported within the time periods 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) | Internal controls
 over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                             
| |     | Our management is responsible for establishing and maintaining
 adequate internal control over financial reporting (as such term is defined
 in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control over
 financial reporting includes the process designed by, or under the
 supervision of, our CEO and CFO, and effected by our Board of Directors,
 management and other personnel, to provide reasonable assurance regarding the
 reliability of financial reporting and the preparation of financial
 statements for external purposes in accordance with generally accepted
 accounting principles and includes those policies and procedures that:                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | pertain to the maintenance of records that, in reasonable detail, accurately
 and fairly reflect our transactions and dispositions of our assets;                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | provide reasonable assurance that our transactions are recorded as
 necessary to permit preparation of our financial statements in accordance
 with GAAP, and that our receipts and expenditures are being made only in
 accordance with authorizations of our management and directors; and
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | provide reasonable assurance regarding prevention or timely detection
 of unauthorized acquisition, use, or disposition of our assets that could
 have a material effect on our financial statements.                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                             
| |     | Because of its inherent limitations, internal control over financial
 reporting cannot prevent or detect every potential misstatement. Therefore,
 even those systems determined to be effective can provide only reasonable
 assurances with respect to financial statement preparation and presentation.
 Also, projections of any evaluation of effectiveness to future periods are
 subject to the risk that controls may become inadequate because of changes in
 conditions, or that the degree of compliance with the policies or procedures
 may decline.                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                             
| |     | Our management conducted an evaluation of the effectiveness of our
 internal control over financial reporting, based on the framework and
 criteria established in Internal Control  Integrated Framework, issued by
 the Committee of Sponsoring Organizations of the Treadway Commission. Based
 on this evaluation, our management assessed the effectiveness of our internal
 control over financial reporting for the year ended December 31, 2010, and
 concluded that such internal control over financial reporting was effective
 as of December 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                             
| |     | This Annual Report on Form 10-K does not include an attestation
 report of our registered public accounting firm regarding internal control
 over financial reporting. Managements report was not subject to attestation
 by our registered public accounting firm pursuant to rules of the SEC that
 require only managements report in this Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                             
| | (c) | Changes to
 internal control over financial reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                             
| |     | There were no changes in ISAs internal control over financial
 reporting during the year ended December 31, 2010 that have materially
 affected, or are reasonably likely to affect ISAs internal control over
 financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                             
| |     | During 2009, ISA acquired all the assets of Venture Metals, LLC, in
 order to enter into the stainless steel and alloys recycling business. For
 this new business, ISA purchased a new recycling system software package from
 a third party vendor and installed it in April, 2009. ISA installed this new
 software in the New Albany,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

32

---



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Seymour, and Camp Ground Road recycling satellite locations on
 October, 1, 2009. ISA installed this new software at the main recycling
 facility at Grade Lane on January 4, 2010. ISA conducted an assessment of our
 new stainless steel recycling business and recycling satellite locations
 internal controls over financial reporting for the period between the
 consummation dates and December 31, 2010, the date of our managements
 assessment and concluded that such internal control over financial reporting
 was effective as of December 31, 2010.

|         |                                                                                               
|-------- | ----------------------------------------------------------------------------------------------
|Item 9B. | Other Information.                                                                            
|         |                                                                                               
|None    
|         |                                                                                               
|PART III
|         |                                                                                               
|Item 10. | ISA Directors Executive Officers and
 Corporate Governance.*                                  
|         |                                                                                               
|Item 11. | Executive Compensation
 *                                                                     
|         |                                                                                               
|Item 12. | Security Ownership of Certain Beneficial
 Owners, Management and Related Stockholder Matters.*
|         |                                                                                               
|Item 13. | Certain Relationships and Related
 Transactions, and Director Independence.*                  
|         |                                                                                               
|Item 14. | Principal Accountant Fees and Services. *                                                     

* The information required by Items 10, 11, 12, 13 and 14 is or will be
set forth in the definitive proxy statement relating to the 2011 Annual Meeting
of Shareholders of ISA which is to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after ISAs year end for
the year covered by this report under the Securities Exchange Act of 1934, as
amended. Such definitive proxy statement relates to an annual meeting of
shareholders and the portions therefrom required to be set forth in this Form
10-K by Items 10, 11, 12, 13 and 14 are incorporated herein by reference
pursuant to General Instruction G(3) to Form 10-K.

PART
IV

|         |                                                          
|-------- | ---------------------------------------------------------
|Item 15. | Exhibits and Consolidated Financial
 Statement Schedules.

(a)(1) The
following consolidated financial statements of Industrial Services of America,
Inc. are filed as a part of this report:

|                                                                                                      |  |     
|----------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                      |  | Page
|                                                                                                      |  |     
|                                                                                                      |  |     
|Report of Independent Registered Public
 Accounting Firm                                              |  | F-1 
|                                                                                                      |  |     
|Consolidated Balance Sheets as of December
 31, 2010 and 2009                                         |  | F-2 
|                                                                                                      |  |     
|Consolidated Statements of Income for the
 years ended December 31, 2010, 2009 and 2008               |  | F-4 
|                                                                                                      |  |     
|Consolidated Statements of Shareholders
 Equity for the years ended December 31, 2010, 2009 and 2008 |  | F-5 
|                                                                                                      |  |     
|Consolidated Statements of Cash Flows for
 the years ended December 31, 2010, 2009 and 2008           |  | F-6 
|                                                                                                      |  |     
|Notes to Consolidated Financial Statements                                                            |  | F-7 
|                                                                                                      |  |     
|(a)(2)
 Consolidated Financial Statement Schedules.                                                  
|                                                                                                      |  |     
|Schedule IIValuation and Qualifying
 Accounts for the years ended December 31, 2010, 2009 and 2008   |  | F-46

(a)(3)
List of Exhibits

33

---



Exhibits
filed with, or incorporated by reference herein, this report are identified in
the Index to Exhibits appearing in this report. The Management Agreement and
the Consulting Agreement required to be filed as exhibits to this Form 10-K
pursuant to Item 15(b) are noted by an asterisk (*) in the Index to Exhibits.

(b) Exhibits.

The
exhibits listed on the Index to Exhibits are filed as a part of this report.

(c)
Consolidated Financial Statement Schedules.

Schedule
IIValuation and Qualifying Accounts for the years ended December 31, 2010,
2009 and 2008 are incorporated by reference at page F-46 of the ISA
Consolidated Financial Statements.

34

---



SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) 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.
|                          |                                       |                                      
|                          |                                       |                                      
|Dated:
 November 14, 2011 | By:                                   | /s/
 Harry Kletter                   
|                          |                                       |                                      
|                          |                                       | Harry
 Kletter, Chairman of the Board
|                          |                                       | and
 Chief Executive Officer         

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:

|                        |  |                                                  |  |                   
|----------------------- |  | ------------------------------------------------ |  | ------------------
|Signature               |  | Title                                            |  | Date              
|                        |  |                                                  |  |                   
|                        |  |                                                  |  |                   
|/s/
 Harry Kletter      |  | Chairman of
 the Board and Chief                 |  | November 14,
 2011
|                        |  | Executive
 Officer (Principal Executive Officer) |  |                   
|Harry
 Kletter          |  |                                                  |  |                   
|                        |  |                                                  |  |                   
|/s/ Brian
 Donaghy      |  | President,
 Chief Operating Officer              |  | November 14,
 2011
|                        |  | and Director                                     |  |                   
|Brian
 Donaghy          |  |                                                  |  |                   
|                        |  |                                                  |  |                   
|/s/
 Alan L. Schroering |  | Chief
 Financial Officer                         |  | November 14,
 2011
|                        |  | (Principal
 Financial Officer and                |  |                   
|Alan L.
 Schroering     |  | Principal
 Accounting Officer)                   |  |                   
|                        |  |                                                  |  |                   
|/s/
 Orson Oliver       |  | Director                                         |  | November 14,
 2011
|                        |  |                                                  |  |                   
|Orson Oliver            |  |                                                  |  |                   
|                        |  |                                                  |  |                   
|/s/
 Roman Epelbaum     |  | Director                                         |  | November 14,
 2011
|                        |  |                                                  |  |                   
|Roman
 Epelbaum         |  |                                                  |  |                   
|                        |  |                                                  |  |                   
|/s/
 Albert Cozzi       |  | Director                                         |  | November 14,
 2011
|                        |  |                                                  |  |                   
|Albert Cozzi            |  |                                                  |  |                   

35

---



INDEX TO EXHIBITS

|        |    |                                                                                                                                                                                                                                                                                                 |                         | 
|------- | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | 
|Exhibit |    |                                                                                                                                                                                                                                                                                                
|Number  |    |                                                                                                                                                                                                                                                                                                 | Description of Exhibits | 
|        |    |                                                                                                                                                                                                                                                                                                 |                         | 
|        |    |                                                                                                                                                                                                                                                                                                
|3.1     | ** | Certificate of Incorporation of ISA is incorporated by reference to
 Exhibit 3.1 of ISAs report on Form 10-KSB for the year ended December 31,
 1995.                                                                                                                                         
|        |    |                                                                                                                                                                                                                                                                                                
|3.2     | ** | Bylaws of ISA are incorporated by reference to Exhibit 3.2 of ISAs
 report on Form 10-KSB for the year ended December 31, 1995.                                                                                                                                                               
|        |    |                                                                                                                                                                                                                                                                                                
|10.1    | ** | Lease Agreement, dated January 1, 1998, by and between ISA and
 K&R, is incorporated by reference herein, to Exhibit 10.10 on Form 8-K of
 ISA, filed March 3, 1998 (File No. 0-20979).*                                                                                                       
|        |    |                                                                                                                                                                                                                                                                                                
|10.2    | ** | Consulting Agreement, dated as of January 2, 1998, by and between ISA
 and K&R, is incorporated by reference herein, to Exhibit 10.11 on Form
 8-K of ISA, filed March 3, 1998 (File No. 0-20979).*                                                                                            
|        |    |                                                                                                                                                                                                                                                                                                
|10.3    | ** | Promissory Note for K&R, LLC in favor of ISA in the principal
 amount of $302,160, dated March 25, 2006, and effective December 31, 2005, is
 incorporated by reference herein to Exhibit 10.32 of ISAs report on Form
 10-K for the year ended December 31, 2005, as filed on March 31, 2006.
|        |    |                                                                                                                                                                                                                                                                                                
|10.4    | ** | Sublease dated as of February 28, 2007 by and between ISA, as sub
 lessor, and Cohen Brothers of Lexington, Inc. as sublessee, is incorporated
 by reference herein to Exhibit 10.38 of ISAs report on Form 10-K for the
 year ended December 31, 2006, as filed on March 27, 2007.           
|        |    |                                                                                                                                                                                                                                                                                                
|10.5    | ** | Asset Purchase Agreement dated as of August 2, 2007, between ISA and
 Industrial Logistic Services, LLC, including exhibits thereto, is
 incorporated by reference herein to Exhibit 10.1 of ISAs report on Form 8-K
 for the event reported on August 2, 2007, as filed on August 8, 2007.   
|        |    |                                                                                                                                                                                                                                                                                                
|10.6    | ** | Executive Employment Agreement dated as of August 2, 2007, between
 ISA and Brian G. Donaghy is incorporated by reference herein to Exhibit 10.2
 of ISAs report on Form 8-K for the event reported on August 2, 2007, as
 filed on August 8, 2007.                                           
|        |    |                                                                                                                                                                                                                                                                                                
|10.7    | ** | Employment Agreement dated effective as of April 4, 2007, between ISA
 and James K. Wiseman, III is incorporated by reference herein to Exhibit 10.3
 of ISAs report on Form 8-K for the event reported on August 2, 2007, as
 filed on August 8, 2007.                                       
|        |    |                                                                                                                                                                                                                                                                                                
|10.8    | ** | ISDA Master Agreement and Schedule, dated as December 22, 2006,
 between ISA and Branch Banking and Trust Company is incorporated by reference
 herein to Exhibit 10.3 of ISAs Report on Form 10-Q for the quarter ended
 September 30, 2008, as filed on November 5, 2008.                   
|        |    |                                                                                                                                                                                                                                                                                                
|10.9    | ** | Swap Confirmation, dated October 20, 2008, between ISA and Branch
 Banking and Trust Company in the notional amount of $2,897,114.77 is
 incorporated by reference herein to Exhibit 10.4 of ISAs Report on Form 10-Q
 for the quarter ended September 30, 2008, as filed on November 5, 2008.
|        |    |                                                                                                                                                                                                                                                                                                
|10.10   | ** | Swap Confirmation, dated October 20, 2008, between ISA and Branch
 Banking and Trust Company in the notional amount of $6,000,000 is
 incorporated by reference herein to Exhibit 10.5 of ISAs Report on Form 10-Q
 for the quarter ended September 30, 2008, as filed on November 5, 2008.   
|        |    |                                                                                                                                                                                                                                                                                                
|10.11   | ** | Agreement to Purchase Real Estate, dated as of April 2, 2009, between
 ISA and LUCA Investments, LLC, is incorporated by reference herein to Exhibit
 10.1 of ISAs report on Form 8-K for the event reported on April 2, 2009, as
 filed on April 7, 2009.                                    
|        |    |                                                                                                                                                                                                                                                                                                
|10.12   | ** | Executive Employment Agreement dated effective as of June 1, 2009,
 between ISA and Steve Jones is incorporated by reference herein to Exhibit
 10.1 of ISAs report on Form 8-K for the event reported on June 1, 2009, as
 filed on June 5, 2009.                                            
|        |    |                                                                                                                                                                                                                                                                                                
|10.13   | ** | Executive Employment Agreement dated effective as of June 1, 2009,
 between ISA and Jeffrey Valentine is incorporated by reference herein to
 Exhibit 10.2 of ISAs report on Form 8-K for the event reported on June 1,
 2009, as filed on June 5, 2009.                                      

36

---



|        |    |                                                                                                                                                                                                                                                                                                                                                         |                         | 
|------- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | 
|Exhibit |    |                                                                                                                                                                                                                                                                                                                                                         |                         | 
|Number  |    |                                                                                                                                                                                                                                                                                                                                                         | Description of Exhibits | 
|        |    |                                                                                                                                                                                                                                                                                                                                                         |                         | 
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.14   | ** | Loan Agreement dated June 30, 2009, by and between ISA and Branch
 Banking and Trust Company is incorporated by reference herein to Exhibit 10.1
 of ISAs Report on Form 8-K for the event reported on June 30, 2009, as filed
 on July 6, 2009.                                                                                                      
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.15   | ** | Promissory Note in the amount of $5,000,000 dated June 30, 2009, from
 ISA to Branch Banking and Trust Company is incorporated by reference herein
 to Exhibit 10.2 of ISAs Report on Form 8-K for the event reported on June
 30, 2009, as filed on July, 6, 2009.                                                                                   
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.16   | ** | Agreement and Plan of Share Exchange, dated as of July 16, 2009,
 between ISA and Harry Kletter Family Limited Partnership, is incorporated by
 reference herein to Exhibit 10.1 of ISAs report on Form 8-K for the event
 reported on July 16, 2009, as filed on July 17, 2009.                                                                      
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.17   | ** | Agreement and Plan of Share Exchange, dated as of July 16, 2009,
 between ISA and Harry Kletter Family Limited Partnership, is incorporated by
 reference herein to Exhibit 10.2 of ISAs report on Form 8-K for the event
 reported on July 16, 2009, as filed on July 17, 2009.                                                                      
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.18   | ** | Note Modification Agreement, dated October 15, 2009, in the amount of
 $5,000,000 from ISA in favor of Branch Banking and Trust Company of North
 Carolina is incorporated by reference herein to Exhibit 10.1 of ISAs Report
 on Form 10-Q for the quarter ended September 30, 2009, as filed on November
 16, 2009.                                 
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.19   | ** | Note Modification Agreement, dated February 22, 2010, in the amount
 of $12,000,000 from ISA in favor of Branch Banking and Trust Company of North
 Carolina is incorporated by reference herein to Exhibit 10.66 of ISAs Report
 on Form 10-K for the year ended December 31, 2010, as filed on March 22,
 2010.                                     
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.20   | ** | Loan Agreement, dated April 13, 2010, in the amount of $20,000,000
 from ISA in favor of Branch Banking and Trust Company and BB&T Bankcard
 Corporation of North Carolina is incorporated by reference herein to Exhibit
 10.1 of ISAs Report on Form 10-Q for the quarter ended March 31, 2010, as
 filed on May 10, 2010.                          
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.21   | ** | Schedule DD to BB&T Loan Agreement is incorporated by reference
 herein to Exhibit 10.2 of ISAs Report on Form 10-Q for the quarter ended
 March 31, 2010, as filed on May 10, 2010.                                                                                                                                                                
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.22   | ** | Promissory Note, dated April 13, 2010, in the amount of $20,000,000
 payable to Branch Banking and Trust Company is incorporated by reference
 herein to Exhibit 10.3 of ISAs Report on Form 10-Q for the quarter ended
 March 31, 2010, as filed on May 10, 2010.                                                                                    
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.23   | ** | Addendum to Promissory Note dated April 13, 2010 is incorporated by
 reference herein to Exhibit 10.4 of ISAs Report on Form 10-Q for the quarter
 ended March 31, 2010, as filed on May 10, 2010.                                                                                                                                                    
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.24   | ** | Modification and Cross-Collateralization Agreement, dated April 13,
 2010, among ISA, ISA Real Estate, LLC, ISA Indiana Real Estate, LLC, 7021
 Grade Lane, LLC and Branch Banking and Trust Company is incorporated by
 reference herein to Exhibit 10.5 of ISAs Report on Form 10-Q for the quarter
 ended March 31, 2010, as filed on May 10, 2010.
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.25   | ** | ISA Asset Purchase Agreement, dated July 1, 2010, by and between ISA
 and Venture Metals, LLC, of Florida is incorporated by reference herein to Exhibit
 10.6 of ISAs Report on Form 10-Q for the quarter ended March 31, 2010, as
 filed on May 10, 2010.                                                                                           
|        |    |                                                                                                                                                                                                                                                                                                                                                        
|10.26   | ** | Amended and Restated Executive Employment Agreement, dated April 1,
 2010, by and between ISA and Brian Donaghy is incorporated by reference
 herein to Exhibit 10.7 of ISAs Report on Form 10-Q for the quarter ended
 March 31, 2010, as filed on May 10, 2010.                                                                                     

37

---



|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                         | 
|------- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | 
|Exhibit |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Number  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Description of Exhibits | 
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                         | 
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.27   | ** | Amended and
 Restated Executive Employment Agreement, dated July 1, 2010, by and between
 ISA and Steve Jones is incorporated by reference herein to Exhibit 10.1 of
 ISAs Report on Form 10-Q for the quarter ended June 30, 2010, as filed on
 August 9, 2010.                                                                                                                                                                                                           
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.28   | ** | Amended and
 Restated Executive Employment Agreement, dated July 1, 2010, by and between
 ISA and Jeff Valentine is incorporated by reference herein to Exhibit 10.2 of
 ISAs Report on Form 10-Q for the quarter ended June 30, 2010, as filed on
 August 9, 2010.                                                                                                                                                                                                        
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.29   | ** | Amendment to
 the Asset Purchase Agreement of Venture Metals, LLC, dated July 1, 2010, by
 and between ISA and Venture Metals, LLC, of Florida is incorporated by
 reference herein to Exhibit 10.3 of ISAs Report on Form 10-Q for the quarter
 ended June 30, 2010, as filed on August 9, 2010.                                                                                                                                                                          
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.30   | ** | 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, 2010, as filed on August 9, 2010.                                                                                                                                                                                      
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.31   | ** | Schedule
 5.22 to Credit Agreement is incorporated by reference herein to Exhibit 10.5
 of ISAs Report on Form 10-Q for the quarter ended June 30, 2010, as filed on
 August 9, 2010.                                                                                                                                                                                                                                                                                      
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.32   | ** | Revolving
 Loan Note, dated July 30, 2010, in the amount of $40,000,000 payable to 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, 2010, as filed on August
 9, 2010.                                                                                                                                                                                                                    
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.33   | ** | Term Loan
 Note, dated July 30, 2010, in the amount of $8,800,000 payable to 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, 2010, as filed on August 9, 2010.                                                                                                                                                                                                                           
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.34   | ** | Security
 Agreement, dated as of July 30, 2010, by and among Fifth Third Bank,
 Computerized Waste Systems, LLC, ISA Indiana Real Estate, LLC, ISA Logistics
 LLC, ISA Real Estate LLC, ISA Recycling, LLC, Waste Equipment Sales &
 Service Co., LLC, 7021 Grade Lane LLC, 7124 Grade Lane LLC, and 7200 Grade
 Lane LLC is incorporated by reference herein to Exhibit 10.8 of ISAs Report
 on Form 10-Q for the quarter ended June 30, 2010, as filed on August 9, 2010.
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.35   | ** | Guaranty,
 dated as of July 30, 2010, by Computerized Waste Systems, LLC, ISA Indiana
 Real Estate, LLC, ISA Logistics LLC, ISA Real Estate LLC, ISA Recycling, LLC,
 Waste Equipment Sales & Service Co., LLC, 7021 Grade Lane LLC, 7124 Grade
 Lane LLC, and 7200 Grade Lane LLC is incorporated by reference herein to
 Exhibit 10.9 of ISAs Report on Form 10-Q for the quarter ended June 30,
 2010, as filed on August 9, 2010.                                      
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10.36   | ** | Pledge
 Agreement, dated as of July 30, 2010, between Industrial Services of America,
 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, 2010, as
 filed on August 9, 2010.                                                                                                                                                                                                       
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|11      |    | Statement of
 Computation of Earnings Per Share (See Note 10 to Notes to Consolidated
 Financial Statements).                                                                                                                                                                                                                                                                                                                                                               
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|31.1    |    | Rule
 13a-14(a) Certification of Harry Kletter for the Form 10-K/A for the year
 ended December 31, 2010.                                                                                                                                                                                                                                                                                                                                                                   
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|31.2    |    | Rule
 13a-14(a) Certification of Alan Schroering for the Form 10-K/A for the year
 ended December 31, 2010.                                                                                                                                                                                                                                                                                                                                                                 
|        |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|32.1    |    | Section 1350
 Certification of Harry Kletter and Alan Schroering for the Form 10-K/A for
 the year ended December 31, 2010.                                                                                                                                                                                                                                                                                                                                                 

38

---



|        |  |                         | 
|------- |  | ----------------------- | 
|Exhibit | 
|Number  |  | Description of Exhibits | 
|        |  |                         | 

*Denotes a
management contract of ISA required to be filed as an exhibit pursuant to Item
601(10)(iii) of Regulation S-K under the Securities Act of 1933, as amended.

**Previously filed.

39

---



INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

CONTENTS

|                                                         |  |   
|-------------------------------------------------------- |  | --
|REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |  | 1 
|                                                         |  |   
|FINANCIAL
 STATEMENTS                                    |  |   
|                                                         |  |   
|CONSOLIDATED
 BALANCE SHEETS                             |  | 2 
|                                                         |  |   
|CONSOLIDATED
 STATEMENTS OF INCOME                       |  | 4 
|                                                         |  |   
|CONSOLIDATED
 STATEMENTS OF SHAREHOLDERS EQUITY         |  | 5 
|                                                         |  |   
|CONSOLIDATED
 STATEMENTS OF CASH FLOWS                   |  | 6 
|                                                         |  |   
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS              |  | 7 
|                                                         |  |   
|SUPPLEMENTARY INFORMATION                                |  |   
|                                                         |  |   
|VALUATION AND
 QUALIFYING ACCOUNTS                       |  | 46

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of
Directors and Shareholders
Industrial Services of America, Inc. and Subsidiaries
Louisville, Kentucky

We have audited the accompanying consolidated balance sheets of
Industrial Services of America, Inc. and Subsidiaries as of December 31, 2010
and 2009 and the related consolidated statements of income, shareholders
equity and cash flows for each of the years in the three year period ended
December 31, 2010. Our audits also included the financial statement schedule
listed in the Index at Item 15(a)2. The financial statements and financial
statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Industrial
Services of America, Inc. and Subsidiaries as of December 31, 2010 and 2009,
and the results of its operations and its cash flows for each of the years in
the three year period ended December 31, 2010, in conformity with U. S.
generally accepted accounting principles. Also, in our opinion, the related
consolidated financial statements schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

|                      |                             
|--------------------- | ----------------------------
|                      | Mountjoy
 Chilton Medley LLP
|                      |                             
|Louisville,
 Kentucky |                             
|November 14,
 2011    |                             

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

1.

---



|                                     
|-------------------------------------
|INDUSTRIAL
 SERVICES OF AMERICA, INC.
|AND
 SUBSIDIARIES                    
|CONSOLIDATED BALANCE SHEETS          
|December
 31, 2010 and 2009          
|                                     
|                                     

|                                                                                                           |  |      |             |      |   |            | 
|---------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ---------- | 
|                                                                                                           |  |      |             |      |   |            | 
|                                                                                                           |  | 2010 |             | 2009 |  
|                                                                                                           |  |      |             |      |  
|ASSETS                                                                                                     |  |      |             |      |   |            | 
|Current assets                                                                                             |  |      |             |      |   |            | 
|Cash                                                                                                       |  | $    | 2,468,284   |      | $ | 713,062    | 
|Accounts receivable  trade (after
 allowance for doubtful accounts of $100,000 in 2010 and 2009) (Note 1) |  |      | 27,449,146  |      |   | 8,512,326  | 
|Net investment in sales-type leases (Note
 5)                                                              |  |      | 33,387      |      |   | 27,928     | 
|Inventories (Note 1)                                                                                       |  |      | 34,310,631  |      |   | 26,426,611 | 
|Deferred income taxes (Note 4)                                                                             |  |      | 941,813     |      |   | 538,045    | 
|Other                                                                                                      |  |      | 398,488     |      |   | 322,847    | 
|                                                                                                           |  |      |             |      |   |            | 
|Total current assets                                                                                       |  |      | 65,601,749  |      |   | 36,540,819 | 
|                                                                                                           |  |      |             |      |   |            | 
|Net property and equipment                                                                                 |  |      | 27,554,103  |      |   | 26,994,539 | 
|                                                                                                           |  |      |             |      |   |            | 
|Other assets                                                                                               |  |      |             |      |   |            | 
|Net investment in sales-type leases (Note
 5)                                                              |  |      | 39,913      |      |   | 73,300     | 
|Notes receivable  related party (Note 6)                                                                  |  |      | 88,391      |      |   | 129,079    | 
|Goodwill (Note 1)                                                                                          |  |      | 6,840,046   |      |   | 2,567,046  | 
|Intangible assets, net (Note 1)                                                                            |  |      | 5,775,000   |      |   |           | 
|Other assets                                                                                               |  |      | 262,664     |      |   | 368,834    | 
|                                                                                                           |  |      |             |      |   |            | 
|Total other assets                                                                                         |  |      | 13,006,014  |      |   | 3,138,259  | 
|                                                                                                           |  |      |             |      |   |            | 
|Total assets                                                                                               |  | $    | 106,161,866 |      | $ | 66,673,617 | 
|                                                                                                           |  |      |             |      |   |            | 

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

2.

---



|                                     
|-------------------------------------
|INDUSTRIAL
 SERVICES OF AMERICA, INC.
|AND
 SUBSIDIARIES                    
|CONSOLIDATED
 BALANCE SHEETS         
|December
 31, 2010 and 2009          
|                                     
|                                     

|                                                                                                                                                                                     |  |      |             |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ----------- | ---- | - | ---------- | -
|                                                                                                                                                                                     |  |      |             |      |   |            |  
|                                                                                                                                                                                     |  | 2010 |             | 2009 |  
|                                                                                                                                                                                     |  |      |             |      |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                 |  |      |             |      |   |            |  
|Current liabilities                                                                                                                                                                  |  |      |             |      |   |            |  
|Current maturities of long-term debt (Note 3)                                                                                                                                        |  | $    | 1,824,227   |      | $ | 12,539,889 |  
|Current maturities of capital lease obligations (Note 8)                                                                                                                             |  |      |            |      |   | 20,798     |  
|Accounts payable                                                                                                                                                                     |  |      | 11,405,534  |      |   | 4,684,386  |  
|Income tax payable                                                                                                                                                                   |  |      | 2,909,374   |      |   | 517,828    |  
|Note payable to BB&T (Note 3)                                                                                                                                                        |  |      |            |      |   | 5,000,000  |  
|Interest rate swap agreement liability (Note 1)                                                                                                                                      |  |      | 650,202     |      |   | 564,715    |  
|Accrued bonuses                                                                                                                                                                      |  |      | 1,174,825   |      |   | 1,513,800  |  
|Other current liabilities                                                                                                                                                            |  |      | 319,198     |      |   | 380,718    |  
|                                                                                                                                                                                     |  |      |             |      |   |            |  
|Total current liabilities                                                                                                                                                            |  |      | 18,283,360  |      |   | 25,222,134 |  
|                                                                                                                                                                                     |  |      |             |      |   |            |  
|Long-term liabilities                                                                                                                                                                |  |      |             |      |   |            |  
|Long-term debt (Note 3)                                                                                                                                                              |  |      | 43,622,659  |      |   | 16,654,481 |  
|Deferred income taxes (Note 4)                                                                                                                                                       |  |      | 3,373,642   |      |   | 2,879,509  |  
|                                                                                                                                                                                     |  |      |             |      |   |            |  
|Total long-term liabilities                                                                                                                                                          |  |      | 46,996,301  |      |   | 19,533,990 |  
|                                                                                                                                                                                     |  |      |             |      |   |            |  
|Shareholders equity                                                                                                                                                                 |  |      |             |      |   |            |  
|Common stock, $0.0033 par value: 10,000,000 shares authorized,
 7,192,500 shares issued in 2010 and 2009, 6,789,917 and 6,429,438 shares
 outstanding in 2010 and 2009, respectively |  |      | 23,975      |      |   | 23,975     |  
|Additional paid-in capital                                                                                                                                                           |  |      | 17,852,630  |      |   | 7,442,346  |  
|Retained earnings                                                                                                                                                                    |  |      | 23,938,423  |      |   | 15,885,814 |  
|Accumulated other comprehensive loss                                                                                                                                                 |  |      | (353,362    | )    |   | (338,829   | )
|Treasury stock at cost, 402,583 and 763,062 shares in 2010 and 2009,
 respectively                                                                                                   |  |      | (579,461    | )    |   | (1,095,813 | )
|                                                                                                                                                                                     |  |      |             |      |   |            |  
|Total shareholders equity                                                                                                                                                           |  |      | 40,882,205  |      |   | 21,917,493 |  
|                                                                                                                                                                                     |  |      |             |      |   |            |  
|Total liabilities and shareholders equity                                                                                                                                           |  | $    | 106,161,866 |      | $ | 66,673,617 |  
|                                                                                                                                                                                     |  |      |             |      |   |            |  
|                                                                                                                                                                                    
|                                                                                                                                                                                     |  |      |             |      |   |            |  

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

3.

---



|                                            
|--------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.        
|AND SUBSIDIARIES                            
|CONSOLIDATED STATEMENTS OF INCOME           
|Years ended December 31, 2010, 2009 and 2008
|                                            
|                                            

|                                              |  |      |             |      |   |             |   |   |             |  
|--------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | - | - | ----------- | -
|                                              |  | 2010 |             | 2009 |   | 2008        |  
|                                              |  |      |             |      |   |             |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Revenue from services                         |  | $    | 6,212,549   |      | $ | 7,094,755   |   | $ | 18,182,726  |  
|Revenue from product sales                    |  |      | 336,792,766 |      |   | 173,956,925 |   |   | 81,859,765  |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Total Revenue                                 |  |      | 343,005,315 |      |   | 181,051,680 |   |   | 100,042,491 |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Cost of goods sold for services               |  |      | 5,401,521   |      |   | 5,514,290   |   |   | 16,550,253  |  
|Cost of goods sold for product sales          |  |      | 310,318,773 |      |   | 155,244,685 |   |   | 68,808,921  |  
|Inventory adjustment for lower cost or market |  |      |            |      |   |            |   |   | 1,228,352   |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Total Cost of goods sold                      |  |      | 315,720,294 |      |   | 160,758,975 |   |   | 86,587,526  |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Selling, general and administrative expenses  |  |      | 13,736,685  |      |   | 10,487,665  |   |   | 9,998,530   |  
|                                              |  |      |             |      |   |             |   |   |             |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Income before other income (expense)          |  |      | 13,548,336  |      |   | 9,805,040   |   |   | 3,456,435   |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Other income (expense)                        |  |      |             |      |   |             |   |   |             |  
|Interest expense                              |  |      | (1,473,037  | )    |   | (1,096,227  | ) |   | (372,444    | )
|Interest income                               |  |      | 29,255      |      |   | 32,147      |   |   | 85,598      |  
|Gain (loss) on sale of assets                 |  |      | 281,241     |      |   | 73,754      |   |   | 34,842      |  
|Provision for lawsuit settlement (Note 11)    |  |      |            |      |   |            |   |   | (990,000    | )
|Other income (loss), net                      |  |      | 40,133      |      |   | (29,322     | ) |   | 336,802     |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Total other expense                           |  |      | (1,122,408  | )    |   | (1,019,648  | ) |   | (905,202    | )
|                                              |  |      |             |      |   |             |   |   |             |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Income before income taxes                    |  |      | 12,425,928  |      |   | 8,785,392   |   |   | 2,551,233   |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Income tax provision (Note 4)                 |  |      | 4,373,319   |      |   | 3,500,680   |   |   | 1,023,635   |  
|                                              |  |      |             |      |   |             |   |   |             |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Net income                                    |  | $    | 8,052,609   |      | $ | 5,284,712   |   | $ | 1,527,598   |  
|                                              |  |      |             |      |   |             |   |   |             |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Basic earnings per share                      |  | $    | 1.22        |      | $ | 0.91        |   | $ | 0.28        |  
|                                              |  |      |             |      |   |             |   |   |             |  
|                                              |  |      |             |      |   |             |   |   |             |  
|Diluted earnings per share                    |  | $    | 1.21        |      | $ | 0.91        |   | $ | 0.28        |  
|                                              |  |      |             |      |   |             |   |   |             |  

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

4.

---



|                                               
|-----------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.           
|AND SUBSIDIARIES                               
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|Years ended December 31, 2010, 2009 and 2008   
|                                               
|                                               

|                                                             |  |               |           |                              |   |                      |  |   |                 |                                           |      |            |       |   |          |   |  |            |   |   |            |   |   |            |  
|------------------------------------------------------------ |  | ------------- | --------- | ---------------------------- | - | -------------------- |  | - | --------------- | ----------------------------------------- | ---- | ---------- | ----- | - | -------- | - |  | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                             |  |               |           |                              |   |                      |  |   |                 | Accumulated
 
 Other
 Comprehensive
 Loss |      |            |       |   |          |   | 
|                                                             |  | Common
 Stock |           | Additional
 Paid-in
 Capital |   | Retained
 
 Earnings |  |   | Treasury
 Stock |                                           |      |           
|                                                             |  |               |           |                              |   |                      |  |   |                 |                                          
|                                                             |  | Shares        |           | Amount                       |   |                      |  |   | Shares          |                                           | Cost |            | Total |  
|                                                             |  |               |           |                              |   |                      |  |   |                 |                                           |      |            |       |   |          |   | 
|                                                             |  |               |           |                              |   |                      |  |   |                 |                                           |      |            |       |   |          |   |  |            |   |   |            |   |   |            |  
|Balance
 as of January 1, 2008                               |  |               | 6,442,500 |                              | $ | 21,475               |  | $ | 3,599,624       |                                           | $    | 9,434,733  |       | $ |         |   |  | (1,011,152 | ) | $ | (1,036,394 | ) | $ | 12,019,438 |  
|                                                            
|Net unrealized
 loss on derivative instruments, net of tax   |  |               |          |                              |   |                     |  |   |                |                                           |      |           |       |   | (475,342 | ) |  |           |   |   |           |   |   | (475,342   | )
|                                                            
|Stock repurchase                                             |  |               |          |                              |   |                     |  |   |                |                                           |      | 2,961      |       |   |         |   |  | (83,410    | ) |   | (530,648   | ) |   | (527,687   | )
|                                                            
|Stock bonuses                                                |  |               |          |                              |   |                     |  |   | 142,749         |                                           |      |           |       |   |         |   |  | 15,000     |   |   | 18,651     |   |   | 161,400    |  
|                                                            
|Cash dividend                                                |  |               |          |                              |   |                     |  |   |                |                                           |      | (364,190   | )     |   |         |   |  |           |   |   |           |   |   | (364,190   | )
|                                                            
|Net income                                                   |  |               |          |                              |   |                     |  |   |                |                                           |      | 1,527,598  |       |   |         |   |  |           |   |   |           |   |   | 1,527,598  |  
|                                                             |  |               |           |                              |   |                      |  |   |                 |                                           |      |            |       |   |          |   |  |            |   |   |            |   |   |            |  
|                                                            
|Balance
 as of December 31, 2008                             |  |               | 6,442,500 |                              |   | 21,475               |  |   | 3,742,373       |                                           |      | 10,601,102 |       |   | (475,342 | ) |  | (1,079,562 | ) |   | (1,548,391 | ) |   | 12,341,217 |  
|                                                            
|Net unrealized
 income on derivative instruments, net of tax |  |               |          |                              |   |                     |  |   |                |                                           |      |           |       |   | 136,513  |   |  |           |   |   |           |   |   | 136,513    |  
|                                                            
|Stock bonuses                                                |  |               |          |                              |   |                     |  |   | 37,402          |                                           |      |           |       |   |         |   |  | 16,500     |   |   | 22,578     |   |   | 59,980     |  
|                                                            
|Purchase of real
 estate (3409 Camp Ground Road)             |  |               |          |                              |   |                     |  |   | 370,000         |                                           |      |           |       |   |         |   |  | 300,000    |   |   | 430,000    |   |   | 800,000    |  
|                                                            
|Purchase of real
 estate (7124 & 7200 Grade Lane)            |  |               | 750,000   |                              |   | 2,500                |  |   | 3,197,500       |                                           |      |           |       |   |         |   |  |           |   |   |           |   |   | 3,200,000  |  
|                                                            
|Stock option
 distribution to Directors                      |  |               |          |                              |   |                     |  |   | 95,071          |                                           |      |           |       |   |         |   |  |           |   |   |           |   |   | 95,071     |  
|                                                            
|Net Income                                                   |  |               |          |                              |   |                     |  |   |                |                                           |      | 5,284,712  |       |   |         |   |  |           |   |   |           |   |   | 5,284,712  |  
|                                                             |  |               |           |                              |   |                      |  |   |                 |                                           |      |            |       |   |          |   |  |            |   |   |            |   |   |            |  
|                                                            
|Balance
 as of December 31, 2009                             |  |               | 7,192,500 |                              |   | 23,975               |  |   | 7,442,346       |                                           |      | 15,885,814 |       |   | (338,829 | ) |  | (763,062   | ) |   | (1,095,813 | ) |   | 21,917,493 |  
|                                                            
|Net unrealized
 loss on derivative instruments, net of tax   |  |               |          |                              |   |                     |  |   |                |                                           |      |           |       |   | (14,533  | ) |  |           |   |   |           |   |   | (14,533    | )
|                                                            
|Stock bonuses                                                |  |               |          |                              |   |                     |  |   | 417,184         |                                           |      |           |       |   |         |   |  | 60,479     |   |   | 86,452     |   |   | 503,636    |  
|                                                            
|Purchase of
 intangibles                                     |  |               |          |                              |   |                     |  |   | 2,693,100       |                                           |      |           |       |   |         |   |  | 300,000    |   |   | 429,900    |   |   | 3,123,000  |  
|                                                            
|Contingent
 consideration (Note 13)                          |  |               |          |                              |   |                     |  |   | 7,300,000       |                                           |      |           |       |   |         |   |  |           |   |   |           |   |   | 7,300,000  |  
|                                                            
|Net income                                                   |  |               |          |                              |   |                     |  |   |                |                                           |      | 8,052,609  |       |   |         |   |  |           |   |   |           |   |   | 8,052,609  |  
|                                                             |  |               |           |                              |   |                      |  |   |                 |                                           |      |            |       |   |          |   |  |            |   |   |            |   |   |            |  
|                                                            
|Balance
 as of December 31, 2010                             |  |               | 7,192,500 |                              | $ | 23,975               |  | $ | 17,852,630      |                                           | $    | 23,938,423 |       | $ | (353,362 | ) |  | (402,583   | ) | $ | (579,461   | ) | $ | 40,882,205 |  
|                                                             |  |               |           |                              |   |                      |  |   |                 |                                           |      |            |       |   |          |   |  |            |   |   |            |   |   |            |  

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

5.

---



|                                             
|---------------------------------------------
|INDUSTRIAL
 SERVICES OF AMERICA, INC.        
|AND
 SUBSIDIARIES                            
|CONSOLIDATED STATEMENTS OF CASH FLOWS        
|Years
 ended December 31, 2010, 2009 and 2008
|                                             
|                                             

|                                                                            |  |      |             |      |   |             |   |   |            |  
|--------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | - | - | ---------- | -
|                                                                            |  | 2010 |             | 2009 |   | 2008        |  
|                                                                            |  |      |             |      |   |             |  
|Cash flows from operating activities                                        |  |      |             |      |   |             |   |   |            |  
|Net income                                                                  |  | $    | 8,052,609   |      | $ | 5,284,712   |   | $ | 1,527,598  |  
|Adjustments to reconcile net income to net cash from operating
 activities: |  |      |             |      |   |             |   |   |            |  
|Depreciation and amortization                                               |  |      | 3,886,874   |      |   | 2,799,192   |   |   | 2,122,167  |  
|Inventory write-down                                                        |  |      |            |      |   |            |   |   | 1,228,352  |  
|Stock bonus to employees                                                    |  |      | 503,636     |      |   | 59,980      |   |   | 161,400    |  
|Stock options to Directors                                                  |  |      |            |      |   | 95,071      |   |   |           |  
|Deferred income taxes                                                       |  |      | (196,346    | )    |   | 2,898,599   |   |   | (156,813   | )
|Provision for doubtful accounts                                             |  |      |            |      |   | (390,000    | ) |   | 390,000    |  
|(Gain)/loss on sale of property and equipment                               |  |      | (281,241    | )    |   | (73,754     | ) |   | (34,842    | )
|Change in assets and liability                                              |  |      |             |      |   |             |   |   |            |  
|Receivables                                                                 |  |      | (18,936,820 | )    |   | (4,310,842  | ) |   | 2,563,367  |  
|Net investment in sales-type leases                                         |  |      | 27,928      |      |   | 24,623      |   |   | 60,364     |  
|Inventories                                                                 |  |      | (7,884,020  | )    |   | (12,946,204 | ) |   | (972,419   | )
|Other assets                                                                |  |      | (66,822     | )    |   | (166,247    | ) |   | 291,659    |  
|Accounts payable                                                            |  |      | 6,721,148   |      |   | 982,491     |   |   | (963,736   | )
|Accrued bonuses                                                             |  |      | (338,975    | )    |   | 1,459,300   |   |   | 54,500     |  
|Accrued legal                                                               |  |      | 29,337      |      |   | (987,828    | ) |   | 1,027,165  |  
|Income tax payable                                                          |  |      | 2,749,210   |      |   | (48,197     | ) |   | 566,025    |  
|Other current liabilities                                                   |  |      | (90,857     | )    |   | (233,371    | ) |   | (89,560    | )
|                                                                            |  |      |             |      |   |             |   |   |            |  
|Net cash from (used in) operating activities                                |  |      | (5,824,339  | )    |   | (5,552,475  | ) |   | 7,775,227  |  
|                                                                            |  |      |             |      |   |             |   |   |            |  
|Cash flows from investing activities                                        |  |      |             |      |   |             |   |   |            |  
|Proceeds from sale of property and equipment                                |  |      | 376,308     |      |   | 111,469     |   |   | 126,283    |  
|Purchases of property and equipment                                         |  |      | (3,876,053  | )    |   | (1,042,019  | ) |   | (3,510,006 | )
|Deposits on equipment                                                       |  |      | (193,101    | )    |   | (290,452    | ) |   | (60,608    | )
|Payments for shredder system                                                |  |      |            |      |   | (6,526,555  | ) |   | (4,374,826 | )
|Acquisition from Venture Metals                                             |  |      |            |      |   | (11,874,985 | ) |   |           |  
|Payments from related party                                                 |  |      | 40,688      |      |   | 38,515      |   |   | 36,459     |  
|                                                                            |  |      |             |      |   |             |   |   |            |  
|Net cash used in investing activities                                       |  |      | (3,652,158  | )    |   | (19,584,027 | ) |   | (7,782,698 | )
|                                                                            |  |      |             |      |   |             |   |   |            |  
|Cash flows from financing activities                                        |  |      |             |      |   |             |   |   |            |  
|Payments on capital lease obligation                                        |  |      | (20,798     | )    |   | (80,771     | ) |   | (133,675   | )
|Proceeds from other long-term debt                                          |  |      |            |      |   | 1,498,885   |   |   | 163,655    |  
|Net proceeds from Fifth Third Bank                                          |  |      | 45,034,384  |      |   |            |   |   |           |  
|(Payments on) Proceeds from note payable to BB&T                            |  |      | (5,000,000  | )    |   | 5,000,000   |   |   |           |  
|Payments on other BB&T debt                                                 |  |      | (28,499,373 | )    |   | (625,230    | ) |   | (6,169,653 | )
|Payment of cash dividend                                                    |  |      |            |      |   |            |   |   | (364,190   | )
|Payments on other long-term debt                                            |  |      | (282,494    | )    |   | (1,731,517  | ) |   | (1,968,722 | )
|Proceeds from BB&T                                                          |  |      |            |      |   | 20,684,355  |   |   | 8,609,900  |  
|Purchases of common stock                                                   |  |      |            |      |   |            |   |   | (527,687   | )
|                                                                            |  |      |             |      |   |             |   |   |            |  
|Net cash from (used in) financing activities                                |  |      | 11,231,719  |      |   | 24,745,722  |   |   | (390,372   | )
|                                                                            |  |      |             |      |   |             |   |   |            |  
|Net change in cash                                                          |  |      | 1,755,222   |      |   | (390,780    | ) |   | (397,843   | )
|Cash at beginning of year                                                   |  |      | 713,062     |      |   | 1,103,842   |   |   | 1,501,685  |  
|                                                                            |  |      |             |      |   |             |   |   |            |  
|                                                                            |  |      |             |      |   |             |   |   |            |  
|Cash at end of year                                                         |  | $    | 2,468,284   |      | $ | 713,062     |   | $ | 1,103,842  |  
|                                                                            |  |      |             |      |   |             |   |   |            |  
|                                                                            |  |      |             |      |   |             |   |   |            |  
|Supplemental disclosure of cash flow information:                           |  |      |             |      |   |             |   |   |            |  
|Cash paid for interest                                                      |  | $    | 1,473,037   |      | $ | 1,096,227   |   | $ | 372,444    |  
|Cash paid for taxes                                                         |  |      | 1,946,341   |      |   | 748,722     |   |   | 617,675    |  
|                                                                            |  |      |             |      |   |             |   |   |            |  
|Supplemental disclosure of noncash investing and financing activities:      |  |      |             |      |   |             |   |   |            |  
|Common stock issued to acquire real estate                                  |  | $    |            |      | $ | 4,000,000   |   | $ |           |  
|Common stock issued to acquire intangibles                                  |  |      | 3,123,000   |      |   |            |   |   |           |  
|Contingent consideration                                                    |  |      | 7,300,000   |      |   |            |   |   |           |  

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

6.

---



|                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Nature of Business: The Recycling division of Industrial
Services of America, Inc. and its subsidiaries (ISA) purchases and sells
ferrous and nonferrous materials, including stainless steel, and fiber scrap on
a daily basis at our two wholly owned subsidiaries, ISA Recycling, LLC (located
in Louisville, Kentucky) and ISA Indiana, Inc. (serving southern Indiana). We expanded this division into the
stainless steel recycling market for super alloys and high-temperature metals
in 2009. The multi-million dollar shredder project, completed in June 2009,
expands our processing capacity, offers specialty grades of scrap and improves
end-product quality. The shredder began operations on July 1, 2009. Through the
Waste Services division (see the Segment information at Note 12), ISA also
provides products and services to meet the waste management needs of its
customers related to ferrous, non-ferrous and corrugated scrap recycling,
management services and waste equipment sales and rental. This division
represents contracts with retail, commercial and industrial businesses to handle
their waste disposal needs, primarily by subcontracting with commercial waste
hauling and disposal companies. Our customers and subcontractors are located
throughout the United States. This division also installs or repairs equipment
and rental equipment on a timely basis. Each of our segments bills separately
for its products or services. Generally, services and products are not bundled
for sale to individual customers. The products or services have value to the
customer on a standalone basis.

Adoption of the FASB
Accounting Standards Codification:In June
2009, the Financial Accounting Standards Board (FASB) issued the FASB
Accounting Standards Codification (ASC). Effective in September 2009, the ASC
became the single source for all authoritative GAAP recognized by the FASB and
is required to be applied to financial statements issued for interim and annual
periods ending after September 15, 2009. The ASC does not change GAAP and did
not impact our consolidated financial statements.

Revenue Recognition:
ISA records revenue for its recycling and equipment sales divisions upon
delivery of the related materials and equipment to the customer. We provide
installation and training on all equipment and we charge these costs to the
customer, recording revenue in the period we provide the service. We are the
middleman in the sale of the equipment and not a manufacturer. Any warranty is
the responsibility of the manufacturer and therefore we make no estimates for
warranty obligations. Allowances for equipment returns are made on a
case-by-case basis. Historically, returns of equipment have not been material.

Our management services group provides our customers with evaluation,
management, monitoring, auditing and cost reduction of our customers
non-hazardous solid waste removal activities. We recognize revenue related to
the management aspects of these services when we deliver the services. We
record revenue related to this activity on a gross basis because we are
ultimately responsible for service delivery, have discretion over the selection
of the specific service provided and the amounts to be charged, and are
directly obligated to the subcontractor for the services provided. We are an
independent contractor. If we discover that third party service

7.

---



|                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

providers have not performed, either by auditing of the service
provider invoices or communications from our customers, we then resolve the
service delivery dispute directly with the third party service supplier.

We record sales-type leases at the net present value of future minimum
lease payments. Interest income related to the lease is recognized over the
life of the lease. At the inception of the lease, any difference between the
net present value of future cash flows and the basis of the leased asset
(carrying value plus initial direct costs, less present value of any residual)
is recorded as a gain or loss.

Cash and Cash Equivalents:
Cash and cash equivalents includes cash in banks with original maturities of
three months or less. Cash and cash equivalents are stated at cost which
approximates market value, which in the opinion of management, are subject to
an insignificant risk of loss in value. We maintain a cash account on deposit
with BB&T which serves as collateral for our interest rate swap agreements.
This compensating balance arrangement is verbal only and does not legally
restrict the use of these funds. As of December 31, 2010, the balance in this
account was $875,000.

Accounts Receivable
and Allowance for Doubtful Accounts:Accounts
receivable consists primarily of amounts due from customers from product and
brokered sales. The allowance for doubtful accounts totaled $100,000 at
December 31, 2010 and December 31, 2009. Our determination of the allowance for
doubtful accounts includes a number of factors, including the age of the
balance, past experience with the customer account, changes in collection
patterns and general economic and industry conditions. Interest is not normally
charged on receivables nor do we normally require collateral for receivables.
Potential credit losses from our significant customers could adversely affect
our results of operations or financial condition. While we believe our
allowance for doubtful accounts is adequate, changes in economic conditions or
any weakness in the steel and metals industry could adversely impact our future
earnings. In general, we consider accounts receivable past due 30 to 60 days
after the invoice date. We charge off losses to the allowance when we deem
further collection efforts will not provide additional recoveries.

Major Customer:North American Stainless (NAS) is a major customer in our Recycling
segment. Sales to NAS equaled 63.7% of our consolidated revenue in 2010, and
68.6% of our consolidated revenue in 2009, and the loss of NAS would have a
material adverse effect on our financial statements. The accounts receivable
balance from NAS was $13,618,720 and $3,931,490 as of December 31, 2010 and
2009, respectively.

Principles of
Consolidation: The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, ISA Indiana, Inc., ISA Recycling, LLC, Industrial Logistics, and
ISA Alloys. Upon consolidation, all intercompany accounts, transactions and
profits have been eliminated.

Common Control:
We conduct significant levels of business (see Note 6) with K&R, LLC
(K&R), which is owned by ISAs chief executive officer and principal
shareholder. Because these entities are under common control, our operating
results or our financial position may be materially different from those that
would have been obtained if the entities were autonomous.

8.

---



|                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

Estimates:
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America, 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. Examples of estimates include the allowance
for doubtful accounts, estimates associated with annual goodwill impairment
tests, and estimates of deferred income tax and liabilities. The Company also
uses estimates when assessing fair values of assets and liabilities acquired in
business acquisitions as well as any fair value and any related impairment
charges related to the carrying value of machinery and equipment, and other
long-lived assets. Despite the Companys intention to establish accurate
estimates and use reasonable assumptions, actual results may differ from these
estimates.

Inventories:
Our inventories primarily consist of ferrous and non-ferrous, including
stainless steel, scrap metals and fiber scrap and are valued at the lower of
average purchased cost or market. 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 make certain assumptions regarding future demand and net realizable
value in order to assess that inventory is properly recorded at the lower of
cost or market. We base our assumptions on historical experience, current
market conditions and current replacement costs. If the anticipated future
selling prices of scrap metal and finished steel products should decline, we
would re-assess the recorded net realizable value of our inventory and make any
adjustments we feel necessary in order to reduce the value of our inventory
(and increase cost of goods sold) to the lower of cost or market.

Some commodities are in saleable condition at acquisition. We purchase
these commodities in small amounts until we have a truckload of material
available for shipment. Some commodities are not in saleable condition at
acquisition. These commodities must be torched, sheared, shredded or baled. We
do not have work-in-process inventory that needs to be manufactured to become
finished goods. We include processing costs in inventory for all commodities by
gross ton. Processing costs in stainless steel inventory totaled $259,323 at
December 31, 2010 and $249,789 at December 31, 2009. Stainless steel inventory
of $24,714,342 at December 31, 2010 and $21,549,014 at December 31, 2009 was
comprised only of raw materials. Processing costs in ferrous inventory totaled
$732,663 at December 31, 2010 and $197,822 at December 31, 2009. Processing
costs in non-ferrous inventory totaled $122,894 at December 31, 2010 and
$105,864 at December 31, 2009. Ferrous inventory of $6,296,255 at December 31,
2010 was comprised of $5,561,981 in raw materials and $734,274 of finished
goods. Ferrous inventory of $1,587,475 at December 31, 2009 was comprised of
$269,344 in raw materials and $1,318,131 of finished goods. Non-ferrous
inventory of $1,853,424 at December 31, 2010 was comprised of $529,881 in raw
materials and $1,323,543 of finished goods. Non-ferrous inventory of $2,219,137
at December 31, 2009 was comprised of $653,019 in raw materials and $1,566,118
of finished goods. We charged $1,114,880 in general and administrative
processing costs to cost of sales for the year ended December 31, 2010 and
$4,711,982 for the year ended December 31, 2009. We charged freight expense to
cost of goods sold.

9.

---



|                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

On January 4, 2010, ISA elected to refine its method of valuing its
inventory to the specific identification method, whereas in all prior years
inventory was valued using the weighted average method. The new method was
adopted due to a change in the inventory software, which now provides the
ability to specifically track and identify individual scrap metal commodities
within the system. This method provides a more accurate value of the inventory
and will apply for all future periods. As the previous software did not have
this tracking ability, management considers it impracticable to retrospectively
apply the method for prior period comparative financial statements, as required
by FASBs authoritative guidance entitled Accounting Changes and Error
Corrections. This change in inventory valuation method will not have a
significant impact on our operations or financial statements.

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 and are used by the Company within the one-year period as these
parts wear out quickly due to the high-volume and intensity of the shredder
function. Other inventory includes miscellaneous equipment, cardboard, fuel,
and baling wire. Inventories as of December 31, 2010 and 2009 consist of the
following:

|                                   |  |      |            |      |   |            | 
|---------------------------------- |  | ---- | ---------- | ---- | - | ---------- | 
|                                   |  | 2010 |            | 2009 |  
|                                   |  |      |            |      |  
|                                  
|Stainless
 steel alloys            |  | $    | 24,714,342 |      | $ | 21,549,014 | 
|Ferrous
 materials                 |  |      | 6,296,255  |      |   | 1,587,475  | 
|Non-ferrous
 materials, high grade |  |      | 1,853,424  |      |   | 2,219,137  | 
|Waste
 Equipment Machinery         |  |      | 75,064     |      |   | 102,032    | 
|Other                              |  |      | 59,040     |      |   | 89,122     | 
|                                   |  |      |            |      |   |            | 
|                                   |  |      |            |      |   |            | 
|Total
 inventories for sale        |  |      | 32,998,125 |      |   | 25,546,780 | 
|                                   |  |      |            |      |   |            | 
|Replacement
 parts                 |  |      | 1,312,506  |      |   | 879,831    | 
|                                   |  |      |            |      |   |            | 
|                                   |  |      |            |      |   |            | 
|Total
 inventories                 |  | $    | 34,310,631 |      | $ | 26,426,611 | 
|                                   |  |      |            |      |   |            | 

Property and
Equipment: Property and equipment are stated
at cost and depreciated on a straight-line basis over the estimated useful
lives of the related property. Assets under capital lease obligations would be
amortized over the term of the capital lease; as of December 31, 2010, we do
not have any assets under capital lease obligations.

10.

---



|                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

Property and equipment as of December 31, 2010 and 2009 consist of the
following:

|                                                |  |            |  |      |            |      |   |            | 
|----------------------------------------------- |  | ---------- |  | ---- | ---------- | ---- | - | ---------- | 
|                                                |  | Life       |  | 2010 |            | 2009 |  
|                                                |  |            |  |      |            |      |  
|                                                |  |            |  |      |            |      |   |            | 
|Land                                            |  |            |  | $    | 5,871,707  |      | $ | 5,862,069  | 
|Equipment and vehicles                          |  | 1-10 years |  |      | 25,733,366 |      |   | 23,207,646 | 
|Office equipment                                |  | 1-7 years  |  |      | 2,313,399  |      |   | 1,886,104  | 
|Rental equipment                                |  | 3-5 years  |  |      | 5,132,661  |      |   | 5,304,771  | 
|Building and leasehold improvements             |  | 5-40 years |  |      | 7,732,949  |      |   | 7,219,385  | 
|                                                |  |            |  |      |            |      |   |            | 
|                                                |  |            |  | $    | 46,784,082 |      | $ | 43,479,975 | 
|                                                |  |            |  |      |            |      |   |            | 
|Less accumulated depreciation and
 amortization |  |            |  |      | 19,229,979 |      |   | 16,485,436 | 
|                                                |  |            |  |      |            |      |   |            | 
|                                                |  |            |  |      |            |      |   |            | 
|                                                |  |            |  | $    | 27,554,103 |      | $ | 26,994,539 | 
|                                                |  |            |  |      |            |      |   |            | 

Depreciation expense for the years ended December 31, 2010, 2009 and
2008 was $3,511,874, $2,799,192, and $2,122,167. Of the $3,511,874 depreciation
expense recognized in 2010, $2,778,624 was recorded in cost of sales, and
$733,250 was recorded in general and administrative expense. Of the $2,799,192
depreciation expense recognized in 2009, $2,102,505 was recorded in cost of
sales, and $696,687 was recorded in general and administrative expense.

A typical term of our rental equipment leases is five years. The
revenue stream is based on monthly usage and recognized in the month of usage.
We record purchased rental equipment, including all installation and freight
charges, as a fixed asset. We are typically responsible for all repairs and
maintenance expenses on rental equipment. Based on existing agreements, future
operating lease revenue from rental equipment for each of the next five years
is estimated to be:

|     |  |   |           | 
|---- |  | - | --------- | 
|2011 |  | $ | 1,603,706 | 
|2012 |  |   | 1,192,838 | 
|2013 |  |   | 651,835   | 
|2014 |  |   | 375,788   | 
|2015 |  |   | 161,689   | 
|     |  |   |           | 
|     |  | $ | 3,985,856 | 
|     |  |   |           | 

Goodwill and Other
Intangible Assets: Goodwill and certain intangible assets are no longer
amortized but are assessed at least annually for impairment with any such
impairment recognized in the period identified. We perform our annual goodwill
impairment test internally at December 31 and at the level of the recycling
reporting units to which all the goodwill is related. We determine whether to
impair goodwill by comparing the fair value of the recycling reporting unit as
a whole (the present value of expected cash flows) to its carrying value
including goodwill. Since the recycling reporting units fair value exceeds its
carrying value, no further computations are required. See also Note 13 
Purchase of Inventory, Fixed Assets, and Intangible Assets of Venture Metals,
LLC for additional information on the purchased intangibles.

11.

---



|                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

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

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. See also Note 13  Purchase of
Inventory, Fixed Assets, and Intangible Assets of Venture Metals, LLC for
additional information on the purchased intangibles.

We have the following intangible assets as of December 31, 2010:

|                                  |  |                       |           |                           |   |                     |   |   |           | 
|--------------------------------- |  | --------------------- | --------- | ------------------------- | - | ------------------- | - | - | --------- | 
|                                  |  | 2010                  |          
|                                  |  |                       |          
|                                  |  | Gross Carrying
 Value |           | Accumulated
 Amortization |   | Net Carrying
 Value |  
|                                  |  |                       |           |                           |   |                     |  
|Amortized
 intangible assets      |  |                       |           |                           |   |                     |   |   |           | 
|Venture Metals, LLC trade name    |  | $                     | 730,000   |                           | $ | (73,000             | ) | $ | 657,000   | 
|Non-compete agreements            |  |                       | 620,000   |                           |   | (62,000             | ) |   | 558,000   | 
|Venture Metals, LLC customer list |  |                       | 4,800,000 |                           |   | (240,000            | ) |   | 4,560,000 | 
|                                  |  |                       |           |                           |   |                     |   |   |           | 
|Total
 intangible assets          |  | $                     | 6,150,000 |                           | $ | (375,000            | ) | $ | 5,775,000 | 

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
$375,000 for the year ended December 31, 2010.

As of December 31, 2010, we expect amortization expense for these
assets for the next six years to be as follows:

|           |  |   |                             |  |              |            |                       |   |           |  | 
|---------- |  | - | --------------------------- |  | ------------ | ---------- | --------------------- | - | --------- |  | 
|Year       |  |   | Balance  Beginning of Year |  | Amortization |            | Balance  End of Year |  
|           |  |   |                             |  |              |            |                       |  
|2011       |  | $ | 5,775,000                   |  | $            | (750,000   | )                     | $ | 5,025,000 | 
|2012       |  |   | 5,025,000                   |  |              | (750,000   | )                     |   | 4,275,000 | 
|2013       |  |   | 4,275,000                   |  |              | (750,000   | )                     |   | 3,525,000 | 
|2014       |  |   | 3,525,000                   |  |              | (750,000   | )                     |   | 2,775,000 | 
|2015       |  |   | 2,775,000                   |  |              | (615,000   | )                     |   | 2,160,000 | 
|2016       |  |   | 2,160,000                   |  |              | (480,000   | )                     |   | 1,680,000 | 
|Thereafter |  |   | 1,680,000                   |  |              | (1,680,000 | )                     |   |          | 

Derivative and
Hedging Activities: The FASBs authoritative
guidance titled Accounting for Derivative Instruments and Hedging Activities,
and subsequent amendments (hereinafter collectively referred to FASBs
guidance), contain numerous requirements including the

12.

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|                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2010, 2009, and 2008
|                                                                                                                                     

recognition of derivative instruments in the financial statements at
fair value. Derivatives that are not hedges must be adjusted to fair value
through the statement of operations. If the derivative meets the requirements
for hedge accounting in accordance with FASBs guidance, depending on the
nature of the hedge, changes in the fair value of the derivative are either
offset against the corresponding change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income (loss) until the hedged item is recognized in earnings.
The ineffective portion of a derivatives change in fair value is immediately
recognized in the statement of operations.

For derivative instruments that are designated and qualify as cash flow
hedges, the effective portion of the gain or loss on the derivative instrument
is reported as a component of other comprehensive income (loss) and
reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value
of future cash flows of the hedged item, if any, is recognized in the statement
of operations.

Beginning in October, 2008, we began to utilize derivative instruments
in the form of interest rate swaps to assist in managing our interest rate
risk. We do not enter into any interest rate swap derivative instruments for
trading purposes. We recognize as an adjustment to interest expense the
differential paid or received on interest rate swaps. We include in other
comprehensive income the change in the fair value of the interest rate swap,
which is established as an effective hedge. See also Note 3  Notes Payable to
Bank for additional information on these interest rate swaps.

Advertising Expense:
Advertising costs are charged to expense in the period the costs are incurred.
Advertising expense was $218,859, $237,751, and $98,363 for the years ended
December 31, 2010, 2009, and 2008, respectively.

Accumulated Other
Comprehensive Income (Loss): Comprehensive income is net income plus
certain other items that are recorded directly to shareholders equity. Amounts
included in other accumulated comprehensive loss for our derivative instruments
are recorded net of the related income tax effects. The following table gives
further detail regarding the composition of other accumulated comprehensive
income (loss) at December 31, 2010 and 2009.

|                                                                         |  |   |          |  
|------------------------------------------------------------------------ |  | - | -------- | -
|Total accumulated other
 comprehensive income (loss) as of 1/1/09        |  | $ | (475,342 | )
|Net unrealized gain on
 derivative instruments, net of tax, during 2009  |  |   | 136,513  |  
|                                                                         |  |   |          |  
|Total accumulated other
 comprehensive income (loss) as of 12/31/09      |  |   | (338,829 | )
|Net unrealized (loss) on
 derivative instruments, net of tax during 2010 |  |   | (14,533  | )
|                                                                         |  |   |          |  
|Total accumulated other
 comprehensive income (loss) as of 12/31/10      |  | $ | (353,362 | )
|                                                                         |  |   |          |  

Income Taxes:
Deferred income taxes are recorded to recognize the tax consequences on future
years of differences between the tax basis of assets and liabilities and their
carrying amounts for financial reporting purposes, referred to as temporary
differences, and for net operating loss carryforwards subject to an ongoing
assessment of realizability. Deferred income taxes are measured by applying
current tax laws.

13.

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|                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

The FASB has issued guidance, included in the ASC, related to the
accounting for uncertainty in taxes recognized in financial statements. These
new standards are effective for annual financial statements for fiscal years
beginning after December 15, 2008. The company evaluates its uncertain tax
positions and a loss contingency is recognized when it is probable that a
liability has been incurred as of the date of the financial statements and the
amount of the loss can be reasonably estimated. The amount recognized is subject
to estimate and managements judgment with respect to the likely outcome for
each uncertain tax position. The amount that is ultimately sustained for an
individual uncertain tax position or for all uncertain tax positions in the
aggregate could differ from the amount recognized.

The Company recognizes interest accrued related to unrecognized tax
positions in interest expense and penalties in operating expenses, if
appropriate. The tax years 2007 through 2010 remain open to examination by the
Internal Revenue Service and certain state taxing jurisdictions to which the
Company is subject.

Statement of Cash
Flows: The statement of cash flows has been
prepared using a definition of cash that includes deposits with original
maturities of three months or less. We have reclassified certain cash flow
items within the accompanying Consolidated Statements of Cash Flows and Notes
to the Financial Statements for prior years in order to be comparable with the
current presentation. These reclassifications had no effect on previously
reported income.

Earnings Per Share: Basic earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
during the year. Diluted earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding plus the dilutive
effect of stock options.

|                                   |  |      |           |      |   |           |  |   |           | 
|---------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|                                   |  | 2010 |           | 2009 |   | 2008      | 
|                                   |  |      |           |      |   |           | 
|                                   |  |      |           |      |   |           |  |   |           | 
|Net income
 (loss)                 |  |      |           |      |   |           |  |   |           | 
|                                   |  |      |           |      |   |           |  |   |           | 
|Net income, as reported            |  | $    | 8,052,609 |      | $ | 5,284,712 |  | $ | 1,527,598 | 
|                                   |  |      |           |      |   |           |  |   |           | 
|                                   |  |      |           |      |   |           |  |   |           | 
|Basic
 earnings (loss) per share   |  |      |           |      |   |           |  |   |           | 
|                                   |  |      |           |      |   |           |  |   |           | 
|As reported                        |  | $    | 1.22      |      | $ | 0.91      |  | $ | 0.28      | 
|                                   |  |      |           |      |   |           |  |   |           | 
|                                   |  |      |           |      |   |           |  |   |           | 
|Diluted
 earnings (loss) per share |  |      |           |      |   |           |  |   |           | 
|                                   |  |      |           |      |   |           |  |   |           | 
|As reported                        |  | $    | 1.21      |      | $ | 0.91      |  | $ | 0.28      | 
|                                   |  |      |           |      |   |           |  |   |           | 

Stock Option Plans: We have an employee stock option plan
under which we may grant options for up to 2,400,000 shares of common stock,
which are reserved by the board of directors for issuance of stock options. The
exercise price of each option is equal to the market price of our stock on the
date of grant. The maximum term of the option is five years.

We accounted for this plan based on FASBs authoritative guidance
entitled Share-Based

14.

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|                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

Payment, using the
modified prospective method. The impact of accounting for this plan under this
guidance on our consolidated results of operations depends on the level of
future option grants and the fair value of the options granted at such future
dates, as well as the vesting periods provided by such awards. Existing
outstanding options did not result in additional compensation expense upon
adoption of this guidance since all outstanding options were fully vested. See
also Note 14  Long Term Incentive Plan in these Notes to Consolidated
Financial Statements for additional information regarding the Long Term
Incentive Plan.

Following is a summary of stock option activity and number of shares
reserved for outstanding options for the years ended December 31, 2010, 2009
and 2008:

|                                 |  |                   |        |                                              |   |                            |  |                                               |      |                                                       |  |           |  |   |      | 
|-------------------------------- |  | ----------------- | ------ | -------------------------------------------- | - | -------------------------- |  | --------------------------------------------- | ---- | ----------------------------------------------------- |  | --------- |  | - | ---- | 
|                                 |  | Number of
 Shares |        | Weighted
 Average
 Exercise Price
 Per Share |   | Exercise
 Price Per
 Share |  | Maximum
 Remaining
 Term of
 Options
 Granted |      | Weighted
 Average
 Grant Date
 Fair Value
 of Options | 
|                                 |  |                   |        |                                              |   |                            |  |                                               |      |                                                       | 
|Balance as
 of January 1, 2008   |  |                   |       |                                              |   |                           |  |                                               |     |                                                       |  |          |  |   |     | 
|                                 |  |                   |        |                                              |   |                            |  |                                               |      |                                                       |  |           |  |   |      | 
|Balance as
 of December 31, 2008 |  |                   |       |                                              |   |                           |  |                                               |     |                                                       |  |          |  |   |     | 
|                                 |  |                   |        |                                              |   |                            |  |                                               |      |                                                       |  |           |  |   |      | 
|Granted                          |  |                   | 90,000 |                                              | $ | 4.23                       |  | $                                             | 4.23 |                                                       |  | 3.5 Years |  | $ | 1.05 | 
|                                 |  |                   |        |                                              |   |                            |  |                                               |      |                                                       |  |           |  |   |      | 
|                                 |  |                   |        |                                              |   |                            |  |                                               |      |                                                       |  |           |  |   |      | 
|Balance as
 of December 31, 2009 |  |                   | 90,000 |                                              | $ | 4.23                       |  | $                                             | 4.23 |                                                       |  | 3.5 Years |  | $ | 1.05 | 
|                                 |  |                   |        |                                              |   |                            |  |                                               |      |                                                       |  |           |  |   |      | 
|Granted                          |  |                   |       |                                              |   |                           |  |                                               |     |                                                       |  |          |  |   |     | 
|                                 |  |                   |        |                                              |   |                            |  |                                               |      |                                                       |  |           |  |   |      | 
|Balance as
 of December 31, 2010 |  |                   | 90,000 |                                              | $ | 4.23                       |  | $                                             | 4.23 |                                                       |  | 3.5 Years |  | $ | 1.05 | 
|                                 |  |                   |        |                                              |   |                            |  |                                               |      |                                                       |  |           |  |   |      | 

On January 6, 2010, the Board of Directors granted
    non-performance based stock awards of 25,500 shares to management at $6.39
    per share. On January 11, 2010, we issued 18,000 shares and on February 11,
    2010, we issued the remaining 7,500 shares of this grant. On June 8, 2010,
    we issued 30,000 thousand shares of our stock to
    management. These
    shares were granted pursuant to a performance based stock plan authorized
    on April 14, 2009, at a grant date fair value of $2.53 per share. On November
    15, 2010, we issued 5,000 shares of our stock to management at $10.34 per
    share. In January 2011, we issued 60,000 shares of our stock to management.
    These shares were granted pursuant to a performance based stock plan authorized
    on April 1, 2010, at a grant date fair value of $11.93 per share. We also
    issued non-performance based stock awards of 600 shares to consultants at
    $12.31 per share.

Fair Value of
Financial Instruments: We estimate the fair
value of our financial instruments using relevant market information and other
assumptions. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, prepayments and other factors.
Changes in assumptions or market conditions could significantly affect these
estimates. As of December 31, 2010, the estimated fair value of our financial
instruments approximated book value. The fair value of our debt approximates
its carrying value because the majority of our debt bears a floating rate of

15.

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|                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

interest based on the LIBOR rate. There is no readily available market
by which to determine fair market value of our fixed term debt; however, based
on existing interest rates and prevailing rates as of each year end, we have
determined that the fair value of our fixed rate debt approximates book value.

Subsequent Events:We have evaluated the period from December 31, 2010 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, except for the stock awards disclosed above.

Impact of Recently
Issued Accounting Standards:

In December 2007, FASB issued authoritative guidance on business
combinations that applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008, which for us is January 1,
2009. The objective of this guidance is to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. This statement requires us as an acquirer of the assets of
Venture Metals to recognize the assets acquired, the liabilities assumed, and
any non-controlling interest in Venture Metals at the acquisition date,
measured at their fair values as of that date, with limited exceptions
specified in the statement. Refer to Note 13  Purchase of Inventory, Fixed Assets,
and Intangible Assets of Venture Metals, LLC of these Notes to Consolidated
Financial Statements for more detailed information about our acquisition of
Venture Metals, LLC.

Effective January 1, 2008, we adopted FASBs authoritative guidance on
fair value measurements for financial assets and liabilities. This guidance was
updated in January, 2010 by Topic 820, Fair Value Measurements and Disclosures
 Improving Disclosures about Fair Value Measurements, effective for interim
and annual reporting periods beginning after December 15, 2009, the year ending
December 31, 2010 for us. 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 accounting standards, which we adopted effective
January 1, 2008, we categorize our financial assets and liabilities into the
following fair value hierarchy:

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

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

16.

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|                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2010, 2009, and 2008
|                                                                                                                                     

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. All of our goodwill and intangible assets are defined
as Level 3. In accordance with this guidance, the following table represents
our fair value hierarchy for financial instruments at December 31, 2010 and
December 31, 2009:

|                           |  |         |           |         |   |             |   |       |           |  |   |             |  
|-------------------------- |  | ------- | --------- | ------- | - | ----------- | - | ----- | --------- |  | - | ----------- | -
|2010:                      |  | Level 1 |           | Level 2 |   | Level 3     |   | Total |          
|                           |  |         |           |         |   |             |   |       |          
|Assets                     |  |         |           |         |   |             |   |       |           |  |   |             |  
|Cash and
 cash equivalents |  | $       | 2,468,284 |         | $ |            |   | $     |          |  | $ | 2,468,284   |  
|Goodwill                   |  |         |          |         |   |            |   |       | 6,840,046 |  |   | 6,840,046   |  
|                           |  |         |           |         |   |             |   |       |           |  |   |             |  
|Net
 intangible assets     |  |         |          |         |   |            |   |       | 5,775,000 |  |   | 5,775,000   |  
|                           |  |         |           |         |   |             |   |       |           |  |   |             |  
|                           |  |         |           |         |   |             |   |       |           |  |   |             |  
|Liabilities                |  |         |           |         |   |             |   |       |           |  |   |             |  
|Long term
 debt            |  | $       |          |         | $ | (45,446,886 | ) | $     |          |  | $ | (45,446,886 | )
|Derivative
 contract       |  |         |          |         |   | (650,202    | ) |       |          |  |   | (650,202    | )
|                           |  |         |           |         |   |             |   |       |           |  |   |             |  
|2009:                      |  | Level 1 |           | Level 2 |   | Level 3     |   | Total |          
|                           |  |         |           |         |   |             |   |       |          
|Assets                     |  |         |           |         |   |             |   |       |           |  |   |             |  
|Cash and
 cash equivalents |  | $       | 713,062   |         | $ |            |   | $     |          |  | $ | 713,062     |  
|Goodwill                   |  |         |          |         |   |            |   |       | 2,567,046 |  |   | 2,567,046   |  
|                           |  |         |           |         |   |             |   |       |           |  |   |             |  
|Liabilities                |  |         |           |         |   |             |   |       |           |  |   |             |  
|Long term
 debt            |  | $       |          |         | $ | (34,194,370 | ) | $     |          |  | $ | (34,194,370 | )
|Derivative
 contract       |  |         |          |         |   | (564,715    | ) |       |          |  |   | (564,715    | )

17.

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|                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2010, 2009, and 2008
|                                                                                                                                     

We have had no transfers in or out of Levels 1 or 2 fair value
measurements. On July 1, 2010, ISA purchased the Venture Metals, LLC customer
list, trade name, and a non-compete agreement, Level 3 assets. The Company is
in the process of obtaining a valuation. Based on preliminary estimates, we
recorded additional goodwill of $4,273,000 and decreased the value of total net
intangibles by $630,000 as of December 31, 2010. We have had no other activity
in Level 3 fair value measurements for the year ending December 31, 2010. For
Level 3 assets, goodwill of $2,567,046 was subject to impairment analysis under
Phase 1 of the ASC guidance. We use an annual capitalized earnings computation
to evaluate Level 3 assets for impairment. No impairment was recorded. The
additional goodwill of $4,273,000 recorded in the 3rd quarter of
2010 will also be subject to this analysis going forward.

In March 2008, the FASB issued authoritative guidance on disclosures
about derivative instruments and hedging activities and updated this guidance
in February 2010 through guidance entitled Technical Corrections to Various
Topics. The March 2008 guidance amends and expands the disclosure requirements
in the previously issued guidance on accounting for derivative instruments and
hedging activities and is effective for fiscal years and interim periods
beginning after November 15, 2008, the year beginning January 1, 2009 for us.
The February 2010 update is effective for the first reporting period beginning
after issuance, the year ending December 31, 2009 for us. We have included the
required disclosures in Note 3 of our Consolidated Financial Statements.

In April 2009, the FASB issued authoritative guidance entitled
Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability has Significantly Decreased and Identifying Transactions That Are Not
Orderly and Recognition and Presentation of Other-Than-Temporary
Impairments. These two documents were issued to provide additional guidance
about (1) measuring the fair value of financial instruments when the markets
become inactive and quoted prices may reflect distressed transactions, and (2)
recording impairment charges on investments in debt instruments. Additionally,
the FASB issued authoritative guidance entitled Interim Disclosures about Fair
Value of Financial Instruments to require disclosures of fair value of certain
financial instruments in interim financial statements. The adoption of this
guidance does not materially impact our financial statements. This guidance
became effective for financial statements issued for interim and annual
reporting periods ending after June 15, 2009, the quarter ending June 30, 2009
for us.

In May 2009, the FASB issued authoritative guidance on subsequent
events, but this guidance was amended by new authoritative guidance issued in
February, 2010. The original guidance required the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
datethat is, whether that date represents the date the financial statements
were issued or were available to be issued. The new guidance removes the
requirement for an SEC filer to disclose a date in both issued and revise
financial statements. This amendment removes potential conflicts with SEC
requirements.

18.

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|                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2010, 2009, and 2008
|                                                                                                                                     

The original guidance became effective for interim and annual periods
ending after June 15, 2009, the quarter ending June 30, 2009 for us, and the
amendment became effective upon issuance of the final update in February, 2010.

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

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

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

NOTE 2  STOCK DIVIDEND

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

19.

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|                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2010, 2009, and 2008
|                                                                                                                                     

NOTE 3 - NOTES PAYABLE TO BANK

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

With respect to the revolving credit facility, the interest rate is one
month LIBOR plus two hundred fifty basis points (2.50%) per annum, adjusted
monthly on the first day of each month. As of December 31, 2010, the interest
rate was 3.375%. As of March 1, 2011, the interest rate was 3.125%. We also pay
a fee of 0.5% on the unused portion. The revolving credit facility expires on
July 31, 2013. Under the revolving credit facility, we are permitted to borrow
the lesser of $40,000,000 or the borrowing base, consisting of the sum of 85%
of eligible accounts plus 60% of eligible inventory up to $17,000,000. Eligible
accounts are generally those receivables that are less than 90 days from the
invoice date. As security for the revolving credit facility, we provided Fifth Third
Bank a first priority security interest in the accounts receivable from most of
our customers and in our inventory. We also cross collateralized the revolving
line of credit with the $8,800,000 term loan. As of December 31, 2010, the
outstanding balance of the revolving line of credit was $35,488,877.

The $8,800,000 term loan provides for an interest rate that is the same
as the interest rate for the revolving credit facility. Principal and interest
is payable monthly in consecutive equal installments of $105,000. 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, 2011 (or, if earlier, upon completion of the
Companys financial statements for the fiscal year ending December 31, 2010),
we will make an annual payment equal to 25% of (i) our adjusted earnings before
interest, taxes, depreciation and amortization (EBITDA), minus (ii) our
aggregate cash payments of interest expense and scheduled payments of principal
(including any prepayments of the term loan), minus (iii) any non-financed
capital expenditures, in each case for the Companys prior fiscal year. Any
such payments will be applied to remaining installments of principal under the
term loan in the inverse order of maturity, and to accrued but unpaid interest
thereon. As security for the term loan, we provided Fifth Third Bank a first
priority security interest in all equipment other than the rental fleet that we
own. As of December 31, 2010, the outstanding balance of the term loan was
$8,275,000.

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

20.

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|                                                                                                                                     
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|INDUSTRIAL SERVICES OF AMERICA, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2010, 2009, and 2008
|                                                                                                                                     

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

In the Credit Agreement, we agreed to certain covenants, including (i)
maintenance of a ratio of debt to adjusted EBITDA for the preceding 12 months
of not more than 3.5 to 1 (or, if measured as of December 31 of any fiscal
year, 4.0 to 1), (ii) maintenance of a ratio of adjusted EBITDA for the
preceding twelve months to aggregate cash payments of interest expense and
scheduled payment of principal in the preceding 12 months of not less than 1.20
to 1, and (iii) a limitation on capital expenditures of $4,000,000 in any
fiscal year. As of December 31, 2010, we were in compliance with all covenants.
For the year ended December 31, 2010, our ratio of debt to adjusted EBITDA was
2.54, our ratio of adjusted EBITDA to aggregate cash payments of interest
expense and scheduled principal payments was 4.15, and our capital expenditures
totaled $3,972,460. As of December 31, 2010, we have available $4,511,123 under
our existing credit facilities that we can use without causing a breach in
these covenants.

On November 15, 2010, we entered into a First Amendment to Credit
Agreement (the Amendment) with Fifth Third Bank which amends the July 30,
2010 Credit Agreement. Under the Credit Agreement, the Company is permitted to
borrow the lesser of $40,000,000 or the borrowing base, consisting of the sum
of 80% of eligible accounts plus 60% of eligible inventory up to $17,000,000.
Under the Amendment, the Bank agreed to temporarily increase the revolving
credit facility to the lesser of $44,500,000 or the borrowing base, consisting
of the sum of 85% of eligible accounts plus 60% of eligible inventory up to
$17,000,000. The increase in availability and percentage of eligible accounts
expired on December 16, 2010, at which time the terms of the Credit Agreement
continued in full force and effect.

On October 19, 2010, we entered into a Promissory Note (the Note)
with Fifth Third Bank in the amount of $1,320,240 for the purpose of purchasing
equipment. The interest rate is equal to five and 20/100 percent (5.20%) per
annum; provided, however, that (A) such interest rate is based on an interest
rate swap rate for a term approximating the weighted average life of the Note
as quoted in the Bloomberg SWAP Rate report as of the date of the Note and (B)
such interest rate may be adjusted by Fifth Third Bank based upon a
corresponding increase in the interest rate swap rate quoted in such Release as
in effect on the date of the advance. Principal and interest is payable monthly
in consecutive equal installments of $30,511 with the first such payment
commencing November 15, 2010, and the final unpaid principal amount due,
together with all accrued and unpaid interest, charges, fees, or other
advances, if any, to be paid on October 15, 2014. As security for the Note, we
provided Fifth Third Bank a first priority security interest in the equipment
purchased with the proceeds. As of December 31, 2010, the outstanding balance
of this note was $1,270,505.

On August 2, 2007, we entered into an asset purchase agreement for
$1,300,000 funded primarily by a note payable to ILS, the sole member of which
is Brian Donaghy, our president and chief operating officer, whereby we pay
$20,000 per month for 60 months for various assets including tractor trailers,
trucks and containers. The note payable reflects a seven percent (7.0%)
interest payment on the outstanding balance plus principal amortization. We
also paid ILS $100,000 cash as a portion of the purchase price at the time of
execution of the asset purchase agreement. We recorded a note payable of
$1,010,040 with an outstanding balance at December 31, 2010 of

21.

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|                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2010, 2009, and 2008
|                                                                                                                                     

$376,514.

We entered into three interest rate swap agreements swapping variable
rates for fixed rates. The first swap agreement covers approximately $5.2
million in debt and commenced April 7, 2009 and matures on April 7, 2014. The
second swap agreement covers approximately $2.4 million in debt and commenced
October 15, 2008 and matures on May 7, 2013. The third swap agreement covers
approximately $510,000 in debt and commenced October 22, 2008 and matures on
October 22, 2013. The three swap agreements fix our interest rate at
approximately 5.8%. At December 31, 2010, we recorded the estimated fair value
of the liability related to the three swaps at approximately $650,000. We
entered into the swap agreements for the purpose of hedging the interest rate
market risk for the respective notional amounts. These swap agreements were not
affected by the debt restructuring with Fifth Third Bank. We maintain a cash
account on deposit with BB&T which serves as collateral for the swap
agreements. See Note 1  Summary of Significant Accounting Policies 
Derivative and Hedging Activities for additional information about these
derivative instruments.

The following table outlines the notional amounts related to the
interest rate swaps as of December 31, 2010:

|                |           |  |      |      |  
|--------------- | --------- |  | ---- | ---- | -
|Notional Amount |           |  | Rate |     
|                |           |  |      |     
|$               | 5,228,707 |  |      | 5.89 | %
|$               | 2,366,881 |  |      | 5.65 | %
|$               | 509,850   |  |      | 5.89 | %

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |      |            |      |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | 2010 |            | 2009 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |      |            |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |      |            |      |   |            | 
|Revolving credit facility of $40 million with Fifth Third Bank. See
 above description for additional details. This credit facility replaced the
 April 13, 2010 BB&T non-revolving line of credit and revolving credit
 facility discussed below.                                                                                                                                                                                                                                                                                                                                                |  | $    | 35,488,877 |      | $ |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |      |            |      |   |            | 
|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. This note payable
 replaced the BB&T $6 million, $3 million, and $609,900 notes payable
 listed below.                                                                                                                                                                                                                                                                                             |  |      | 8,275,000  |      |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |      |            |      |   |            | 
|Note
 payable to Fifth Third Bank in the amount of $1,320,240 secured by equipment
 purchased with the proceeds. See above description for additional details.                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |      | 1,270,505  |      |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |      |            |      |   |            | 
|Non-revolving
 line of credit with BB&T effective February 11, 2009 in the amount of
 $12,000,000 with an original maturity date of February 11, 2010 that BB&T
 extended to March 24, 2010, then to April 13, 2013 under a new BB&T loan
 agreement, and then was replaced by the Fifth Third revolving credit facility
 effective July 30, 2010. Interest was payable monthly starting March 11,
 2009, and the note bore interest at the adjusted LIBOR rate of one month
 LIBOR plus 2.25% per annum with a floor of 4.0%. All our assets (except rental
 fleet equipment) secured this note. |  |      |           |      |   | 11,517,440 | 

22.

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|                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2010, 2009, and 2008
|                                                                                                                                     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |            |  |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | ---------- |  | - | ---------- | 
|Revolving
 credit facility of $10 million with BB&T secured by all assets except for
 rental fleet equipment with a variable interest rate of Libor plus 2.25% and
 no required monthly principal payments. The original maturity date under this
 agreement was January 1, 2012. This note extended to April 13, 2013 under a
 new BB&T loan agreement, and was replaced by the Fifth Third revolving
 credit facility effective July 30, 2010. |  |   |           |  |   | 8,166,917  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |            |  |   |            | 
|Note
 payable to BB&T in the amount of $3.0 million secured by our rental fleet
 equipment with a fixed interest rate of 5.65%. The repayment terms were
 principal and interest paid monthly commencing on November 7, 2008 with one
 final payment of all remaining principal and accrued interest due at maturity
 on May 7, 2013. This note was replaced by the Fifth Third note payable
 effective July 30, 2010.                           |  |   |           |  |   | 2,598,526  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |            |  |   |            | 
|Note
 payable to BB&T in the amount of $6.0 million secured by our shredder system
 assets with a fixed interest rate of 5.89%. The repayment terms were
 principal and interest paid monthly commencing on November 7, 2008 with one
 final payment of all remaining principal and accrued interest due at maturity
 on April 7, 2014. This note was replaced by the Fifth Third note payable
 effective July 30, 2010.                         |  |   |           |  |   | 5,661,275  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |            |  |   |            | 
|Note
 payable to Branch Banking and Trust Company in the amount of $609,900 secured
 by a crane with a fixed interest rate of 5.89%. The repayment terms were principal
 and interest paid monthly beginning December 1, 2008 with one final payment
 of all remaining principal and accrued interest due at maturity in December
 2013. This note was replaced by the Fifth Third note payable effective July
 30, 2010.                        |  |   |           |  |   | 555,215    | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |            |  |   |            | 
|Note payable to Paccar Financial Corp. in the amount of $163,655
 secured by one Kenworth truck. Payments are $1,697.68 per month with an
 effective interest rate of 6.5%. The maturity date under this agreement is
 September 2011.                                                                                                                                                                                                           |  |   | 35,990     |  |   | 112,724    | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |            |  |   |            | 
|Note payable to ILS for various assets including tractor trailers,
 trucks and containers. The repayment terms are $20,000 per month for 60
 months at a seven percent (7.0%) interest rate. The maturity date under this
 agreement is August 2012.                                                                                                                                                                                             |  |   | 376,514    |  |   | 582,273    | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   | 45,446,886 |  |   | 29,194,370 | 
|Less current
 maturities                                                                                                                                                                                                                                                                                                                                                                                                                         |  |   | 1,824,227  |  |   | 12,539,889 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |            |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | $ | 43,622,659 |  | $ | 16,654,481 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |            |  |   |            | 

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

|      |  |   |            | 
|----- |  | - | ---------- | 
|2011  |  | $ | 1,824,227  | 
|2012  |  |   | 1,739,764  | 
|2013  |  |   | 6,096,058  | 
|2014  |  |   | 35,786,837 | 
|2015  |  |   |           | 
|      |  |   |            | 
|      |  |   |            | 
|Total |  | $ | 45,446,886 | 
|      |  |   |            | 

23.

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|                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2010, 2009, and 2008
|                                                                                                                                     

NOTE 4 - INCOME TAXES

The income tax
provision (benefit) consists of the following for the years ended December 31,
2010, 2009 and 2008:

|                                     |  |      |           |      |   |           |  |   |           |  
|------------------------------------ |  | ---- | --------- | ---- | - | --------- |  | - | --------- | -
|                                     |  | 2010 |           | 2009 |   | 2008      | 
|                                     |  |      |           |      |   |           | 
|Federal                              |  |      |           |      |   |           |  |   |           |  
|Current                              |  | $    | 3,556,413 |      | $ | 363,915   |  | $ | 912,289   |  
|Deferred                             |  |      | 54,292    |      |   | 2,562,862 |  |   | (128,610  | )
|                                     |  |      |           |      |   |           |  |   |           |  
|                                     |  |      | 3,610,705 |      |   | 2,926,777 |  |   | 783,679   |  
|                                     |  |      |           |      |   |           |  |   |           |  
|State                                |  |      |           |      |   |           |  |   |           |  
|Current                              |  |      | 884,105   |      |   | 466,017   |  |   | 268,159   |  
|Refundable state recycle tax credits |  |      | (185,148  | )    |   |          |  |   |          |  
|Deferred                             |  |      | 63,657    |      |   | 107,886   |  |   | (28,203   | )
|                                     |  |      |           |      |   |           |  |   |           |  
|                                     |  |      | 762,614   |      |   | 573,903   |  |   | 239,956   |  
|                                     |  |      |           |      |   |           |  |   |           |  
|                                     |  |      |           |      |   |           |  |   |           |  
|                                     |  | $    | 4,373,319 |      | $ | 3,500,680 |  | $ | 1,023,635 |  
|                                     |  |      |           |      |   |           |  |   |           |  

A reconciliation of income
taxes at the statutory rate to the reported provision is as follows:

|                                                                |  |      |           |      |   |           |  |   |           |  
|--------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | -
|                                                                |  | 2010 |           | 2009 |   | 2008      | 
|                                                                |  |      |           |      |   |           | 
|                                                                |  |      |           |      |   |           |  |   |           |  
|Federal
 income tax at statutory rate                           |  | $    | 4,224,816 |      | $ | 2,987,033 |  | $ | 868,584   |  
|State and
 local income taxes, net of federal income tax effect |  |      | 599,048   |      |   | 398,334   |  |   | 158,370   |  
|Permanent
 differences                                          |  |      | (155,713  | )    |   | 6,392     |  |   | 8,855     |  
|Other
 differences                                              |  |      | (294,832  | )    |   | 108,921   |  |   | (12,174   | )
|                                                                |  |      |           |      |   |           |  |   |           |  
|                                                                |  |      |           |      |   |           |  |   |           |  
|                                                                |  | $    | 4,373,319 |      | $ | 3,500,680 |  | $ | 1,023,635 |  
|                                                                |  |      |           |      |   |           |  |   |           |  

24.

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|                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2010, 2009, and 2008
|                                                                                                                                     

Significant
components of the Companys deferred tax liabilities and assets as of December
31, 2010 and 2009 are as follows:

|                                   |  |      |            |      |   |            |  
|---------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                   |  | 2010 |            | 2009 |  
|                                   |  |      |            |      |  
|Deferred tax
 liabilities          |  |      |            |      |   |            |  
|Tax depreciation in excess of book |  | $    | (3,401,791 | )    | $ | (2,951,577 | )
|Tax amortization in excess of book |  |      | (309,616   | )    |   | (241,001   | )
|                                   |  |      |            |      |   |            |  
|Gross deferred tax liabilities     |  |      | (3,711,407 | )    |   | (3,192,578 | )
|Deferred tax
 assets               |  |      |            |      |   |            |  
|Property taxes                     |  |      | 43,086     |      |   | 28,426     |  
|Allowance for doubtful accounts    |  |      | 43,000     |      |   | 43,000     |  
|Book amortization in excess of tax |  |      | 58,179     |      |   | 87,183     |  
|Inventory capitalization           |  |      | 249,685    |      |   | 285,989    |  
|Reserve for CWS                    |  |      | 129,000    |      |   | 129,000    |  
|Bonuses                            |  |      | 466,292    |      |   |           |  
|Deferred compensation              |  |      |           |      |   | 40,881     |  
|Interest rate swap                 |  |      | 279,587    |      |   | 225,886    |  
|Other                              |  |      | 10,749     |      |   | 10,749     |  
|                                   |  |      |            |      |   |            |  
|                                   |  |      |            |      |   |            |  
|Gross deferred tax assets          |  |      | 1,279,578  |      |   | 851,114    |  
|                                   |  |      |            |      |   |            |  
|                                   |  |      |            |      |   |            |  
|Net deferred tax liabilities       |  | $    | (2,431,829 | )    | $ | (2,341,464 | )
|                                   |  |      |            |      |   |            |  

Significant new equipment additions during 2009 resulted in deferred
income tax liabilities for differences between book and tax depreciation due to
IRS regulations allowing a first-year, fifty percent (50.0%) write-off for all
new equipment additions. The Company applied this depreciation write-off to the
shredder and eddy current systems, resulting in prior year depreciation expense
for this equipment of approximately $5,776,000, which translates into Federal
tax savings of approximately $2,888,000.

We use the deferral method of accounting for the available state tax
credits relating to the purchase of the shredder equipment. On December 31,
2010, we had deferred recycling equipment state tax credit carryforwards of
$4,186,989 relating to this purchase which do not expire. This tax credit is
limited to 25 percent of our state income tax liability. We used the available
credit of $185,148 in 2010.

NOTE 5 - SALES-TYPE LEASES

The Company is the lessor of equipment under sales-type lease
agreements having terms of three to five years, with the lessees having the
option to acquire the equipment at the termination of the leases. All costs
associated with this equipment are the responsibility of the lessees.

25.

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|                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.
 AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2010, 2009, and 2008
|                                                                                                                                     

Future lease
payments receivable under sales-type leases at December 31, 2010 are as
follows:

|                                    |  |   |         |  
|----------------------------------- |  | - | ------- | -
|2011                                |  | $ | 43,908  |  
|2012                                |  |   | 43,908  |  
|Thereafter                          |  |   |        |  
|                                    |  |   |         |  
|                                    |  |   |         |  
|Minimum lease payments receivable   |  |   | 87,816  |  
|Less unearned income                |  |   | (14,516 | )
|                                    |  |   |         |  
|                                    |  |   |         |  
|Net investment in sales-type leases |  |   | 73,300  |  
|Less current portion                |  |   | (33,387 | )
|                                    |  |   |         |  
|                                    |  | $ | 39,913  |  
|                                    |  |   |         |  

NOTE 6 - RELATED PARTY TRANSACTIONS

The Company enters into various transactions with related parties
including the Companys principal shareholder and an affiliated company owned
by the Companys principal shareholder (K&R). A summary of these
transactions is as follows:

|                                               |  |      |         |      |   |         |  |   |         | 
|---------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                               |  | 2010 |         | 2009 |   | 2008    | 
|                                               |  |      |         |      |   |         | 
|Balance
 sheet accounts:                       |  |      |         |      |   |         |  |   |         | 
|Accounts receivable                            |  | $    |        |      | $ |        |  | $ |        | 
|                                               |  |      |         |      |   |         |  |   |         | 
|                                               |  |      |         |      |   |         |  |   |         | 
|Notes receivable                               |  | $    | 88,391  |      | $ | 129,079 |  | $ | 167,594 | 
|                                               |  |      |         |      |   |         |  |   |         | 
|                                               |  |      |         |      |   |         |  |   |         | 
|Deposits (included in other long-term
 assets) |  | $    | 62,106  |      | $ | 62,106  |  | $ | 62,106  | 
|                                               |  |      |         |      |   |         |  |   |         | 
|                                               |  |      |         |      |   |         |  |   |         | 
|                                               |  |      |         |      |   |         |  |   |         | 
|Income
 statement activity:                    |  |      |         |      |   |         |  |   |         | 
|Rent expense (property)                        |  | $    | 582,000 |      | $ | 582,000 |  | $ | 582,000 | 
|                                               |  |      |         |      |   |         |  |   |         | 
|Lease expense (equipment)                      |  | $    | 5,500   |      | $ |        |  | $ |        | 
|                                               |  |      |         |      |   |         |  |   |         | 
|Consulting fees                                |  | $    | 420,000 |      | $ | 240,000 |  | $ | 240,000 | 
|                                               |  |      |         |      |   |         |  |   |         | 

ISA leases its corporate offices, processing property and buildings in
Louisville, Kentucky for $48,500 per month from K&R pursuant to the K&R
Lease. Deposits include one month of the original lease agreements rent in
advance in the amount of $42,106. In 2004, we paid for repairs totaling
$302,160 that we made to the buildings and property that we lease from K&R,
located at 7100 Grade Lane, Louisville, Kentucky. K&R executed an unsecured
promissory note, dated March 25, 2005, but effective December

26.

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|                                          
|------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.      
|AND SUBSIDIARIES                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2010, 2009, and 2008         
|                                          

31, 2004, to us for the principal sum of $302,160. In January 2006,
K&R began making payments on the promissory note of principal only in
ninety-six (96) monthly installments of $3,148 each. Failure of K&R to make
any payment when due under this note within fifteen (15) days of its due date
shall constitute a default. After the fifteen day period, the note shall bear
interest at a rate equal to fifteen percent (15.0%) per annum and we have the
right to exercise our remedies to collect full payment of the note.

In an addendum to the K&R lease as of January 1, 2006, the rent was
increased $4,000 as a result of the improvements made to the property in 2004.
For years 2010, 2009, and 2008, the payments to K&R by the Company of
$4,000 for additional rent and the payment from K&R to the Company of
$3,898 for the promissory note were offset.

Effective April 1, 2010, Industrial Services of America, Inc. (the
Company) and K&R, LLC (K&R) entered into an agreement (the
Amendment) which amends a consulting agreement which the parties had entered
into on January 2, 1998 (the Prior Agreement). Under the Prior Agreement, the
Company engaged K&R as a consultant and retained the services of K&R
management personnel to perform planning and consulting services with respect
to the Companys businesses, including the preparation of business plans, pro
forma budgets, and assistance with general operational issues. The Prior
Agreement provided for a term of ten years, with an automatic renewal for
additional terms of one year on January 1 of each successive calendar year
unless either party provides the other party with written notice of its intent
not to renew at least six months prior to the expiration of the then existing
term. The Companys Chief Executive Officer, Harry Kletter, is a member of
Kletter Holding, LLC, which is the sole member of K&R. The Amendment
increases the consulting fees from $240,000 per annum to $480,000 per annum.
The annual fee is payable in equal monthly installments of $40,000. The
Amendment otherwise ratifies the Prior Agreement in all respects. Deposits
include one month of the original agreements consulting services in advance in
the amount of $20,000. Our Chairman is compensated through these consulting
fees. In 2010, we extended this consulting agreement for one year according to
the terms of the contract.

Effective December 1, 2010, the Company and K&R entered into a
lease agreement, under which the Company leases a crane from K&R for a
monthly payment of $5,500 for 5 years.

Other related-party transactions are as follows:

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

Amendment to Steve
Jones employment agreement: Effective July 1,
2010, the Company amended and restated the employment agreement of Steve Jones
(Mr. Jones), the Companys Vice President of Operations  ISA Alloys at the
time, to (a) extend the term to June 30, 2015, and (b) replace the annual bonus
of a cash payment equal to 7.5% of the amount determined for each fiscal year
of the segment

27.

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|                                          
|------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.      
|AND SUBSIDIARIES                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2010, 2009, and 2008         
|                                          

profit of ISA Alloys minus selling, general and administrative expenses
applicable to the ISA Alloys segment with (i) an annual bonus based on the
Companys achievement of certain return on net assets (RONA) targets pursuant
to incentive plans to be established by the Company, to be payable in cash or
partly in Common Stock, at the election of Mr. Jones. Also, due to managements
reconsideration of appropriate compensation for this position, Mr. Jones was no
longer entitled to: (i) a bonus of up to 45,000 shares of Common Stock per
annum based on the Companys achievement of certain RONA targets, and (ii) a
one-time bonus of up to 225,000 shares of Common Stock based on the Companys
achievement of certain 5 year RONA targets as of December 31, 2014. As of
December 17, 2010, Mr. Jones was no longer an employee of the Company.

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

Purchase of Venture
Metals, LLC Intangibles: On March 26, 2010, we
entered into an agreement dated July 1, 2010, subject to shareholder approval
of certain issuances of shares of our common stock. After shareholder approval
of the issuance of 300,000 shares of our common stock, on July 1, 2010, we
entered into an asset purchase agreement and a non-compete agreement with
Venture Metals, LLC, 3409 Camp Ground Road, Louisville, KY 40211. Pursuant to
the asset purchase agreement dated July 1, 2010, in consideration for the
transfer of the Venture Metals, LLC name and entry into the Non-Compete
Agreement, we delivered to Venture Metals, LLC 300,000 shares of our common
stock based on a price of $10.41 per share (the Purchase Price) based on the
stock price on July 1, 2010.

The purchase price was negotiated between us and Steve Jones, co-owner
of Venture Metals, LLC. Venture Metals, LLC is owned by Steve Jones and Jeff
Valentine, both of who were our employees at the time. Mr. Valentine remains
our employee. At the same time as these negotiations took place, we
renegotiated all management contracts and employment agreements, including
those of Mr. Jones and Mr. Valentine, as previously described in this Note. Mr.
Jones and Mr. Valentines original employment agreements were entered into in
connection with our prior purchase of assets from Venture Metals, LLC. An
outside financial consultant also assessed the transaction to provide an
opinion of the fair value of the transaction, which led to a supplemental
acquisition dated July 1, 2010, as described below.

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

28.

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|                                          
|------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.      
|AND SUBSIDIARIES                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2010, 2009, and 2008         
|                                          

shall deliver up to an additional 750,000 shares of ISA Common Stock in
accordance certain terms.

The Company is in the process of obtaining a valuation. Based on
preliminary estimates, we recorded additional goodwill of $4,273,000 and
decreased the intangible asset by $630,000 as of December 31, 2010.

See Note 13  Purchase of Inventory, Fixed Assets, and Intangibles of
Venture Metals, LLC for the material terms of the Non-Compete Agreement and
supplemental acquisition details.

Donaghy Asset
Purchase Agreement: During 2007, we entered into an asset purchase agreement
for $1,800,000 funded primarily by a note payable to Industrial Logistic
Services, LLC, the sole member of which is Brian Donaghy, our president and
chief operating officer, whereby we pay $20,000 per month for 60 months for
various assets including tractor trailers, trucks and containers. The note
payable reflects a seven percent (7.0%) interest payment on the outstanding
balance plus principal amortization. During 2010 and 2009, we made payments on
this note of $240,000. The outstanding balance at December 31, 2010 was
$376,514.

NOTE 7 - EMPLOYEE RETIREMENT PLAN

We maintain a defined contribution retirement plan under Section 401(k)
of the Internal Revenue Code which covers substantially all employees. Eligible
employees may contribute a maximum of 15.0% of their annual salary. Under the
plan, we match 25.0% of each employees voluntary contribution up to 6.0% of
their gross salary. The expense under the plan for 2010, 2009 and 2008 was
$56,533, $48,577, and $46,814, respectively.

NOTE 8 - LEASE COMMITMENTS

Operating Leases: 
We lease our Louisville, Kentucky facility from a related party (see Note 6)
under an operating lease expiring December 2012. The rent was adjusted in
January 2008 per the agreement to monthly payments of $48,500 through December
2012. In addition, the Company is also responsible for real estate taxes,
insurance, utilities and maintenance expense.

We lease equipment from a related party (see Note 6) under an operating
lease expiring November 2015.

We lease a facility in Dallas, Texas for management services
operations. The agreement provided that monthly payments of $2,457 were paid
through September 2006. The lease was renewed effective October 1, 2010 for a
one-year period with monthly payments of $969. The Company also leases other
machinery and equipment under operating leases which expire through August
2012.

We lease a facility in Lexington, Kentucky for $4,500 per month; the
lease terminates December 31, 2012. We have subleased this property for a term
commencing March 1, 2007 and ending December 31, 2012 for $4,500 per month. If
for any reason the sublessee defaults, we remain liable for the remainder of
the lease payments through December 31, 2012.

29.

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|                                          
|------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.      
|AND SUBSIDIARIES                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2010, 2009, and 2008         
|                                          

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

|                               |  |   |           | 
|------------------------------ |  | - | --------- | 
|2011                           |  | $ | 645,351   | 
|2012                           |  |   | 636,000   | 
|Thereafter                     |  |   |          | 
|                               |  |   |           | 
|                               |  |   |           | 
|Future
 minimum lease payments |  | $ | 1,281,351 | 
|                               |  |   |           | 

Total rent expense for the years ended December 31, 2010, 2009 and 2008
was $968,883, $1,066,474, and $876,312, respectively.

Capital Leases:

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

NOTE 9 - CASH DIVIDEND

In 2010 and 2009, the Board of Directors did not declare a cash
dividend.

The Board of Directors, at its regular annual meeting June 26, 2008,
declared a cash dividend payment of ten cents ($0.10, $0.067 after stock split)
per common share of stock for shareholders of record as of July 31, 2008, with
a payment date of August 21, 2008.

NOTE 10  PER SHARE DATA

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

|                                                            |  |      |           |      |   |           |  |   |           | 
|----------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|                                                            |  | 2010 |           | 2009 |   | 2008      | 
|                                                            |  |      |           |      |   |           | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|Basic earnings per share                                    |  |      |           |      |   |           |  |   |           | 
|Net income                                                  |  | $    | 8,052,609 |      | $ | 5,284,712 |  | $ | 1,527,598 | 
|Weighted average shares outstanding                         |  |      | 6,622,480 |      |   | 5,783,328 |  |   | 5,393,720 | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|Basic earnings per share                                    |  | $    | 1.22      |      | $ | 0.91      |  | $ | 0.28      | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|Diluted earnings per share                                  |  |      |           |      |   |           |  |   |           | 
|Net income                                                  |  | $    | 8,052,609 |      | $ | 5,284,712 |  | $ | 1,527,598 | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|Weighted average shares outstanding                         |  |      | 6,622,480 |      |   | 5,783,328 |  |   | 5,393,720 | 
|Add dilutive effect of assumed exercising
 of stock options |  |      | 44,000    |      |   | 18,131    |  |   |          | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|Diluted average shares outstanding                          |  |      | 6,666,480 |      |   | 5,801,459 |  |   | 5,393,720 | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|Diluted earnings per share                                  |  | $    | 1.21      |      | $ | 0.91      |  | $ | 0.28      | 
|                                                            |  |      |           |      |   |           |  |   |           | 

30.

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|                                          
|------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.      
|AND SUBSIDIARIES                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2010, 2009, and 2008         
|                                          

NOTE 11 - LEGAL PROCEEDINGS

Finalized LitigationIn May 2006, All American Recycling, known as AAR,
and its owners, R.D. Burton and Donna Burton filed a lawsuit in Jefferson
County, Kentucky Circuit Court against us and K&R Resources LLC (All
American Recycling, Inc. and R.D. Burton and Donna Burton v. Industrial
Services of America, Inc., et. al., Jefferson Circuit Court, Case No.
06-C-04701), as further described in the Form 10-Q for the period ended
September 30, 2008. Both parties entered into a settlement agreement as
described in the 8-K dated February 18, 2009. By March 31, 2009, All American
Recycling, Inc. had vacated the premises at Grade Lane, Louisville, Kentucky
that it had subleased from us pursuant to the terms of the settlement agreement
that was entered on February 2, 2009.

We have renovated the Camp Ground Road facility and it is now a full-service
yard providing ferrous, non-ferrous and stainless material for the Grade Lane
operations. After AAR vacated the Grade Lane premises, we relocated the
stainless steel inventory operations from the Camp Ground Road location to the
vacated premises on Grade Lane.

Pending Litigation

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

We filed a Motion for Summary Judgment in October, 2009, which the
court denied in February, 2010. Discovery by the parties is still ongoing. A
jury trial is currently set for June 20, 2011. As of December 31, 2010, the
amount of relief sought for punitive and compensatory damages was undetermined. We are vigorously defending all of
Lennoxs claims as we believe the claims to be without merit.

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

NOTE 12 - SEGMENT INFORMATION

The Companys operations include two primary segments: Recycling and
Waste Services. In prior years, our three primary segments were ISA Recycling,
Computerized Waste Systems (CWS), and Waste Equipment Sales & Service
(WESSCO). In the first quarter of 2009, we decided to consolidate CWS and
WESSCO into one reporting segment because CWS revenues have declined so that
this segment is no

31.

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|                                          
|------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.      
|AND SUBSIDIARIES                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2010, 2009, and 2008         
|                                          

longer material to our total revenues. We named this combined segment
Waste Services because it more accurately reflects that business. Waste
Services provides waste disposal services including contract negotiations with
service providers, centralized billing, invoice auditing, and centralized
dispatching. Waste Services also sells, leases, and services waste handling and
recycling equipment. The Recycling segment provides products and services to
meet the needs of its customers related to ferrous, non-ferrous and fiber
recycling in two locations in the Midwest.

In the first quarter of 2009, we initially decided to report our
stainless steel alloys business as a separate segment. However, as we gained
more experience with the business and upon further management review, we have
determined that stainless steel alloys should be reported as part of the
Recycling segment. As our alloys business developed, we realized that it was
more like recycling than a separate segment. Furthermore, during the second
quarter of 2009, we found that stainless steel alloys shared resources with
Recycling, including employees, equipment, and corporate functions. We also
found that the chief decision maker of the Recycling segment makes the
decisions on allocation of funds to the different division levels within recycling,
including stainless steel alloys.

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.

The accounting policies of the two segments are the same as those
described in the summary of significant accounting policies (Note 1). 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.

|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|---------------------------------------------- |  | --------- | ------------ | ----------------- | - | ---------- | - | ----------------- | ---------- | - | - | ------------ | -
|                                               |  | Recycling |              | Waste
 
 Services |   | Other      |   | Segment
 
 Totals |           
|                                               |  |           |              |                   |   |            |   |                   |           
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|2010                                           |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|Recycling revenues                             |  | $         | 334,667,090  |                   | $ |           |   | $                 |           |   | $ | 334,667,090  |  
|Equipment sales, services and leasing revenues |  |           |             |                   |   | 2,125,677  |   |                   |           |   |   | 2,125,677    |  
|Management fees                                |  |           |             |                   |   | 6,212,548  |   |                   |           |   |   | 6,212,548    |  
|Cost of goods sold                             |  |           | (309,480,805 | )                 |   | (6,239,489 | ) |                   |           |   |   | (315,720,294 | )
|Selling, general and administrative expenses   |  |           | (7,469,442   | )                 |   | (1,016,320 | ) |                   | (5,250,923 | ) |   | (13,736,685  | )
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|Segment profit (loss)                          |  | $         | 17,716,843   |                   | $ | 1,082,416  |   | $                 | (5,250,923 | ) | $ | 13,548,336   |  
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  

32.

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|                                          
|------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.      
|AND SUBSIDIARIES                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2010, 2009, and 2008         
|                                          

|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|---------------------------------------------- |  | --------- | ------------ | ----------------- | - | ---------- | - | ----------------- | ---------- | - | - | ------------ | -
|                                               |  | Recycling |              | Waste
 
 Services |   | Other      |   | Segment
 
 Totals |           
|                                               |  |           |              |                   |   |            |   |                   |           
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|2010                                           |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|Cash                                           |  | $         | 1,257,875    |                   | $ |           |   | $                 | 1,210,409  |   | $ | 2,468,284    |  
|Accounts receivable, net                       |  |           | 24,932,813   |                   |   | 1,140,517  |   |                   | 1,375,816  |   |   | 27,449,146   |  
|Inventories                                    |  |           | 34,221,646   |                   |   | 88,985     |   |                   |           |   |   | 34,310,631   |  
|Net property and equipment                     |  |           | 25,798,737   |                   |   | 1,228,183  |   |                   | 527,183    |   |   | 27,554,103   |  
|Goodwill                                       |  |           | 6,840,046    |                   |   |           |   |                   |           |   |   | 6,840,046    |  
|Net intangibles                                |  |           | 5,775,000    |                   |   |           |   |                   |           |   |   | 5,775,000    |  
|Other assets                                   |  |           | 574,525      |                   |   | 85,653     |   |                   | 1,104,478  |   |   | 1,764,656    |  
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|Segment assets                                 |  | $         | 99,400,642   |                   | $ | 2,543,338  |   | $                 | 4,217,886  |   | $ | 106,161,866  |  
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|                                               |  | Recycling |              | Waste
 
 Services |   | Other      |   | Segment
 
 Totals |           
|                                               |  |           |              |                   |   |            |   |                   |           
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|2009                                           |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|Recycling revenues                             |  | $         | 171,841,112  |                   | $ |           |   | $                 |           |   | $ | 171,841,112  |  
|Equipment sales, services and leasing revenues |  |           |             |                   |   | 2,115,813  |   |                   |           |   |   | 2,115,813    |  
|Management fees                                |  |           |             |                   |   | 7,094,755  |   |                   |           |   |   | 7,094,755    |  
|Cost of goods sold                             |  |           | (154,482,014 | )                 |   | (6,276,961 | ) |                   |           |   |   | (160,758,975 | )
|Selling, general and administrative expenses   |  |           | (6,279,660   | )                 |   | (1,333,300 | ) |                   | (2,874,705 | ) |   | (10,487,665  | )
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|Segment profit (loss)                          |  | $         | 11,079,438   |                   | $ | 1,600,307  |   | $                 | (2,874,705 | ) | $ | 9,805,040    |  
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|                                               |  | Recycling |              | Waste
 
 Services |   | Other      |   | Segment
 
 Totals |           
|                                               |  |           |              |                   |   |            |   |                   |           
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|2009                                           |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|Cash                                           |  | $         | 530,927      |                   | $ |           |   | $                 | 182,135    |   | $ | 713,062      |  
|Accounts receivable, net                       |  |           | 7,520,273    |                   |   | 980,897    |   |                   | 11,156     |   |   | 8,512,326    |  
|Inventories                                    |  |           | 26,314,944   |                   |   | 111,667    |   |                   |           |   |   | 26,426,611   |  
|Net property and equipment                     |  |           | 23,576,453   |                   |   | 1,340,654  |   |                   | 2,077,432  |   |   | 26,994,539   |  
|Goodwill                                       |  |           | 2,567,046    |                   |   |           |   |                   |           |   |   | 2,567,046    |  
|Other assets                                   |  |           | 586,238      |                   |   | 22,114     |   |                   | 851,681    |   |   | 1,460,033    |  
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  
|Segment assets                                 |  | $         | 61,095,881   |                   | $ | 2,455,332  |   | $                 | 3,122,404  |   | $ | 66,673,617   |  
|                                               |  |           |              |                   |   |            |   |                   |            |   |   |              |  

33.

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|                                          
|------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.      
|AND SUBSIDIARIES                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|December 31, 2010, 2009, and 2008         
|                                          

|                                               |  |           |             |                   |   |             |   |                   |            |   |   |             |  
|---------------------------------------------- |  | --------- | ----------- | ----------------- | - | ----------- | - | ----------------- | ---------- | - | - | ----------- | -
|                                               |  | Recycling |             | Waste
 
 Services |   | Other       |   | Segment
 
 Totals |           
|                                               |  |           |             |                   |   |             |   |                   |           
|                                               |  |           |             |                   |   |             |   |                   |            |   |   |             |  
|2008                                           |  |           |             |                   |   |             |   |                   |            |   |   |             |  
|Recycling revenues                             |  | $         | 79,545,562  |                   | $ |            |   | $                 |           |   | $ | 79,545,562  |  
|Equipment sales, services and leasing revenues |  |           |            |                   |   | 2,314,203   |   |                   |           |   |   | 2,314,203   |  
|Management fees                                |  |           |            |                   |   | 18,182,726  |   |                   |           |   |   | 18,182,726  |  
|Cost of goods sold                             |  |           | (69,197,345 | )                 |   | (17,390,181 | ) |                   |           |   |   | (86,587,526 | )
|Selling, general and administrative expenses   |  |           | (5,179,086  | )                 |   | (1,875,098  | ) |                   | (2,944,346 | ) |   | (9,998,530  | )
|                                               |  |           |             |                   |   |             |   |                   |            |   |   |             |  
|                                               |  |           |             |                   |   |             |   |                   |            |   |   |             |  
|Segment profit (loss)                          |  | $         | 5,169,131   |                   | $ | 1,231,650   |   | $                 | (2,944,346 | ) | $ | 3,456,435   |  
|                                               |  |           |             |                   |   |             |   |                   |            |   |   |             |  
|                                               |  |           |             |                   |   |             |   |                   |            |   |   |             |  
|                                               |  | Recycling |             | Waste
 
 Services |   | Other       |   | Segment
 
 Totals |           
|                                               |  |           |             |                   |   |             |   |                   |           
|                                               |  |           |             |                   |   |             |   |                   |            |   |   |             |  
|2008                                           |  |           |             |                   |   |             |   |                   |            |   |   |             |  
|Cash                                           |  | $         | 237,914     |                   | $ | 15,132      |   | $                 | 850,796    |   | $ | 1,103,842   |  
|Accounts receivable                            |  |           | 2,084,702   |                   |   | 1,714,436   |   |                   | 12,346     |   |   | 3,811,484   |  
|Inventories                                    |  |           | 4,255,802   |                   |   | 115,546     |   |                   |           |   |   | 4,371,348   |  
|Net property and equipment                     |  |           | 13,736,644  |                   |   | 1,632,674   |   |                   | 2,074,061  |   |   | 17,443,379  |  
|Goodwill                                       |  |           | 560,005     |                   |   |            |   |                   |           |   |   | 560,005     |  
|Other assets                                   |  |           | 179,393     |                   |   | 16,953      |   |                   | 1,305,026  |   |   | 1,501,372   |  
|                                               |  |           |             |                   |   |             |   |                   |            |   |   |             |  
|                                               |  |           |             |                   |   |             |   |                   |            |   |   |             |  
|Segment assets                                 |  | $         | 21,054,460  |                   | $ | 3,494,741   |   | $                 | 4,242,229  |   | $ | 28,791,430  |  
|                                               |  |           |             |                   |   |             |   |                   |            |   |   |             |  

NOTE 13  PURCHASE OF INVENTORY, FIXED
ASSETS, AND INTANGIBLE ASSETS OF VENTURE METALS, LLC

On January 13, 2009 we entered into an inventory purchase agreement
with Venture Metals, LLC (Venture), a metal recycler focused on stainless
steel and high temperature alloys, and its members, Steve Jones, Jeff Valentine
and Carlos Corona, under which we agreed to pay to Venture $8,846,794 for
inventory comprised of stainless steel and high temperature alloys, which we
verified as to weight. We funded the purchase of the inventory through our line
of credit with BB&T. We subsequently paid an additional $262,265 for
inventory after the final verification of weight. This initial transaction was
part of an overall agreement to acquire the operations of Venture.

Under the agreement, we had the right to retain the use of the property
located at 3409 Camp Ground Road, Louisville, Kentucky, the site of the Venture
business that Venture leases from Luca Investments, LLC (Luca), an affiliate
of Venture, owned 50.0% each by Messrs. Jones and Valentine. We had the right
to use the facilities located on those premises for a period not to exceed two
years from the date of the

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|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

agreement for a monthly rental of $15,000. Messrs. Valentine and Corona
are our employees. We entered into an employment agreement with Mr. Valentine
which includes bonuses for which we have accrued in our balance sheet as of
December 31, 2010 and 2009.

On April 13, 2009, we exercised our option to purchase fixed assets
under an installment purchase agreement with Venture, whereby Venture sold all
of its fixed assets, located at 3409 Camp Ground Road, Louisville, Kentucky, to
us by virtue of an installment purchase agreement effective February 11, 2009.
Steve Jones, Jeff Valentine and Carlos Corona were the sole members of Venture.
Under the notice of exercise of option to purchase fixed assets we agreed to
purchase the fixed assets on April 17, 2009 for the purchase price of
$1,498,885 less the aggregate amount of all rent we paid to Venture under the
previous agreement. The installment payment we owed to Venture was $15,000 per
month commencing March 1, 2009 with a pro-rata amount paid for the period from
February 11, 2009 through February 28, 2009. A further description of the
installment purchase agreement and related transactions is contained in Items
1.01 and 2.01 of Form 8-K for the event dated February 11, 2009, as filed on
February 18, 2009, with the Securities and Exchange Commission by us.

At the time of the consummation of the option to purchase fixed assets,
the installment purchase agreement terminated. In connection with the exercise
of the option to purchase, Venture had to satisfy outstanding obligations with
respect to the fixed assets owed to a number of creditors. The fixed assets
include equipment such as cranes, loaders, scales, forklifts, computers,
including computer software, furniture and certain leasehold improvements to
the property at 3409 Camp Ground Road, Louisville, Kentucky.

We completed the acquisition of the real property at 3409 Camp Ground
Road, Louisville, Kentucky, from Luca on April 2, 2009. Under the agreement, we
purchased the property and improvements thereon consisting of 5.67 acres with a
7,875 square foot building located thereon. We paid $2,067,041 for the
property, comprised of $1,267,041 in cash and 300,000 shares of ISA common
stock priced at the per share NASDAQ last sale price of $2.67, as quoted on
NASDAQ at 10:30 a.m. (EDT) on April 2, 2009. We determined the purchase price
for the real estate based on internal analyses as to the value of the property.
BB&T provided credit to us under our $10,000,000 line of credit with
BB&T funding the cash portion of the purchase price.

Although the above transactions were not completed
    simultaneously due to timing constraints relating to verification of inventory,
    fixed asset appraisals, property appraisals, and funding considerations,
    managements
intention from the initial transaction was to purchase the operations of
Venture. As the above transactions were completed within the one-year
measurement period according to ASC Topic 805, we have treated these combined
transactions as an acquisition (the 2009 Acquisition) and have followed
FASBs authoritative guidance on business combinations for reporting purposes.
Accordingly, the results of operations of the acquired business have been
included in the consolidated statement of income since January 2009. See also
the Unaudited Pro Forma Consolidated Financial Statements and Notes for the
year ending December 31, 2008 included in Note 16Unaudited Pro Forma Consolidated Financial Statement and Notes. With this
acquisition, we did not obtain control of Venture, as we did not have any
financial interest, variable financial interest, voting interest or shares in
Venture, not did we have or obtain a non-controlling interest in Venture.

The initial purchase price was allocated based on the information
available to management and Venture at the time. Management engaged a third
party appraiser to determine the fair value of the property and

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|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

equipment acquired. Subsequent to the completion of this process, we
recorded an adjustment to the purchase price allocation amounting to
$2,007,041. Goodwill resulting from this purchase relates to the name
recognition of Venture Metals, LLC in the industry as well as synergies
expected from the business combination. Any adjustments made to provisional
amounts are based on new information obtained about the facts and circumstances
that existed as of the acquisition date.

The following table summarizes the purchase price allocation:

|                                   |  |          |            |            |   |            |   |   |            |  
|---------------------------------- |  | -------- | ---------- | ---------- | - | ---------- | - | - | ---------- | -
|                                   |  | Original |            | Adjustment |   | Final      |  
|                                   |  |          |            |            |   |            |  
|Inventory                          |  | $        | 9,109,059  |            | $ |           |   | $ | 9,109,059  |  
|Equipment,
 furniture and fixtures |  |          | 1,498,885  |            |   | (474,301   | ) |   | 1,024,584  |  
|Property and
 improvement          |  |          | 2,067,041  |            |   | (1,532,740 | ) |   | 534,301    |  
|Goodwill                           |  |          |           |            |   | 2,007,041  |   |   | 2,007,041  |  
|                                   |  |          |            |            |   |            |   |   |            |  
|                                   |  |          |            |            |   |            |   |   |            |  
|                                   |  |          | 12,674,985 |            | $ |           |   |   | 12,674,985 |  
|Less: Amount
 paid with stock      |  |          | (800,000   | )          |   |           |   |   | (800,000   | )
|                                   |  |          |            |            |   |            |   |   |            |  
|                                   |  |          |            |            |   |            |   |   |            |  
|Cash
 consideration                |  | $        | 11,874,985 |            | $ |           |   | $ | 11,874,985 |  
|                                   |  |          |            |            |   |            |   |   |            |  

On March 26, 2010, we entered into an agreement dated July 1, 2010,
subject to shareholder approval of certain issuances of shares of our common
stock. After shareholder approval of the issuance of 300,000 shares of our
common stock, on July 1, 2010, we entered into an asset purchase agreement and
a non-compete agreement with Venture. Pursuant to the asset purchase agreement
dated July 1, 2010, in consideration for the transfer of the Venture Metals,
LLC name and entry into the Non-Compete Agreement, we delivered to Venture
300,000 shares of our common stock based on a price of $10.41 per share (the
Purchase Price) based on the stock price on July 1, 2010. Management
determined that the purchase of these intangibles would protect our market
position and customer and supplier relationships and also constitutes a
separate business acquisition under ASC Topic 805 (the 2010 Acquisition).

The purchase price was negotiated between us and Steve Jones, co-owner
of Venture. After purchasing Mr. Coronas share of Venture on January 1, 2010,
Venture was owned by Steve Jones and Jeff Valentine, both of who were our
employees at the time. Mr. Valentine remains our employee. At the same time as
these negotiations took place, we renegotiated the employment agreements of Mr.
Jones and Mr. Valentine, as further described Note 6  Certain Related Party
Transactions. Mr. Jones and Mr. Valentines original employment agreements
were entered into in connection with our prior purchase of assets from Venture.
An outside financial consultant also assessed the transaction to provide an
opinion of the fair value of the transaction, which led to a supplemental
acquisition dated July 1, 2010, as described below.

The material terms of the Non-Compete Agreement include that (i)
Venture, or any entity that Venture may become, operating under any name agrees
that for a period of five (5) years from the date of the Agreement (the Non-Competition
Period), Venture will not directly or indirectly (a) engage in any business
which is the same or substantially the same as any business of the Company (the
Restricted Business), or (b) have any interest in any other business venture,
whether as a debt or equity holder, member, manager, partner, agent, security
holder, consultant or otherwise, that directly or indirectly is engaged in the
Restricted Business, within one hundred (100) direct miles of any geographic
area in which

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|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

the Company, its affiliates or any of their respective subsidiaries,
engages in the business operations as of the date hereof (the Restricted
Area); (ii) during the Non-Competition Period, Venture will not, directly or
indirectly, (a) solicit for employment or employ (or attempt to solicit for
employment or employ), for Venture or on behalf of any other person (other than
the Company or any of its respective subsidiaries), or (b) otherwise encourage
any such employee to leave his or her employment with the Company, its
affiliates or any of their respective subsidiaries; (iii) during the
Non-Competition Period, Venture shall not, directly or indirectly, (a) solicit,
call on, or transact or engage in the Restricted Business with (or attempt to
do any of the foregoing with respect to) any customer (e.g.: North American
Stainless), distributor, vendor, supplier or agent with whom the Company, its
affiliates or any of their respective subsidiaries shall have dealt, or that
the Company, its affiliates or any of their respective subsidiaries shall have
actively sought to deal, for or on behalf of Venture or any other person (other
than the Company, its affiliates or any of their respective subsidiaries) in
connection with the Restricted Business or (b) encourage any such customer,
distributor, vendor, supplier or agent to cease, in whole or in part, its
business relationship with the Company, its affiliates or any of their
respective subsidiaries; and (iv) if Venture breaches the terms of this
Agreement, the Company will be entitled to the following remedies: (a) damages
from Venture; (b) to offset against any and all amounts owing to Venture under
the Asset Purchase Agreement any and all amounts which the Company claims under
the Agreement; (c) in addition to its right to damages and any other rights it
may have to obtain injunctive or other equitable relief to restrain any breach
or threatened breach or otherwise to specifically enforce the provisions of
this Agreement, it being agreed that money damages alone would be inadequate to
compensate the Company and would be an inadequate remedy for such breach; and
(d) the rights and remedies of the parties to the Agreement are cumulative and
not alternative.

On June 16, 2010, the Company and Venture agreed to a supplemental
acquisition, the 2010 Acquisition, dated July 1, 2010. Pursuant to this
agreement, on April 12, 2010, the Company paid Venture $1,348,942 for the
benefit of Messrs. Jones and Valentine using the line of credit. This amount
represents an annual performance
bonus in cash equal to seven and one-half percent (7.5%) for both Mr. Jones and
Mr. Valentine of the amount determined, for the 2009 fiscal year of the
Company, by (i) the Segment profit of the 2009 Acquisition (the Alloys Segment
Profit) minus (ii) the product of (a) the selling, general and administrative
expenses under the Other category, times (b) the percentage determined by
dividing the Alloys Segment Profit by the Segment profit under the Segment
Totals category, all as reflected in the Segment Information note of the Notes
to Consolidated Financial Statements as contained in the 2009 Annual Report on
Form 10-K. The amount was accrued in 2009 by expensing the calculated
amount monthly throughout 2009 to bonus expense in the Recycling segments
SG&A expenses. On July 1, 2010, the Company issued to Venture 300,000
shares of Common Stock, in exchange for Ventures customer list, the Venture
name, Ventures execution of a non-compete agreement, and Ventures agreement
to cause Mr. Jones and Mr. Valentine to provide the company with non-compete
agreements. Based on an independent appraisal, the Company shall deliver up to
an additional 750,000 shares of ISA Common Stock in accordance with the
following:

(a)
Venture shall receive up to ninety thousand (90,000) shares of ISA common stock
per annum commencing in 2011 for calendar year 2010, and thereafter in 2012,
2013, 2014, and 2015 for calendar years 2011, 2012, 2013, and 2014,
respectively, resulting in a maximum of four hundred and fifty thousand
(450,000) shares of ISA common stock over the such period (but in no event
greater than 90,000 shares in any one calendar year) based on satisfaction of
certain RONA criteria as established by the Company.

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|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

Such consideration shall be payable in the
form of ISA common stock in one delivery of a stock certificate, as soon as
practicable following December 31, 2015 subject to applicable withholding and
other taxes and other required deductions;

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

The Company is in the process of obtaining a valuation.
     Of the valuation methodologies considered for the valuation of the intangible
    assets  purchased from Venture, the income approach valuation method is being
    considered. In  this approach, discounted cash flow analysis measures the
    value of a company by the  present value of its estimated future economic
    benefits. These benefits can include  earnings, cost savings, tax deductions,
    and proceeds from disposition. Value indications  are developed by discounting
    expected cash flows to their present value at a rate of return  that incorporates
    the risk-free rate for the use of funds, the expected rate of inflation
    and risks associated with the particular investment. The material assumptions
    to be used  in the valuation will include a discount rate range, a long-term
    growth rate, a working  capital rate, and a terminal growth rate range. The
    valuation will include income  projections and capital expenditure forecasts
    as provided by management. These assumptions  and estimates will be based
    on information available at the time the valuation is performed.  These assumptions
    and estimates bear the risk of change as future performance, future economic
     conditions, and continued major customer relationships cannot be predicted
    or guaranteed.

Based on preliminary estimates and the share price as of July 1, 2010
of $10.41 per share, we recorded additional goodwill of $4,273,000, decreased
the value of the intangible asset by $630,000, and increased fourth quarter
amortization expense related to the intangible assets by $98,718. We have also
recorded a commitment of $7,300,000 to paid in capital representing the fair
value of the contingent consideration associated with the purchase of the
intangibles as of December 31, 2010. This commitment value was determined based
on managements estimate that the probability of achieving the RONA criteria
was approximately 94%. The maximum value of the contingent shares is $7,807,500
based on the $10.41 per share value as of the acquisition date.

NOTE 14 - LONG TERM INCENTIVE PLAN

At our June 16, 2009 annual shareholders meeting, shareholders approved
ratification of a long term incentive plan and approved the issuance of
additional common shares of our stock. At our June 10, 2010 annual shareholders
meeting, the shareholders approved the reservation of 1,200,000 additional
shares of our common stock under the plan. The plan makes available up to
2,400,000 shares of our common stock for performance-based awards under the
plan. We may grant any of these types of awards: non-qualified and incentive
stock options; stock appreciation rights; and other stock awards including
stock units, restricted stock units, performance shares, performance units, and
restricted stock. The performance goals that we may use for such awards will be
based on any one or more of the following performance

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|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

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.

For performance-based stock awards granted under this plan, we have
assumed that the performance targets for awards granted in a specific year will
be achieved. We have assumed that performance targets for future years will not
be achieved. Based on these assumptions, we use the closing per share stock
price on the date the contract is signed to calculate award values for
recording purposes. These calculated amounts reflect the aggregate grant date
fair value of the stock awards computed in accordance with ASC Topic 718.

As of July 1, 2009, we awarded options to purchase 30,000 shares of our
stock each to our three independent directors for a total of 90,000 shares at a
per share exercise price of $4.23. We recorded expense related to these stock
options of $95,071 in 2009. See Note 1  Stock Option Plans of these Notes to
Consolidated Financial Statements for additional information on this stock
option plan.

On January 6, 2010, the Board of Directors granted
    non-performance based stock awards of 25,500 shares to management at $6.39
    per share. On January 11, 2010, we issued 18,000 shares and on February 11,
    2010, we issued the remaining 7,500 shares of this grant. On June 8, 2010,
    we issued 30,000 thousand shares of our stock to management. These
    shares were granted pursuant to a performance based stock plan authorized
    on April 14, 2009, at a grant
date fair value of $2.53 per share. On November 15, 2010, we issued 5,000
shares of our stock to management at $10.34 per share. In January 2011, we
issued 60,000 shares of our stock to management. These
    shares were granted pursuant to a performance based stock plan authorized
    on April 1, 2010, at a
grant date fair value of $11.93 per share. We also issued non-performance based
    stock awards of 600 shares to consultants at $12.31 per share.

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|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 December 31, 2010, 2009, and 2008
|                                                                                                                                        

NOTE 15 - SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)

|                                     |  |     |            |     |   |            |  |     |            |      |   |            |  |   |             | 
|------------------------------------ |  | --- | ---------- | --- | - | ---------- |  | --- | ---------- | ---- | - | ---------- |  | - | ----------- | 
|                                     |  | 1st |            | 2nd |   | 3rd        |  | 4th |            | Year |  
|                                     |  |     |            |     |   |            |  |     |            |      |  
|2010                                 |  |     |            |     |   |            |  |     |            |      |   |            |  |   |             | 
|Revenue                              |  | $   | 74,168,966 |     | $ | 92,814,962 |  | $   | 76,550,300 |      | $ | 99,471,087 |  | $ | 343,005,315 | 
|Gross profit                         |  |     | 6,283,458  |     |   | 7,753,664  |  |     | 7,368,973  |      |   | 5,878,926  |  |   | 27,285,021  | 
|Income before other income (expense) |  |     | 3,082,436  |     |   | 4,189,393  |  |     | 3,484,914  |      |   | 2,791,593  |  |   | 13,548,336  | 
|Net income                           |  |     | 1,763,264  |     |   | 2,347,200  |  |     | 1,922,621  |      |   | 2,019,524  |  |   | 8,052,609   | 
|Basic earnings per share             |  |     | 0.27       |     |   | 0.36       |  |     | 0.28       |      |   | 0.30       |  |   | 1.22        | 
|Diluted earnings per share           |  |     | 0.27       |     |   | 0.36       |  |     | 0.28       |      |   | 0.29       |  |   | 1.21        | 

|                                     |  |     |            |     |   |            |  |     |            |      |   |            |  |   |             | 
|------------------------------------ |  | --- | ---------- | --- | - | ---------- |  | --- | ---------- | ---- | - | ---------- |  | - | ----------- | 
|                                     |  | 1st |            | 2nd |   | 3rd        |  | 4th |            | Year |  
|                                     |  |     |            |     |   |            |  |     |            |      |  
|2009                                 |  |     |            |     |   |            |  |     |            |      |   |            |  |   |             | 
|Revenue                              |  | $   | 24,249,923 |     | $ | 39,124,314 |  | $   | 79,969,474 |      | $ | 37,707,969 |  | $ | 181,051,680 | 
|Gross profit                         |  |     | 3,984,805  |     |   | 4,151,071  |  |     | 6,513,443  |      |   | 5,643,386  |  |   | 20,292,705  | 
|Income before other income (expense) |  |     | 1,275,144  |     |   | 1,711,188  |  |     | 3,906,967  |      |   | 2,911,741  |  |   | 9,805,040   | 
|Net income                           |  |     | 654,063    |     |   | 922,210    |  |     | 2,161,214  |      |   | 1,547,225  |  |   | 5,284,712   | 
|Basic earnings per share             |  |     | 0.12       |     |   | 0.17       |  |     | 0.37       |      |   | 0.24       |  |   | 0.91        | 
|Diluted earnings per share           |  |     | 0.12       |     |   | 0.17       |  |     | 0.37       |      |   | 0.24       |  |   | 0.91        | 

Shredder production began in the third quarter of 2009, significantly
increasing revenues in the first and second quarters of 2010 as compared to the
first and second quarters of 2009. Historically, fourth quarter revenue has
decreased; however, in the fourth quarter of 2010, a major customer increased
their stainless steel orders by $57.4 million as compared to the fourth quarter
of 2009.

Depreciation expense that was taken in the first three quarters of 2009
in the amount of $68,439 related to the acquisition of the Venture Metals, LLC
was adjusted as a result of finalizing the purchase price allocation resulting
in a reduction of depreciation expense in the fourth quarter of 2009.

|                                     |  |     |            |     |   |            |  |     |            |      |   |            |   |   |             |  
|------------------------------------ |  | --- | ---------- | --- | - | ---------- |  | --- | ---------- | ---- | - | ---------- | - | - | ----------- | -
|                                     |  | 1st |            | 2nd |   | 3rd        |  | 4th |            | Year |  
|                                     |  |     |            |     |   |            |  |     |            |      |  
|2008                                 |  |     |            |     |   |            |  |     |            |      |   |            |   |   |             |  
|Revenue                              |  | $   | 26,083,395 |     | $ | 34,511,085 |  | $   | 28,837,828 |      | $ | 10,610,183 |   | $ | 100,042,491 |  
|Inventory write-down                 |  |     |           |     |   |           |  |     |           |      |   | (1,228,352 | ) |   | (1,228,352  | )
|Income before other income (expense) |  |     | 1,884,895  |     |   | 2,814,162  |  |     | 1,940,416  |      |   | (3,183,038 | ) |   | 3,456,435   |  
|Legal settlement                     |  |     |           |     |   |           |  |     |           |      |   | (990,000   | ) |   | (990,000    | )
|Net income                           |  |     | 1,086,551  |     |   | 1,662,632  |  |     | 1,280,115  |      |   | (2,501,700 | ) |   | 1,527,598   |  
|Basic earnings per share             |  |     | 0.20       |     |   | 0.31       |  |     | 0.24       |      |   | (0.46      | ) |   | 0.28        |  
|Diluted earnings per share           |  |     | 0.20       |     |   | 0.31       |  |     | 0.24       |      |   | (0.46      | ) |   | 0.28        |  

40.

---



NOTE 16 - UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

|                                               
|-----------------------------------------------
|INDUSTRIAL SERVICES OF AMERICA, INC.           
|AND SUBSIDIARIES                               
|UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
|DECEMBER 31, 2008                              
|                                               
|                                               

|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | --- | ---------- | --------------- | - | ---------------------- |  | ----- | ----------- | ---------------------- | ------ |  | - | ---------- | -
|                                                                                                                                          |  | ISA |            | Venture
 Metals |   | Pro Forma
 Adjustments |  | Notes |             | Pro Forma as
 Adjusted |       
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |       
|ASSETS                                                                                                                                    |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Current assets                                                                                                                            |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Cash                                                                                                                                      |  | $   | 1,103,842  |                 | $ |                       |  | $     |            |                        |        |  | $ | 1,103,842  |  
|Income tax receivable                                                                                                                     |  |     | 36,016     |                 |   |                       |  |       |            |                        |        |  |   | 36,016     |  
|Accounts receivable  trade (after allowance for doubtful accounts of
 $490,000 in 2008)                                                  |  |     | 3,811,484  |                 |   | 2,822,998              |  |       | (2,822,998  | )                      | (a)    |  |   | 3,811,484  |  
|Net investment in sales-type leases                                                                                                       |  |     | 54,629     |                 |   |                       |  |       |            |                        |        |  |   | 54,629     |  
|Inventories                                                                                                                               |  |     | 4,371,348  |                 |   | 9,108,489              |  |       | 570         |                        | (b)    |  |   | 13,480,407 |  
|Deferred income taxes                                                                                                                     |  |     | 912,337    |                 |   |                       |  |       |            |                        |        |  |   | 912,337    |  
|Other                                                                                                                                     |  |     | 126,902    |                 |   | 175,080                |  |       | (175,080    | )                      | (a)    |  |   | 126,902    |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Total current assets                                                                                                                      |  |     | 10,416,558 |                 |   | 12,106,567             |  |       | (2,997,508  | )                      |        |  |   | 19,525,617 |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Shredder system construction in progress                                                                                                  |  |     | 6,547,902  |                 |   |                       |  |       |            |                        |        |  |   | 6,547,902  |  
|Net property and equipment                                                                                                                |  |     | 10,895,477 |                 |   | 1,700,089              |  |       | (141,204    | )                      | (b)    |  |   | 12,454,362 |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Other assets                                                                                                                              |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Net investment in sales-type leases                                                                                                       |  |     | 71,222     |                 |   |                       |  |       |            |                        |        |  |   | 71,222     |  
|Notes receivable  related party                                                                                                          |  |     | 167,594    |                 |   |                       |  |       |            |                        |        |  |   | 167,594    |  
|Goodwill                                                                                                                                  |  |     | 560,005    |                 |   |                       |  |       | 2,007,041   |                        | (b)    |  |   | 2,567,046  |  
|Other assets                                                                                                                              |  |     | 132,672    |                 |   |                       |  |       |            |                        |        |  |   | 132,672    |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|                                                                                                                                          |  |     | 931,493    |                 |   |                       |  |       | 2,007,041   |                        |        |  |   | 2,938,534  |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|                                                                                                                                          |  | $   | 28,791,430 |                 | $ | 13,806,656             |  | $     | (1,131,671  | )                      |        |  | $ | 41,466,415 |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                      |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Current liabilities                                                                                                                       |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Current maturities of long-term debt                                                                                                      |  | $   | 857,863    |                 | $ | 6,327,860              |  | $     | (6,327,860  | )                      | (a)    |  | $ | 857,863    |  
|Current maturities of capital lease obligations                                                                                           |  |     | 80,771     |                 |   |                       |  |       |            |                        |        |  |   | 80,771     |  
|Accounts payable                                                                                                                          |  |     | 3,701,895  |                 |   | 1,593,125              |  |       | (1,593,125  | )                      | (a)    |  |   | 3,701,895  |  
|Income tax payable                                                                                                                        |  |     | 566,025    |                 |   | 1,734,365              |  |       | (1,734,365  | )                      | (a)    |  |   | 566,025    |  
|Liability for legal settlements                                                                                                           |  |     | 1,037,165  |                 |   |                       |  |       |            |                        |        |  |   | 1,037,165  |  
|Interest rate swap agreement liability                                                                                                    |  |     | 792,236    |                 |   |                       |  |       |            |                        |        |  |   | 792,236    |  
|Other current liabilities                                                                                                                 |  |     | 391,731    |                 |   | 406,979                |  |       | (406,979    | )                      | (a)    |  |   | 391,731    |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Total current liabilities                                                                                                                 |  |     | 7,427,686  |                 |   | 10,062,329             |  |       | (10,062,329 | )                      |        |  |   | 7,427,686  |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Long-term liabilities                                                                                                                     |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Long-term debt                                                                                                                            |  |     | 8,510,014  |                 |   | 454,257                |  |       | 11,420,728  |                        | (a)(c) |  |   | 20,384,999 |  
|Capital lease obligations                                                                                                                 |  |     | 20,798     |                 |   |                       |  |       |            |                        |        |  |   | 20,798     |  
|Deferred income taxes                                                                                                                     |  |     | 808,609    |                 |   |                       |  |       |            |                        |        |  |   | 808,609    |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|                                                                                                                                          |  |     | 9,339,421  |                 |   | 454,257                |  |       | 11,420,728  |                        |        |  |   | 21,214,406 |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Shareholders equity                                                                                                                      |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|Common
     stock, $0.0033 par value: 10,000,000 shares authorized, 6,142,500 shares
     issued and 5,062,938 shares outstanding in 2008 |  |     | 21,475     |                 |   |                       |  |       | 990         |                        | (c)    |  |   | 22,465     |  
|Additional paid-in capital                                                                                                                |  |     | 3,742,373  |                 |   |                       |  |       | 799,010     |                        | (c)    |  |   | 4,541,383  |  
|Retained earnings                                                                                                                         |  |     | 10,601,102 |                 |   |                       |  |       |            |                        |        |  |   | 10,601,102 |  
|Accumulated other comprehensive loss                                                                                                      |  |     | (792,236   | )               |   |                       |  |       |            |                        |        |  |   | (792,236   | )
|Members Equity                                                                                                                           |  |     |           |                 |   | 3,290,070              |  |       | (3,290,070  | )                      | (d)    |  |   |           |  
|Treasury
     stock at cost, 779,562 shares in 2008                                                                                       |  |     | (1,548,391 | )               |   |                       |  |       |            |                        |        |  |   | (1,548,391 | )
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|                                                                                                                                          |  |     | 12,024,323 |                 |   | 3,290,070              |  |       | (2,490,070  | )                      |        |  |   | 12,824,323 |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  
|                                                                                                                                          |  | $   | 28,791,430 |                 | $ | 13,806,656             |  | $     | (1,131,671  | )                      |        |  | $ | 41,466,415 |  
|                                                                                                                                          |  |     |            |                 |   |                        |  |       |             |                        |        |  |   |            |  

|
|
|
|
|

41.

---



|                                                      
|------------------------------------------------------
|INDUSTRIAL
 SERVICES OF AMERICA, INC.                 
|AND
 SUBSIDIARIES                                     
|UNAUDITED
 PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
|Year
 ended December 31, 2008                         
|                                                      
|                                                      

|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|---------------------------------------------- |  | --- | ----------- | --------------- | - | ---------------------- | - | ----- | -------- | ---------------------- | --- |  | - | ----------- | -
|                                               |  | ISA |             | Venture
 Metals |   | Pro Forma
 Adjustments |   | Notes |          | Pro Forma as
 Adjusted |    
|                                               |  |     |             |                 |   |                        |   |       |          |                        |    
|                                               |  |     |             |                 |   |                        |   |       |          |                        |    
|Revenue from services                          |  | $   | 18,182,726  |                 | $ |                       |   | $     |         |                        |     |  | $ | 18,182,726  |  
|Revenue from product sales                     |  |     | 81,859,765  |                 |   | 161,714,637            |   |       |         |                        |     |  |   | 243,574,402 |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Total
 Revenue                                 |  |     | 100,042,491 |                 |   | 161,714,637            |   |       |         |                        |     |  |   | 261,757,128 |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Cost of goods sold for
 services               |  |     | 16,502,452  |                 |   |                       |   |       |         |                        |     |  |   | 16,502,452  |  
|Cost of goods sold for
 product sales          |  |     | 68,639,348  |                 |   | 155,118,176            |   |       |         |                        |     |  |   | 223,757,524 |  
|Inventory adjustment for
 lower cost or market |  |     | 1,228,352   |                 |   |                       |   |       |         |                        |     |  |   | 1,228,352   |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Total Cost
 of goods sold                      |  |     | 86,370,152  |                 |   | 155,118,176            |   |       |         |                        |     |  |   | 241,488,328 |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Selling, general and
 administrative expenses  |  |     | 10,215,904  |                 |   | 5,553,631              |   |       | (206,180 | )                      | (e) |  |   | 15,563,355  |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Income
 before other income (expense)          |  |     | 3,456,435   |                 |   | 1,042,830              |   |       | 206,180  |                        |     |  |   | 4,705,445   |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Other income (expense)                         |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Interest expense                               |  |     | (372,444    | )               |   | (1,083,188             | ) |       | (40,163  | )                      | (f) |  |   | (1,495,795  | )
|Interest income                                |  |     | 85,598      |                 |   | 10,229                 |   |       |         |                        |     |  |   | 95,827      |  
|Gain (loss) on sale of assets                  |  |     | 34,842      |                 |   | (7,389                 | ) |       |         |                        |     |  |   | 27,453      |  
|Provision
     for lawsuit settlement          |  |     | (990,000    | )               |   |                       |   |       |         |                        |     |  |   | (990,000    | )
|Other income (loss), net                       |  |     | 336,802     |                 |   |                       |   |       |         |                        |     |  |   | 336,802     |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|                                               |  |     | (905,202    | )               |   | (1,080,348             | ) |       | (40,163  | )                      |     |  |   | (2,025,713  | )
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Income
 before income taxes                    |  |     | 2,551,233   |                 |   | (37,518                | ) |       | 166,017  |                        |     |  |   | 2,679,732   |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Income tax provision                           |  |     | 1,023,635   |                 |   |                       |   |       | 48,257   |                        | (g) |  |   | 1,071,892   |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Net income                                     |  | $   | 1,527,598   |                 | $ | (37,518                | ) | $     | 117,760  |                        |     |  | $ | 1,607,840   |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Basic earnings per share                       |  | $   | 0.28        |                 |   |                        |   |       |          |                        |     |  | $ | 0.30        |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Average Shares Outstanding                     |  |     | 5,393,720   |                 |   |                        |   |       |          |                        |     |  |   | 5,393,720   |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Diluted earnings per share                     |  | $   | 0.28        |                 |   |                        |   |       |          |                        |     |  | $ | 0.30        |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|                                               |  |     |             |                 |   |                        |   |       |          |                        |     |  |   |             |  
|Average Shares Outstanding                     |  |     | 5,393,720   |                 |   |                        |   |       |          |                        |     |  |   | 5,393,720   |  

|
|
|
|
|

42.

---



PRO FORMA ADJUSTMENTS

The following pro forma adjustments are reflected in the accompanying
    unaudited pro forma consolidated financial information:

| |     |                                                                                                                                                                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | To
          remove assets and liabilities of Venture Metals, LLC. not acquired
          or assumed by the Company.                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                      
| | (b) | To
          record inventory, property, equipment, and goodwill of Venture Metals,
          LLC. acquired by the Company.                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                      
| | (c) | To
          record stock funding used and borrowings made on the Companys non-revolving credit facility
          to fund the cash portion of the purchase price, and other liabilities
          assumed by the Company in the acquisition.                                                       
| |     |                                                                                                                                                                                                                                                                                                      
| | (d) | To
          eliminate the stockholders equity section of the sellers balance
          sheet.                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                      
| | (e) | Reflects
          elimination of selling, general and administrative expenses associated
          primarily with banking fees previously incurred by Venture Metals,
          LLC. that will not be incurred in revised capital structure offset
          by estimated depreciation on equipment.
| |     |                                                                                                                                                                                                                                                                                                      
| | (f) | To
          record interest expense on funds borrowed to finance the acquisition,
          net of interest expense reported by the acquiree.                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                      
| | (g) | To
          record the pro forma (provision) benefit for income taxes based on Pro
          Forma as Adjusted pretax income (loss) based upon each periods
          consolidated combined state and Federal effective tax rate of 40%.                                                         

43.

---



The unaudited pro forma consolidated statements of income for the year
ended December 31, 2008 give effect to Industrial Services of America, Inc.s
(the Company) January 15, 2009 acquisition of certain assets of Venture Metals,
LLC. (Venture Metals) as if the acquisition of certain assets had been
completed on January 1, 2008.

The unaudited pro forma consolidated balance sheet as of December 31,
2008, gives effect to the acquisition as if the transaction had occurred on
December 31, 2008.

The unaudited pro forma consolidated financial information should be
read in conjunction with the Companys historical consolidated financial
statements and accompanying notes included in the Companys periodic reports
previously filed with the Securities and Exchange Commission. The unaudited pro
forma consolidated financial information may not necessarily reflect the
financial position or results of operations which would have been obtained if
these transactions had been consummated on the dates indicated in the unaudited
pro forma consolidated financial information.

The unaudited pro forma consolidated financial data are based on the
final purchase price allocation as determined by a third party appraiser. Pro
forma adjustments are necessary to reflect the final purchase price and changes
in our capital structure and to adjust amounts related to Venture Metals assets
and liabilities to their fair values. Pro forma adjustments are also necessary
to reflect the income tax effects related to the pro forma adjustments.



44.

---



BASIS OF PRESENTATION

The accompanying unaudited pro forma consolidated financial information
is presented on a basis consistent with the Companys historical consolidated
financial statements. Industrial Services of America acquired certain assets of
Venture Metals, LLC. which represents substantially all of the continuing
operations of Venture Metals, LLC. Assets and liabilities of Venture Metals not
acquired by Industrial Services of America, Inc. have been eliminated in
pro-forma adjustments as further described below.

PURCHASE PRICE

Purchase Price SummaryFor purposes of the pro forma financial information,
the following table presents the components of the purchase price
consideration.

|                                   |  |   |            |  |  |                           
|---------------------------------- |  | - | ---------- |  |  | --------------------------
|Cash paid as
 of January 13, 2009  |  | $ | 8,846,794  |  |  | Inventory                 
|Cash paid as
 of February 10, 2009 |  |   | 262,265    |  |  | Inventory                 
|Cash paid as
 of April 2, 2009     |  |   | 1,267,041  |  |  | Property                  
|Stock issued
 as of April 2, 2009  |  |   | 800,000    |  |  | Property
 (300,000 shares)
|Cash paid as
 of April 17, 2009    |  |   | 1,498,885  |  |  | Fixed Assets              
|                                   |  |   |            |  |  |                           
|                                   |  |   |            |  |  |                           
|Total
 purchase price              |  | $ | 12,674,985 |  |  |                           
|                                   |  |   |            |  |  |                           

Purchase Price Allocation


The following represents the preliminary allocation of the purchase
price to the acquired assets of Venture Metals, LLC. along with the adjustment
made to the purchase price allocation based on the third party appraisal and is
for illustrative purposes only. The allocation is based on Venture Metals,
LLC.s assets as of December 31, 2008.


|                                   |  |          |            |            |   |            |   |   |            | 
|---------------------------------- |  | -------- | ---------- | ---------- | - | ---------- | - | - | ---------- | 
|                                   |  | Original |            | Adjustment |   | Final      |  
|                                   |  |          |            |            |   |            |  
|Inventory                          |  | $        | 9,109,059  |            | $ |           |   | $ | 9,109,059  | 
|Equipment, furniture and
 fixtures |  |          | 1,498,885  |            |   | (474,301   | ) |   | 1,024,584  | 
|Property and improvement           |  |          | 2,067,041  |            |   | (1,532,740 | ) |   | 534,301    | 
|Goodwill                           |  |          |           |            |   | 2,007,041  |   |   | 2,007,041  | 
|                                   |  |          |            |            |   |            |   |   |            | 
|                                   |  |          |            |            |   |            |   |   |            | 
|Total purchase price               |  | $        | 12,674,985 |            | $ |           |   | $ | 12,674,985 | 
|                                   |  |          |            |            |   |            |   |   |            | 



45.

---



|                                                                                                                                                       
|-------------------------------------------------------------------------------------------------------------------------------------------------------
|SUPPLEMENTARY
 INFORMATION                                                                                                                             
|                                                                                                                                                       
|INDUSTRIAL SERVICES OF AMERICA, INC. 
 AND SUBSIDIARIES
 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 
 Years ended December 31, 2010, 2009 and 2008
|                                                                                                                                                       
|                                                                                                                                                       

|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|------------------------------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------------------ | - | ------------ |  | ------------------------- | -------- | - | - | ------- | 
|                                                                          |  | Balance at
 Beginning
 of Period |         | Additions
 Charged to
 Costs and
 Expenses |   | Deductions * |  | Balance at
 End of Period |         
|                                                                          |  |                                  |         |                                            |   |              |  |                           |         
|Description                                                               |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|Allowance for doubtful accounts 2010
 (deducted from accounts receivable) |  | $                                | 100,000 |                                            | $ |             |  | $                         |         |   | $ | 100,000 | 
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|Allowance for doubtful accounts 2009
 (deducted from accounts receivable) |  | $                                | 490,000 |                                            | $ |             |  | $                         | (390,000 | ) | $ | 100,000 | 
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|Allowance for doubtful accounts 2008
 (deducted from accounts receivable) |  | $                                | 100,000 |                                            | $ | 390,000      |  | $                         |         |   | $ | 490,000 | 
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|Accrual for legal settlements for 2010                                    |  | $                                |        |                                            | $ |             |  | $                         |         |   | $ |        | 
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|Accrual for legal settlements for 2009                                    |  | $                                | 990,000 |                                            | $ |             |  | $                         | 990,000  |   | $ |        | 
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|Accrual for legal settlements for 2008                                    |  | $                                |        |                                            | $ | 990,000      |  | $                         |         |   | $ | 990,000 | 
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 

*uncollected
amounts written off, net of recoveries

46.

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