UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington,
DC 20549

FORM 10-K

|  |                                                                                            | 
|- | ------------------------------------------------------------------------------------------ | 
|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

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|                                                       
|-------------------------------------------------------
|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 40232
(502) 368-1661
(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices)

Securities registered
pursuant to Section 12(b) of the Act: None

Securities registered
pursuant to Section 12(g) of the Act:

Common Stock, $.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 o
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

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, $.0033 par value, outstanding as of the close of
business on March 28, 2011: 6,580,038.

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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.

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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.

2

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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.

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 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.

3

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| |   |                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

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.

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.

4

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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
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.

5

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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 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.

6

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Our
management services division offers 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.

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.

7

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|         |             
|-------- | ------------
|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.

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.

8

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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.

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.

9

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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    | 
| |                                       |  |                 | 
| | 6709 Grade Lane, Louisville, KY       |  | Own             | 
| | 7021 Grade Lane, Louisville, KY       |  | Own             | 
| | 7100 Grade Lane, Louisville, KY       |  | Lease (K&R) (1) | 
| | 7110 Grade Lane, Louisville, KY       |  | Own             | 
| | 7124 Grade Lane, Louisville, KY       |  | Own             | 
| | 7200 Grade Lane, Louisville, KY       |  | Own             | 
| | 3409 Camp Ground Road, Louisville, KY |  | Own             | 
| | 1565 E. 4th Street, Seymour, IN       |  | Own             | 
| | 1617 State Road 111, New Albany, IN   |  | Own             | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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 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.

10

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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.

We
believe that all of our properties are well maintained and in good condition
and that the current operating facilities are adequate for present and
immediate future business needs.

|         |                    
|-------- | -------------------
|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. 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.

11

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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.

12

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

Selected Financial Data

|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------ |  | - | ------ | 
|(Amounts in Thousands, Except Per Share Data)                            |  | 2010 |         | 2009 |   | 2008    |  | 2007 |         | 2006 |  
|                                                                         |  |      |         |      |   |         |  |      |         |      |  
|                                                                         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|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 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.

13

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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.

14

---



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

On
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.

15

---



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 shredder 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 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.

16

---



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.

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%   | 

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.

17

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|                                                                             |  |   |          |  
|---------------------------------------------------------------------------- |  | - | -------- | -
|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 33.9% increase in the volume of stainless steel shipments, a 96.8%
increase in the volume of ferrous shipments, and a 5.2% increase in the volume
of nonferrous shipments. 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 20.1%, of ferrous purchases of 115.3%, and of nonferrous purchases of 22.5%.
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.

18

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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.

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 shredder 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:

19

---



|                            |  |                    |            |                    |   |            | 
|--------------------------- |  | ------------------ | ---------- | ------------------ | - | ---------- | 
|                            |  | 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 | 
|                            |  |                    |            |                    |   |            | 
|Shredder
 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 

20

---



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     | 
|Shredder
 replacement parts |  |      | 1,312,506  |       |   |          |  |         |          |       |   |          |  |   | 1,312,506  | 
|Ferrous
 Materials          |  |      | 2,371,978  |       |   | 690,601   |  |         | 279,454   |       |   | 2,954,222 |  |   | 6,296,255  | 
|Non-ferrous
 materials      |  |      | 1,459,379  |       |   | 152,300   |  |         | 49,449    |       |   | 192,296   |  |   | 1,853,424  | 
|Other                       |  |      | 59,040     |       |   |          |  |         |          |       |   |          |  |   | 59,040     | 
|                            |  |      |            |       |   |           |  |         |           |       |   |           |  |   |            | 
|                            |  |      |            |       |   |           |  |         |           |       |   |           |  |   |            | 
|                            |  | $    | 24,233,125 |       | $ | 5,449,908 |  | $       | 1,228,939 |       | $ | 3,398,659 |  | $ | 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    | 
|Shredder
 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.

21

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                              

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

22

---



|                                                                                                                                                                                                                                          |   |                                                                                                                                                           
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                          |  | 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.

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 | 

23

---



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. 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 shredder 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:

24

---



|                            |  |                    |            |                    |   |           | 
|--------------------------- |  | ------------------ | ---------- | ------------------ | - | --------- | 
|                            |  | 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 | 
|                            |  |                    |            |                    |   |           | 
|Shredder
 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  | 
|     |  |                 |  |            |  |   |           |  |   |            | 
|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  | 

25

---



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    | 
|Shredder
 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.

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.

26

---



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:

|                                 |  |         |           |         |   |             |   |       |           |  |   |             |  
|-------------------------------- |  | ------- | --------- | ------- | - | ----------- | - | ----- | --------- |  | - | ----------- | -
|                                 |  | 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    | )

27

---



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 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.

28

---



|         |                                                             
|-------- | ------------------------------------------------------------
|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

|         |                         
|-------- | ------------------------
|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 specific in the
 SECs rules and forms, and (2) is accumulated and communicated to ISAs management, including our principal
 executive and principal financial officers, as appropriate to allow timely
 decisions regarding the required disclosure.

29

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                             
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 is designed to provide reasonable assurance to our
 management and Board of Directors regarding the reliability of financial
 reporting and the preparation and fair presentation of published financial
 statements for external purposes in accordance with generally accepted
 accounting principles in the United States.                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Our internal control over financial reporting 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | With the exception noted below, 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, 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.

30

---



|         |                   
|-------- | ------------------
|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.

31

---



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-39
|                                                    |                                                                                                       |     
|(a)(3)
 List of Exhibits                            |                                                                                                      

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-39 of the ISA
Consolidated Financial Statements.

32

---



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: March
 28, 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
 Executive Officer (Principal Executive Officer)         |  | March 28,
 2011
|                        |  |                                                                                           | 
|Harry
 Kletter          |  |                                                                                           | 
|                        |  |                                                                                           |  |                
|/s/ Brian
 Donaghy      |  | President,
 Chief Operating Officer
 and Director                                         |  | March 28,
 2011
|                        |  |                                                                                           | 
|Brian
 Donaghy          |  |                                                                                           |  |                
|                        |  |                                                                                           |  |                
|/s/ Alan L.
 Schroering |  | Chief
 Financial Officer
 (Principal Financial Officer and
 Principal Accounting Officer) |  | March 28,
 2011
|                        |  |                                                                                           | 
|Alan L.
 Schroering     |  |                                                                                           | 
|                        |  |                                                                                           |  |                
|/s/ Orson
 Oliver       |  | Director                                                                                  |  | March 28,
 2011
|                        |  |                                                                                           |  |                
|Orson Oliver            |  |                                                                                           |  |                
|                        |  |                                                                                           |  |                
|/s/ Roman
 Epelbaum     |  | Director                                                                                  |  | March 28,
 2011
|                        |  |                                                                                           |  |                
|Roman
 Epelbaum         |  |                                                                                           |  |                
|                        |  |                                                                                           |  |                
|/s/ Albert
 Cozzi       |  | Director                                                                                  |  | March 28,
 2011
|                        |  |                                                                                           |  |                
|Albert Cozzi            |  |                                                                                           |  |                
|                        |  |                                                                                           |  |                

33

---



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.                                      

34

---



|                 |    |                                                                                                                                                                                                                                                                                                                       
|---------------- | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                                         
|                 |    |                                                                                                                                                                                                                                                                                                                       
|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.                                                                                                                                           
|                 |    |                                                                                                                                                                                                                                                                                                                       
|10.21            | ** | Schedule DD to
 BB&T Loan Agreement.                                                                                                                                                                                                                                                                                
|                 |    |                                                                                                                                                                                                                                                                                                                       
|10.22            | ** | Promissory Note,
 dated April 13, 2010, in the amount of $20,000,000 payable to Branch Banking
 and Trust Company.                                                                                                                                                                                                    
|                 |    |                                                                                                                                                                                                                                                                                                                       
|10.23            | ** | Addendum to
 Promissory Note dated April 13, 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.                                                                                                                
|                 |    |                                                                                                                                                                                                                                                                                                                       
|10.25            | ** | ISA Asset
 Purchase Agreement, dated July 1, 2010, by and between ISA and Venture
 Metals, LLC, of Florida.                                                                                                                                                                                                           
|                 |    |                                                                                                                                                                                                                                                                                                                       
|10.26            | ** | Amended and
 Restated Executive Employment Agreement, dated April 1, 2010, by and between
 ISA and Brian Donaghy.                                                                                                                                                                                                     
|                 |    |                                                                                                                                                                                                                                                                                                                       
|10.27            | ** | Amended and Restated
 Executive Employment Agreement, dated July 1, 2010, by and between ISA and
 Steve Jones.                                                                                                                                                                                                        
|                 |    |                                                                                                                                                                                                                                                                                                                       
|10.28            | ** | Amended and
 Restated Executive Employment Agreement, dated July 1, 2010, by and between
 ISA and Jeff Valentine.                                                                                                                                                                                                     
|                 |    |                                                                                                                                                                                                                                                                                                                       
|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.                                                                                                                                                                       
|                 |    |                                                                                                                                                                                                                                                                                                                       

35

---



|                 |    |                                                                                                                                                                                                                                                                                                                          
|---------------- | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 
 Number |    | Description of Exhibits                                                                                                                                                                                                                                                                                                  
|                 |    |                                                                                                                                                                                                                                                                                                                          
|                 |    |                                                                                                                                                                                                                                                                                                                          
|10.30            | ** | Credit Agreement, dated July 30, 2010, by and among Industrial
 Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank.                                                                                                                                                                                       
|                 |    |                                                                                                                                                                                                                                                                                                                          
|10.31            | ** | Schedule 5.22 to Credit Agreement.                                                                                                                                                                                                                                                                                       
|                 |    |                                                                                                                                                                                                                                                                                                                          
|10.32            | ** | Revolving Loan Note, dated July 30, 2010, in the amount of
 $40,000,000 payable to Fifth Third Bank.                                                                                                                                                                                                                     
|                 |    |                                                                                                                                                                                                                                                                                                                          
|10.33            | ** | Term Loan Note, dated July 30, 2010, in the amount of $8,800,000
 payable to Fifth Third Bank.                                                                                                                                                                                                                           
|                 |    |                                                                                                                                                                                                                                                                                                                          
|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.
|                 |    |                                                                                                                                                                                                                                                                                                                          
|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.                                       
|                 |    |                                                                                                                                                                                                                                                                                                                          
|10.36            | ** | Pledge Agreement, dated as of July 30, 2010, between Industrial
 Services of America, Inc. and Fifth Third Bank.                                                                                                                                                                                                         
|                 |    |                                                                                                                                                                                                                                                                                                                          
|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 for
 the year ended December 31, 2010.                                                                                                                                                                                                                   
|                 |    |                                                                                                                                                                                                                                                                                                                          
|31.2             |    | Rule 13a-14(a) Certification of Alan Schroering for the Form 10-K for
 the year ended December 31, 2010.                                                                                                                                                                                                                 
|                 |    |                                                                                                                                                                                                                                                                                                                          
|32.1             |    | Section 1350 Certification of Harry Kletter and Alan Schroering for
 the Form 10-K for the year ended December 31, 2010.                                                                                                                                                                                                 

*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.

36

---



|                                    
|------------------------------------
|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                       |  | 39

---



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. These consolidated financial statements 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                                        |                             
|March 28,
 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    | 
|                                                                                                           |  |      |             |      |   |            | 
|                                                                                                           |  |      | 13,006,014  |      |   | 3,138,259  | 
|                                                                                                           |  |      |             |      |   |            | 
|                                                                                                           |  | $    | 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  |  
|                                                                                   |  |      |             |      |   |            |  
|                                                                                   |  |      | 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 | )
|                                                                                   |  |      |             |      |   |            |  
|                                                                                   |  |      | 40,882,205  |      |   | 21,917,493 |  
|                                                                                   |  |      |             |      |   |            |  
|                                                                                   |  | $    | 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     |  
|                                              |  |      |             |      |   |             |   |   |             |  
|                                              |  |      | (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   
|                                               
|                                               

|                                                               |  |               |           |                            |   |                  |                 |                                   |            |  |      |            |       |   |          |   |  |            |   |   |            |   |   |            |  
|-------------------------------------------------------------- |  | ------------- | --------- | -------------------------- | - | ---------------- | --------------- | --------------------------------- | ---------- |  | ---- | ---------- | ----- | - | -------- | - |  | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                               |  |               |           | Additional
 Paid-inCapital |   | RetainedEarnings |                 | AccumulatedOtherComprehensiveLoss |            |  |      |            |      
|                                                               |  | Common
 Stock |           |                            |   |                  | 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 (Note 13)                                      |  |      | 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 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.

7.

---



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

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 accounting principles generally accepted 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. Future
results could differ from the current 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.

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.

9.

---



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

Inventory also includes all types of industrial
waste handling equipment and machinery held for resale such as compactors,
balers, and containers. Shredder replacement parts included in Inventory are
depreciated over a one-year life 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 | 
|                                   |  |      |            |      |   |            | 
|Shredder 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.

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 units 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.

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.

11.

---



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

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   | 
|Venture Metals, LLC customer list |  |                      | 620,000   |                          |   | (62,000            | ) |   | 558,000   | 
|Non-compete agreements            |  |                      | 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
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.

12.

---



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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.

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.

13.

---



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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 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.

14.

---



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

|                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                             
|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 11, 2010, we granted 18,000 shares of our stock to management at a
 per share price of $6.47. As of February 11, 2010, we awarded 7,500 shares of
 our stock to management at a per share price of $6.73. As of June 8, 2010, we
 awarded 30,000 shares of our stock to management at a per share price of
 $9.51. As of November 15, 2010, we awarded 5,000 shares of our stock to
 management at a per share price of $10.34. In January 2011, we awarded 60,000
 shares of stock to management and 600 shares of stock to consultants at
 various prices.                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|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 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.

15.

---



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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 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.                                                                                                                                                                                                                                                                                                                                                                                                                            

16.

---



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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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    | )

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.

17.

---



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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|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.                                                                                                                                                                                                                                                                                                                         

18.

---



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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|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.                                                                                                                                                                                                                                                                                                                                

19.

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

20.

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 $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.                         

21.

---



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

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 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|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  | 

22.

---



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

|                                                                                                                                                                                                                                                                                                                                                                                                                         |  |   |            |  |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | ---------- |  | - | ---------- | 
|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.

---



|                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------
|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, 2006, but effective December 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.

26.

---



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

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,
proforma budgets, and assistance with general operational issues. The Prior
Agreement provided for a term of ten years, with an automatic renewal for
additional terms of one year on January 1 of each successive calendar year
unless either party provides the other party with written notice of its intent
not to renew at least six months prior to the expiration of the then existing
term. The Companys Chief Executive Officer, Harry Kletter, is a member
of Kletter Holding, LLC, which is the sole member of K&R. The Amendment
increases the consulting fees from $240,000 per annum to $480,000 per annum.
The annual fee is payable in equal monthly installments of $40,000. The
Amendment otherwise ratifies the Prior Agreement in all respects. 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 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, as a result
of the supplemental acquisition between the Company and Venture Metals, LLC
(Venture), further discussed below, 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.

27.

---



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

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

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 the employment agreements 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
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.

28.

---



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

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 a crane 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.

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 | 
|                               |  |   |           | 

29.

---



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

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      | 
|                                                           |  |      |           |      |   |           |  |   |           | 

NOTE
11 - LEGAL PROCEEDINGS

Finalized Litigation
In 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.

30.

---



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

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. 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 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.

31.

---



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

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   |  
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|                                               |  | 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  |  
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  
|                                               |  |           |              |                 |   |            |   |                 |            |   |   |              |  

32.

---



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

|                                               |           |              |                 |   |             |   |                 |            |   |   |              |  
|---------------------------------------------- | --------- | ------------ | --------------- | - | ----------- | - | --------------- | ---------- | - | - | ------------ | -
|                                               | 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   |  
|                                               |           |              |                 |   |             |   |                 |            |   |   |              |  
|                                               |           |              |                 |   |             |   |                 |            |   |   |              |  
|                                               | 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    |  
|                                               |           |              |                 |   |             |   |                 |            |   |   |              |  

33.

---



|                                           
|-------------------------------------------
|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                       |  |           |            |                 |   |           |  |                 |           |  |   |            | 
|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 and its members, Steve Jones, Jeff Valentine and Carlos Corona,
under which we agreed to pay to Venture Metals $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 Metals.

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 Metals
business that Venture Metals leases from Luca Investments, LLC, an affiliate of
Venture Metals, 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 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 include 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 Metals, LLC, whereby Venture Metals
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 are the sole
members of Venture Metals. 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 Metals under the previous agreement. The installment payment we owed to
Venture Metals 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
Metals 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.

34.

---



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

We
completed the acquisition of the real property at 3409 Camp Ground Road,
Louisville, Kentucky, from Luca Investments, LLC, an affiliate of Venture
Metals, 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.

We
have treated this transaction as an 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.

The
initial purchase price was allocated based on the information available to
management and Venture Metals. Management engaged a third party appraiser to
determine the fair value of the property and equipment acquired. Subsequent to
the completion of this process, we recorded an adjustment to the purchase price
allocation amounting to $2,007,041.

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 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.

35.

---



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

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 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
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.

The material terms of the
Non-Compete Agreement include that (i) Venture Metals, or any entity that
Venture Metals 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 Metals 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 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 Metals will
not, directly or indirectly, (a) solicit for employment or employ (or attempt
to solicit for employment or employ), for Venture Metals 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 Metals 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 Metals 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 Metals breaches the terms of this Agreement, the Company will be
entitled to the following remedies: (a) damages from Venture Metals; (b) to
offset against any and all amounts owing to Venture Metals 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 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 shall deliver up to an
additional 750,000 shares of ISA Common Stock in accordance with the following:

36.

---



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

(a)
Venture shall receive up to ninety thousand (90,000) shares of ISA common stock
per annum commencing in 2011 for calendar year 2010, and thereafter in 2012,
2013, 2014, and 2015 for calendar years 2011, 2012, 2013, and 2014,
respectively, resulting in a maximum of four hundred and fifty thousand
(450,000) shares of ISA common stock over the such period (but in no event
greater than 90,000 shares in any one calendar year) based on satisfaction of
the RONA criteria set forth in Exhibit 10.3 of the June 30, 2010 Form 10-Q as
previously filed with the SEC and incorporated herein by reference. Such
consideration shall be payable in the form of ISA common stock in one delivery
of a stock certificate, as soon as practicable following December 31, 2015
subject to applicable withholding and other taxes and other required
deductions;

(b)
Venture shall be entitled to receive additional consideration for the purchase
of assets up to three hundred thousand (300,000) shares of ISA common stock
based on satisfaction of the 5 year (2010-2014) average RONA criteria set forth
in Exhibit 10.3 of the June 30, 2010 Form 10-Q as previously filed with the SEC
and incorporated herein by reference. Such consideration shall be payable in
the form of Company common stock in one delivery of a stock certificate, as
soon as practicable following December 31, 2014 subject to applicable
withholding and other taxes and other required deductions.

The Company is in the process of obtaining a valuation.
    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 representing the fair value of the
    contingent consideration associated with the purchase of the intangibles
    as of December 31, 2010.

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 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.

37.

---



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

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 11, 2010, we issued 18,000 shares of
stock to management at a per share price of $6.47, and as of February 11, 2010,
we awarded 7,500 shares of our stock to management at a per share price of
$6.73. The Board of Directors approved the grant on January 6, 2010. On June
    8, 2010, we awarded 30,000 shares of our stock to management at a per share
    price of $9.51. On November 15, 2010, we awarded 5,000 shares of our stock
    to management at a per share price of $10.34. In January 2011, we awarded
    60,000 shares of our stock to management and 600 shares of our stock to consultants
at various prices.

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 | 
|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 | 
|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        | 

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        |  

38.

---



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

|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|------------------------------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------------------ | - | ------------ |  | ------------------------- | -------- | - | - | ------- | 
|Description                                                               |  | Balance at
 Beginning
 of Period |         | Additions
 Charged to
 Costs and
 Expenses |   | Deductions * |  | Balance at
 End of Period |         
|                                                                          |  |                                  |         |                                            |   |              |  |                           |         
|                                                                          |  |                                  |         |                                            |   |              |  |                           |          |   |   |         | 
|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

39.

---