UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, 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, 2008





[   ]         
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF
1934



For the transition
period from __________ to __________





Commission File
No.: 0-20979

_____________________



INDUSTRIAL
SERVICES OF AMERICA, INC.

(Exact name of
registrant as specified in its charter)



Florida
			59-0712746(State
			or other jurisdiction of
			incorporation or organization)
			(I.R.S.
			Employer
			Identification No.)




7100 Grade Lane
P.O. Box 32428
Louisville, Kentucky 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,
$.005 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   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   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



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.      [   ]



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                                    Accelerated
filer                            Non-accelerated filer                                      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   No X



Aggregate market value of the 1,998,737 shares
of voting Common Stock held by non-affiliates of the registrant at the closing
sales price on June 30, 2008:  $31,839,875.



Number of shares of Common Stock, $.005 par value,
outstanding as of the close of business on March 31, 2009:  3,575,292.

_____________________



DOCUMENT
INCORPORATED BY REFERENCE



Portions of the registrant's definitive Proxy Statement for
the 2009 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 logistic
management services company that provides recycling and scrap processing and
waste handling equipment sales and service, as well as offering total package
waste and recycling management services to commercial, industrial and logistic
customers nationwide.





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.



Our principal products and services are ferrous and non-ferrous scrap metals,
management services, and waste equipment sales, rental and service.  Our goal is
to remain dedicated to the recycling, management services, and equipment
industry while sustaining steady growth at an acceptable profit, adding to our
net worth, and providing positive returns for our stockholders.



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 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 and/or baling. We also continue to focus on initiating growth
in our management services business segment and our waste and recycling
equipment sales, service and leasing division.



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.



Ferrous Scrap Processing - We prepare ferrous scrap material for resale
through a variety of methods including sorting, shearing, cutting and bailing. 
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.



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.



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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. The boxes are
subsequently transported 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 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.



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, 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.



Management Services Operations - Computerized Waste Systems (CWS)



Our management services operations are in the business of commercial, retail and
industrial waste and recycling management services.  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, CWScreates 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 Canada and Mexico.  This software enables us to generate
detailed monthly customized billing reports, and price tracking to accommodate
our customers' needs.



Our management services division provides our customers evaluation, management,
monitoring, auditing and cost reduction of non-hazardous solid waste removal and
recycling activities.  CWS has developed a network of over 2,300 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 can review the accuracy of recent billings for hauling,
landfill and recycling rates.



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Waste and Recycling Equipment Sales and Services Operations-WESSCO-Waste and
Sales Service Company



Our waste equipment sales and services operation, WESSCO, is in the business of
commercial and industrial waste and recycling handling equipment sales, rental
and maintenance.  By offering competitively priced waste and recycling handling
equipment from a number of different manufacturers, we are 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



We record revenues and costs in the period of delivery.  Our management services
division has third party service providers providing same day service for all
waste removal and recycling services for our customers.  Our recycling division
purchases ferrous and nonferrous materials, cardboard and paper on a daily
basis.  We record these purchases in the period received.  We record revenue and
cost in the period of delivery.  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 419,500 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
as well as in Canada.



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%) 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.



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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 4.4 acres of asphalted
parking area.  ISA Logistics and Waste Equipment Sales and Service Company (WESSCO)
will occupy this property, relocating from the main Louisville location,
creating room for the new shredder and related maintenance equipment.   We plan
to widen Grade Lane to three lanes along our property, allowing traffic to move
more freely and safely. The road improvements will accommodate our growth from
the $10 million shredder project. The shredder will shred 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.  We intend for the shredder to become fully operational
by the end of the second quarter of 2009.



In January, 2009, we expanded into the stainless steel and high-temperature
alloys recycling business by purchasing inventories from Ventures Metals, LLC,
agreeing to lease its processing equipment and facilities on Camp Ground Road in
Louisville, Kentucky and in Mobile, Alabama, and hiring key executives to head
up a new ISA Alloys division.



In March, 2009, we transformed the Camp Ground Road location into a full-service
recycling material receiving facility.



Industry
Background



Our operations primarily involve the collection and processing of ferrous and
non-ferrous scrap metals. We collect industrial scrap metal and obsolete scrap
metal, process it into reusable forms and supply the recycled scrap metals to
our customers.  Since October 2005, we have focused much of our attention on our
recycling business segment.  We sell processed ferrous and non-ferrous scrap
material 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 and/or baling.



We manage non-hazardous solid waste and recyclables for retail, commercial and
industrial customers.  As such, the multi-billion dollar solid waste collection
and disposal business drives the 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; this fact can only enhance our business.



In addition to increasing landfill costs, regulatory measures and more stringent
control of material bound for disposal ("flow control") 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



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. We believe that with the proprietary database of regional
and national pricing, we will maintain our edge on a national basis.



There has been increased competition from national hauling and recycling
companies.  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 interest in higher
hauling and disposal rates, the national hauling companies do not have
operations in every community.  Additionally, we have encountered evidence



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of some reluctance from independent hauling and recycling companies to work with
national hauling and recycling companies for locations not serviced by these
national companies.



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.



The metal recycling business is highly competitive and is subject to significant
changes in economic and market conditions.  Certain ISA 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.



An important difference between us and the majority of our competition is our
management process.  Our systematic approach attempts to provide consistent
results for the customer.  At the implementation stage, we actively bid out
every location that a new customer requests.  We repeat this bidding process any
time a customer receives notice of an undocumented price increase or at regular
intervals as indicated in the contract.  At subsequent stages, we will evaluate
a customer's solid waste and recycling program and provide alternatives for
improvement.



We have developed a network of maintenance, hauling, disposal, equipment and
recycling companies throughout the country and in Canada, and due to the volume
of business we have awarded to them, these companies will often offer us
discounted hauling, disposal and maintenance rates and increased recycling
prices.  However, no company or service provider in the hauling, disposal,
recycling, equipment and/or maintenance industries owns or controls us.  We deal
with those companies and service providers that can supply quality service and
products at a favorable price and understand that as long as we serve our
customers well, we and our service providers will have the opportunity to bid on
future accounts.



Few, if any, of our competitors have a national network of service providers
similar to the one we have developed over our years of operation.  Although the
major hauling and recycling companies have operating companies in most major and
intermediate-sized cities, they do not have nationwide geographic coverage. 
Therefore, for large commercial and industrial clients, they must obtain bids
from local hauling, disposal and recycling companies that may perceive them to
be future competitors.  We have positioned ourselves to negotiate with the
haulers, landfill operators and recyclers while servicing our customers on a
nationwide basis.



Employees



As of December 31, 2008, ISA had one hundred twenty six (126) full-time
employees as follows: recycling 62, management services 13, sales/leasing 5,
drivers 15, maintenance 16, and administration/information technology 15.  None
of our employees is 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 does not
subject us to potential environmental liability, we 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.



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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.



Subsequent Events



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 Branch Banking and Trust Company.



Under the agreement, we also have 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% each by Messrs. Jones and Valentine.  We
have 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. Jones, Valentine and Corona are our employees.



On February 11, 2009, we executed a
promissory note, loan agreement and related security documents with Branch
Banking and Trust Company in the amount of $12,000,000 for the purpose of
financing our acquisition of inventory and fixed assets from Venture Metals, and
real estate at 3409 Camp Ground Road, Louisville, Kentucky, from Luca
Investments, LLC, an affiliate of Venture Metals.  The maturity date of this
note is February 11, 2010.  Interest is payable monthly commencing March 11,
2009, and the note shall bear interest at the adjusted LIBOR rate of one month
LIBOR plus 2.25% per annum with a floor of 4%.  All ours assets (except rental
fleet equipment) secure this note.



On February 18, 2009, and effective
February 11, 2009, we entered into a lease agreement with Venture Metals,
leasing from Venture Metals all of the fixed assets of Venture Metals, located
at 3409 Camp Ground Road, Louisville, Kentucky.  We have agreed to pay rent in
the amount of $15,000 per month commencing March 1, 2009, with a pro rata amount
to be paid for the period from February 11, 2009 through February 28, 2009.



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.



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Risks Related
to Our Operations



Our business has increasing involvement in 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.



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 do not believe any competition offers the unique
mixture of the services and products we provide in the waste management area.
Many entities have substantially greater financial, technical, manufacturing,
marketing, distribution and other resources than we possess.  In addition, the
industry is constantly changing as a result of consolidation that may create
additional competitive pressures in our business environment.



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



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.



We believe that the long-term fundamentals supporting the prices for recycled
metals remain positive; however, given the current trends in the market for
ferrous and nonferrous metal, we believe that fiscal 2009 selling prices will be
lower than those seen in 2008.  Due to the high level of uncertainty regarding
the economic environment, our past trends of sales volumes may not be indicative
of expected volumes in fiscal 2009.



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 fleet of cranes and heavy
equipment. We are also susceptible to increases in indirect fuel costs which
include fuel surcharges from vendors.  During 2006, 2007 and 2008, we
experienced increases in the cost of fuel and other petroleum-based products,
although these prices decreased somewhat in later 2008.  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. Due to political
instability in oil-producing countries, fuel prices may continue to increase in
2009. 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.



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 not entered into employment agreements with any of our
senior management personnel with the exception of our president and chief
operating officer, Brian Donaghy, and our vice president of ISA Recycling, James
Wiseman III. 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.



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.



Related Parties Agreements -- K&R



On February 16, 1998 our Board of Directors ratified and formalized an existing
relationship in connection with (i) our leasing of facilities from K&R, LLC and
(ii) the provision of consulting services from K&R to us.  K&R is our affiliate
because our Chief Executive Officer is our principal shareholder and he owns
100% of K&R.



Lease Agreement.  This K&R lease, effective as of January 1, 1998,
covers approximately 20.5 acres of land and the improvements thereon, which are
located at 7100 Grade Lane in Louisville, Kentucky.  The principal improvements
consist of the following:



--       an approximately 22,750 square
foot building used as the corporate and CWS offices;

--       an approximately 8,286 square
foot building used for sales/leasing and information technology offices;

--       an approximately 13,995 square
foot building used as the paper recycling plant;

--       an approximately 12,000 square
foot building used for the metals recycling plant;



---





--       an approximately 51,760 square
foot building used as the recycling offices and warehouse space;

--       and the remaining 15,575 square
feet of space contained in five (5) buildings ranging in size from approximately
256 to 8,000 square feet.



The initial term of the K&R lease was for ten years with two five-year option
periods available thereafter.  In 2007, we extended this lease agreement for
five years per the terms of the lease.  The base rent for the first five years
was $450,000 per annum.  The rent for the second five years, beginning January
1, 2003, became $505,272 per annum, payable at the beginning of each month in an
amount equal to $42,106.  The rent for the third five years, 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 2004, we paid for repairs totaling $302,160 that we made to the buildings and
property that we lease from K&R, located at 7100 Grade Lane, Louisville,
Kentucky.  K&R executed an unsecured promissory note, dated March 25, 2005 but
effective December 31, 2004, to us for the principal sum of $302,160.  K&R makes
payments on the promissory note of principal and interest in ninety-six (96)
monthly installments of $3,897.66. The rate of interest is five and one-half
percent (5.5%) per annum.  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%) per annum and we have the right to exercise our remedies
to collect full payment of the note.



In an addendum to the K&R lease as of January 1, 2005, the rent was increased
$4,000 as a result of the improvements made to the property in 2004.  For years
2008 and 2007, 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 $3,897.66 for the promissory
note were offset.



K&R Consulting Agreement.The K&R consulting agreement remains in
effect until December 31, 2009, 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 renewed this
consulting agreement for one year.  K&R shall provide strategic planning for
mergers and acquisitions.  We pay to K&R $240,000 in equal monthly installments
of $20,000 in connection with the K&R consulting activities.



The K&R consulting agreement terminates upon a non-defaulting party providing
written notice to the other party of its intent to terminate.  The recipient of
the notice has 10 days to cure monetary defaults and 30 days to cure
non-monetary defaults.  Upon termination, K&R agrees not to engage, directly or
indirectly, in the business conducted by, or hire our employees for a period of
five years and within 100 miles of any of our operations.



We compensate our principal shareholder and Chief Executive Officer through
consulting fees paid pursuant to the K&R consulting agreement.



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.



Lease Agreement - Louisiana



On February 6, 2007, we leased 7.7 acres of real property, including a 38,000
square foot warehouse and a 400 square foot office, in Pineville, Louisiana for
$5,250 per month for twenty-four months beginning March 1, 2007 and ending
February 28, 2009, with an option to purchase the property for a purchase price
of $575,000.  On January 18, 2008, we sold our position in this property,
including the lease and the option, for $25,000.



---





Property Purchase - New Albany



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.



Property Lease -- 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.



Item 3.        Legal Proceedings.



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.  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 our financial
statements for the year ended December 31, 2008, and we paid the settlement
amount of $990,000 in February 2009.  On February 2, 2009, the parties to the
lawsuit entered into a settlement agreement that resulted in the dismissal of
the case with prejudice on February 17, 2009 and provided for, among other
items, the payment of the jury award on February 9, 2009, by the defendants to
the plaintiffs.  In addition, AAR agreed to vacate by March 31, 2009 the
premises at Grade Lane, Louisville, Kentucky, that AAR subleased from us.  AAR
also agreed to be subject to a non-competition and non-solicitation term
beginning February 2, 2009, for one year, wherein AAR has agreed not to engage
in competition with, or solicit business or employees from, us during that
period and within a distance of 2.5 miles of our Grade Lane facilities.



After AAR leaves the Grade Lane facilities, we intend to relocate the stainless
steel inventory operations of Venture Metals from the Camp Ground Road location
to the vacated premises on Grade Lane.  We then intend to renovate the Camp
Ground Road facilities to become a full-service yard for the purpose of
providing ferrous, non-ferrous and stainless material for the Grade Lane
operations.



On January 4, 2007, Lennox Industries, Inc., a commercial heating and
air-conditioning manufacturer, filed suit against us in the Arkansas County,
Arkansas Circuit Court in the case styled Lennox Industries, Inc. v.
Industrial Services of America, Inc., Case No. CV-2007-004.  Because of
settlement negotiations, Lennox did not serve us until May 23, 2007.  Lennox
alleges that we breached a 2001 contract with Lennox where we agreed to act as
agent for Lennox, by our failure to properly evaluate, categorize, classify and
value the production scrap and waste of Lennox, thereby brokering such products
at prices below market value.  Lennox also alleges negligence and breach of
fiduciary duty related to the same alleged failure.  Lennox is taking the
position that ISA had a duty to obtain a price that was consistent with the
materials being sold on their behalf that it failed to show a proper duty of
care in its dealings with Lennox.   On July 9, 2008, Lennox amended its
Complaint to add a cause of action based on fraud and misrepresentation (civil
fraud).  The Lennox complaint does not state any specific monetary damages.  We
have filed an answer denying all claims.  The litigation is in its discovery
phase with a trial date currently set for July 2009.   We currently believe that
the claims have no 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.        Submission of Matters to a Vote of Security Holders.



None.



---





Item
			4a.        ISA Executive Officers.Name
			Served as an
			ExecutiveOfficer From
			Age
			Position with the 
			Registrant and OtherPrincipal OccupationsHarry Kletter
			1983
			82
			ISA Chairman of the Board and Chief Executive Officer from May 2,
			2000 to 2007.  ISA Chairman of the Board and Chief Visionary Officer
			from February 3, 2000 to May 2, 2000.  Mr. Kletter served as
			Chairman of the Board and Chief Executive Officer from July 31, 1992
			to February 3, 2000, President of ISA from July 31, 1992 to December
			1997, from January 1990 to July 1991, and from October 1983 to
			January 1988.  Mr. Kletter is also Chairman and sole shareholder of
			K&R, LLC.Brian Donaghy
			August 2007
			33
			President and
			Chief Operating Officer since August 2007.  Mr. Donaghy served as
			ISA's acting COO from January 1, 2007 through August 2007.  Prior to
			his appointment to that position, Mr. Donaghy was a consultant to
			ISA Recycling.  From 2001 to 2007, he owned and operated Industrial
			Logistic Services, LLC, a scrap metal and waste transportation
			company located at ISA's Louisville headquarters, the assets of
			which he has sold to ISA in 2007.Alan L.
			Schroering
			2000
			44
			ISA Chief
			Financial Officer since May, 2001.  Mr. Schroering served as an ISA
			board member from June 2000 to May 2001. Mr. Schroering has served
			as Treasurer from October 2001 to present.  Mr. Schroering served in
			several accounting positions with National Processing Company from
			April 1998 to May 2000.  Mr. Schroering served previously in several
			accounting positions with ISA from November 1984 to March 1998.James K. Wiseman,
			III
			August 2007
			55
			Vice President of
			ISA Recycling since August 2007.  Midwest Metals, Inc. in
			Louisville, Kentucky employed Mr. Wiseman from May 1997 to March
			2007 as general manager of the physical scrap operation and trader
			of non- ferrous metals.




None of the
above officers is related to any other.  With respect to certain arrangements
with certain officers of ISA relating to executive compensation, see section
entitled "Executive Compensation - Certain Transactions" in ISA's Proxy
Statement for the 2009 Annual Meeting of Shareholders as incorporated herein by
reference at Item 11.



---





PART II



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



Effective
August 29, 1996, the $.01 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."  Prior to August 29, 1996, our common stock traded on the Over the
Counter Bulletin Board operated by the National Association of Securities
Dealers, Inc.   High and low sales price of the common stock price is summarized
as follows:



Quarter Ended
			
			2008
			
			2007
			
			2006High
			Low
			
			High
			Low
			
			High
			LowMarch 31
			
			$ 11.27
			$ 6.00
			
			$ 7.22
			$ 5.37
			
			$ 5.20
			$3.22June 30
			
			$17.74
			$ 8.82
			
			$17.19
			$ 6.84
			
			$ 8.00
			$4.82September 30
			
			$19.50
			$ 8.30
			
			$14.51
			$ 8.76
			
			$ 6.31
			$5.58December 31
			
			$10.38
			$ 4.37
			
			$13.38
			$ 7.36
			
			$ 6.72
			$5.26




There were approximately 356
shareholders of record as of December 31, 2008.



Until August
8, 2000, we had always had a policy intending that we would retain earnings to
help finance our expansion programs.  On August 8, 2000, our Board of Directors
approved a change in the dividend policy whereby our Board of Directors could
declare dividends.  The Board of Directors, at its regular annual meeting June
26, 2008, declared a cash dividend payment of ten cents ($0.10) per common share
of stock for shareholders of record as of July 31, 2008, with a payment date of
August 21, 2008. The Board of Directors, at our May 15, 2007 annual meeting,
declared a cash dividend payment of ten cents ($0.10) per common share for
shareholders of record as of June 15, 2007 with a payment date of July 20,
2007.



Under our loan
agreement with Branch Banking and Trust Company, our Board of Directors does not
have the discretionary power to declare dividends or pay any dividends without
the prior written consent of BB&T.



On November 15,
2005, our Board of Directors authorized a new program to repurchase up to
200,000 shares of our common stock at current market prices.  In 2008 we
repurchased 55,607 shares, in 2007 we repurchased 40,000 shares, in 2006 we
repurchased 5,509 shares and in 2005 we repurchased 10,000 shares.  We
repurchased 673,400 shares of our common stock in a prior stock repurchase
program that began in August 2000.



Issuer Purchases of Equity Securities

Period
			Total Number
			Average Price
			Total Number of Shares
			Maximum Number of Shares thatof Shares
			Paid per Share
			Purchased as part of Publicly
			may yet be Purchased Under thePurchased
			
			Announced Plans or Programs
			Plans or ProgramsNov-05
			10,000
			$ 2.9762
			10,000
			190,000Dec-05
			-Jan-06
			5,509
			$ 2.9658
			15,509
			184,491Aug-07
			20,000
			$ 9.9229
			35,509
			164,491Dec-07
			20,000
			$ 7.7257
			55,509
			144,491Mar-08
			19,753
			$ 8.2823
			75,262
			124,738May-08
			9,854
			$ 11.4170
			85,116
			114,884Sept-08
			26,000
			$ 9.7902
			111,116
			88,884




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Item 6.        Selected
Financial Data.



Selected Financial Data



2008
			
			2007
			
			2006
			
			2005
			
			2004(Amounts in Thousands, Except Per Share Data)Year ended December 31:Total revenue
			$  100,042
			
			$    76,956
			
			$    62,082
			
			$ 117,382
			
			$ 139,588Net income (loss)
			1,528
			
			2,564
			
			2,188
			
			1,102
			
			1,497Earnings (loss)per common share:Basic
			$        0.43
			
			$        0.71
			
			$        0.61
			
			$       0.31
			
			$      0.43Diluted
			$        0.43
			
			$        0.71
			
			$        0.61
			
			$       0.31
			
			$      0.42Cash dividends declaredper common share
			$        0.10
			
			$        0.10
			
			$             -
			
			$           -
			
			$     0.10At year end:Total assets
			$    28,791
			
			$    26,285
			
			$    19,332
			
			$   17,884
			
			$  21,079Long-term debt and capital leaseobligations, net of current maturities
			$      8,531
			
			$      8,495
			
			$       2,858
			
			$       153
			
			$    1,272




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
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,
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.



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 2,100 customer locations
throughout the United States and we utilize an active database of over 6,500
vendors to provide timely, thorough and cost-effective service to our
customers.





---





Our goal is to remain dedicated to the recycling, management services, and
equipment industry 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 closed the
Lexington, Kentucky location in the first quarter of 2007 and our location in
Pineville, Louisiana in January 2008.  We do not have operating locations
outside the United States.



Liquidity and Capital Resources



As of December
31, 2008, we held cash and cash equivalents of $1,103,842.



We currently
maintain a $10.0 million senior revolving credit facility with the Branch
Banking and Trust Company.  This revolving credit facility has a three year term
expiring January 1, 2012,   provides for advances of up to eighty percent (80%)
of our eligible accounts receivable and up to forty percent (40%) of eligible
inventory, and up to one hundred percent (100%) of our net book value of
eligible equipment less an outstanding indebtedness on the equipment.  The
revolving credit facility bears interest at the one month LIBOR rate, as
published in the Wall Street Journal, plus two and twenty-five one-hundredths
percent (2.25%) per annum, and is secured by all our assets (except rental fleet
equipment).  The revolving credit facility contains certain restrictive and
financial covenants.  At December 31, 2008, we were in compliance with all
restrictive covenants and the entire amount of our credit facility less our
outstanding borrowings was available for borrowings.



On February 11, 2009, we
executed a promissory note, loan agreement and related security documents with
Branch Banking and Trust Company in the amount of $12,000,000 for the purpose of
financing our acquisition of inventory and fixed assets from Venture Metals, and
real estate at 3409 Camp Ground Road, Louisville, Kentucky, from Luca
Investments, LLC, an affiliate of Venture Metals.  The maturity date of this
note is February 11, 2010.  Interest is payable monthly commencing March 11,
2009, and the note shall bear interest at the adjusted LIBOR rate of one month
LIBOR plus 2.25% per annum with a floor of 4%.  As of February 11, 2009, the
applicable interest rate was 4% since the calculated rate was 2.67%.  All our
assets (except rental fleet equipment) secure this note.  As a result of this
note and related loan documents, we and BB&T undertook amendments to existing
security agreements related to a $10,000,000 borrowing line from BB&T, dated
December 22, 2006, a BB&T Bankcard Corporation Commercial Card Application and
BB&T Bankcard Corporation Commercial Card Plan Agreement, executed December 9,
2003 and December 8, 2003, and a $6,000,000 equipment loan to purchase our
shredder system and complimentary facility improvements, dated May 7, 2008, so
as to provide that the security for each of the above loans also secures the
$12,000,000 loan of February 11, 2009.



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%) 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, 2008 of $774,161.



On May 14, 2008, we executed
a new loan agreement with Branch Banking and Trust Company in the amount of $3.0
million secured by our rental fleet equipment.  This note replaces the $2.0
million rental fleet loan with Fifth Third Bank.  Until October 15, 2008,
indebtedness under this loan agreement accrued interest at the one month Libor
rate, as published in the Wall Street Journal, plus 1.625% per annum. 
Fifty-nine (59) monthly principal and interest payments of $30,966.76 commenced
on June 7, 2008 with one final payment of all remaining principal and accrued
interest due on May 7, 2013.  Effective October 15, 2008, we converted this
revolving credit facility with a variable interest rate into a fixed interest
rate of 5.65% by executing a floating to fixed interest rate swap with BB&T as
the counterparty to the ISDA Master Agreement, Schedule and confirmation.  The
maturity date under this revised agreement is May 2013.  The repayment terms are
principal paid in twelve (12) monthly payments of $19,673.54 plus interest
commencing on November 7, 2008 and continuing through October 7, 2009, principal
paid in 12 monthly payments of $20,835.07 plus interest commencing on November
7, 2009 and continuing through October 7, 2010, principal paid in 12 monthly
payments of $22,065.17 plus interest commencing on November 7, 2010 and
continuing through October 7, 2011, principal paid in 12 monthly payments of
$23,367.89 plus interest commencing on November 7, 2011 and continuing through
October 7, 2012, principal paid in six (6) monthly payments of $24,747.53 plus
interest commencing on November 7, 2012 and continuing through April 7, 2013,
with one final payment of all remaining principal and accrued interest due at
maturity on May 7, 2013.  The principal and interest payments of this facility
are calculated on the basis of a ten (10) year amortization, resulting in a
principal balance of approximately $1.7 million due at maturity.  The terms of
the loan agreement place certain restrictive covenants



---





on us, including maintenance
of a specified tangible net worth, debt to net worth and EBITDA ratio. 
Consequently, these covenants restrict our ability to incur as much additional
debt as we may desire for future growth.  At December 31, 2008, we were in
compliance with all restrictive covenants.



On May 14, 2008, we executed
a new loan agreement with Branch Banking and Trust Company in the amount of $6.0
million to finance the purchase of our shredder system and complementary
facility improvements.  The security for this facility is the shredder and
assets being purchased.  Our Board approved the acquisition and installation of
the shredder system and complementary facility improvements on June 21, 2007. 
The note has a term beginning May 2008 and originally expiring November 2013. 
Until October 15, 2008, the facility bore interest at the one month Libor rate,
as published in the Wall Street Journal, plus 1.625% per annum.  The facility
originally provided for interest only monthly payments which commenced June 7,
2008 and continued through November 7, 2008.  Effective October 15, 2008, we
converted this revolving credit facility into a fixed interest rate of 5.89% by
executing a floating to fixed interest rate swap with BB&T as the counterparty
to the ISDA Master Agreement, Schedule and confirmation.  The maturity date
under this revised agreement is April 2014.  The repayment terms are interest
only paid in 6 monthly payments starting on November 7, 2008 and continuing
through April 7, 2009, principal paid in twelve (12) monthly payments of
$37,636.11 plus interest commencing on May 7, 2009 and continuing through April
7, 2010, principal paid in 12 monthly payments of $39,957.42 plus interest
commencing on May 7, 2010 and continuing through April 7, 2011, principal paid
in 12 monthly payments of $42,421.91 plus interest commencing on May 7, 2011 and
continuing through April 7, 2012, principal paid in 12 monthly payments of
$45,038.40 plus interest commencing on May 7, 2012 and continuing through April
7, 2013, principal paid in eleven (11) monthly payments of $47,816.27 plus
interest commencing on May 7, 2013 and continuing through March 7, 2014, with
one final payment of all remaining principal and accrued interest due at
maturity on April 7, 2014.  The principal and interest payments of the facility
are calculated on the basis of a ten (10) year amortization, resulting in a
principal balance of approximately $3.5 million being due on or before April 7,
2014, at which time we anticipate that we will refinance.  The terms of the loan
agreement place certain restrictive covenants on us, including maintenance of a
specified tangible net worth, debt to net worth and EBITDA ratio.  Consequently,
these covenants restrict our ability to incur as much additional debt as we may
desire for future growth.  At December 31, 2008, we were in compliance with all
restrictive covenants.



During 2008, we paid
$3,571,740 for land, improvements, property and equipment.  We paid $1,190,000
for the land and building at 6709 Grade Lane.  We paid $178,022 for other
buildings and improvements.  In the recycling segment we paid $1,104,150 for
cranes, a forklift, balers, shear rebuild, scales, trailers, grapple and other
operating equipment.  In the equipment sales, leasing and service segment, we
purchased $488,993 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 $129,682 of office equipment and
$480,893 in vehicles.



In January,
2009, we expanded into the stainless steel and high-temperature alloys recycling
business by purchasing inventories from Ventures Metals, LLC, agreeing to lease
its processing equipment and facilities on Camp Ground Road in Louisville,
Kentucky and in Mobile, Alabama, and hiring key executives to head up a new ISA
Alloys division.



On February
18, 2009, and effective February 11, 2009, we entered into a lease agreement
with Venture Metals, leasing from Venture Metals all of the fixed assets of
Venture Metals, located at 3409 Camp Ground Road, Louisville, Kentucky.  Refer
to Subsequent Events, page 8, for more information.



In March,
2009, we transformed the Camp Ground Road location into a full-service recycling
material receiving facility.



We implemented
the use of a purchasing card with a credit limit of $6.0 million in the second
quarter of 2004.  We have included the balance due on the purchasing card as
part of accounts payable.  The outstanding balance on the purchasing card at
December 31, 2008 was $736,157 with a due date of January 25, 2009, which we
paid in full before the due date.  The card accrues interest at prime plus 5.9%
after the first twenty-five days of the purchase; however, our intention is to
pay off the full balance every month so as to not incur finance charges.  To
date we have not incurred any interest charges on this purchasing card.  The
card requires monthly minimum payments on any balance outstanding at month end. 
We receive rebates on an annual basis for all purchases made with the card.



We expect that
existing cash flow from operations and available credit under our existing
credit facilities, including the purchasing card, will be sufficient to meet our
cash needs in 2009.



---





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.



Revenue recognition



We recognize
revenues from processed ferrous and non-ferrous scrap metal sales when title
passes to the customer.  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 $490,000
at December 31, 2008 and $100,000 at December 31, 2007.  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 ferrous and non-ferrous scrap metals and we value at the
lower of average purchased cost or market. 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.



We believe that
the long-term fundamentals supporting the prices for recycled metals remain
positive; however, given the current trends in the market for ferrous and
nonferrous metal, we believe that fiscal 2009 selling prices will be lower than
those seen in 2008.  Due to the high level of uncertainty regarding the economic
environment, our past trends of sales volumes may not be indicative of expected
volumes in fiscal 2009.



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.  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, 2008, we
determined no impairment existed.



We review
goodwill at least annually for impairment based on the fair value method
prescribed in Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill."  At December 31, 2008, we determined, based on current industry and
other market information, that no impairment existed.



Derivative Instruments



Beginning in
October, 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 Statement of Financial Accounting
Standard ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities," as amended.



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
carryforwards. 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,
			
			2008
			2007
			2006Consolidated
			Statements of Income Data:Total
			revenue .......................................................
			
			100.0%
			100.0%
			100.0%Total cost of
			goods sold........................................
			
			86.3%
			84.5%
			85.4%Selling, general and administrativeexpenses
			............................................................
			
			10.2%
			10.1%
			9.0%Income before
			other income (expense).............
			
			3.5%
			5.4%
			5.6%




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 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, 2008 and 2007.



12/31/2008
			
			12/31/2007Net unrealized
			losses on derivative instruments, net of tax
			$  475,342
			
			$                    -Total accumulated
			other comprehensive income (loss)
			$  475,342
			
			$                    -




---





Year Ended December 31, 2008 Compared to Year
Ended December 31, 2007



Total
revenue increased $23,086,950 or 30.0% to $100,042,491 in 2008 compared to
$76,955,541 in 2007.  Recycling revenue increased $21,942,491 or 38.1% to
$79,545,562 in 2008 compared to $57,603,071 in 2007.This change is due
to an increase of 2% in the volume of shipments and an increase of 32% in
average price per ton over the course of 2008.  However, in the fourth quarter
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.  In addition,
continued weak demand and the impact of declines in anticipated future selling
prices which outpaced the decline in inventory costs, results in ISA recording a
non-cash net realizable value ("NRV") inventory write-down of $1.2 million. Management services revenue increased $948,532 or 5.5% to
$18,182,726 in 2008 compared to $17,234,194 in 2007.  This change is primarily
due to new customers in the first three quarters of 2008, slightly offset by the
loss of two large customers in late 2008.  Equipment, service and leasing
revenue increased $195,927 or 9.2% to $2,314,203 in 2008 compared to $2,118,276
in 2007.  This increase is primarily due to growth in equipment rental revenue
due to new customers.



Total cost
of goods sold increased $21,355,242 or 32.8% to $86,370,152 in 2008 compared to
$65,014,911 in 2007.  Recycling cost of goods sold increased $18,620,700 or
36.9% to $69,027,772 in 2008 compared to $50,407,072 in 2007 due to an increase
in the volume of shipments as well as an increase in the volume of purchases of
8% and an increase in average cost per ton of 10%.  Management services cost of
goods sold increased $2,126,913 or 14.8% to $16,502,452 in 2008 compared to
$14,375,539 in 2007.  This change is primarily due to new customers in the first
three quarters of 2008, slightly offset by the loss of two large customers in
late 2008.  We also reduced CWS cost of goods sold by $858,249 in 2007 due to a
change in management's estimate related to the liability associated with this
operation.  Equipment, service and leasing cost of goods sold increased $607,628
to $839,928 in 2008 compared to $232,300 in 2007.  This increase is primarily
due to the increases in equipment costs, such as containers and compactors,
purchased for resale and reclassification of cost of sales expenses.



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 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.



Selling,
general and administrative expenses increased $2,448,990 or 31.5% to $10,215,904
in 2008 compared to $7,766,915 in 2007.  The increase in SG&A is primarily due
to an increase of $1,702,435 in costs associated with the ILS operation,
including fuel, truck labor and overtime, depreciation, repairs and maintenance
on vehicles and equipment, license and fees and other labor, and an increase of
$394,557 in bad debt expense.   As a percentage of total revenue, selling,
general and administrative expenses were 10.2% in 2008 compared to 10.1% in
2007.



Interest
expense increased $81,755 or 28.1% to $372,444 in 2008 compared to $290,689 in
2007 due to an increase in long term debt in 2008 compared to 2007.



Other income was $336,802 in
2008 compared to other income of $22,741 in 2007, an increase of $314,061.



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.



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



Fiscal Year Ended December 31Description
			Other Income (Expense)
			2008
			
			2007Change in accrual for note payable
			156,400Insurance claim
			117,306Change in accrual for accounts payable
			31,441Flexible spending forfeitures
			13,741Reversal of tax accrual for rental
			containers
			
			
			$
			20,670Other
			17,914
			
			2,071Total other income, net
			$ 
			336,802
			
			$
			22,741




The income
tax provision is 40.1% for the year ended December 31, 2008 compared to 36.2%
for the year ended December 31, 2007.  The percentage increase is due primarily
to the impact of a tax credit in 2007 of $99,358 which lowered the 2007
provision by 2.5%.



Financial Condition at December 31, 2008 compared to
December 31, 2007



Cash and
cash equivalents decreased $397,843 to $1,103,842 as of December 31, 2008
compared to $1,501,685 at  December 31, 2007.



Net cash
from operating activities increased $7,140,054 to $7,776,353 as of December 31,
2008 compared to $636,299 as of December 31, 2007.  This increase was primarily
due to decreases in accounts receivable and inventory of $2,953,367 and
$255,933, respectively, and the increase in current liabilities such as income
tax payable of $566,025 and the accrual for legal settlements of $1,037,165.



We used net
cash from investing activities of $7,783,824 for the year ending December 31,
2008 compared to $4,251,092 for the same period in 2007.  The difference of
$3,532,732 was primarily due to an increase of $1,401,911 in purchases of
property and equipment and $4,374,826 spent on the shredder system in 2008
compared to $2,173,076 spent in 2007.



Net cash
from financing activities decreased $4,175,043 to ($390,372) for the year ending
December 31, 2008 compared to $3,784,671 for the same period in 2007.  Proceeds
from long term debt totaled $8,773,555 in 2008 and $7,850,000 in 2007, and
payments on long-term debt were $8,138,375 in 2008 and $3,010,306 in 2007.



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%) 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, 2008 of $774,161.



On May 14, 2008, we executed
a new loan agreement with Branch Banking and Trust Company in the amount of $3.0
million secured by our rental fleet equipment.  This note replaces the $2.0
million rental fleet loan with Fifth Third Bank.  Until October 15, 2008,
indebtedness under this loan agreement accrued interest at the one month Libor
rate, as published in the Wall Street Journal, plus 1.625% per annum. 
Fifty-nine (59) monthly principal and interest payments of $30,966.76 commenced
on June 7, 2008 with one final payment of all remaining principal and accrued
interest due on May 7, 2013.  Effective October 15, 2008, we converted this
revolving credit facility with a variable interest rate into a fixed interest
rate of 5.65% by executing a floating to fixed interest rate swap with BB&T as
the counterparty to the ISDA Master Agreement, Schedule and confirmation.  The
maturity date under this revised agreement is May 2013.  The repayment terms are
principal paid in twelve (12) monthly payments of $19,673.54 plus interest
commencing on November 7, 2008 and continuing through October 7, 2009, principal
paid in 12 monthly payments of $20,835.07 plus interest commencing on November
7, 2009 and continuing through October 7, 2010, principal paid in 12 monthly
payments of $22,065.17 plus interest commencing on November 7, 2010 and
continuing through October 7, 2011, principal paid in 12 monthly payments of
$23,367.89 plus interest commencing on November 7, 2011 and continuing through
October 7, 2012, principal paid in six (6) monthly payments of $24,747.53 plus
interest commencing on November 7, 2012 and continuing through April 7, 2013,
with one final payment of all remaining principal and accrued interest due at
maturity on May 7, 2013.  The principal and interest payments of this facility
are calculated on the basis of a ten (10) year amortization, resulting in a
principal balance of approximately $1.7 million due at maturity.  The terms of
the loan agreement place certain restrictive covenants on us, including
maintenance of a specified tangible net worth, debt to net worth and EBITDA
ratio.  Consequently, these covenants restrict our ability to incur as much
additional debt as we may desire for future growth.  At December 31, 2008, we
were in compliance with all restrictive covenants.



On May 14, 2008, we executed
a new loan agreement with Branch Banking and Trust Company in the amount of $6.0
million to finance the purchase of our shredder system and complementary
facility improvements.  The security for this facility is the shredder and
assets being purchased.  Our Board approved the acquisition and installation of
the shredder system and complementary facility improvements on June 21, 2007. 
The note has a term beginning May 2008 and



---





originally expiring November
2013.  Until October 15, 2008, the facility bore interest at the one month Libor
rate, as published in the Wall Street Journal, plus 1.625% per annum.  The
facility originally provided for interest only monthly payments which commenced
June 7, 2008 and continued through November 7, 2008.  Effective October 15,
2008, we converted this revolving credit facility into a fixed interest rate of
5.89% by executing a floating to fixed interest rate swap with BB&T as the
counterparty to the ISDA Master Agreement, Schedule and confirmation.  The
maturity date under this revised agreement is April 2014.  The repayment terms
are interest only paid in 6 monthly payments starting on November 7, 2008 and
continuing through April 7, 2009, principal paid in twelve (12) monthly payments
of $37,636.11 plus interest commencing on May 7, 2009 and continuing through
April 7, 2010, principal paid in 12 monthly payments of $39,957.42 plus interest
commencing on May 7, 2010 and continuing through April 7, 2011, principal paid
in 12 monthly payments of $42,421.91 plus interest commencing on May 7, 2011 and
continuing through April 7, 2012, principal paid in 12 monthly payments of
$45,038.40 plus interest commencing on May 7, 2012 and continuing through April
7, 2013, principal paid in eleven (11) monthly payments of $47,816.27 plus
interest commencing on May 7, 2013 and continuing through March 7, 2014, with
one final payment of all remaining principal and accrued interest due at
maturity on April 7, 2014.  The principal and interest payments of the facility
are calculated on the basis of a ten (10) year amortization, resulting in a
principal balance of approximately $3.5 million being due on or before April 7,
2014, at which time we anticipate that we will refinance.  The terms of the loan
agreement place certain restrictive covenants on us, including maintenance of a
specified tangible net worth, debt to net worth and EBITDA ratio.  Consequently,
these covenants restrict our ability to incur as much additional debt as we may
desire for future growth.  At December 31, 2008, we were in compliance with all
restrictive covenants.



We implemented
the use of a purchasing card with a credit limit of $6.0 million in the second
quarter of 2004.  We include the balance due on the purchasing card as part of
accounts payable.  The outstanding balance on the purchasing card at December
31, 2008 was $736,157.



We believe our
principal sources of liquidity from available funds on hand, cash generated from
operations and the availability of borrowing under our senior revolving credit
facility and purchasing card will be sufficient to fund operations in fiscal
year 2009. Our primary sources of funds are our ability to generate cash from
operations and the availability of borrowing under our senior revolving credit
facility to meet our liquidity obligations, which could be affected by factors
such as a decline in demand for our products, loss of key contract customers
such as occurred with Circuit City and Mervyn's in 2008, our ability to generate
profits and other unforeseen circumstances. The availability of our revolving
credit facility is contingent on complying with certain debt covenants.  We do
not expect the covenants to limit or restrict our ability to borrow on the
facility in fiscal year 2009.



Trade
accounts receivable after allowances for doubtful accounts decreased $2,953,367
or 43.6% to $3,811,484 as of December 31, 2008.  The primary reason for the
decrease in trade accounts receivable after allowances for doubtful accounts is
primarily a fourth quarter decrease in both the volume of shipments and the
selling prices in the recycling segment.



Recycling
accounts receivable decreased $2,729,269 or 57% to $2,084,702 as of December 31,
2008 compared to $4,813,971 as of December 31, 2007.  This change is primarily
due to a decrease in the volume of shipments and selling prices in the recycling
segment in the fourth quarter.  On average, volume of ferrous shipments in gross
tons decreased 36% in the fourth quarter of 2008 compared to the same period in
2007.  On average, ferrous sales prices decreased 11% in the fourth quarter of
2008 compared to the same period in 2007.  On average, volume of nonferrous
shipments in pounds decreased 59% in the fourth quarter of 2008 compared to the
fourth quarter of 2007.  On average, nonferrous sales prices decreased 50% in
the fourth quarter of 2008 compared to the same period in 2007.



CWS accounts
receivable decreased $198,258 or 10% to $1,669,842 as of December 31,
2008 compared to $1,868,100 as of December 31, 2007.  Two of CWS's customers
declared bankruptcy in 2008, and we increased our allowance for doubtful
accounts by $390,000 as a result of these bankruptcies.



WESSCO
accounts receivable decreased $25,366 or 36% to $44,594 as of December 31, 2008
compared to $69,960 as of December 31, 2007.



Inventories
consist principally of ferrous and nonferrous scrap materials and waste
equipment machinery held for resale.  We value inventory at the lower of cost or
market.  Inventory decreased $255,933 or 5.5% to $4,371,348 as of December 31,
2008 compared to $4,627,281 as of December 31, 2007.  Inventories as of December
31, 2008 and December 31, 2007 consist of the following:



---





December 31,2008
			
			December 31,2007Ferrous
			$  2,162,149
			
			$  1,848,445Non-Ferrous
			2,033,154
			
			2,715,703Waste equipment
			machinery
			95,675
			
			36,498Other
			80,370
			
			26,635Total inventories
			$
			 4,371,348
			
			$
			 4,627,281




For the year
ended December 31, 2008, we shipped 81,050 gross tons of ferrous material. 
During the same period, we purchased 84,257 gross tons of ferrous material.  For
the year ended December 31, 2007, we shipped 81,947 gross tons of ferrous
material.  During the same period, we purchased 76,659 gross tons of ferrous
material.  As of December 31, 2008, ferrous inventory consisted of 11,374 gross
tons at a unit cost of $190.096 per gross ton.  As of December 31, 2007, ferrous
inventory consisted of 7,713 gross tons at a unit cost of $239.65 per gross
ton.  For the year ended December 31, 2008, the purchase price plus processing
costs of ferrous material averaged $190.10 per gross ton compared to $239.65 per
gross ton in 2007.



For the year
ended December 31, 2008, we shipped 34,342,392 pounds of nonferrous material.
During the same period, we purchased 35,601,248 pounds of nonferrous material. 
For the year ended December 31, 2007, we shipped 28,840,349 pounds of nonferrous
material. During the same period, we purchased 24,314,589 pounds of nonferrous
material.  As of December 31, 2008, nonferrous inventory consisted of 3,720,330
pounds with a unit cost of $0.5465 per pound.  As of December 31, 2007,
nonferrous inventory consisted of 1,992,954 pounds at a unit cost of $1.3626 per
pound.  For the year ended December 31, 2008, the purchase price plus processing
costs of non-ferrous material has averaged $0.546 per pound compared to $1.363
per pound in 2007.



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.



Year
			Inventory Type
			Gross Tons
			Unit Cost
			Amount2008
			Ferrous
			11,374
			$  190.096
			$ 2,162,1492007
			Ferrous
			7,713
			$
			239.653
			$1,848,445Year
			Inventory Type
			Pounds
			Unit Cost
			Amount2008
			Nonferrous
			3,720,330
			0.546%
			$ 2,033,1542007
			Nonferrous
			1,992,954
			%1.363
			$
			2,715,703




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



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




---





Inventory aging for the year
ended December 31, 2007 (Days Outstanding):



Description
			1-30
			
			31-60
			
			61-90
			
			Over
			90
			
			TotalEquipment & parts
			$     36,498
			
			$               -
			
			$            -
			
			$           -
			
			$     36,498Ferrous Materials
			1,163,306
			
			566,774
			
			78,183
			
			40,182
			
			1,848,445Non-ferrous materials
			1,885,783
			
			553,049
			
			129,552
			
			147,319
			
			2,715,703Other
			26,635
			
			-
			
			-
			
			-
			
			26,635$3,112,222
			
			$1,119,823
			
			$
			207,735
			
			$187,501
			
			$4,627,281






Accounts
payable trade decreased $963,736 or 20.7% to $3,701,895 as of December 31, 2008
compared to $4,665,631 as of December 31, 2007. 
Recycling accounts payable decreased $665,015 or 50% to $667,272 as of December
31, 2008 compared to $1,332,287 as of December 31, 2007.  This decrease is
primarily due to the decrease in volume of commodity purchases at respective
year-ends and decreased commodity purchase prices of ferrous and nonferrous
materials.  Our accounts payable payment policy in the recycling segment is
consistent between years.



CWS accounts
payable decreased $145,802 or 4.7% to $2,918,030 as of December 31, 2008
compared to $3,063,832 as of December 31, 2007.  This change is due to timing of
payments.



WESSCO
accounts payable increased $12,830 or 15.2% to $97,214 as of December 31, 2008
compared to $84,384 as of December 31, 2007.



Working capital
decreased $4,951,168 to $2,988,872 as of December 31, 2008 compared to
$7,940,040 as of December 31, 2007.  Net income of $1,527,598, depreciation of
$2,122,167 and the decrease in receivables of $2,953,367 were positive
contributors to working capital in 2008, offset by an increase in the liability
from interest rate swap agreements of $475,342.  During 2008, we used these
positive working capital contributors to purchase property and equipment of
$3,571,740.



Contractual Obligations



The following
table provides information with respect to our known contractual obligations for
the year ended December 31, 2008.



Payments due by periodObligation Description
			Total
			Less
			than 1 year
			1-3 years
			3-5 years
			More
			than 5 yearsLong-term debt obligations
			$9,367,877
			$857,863
			$2,138,067
			$3,782,940
			$
			2,589,007Capital lease obligations (1)
			101,569
			80,771
			20,798
			0
			0Operating lease obligations (2)
			2,596,561
			684,882
			1,275,679
			636,000
			0Total
			$12,066,007
			$1,623,516
			$3,434,544
			$4,418,940
			$2,589,007




(1)     We lease various pieces of equipment that qualify for capital
lease treatment.  These lease arrangements require monthly lease payments
expiring at various dates through June 2010.



(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 1. Business
-- Related Parties Agreements.



We also lease a management services operations facility and
various pieces of equipment in Dallas, Texas for which monthly payments of
$2,750 are due through September 2009.



---





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.



On February 6, 2007, we leased 7.7 acres of real property,
including a 38,000 square foot warehouse and a 400 square foot office, in
Pineville, Louisiana for $5,250 per month for twenty-four months beginning March
1, 2007 and ending February 28, 2009, with an option to purchase the property
for a purchase price of $575,000.  On January 18, 2008, we sold our position in
this property, including the lease and the option, for $25,000.





Year Ended December
31, 2007 Compared to Year Ended December 31, 2006



Total
revenue increased $14,873,493 or 24.0% to $76,955,541 in 2007 compared to
$62,082,048 in 2006.  Recycling revenue increased $12,636,048 or 28.1% to
$57,603,071 in 2007 compared to $44,967,023 in 2006.This change is due
to an increase of 8% in the volume of shipments and an increase of 18% in
average price per ton.  Management services revenue increased $1,846,953 or
12.0% to $17,234,194 in 2007 compared to $15,387,241 in 2006.  This change is
primarily due to new customers.  Equipment, service and leasing revenue
increased $390,492 or 22.60% to $2,118,276 in 2007 compared to $1,727,784 in
2006.  This increase is primarily due to growth in equipment rental revenue due
to new customers.



Total cost
of goods sold increased $12,018,470 or 22.6% to $65,014,911 in 2007 compared to
$52,996,441 in 2006.  Recycling cost of goods sold increased $10,958,115 or
27.8% to $50,407,072 in 2007 compared to $39,448,957 in 2006 due to an increase
in the volume of shipments as well as an increase in the volume of purchases of
4% and an increase in average cost per ton of 18.3%.  Management services cost
of goods sold increased $1,663,466 or 13.0% to $14,375,539 in 2007 compared to
$12,712,073 in 2006.  This change is primarily due to new customers.  We also
reduced CWS cost of goods sold by $858,249 in 2007 and $1,272,241 in 2006 due to
a change in management's estimate related to the liability associated with this
operation.  Equipment, service and leasing cost of goods sold decreased $603,111
or 72.2% to $232,300 in 2007 compared to $835,411 in 2006.  This decrease is
primarily due to the decreases in equipment costs, such as containers and
compactors, purchased for resale and a decrease in service and repair expense.



Selling,
general and administrative expenses increased $2,156,956 or 38.4% to $7,766,915
in 2007 compared to $5,609,959 in 2006.  The increase in SG&A is primarily due
to costs associated with the ILS asset purchase, including stock bonus and
increase in truck driver labor and overtime, an increase in fuel costs, and an
increase in legal costs due to the settlement of a lawsuit.   As a percentage of
total revenue, selling, general and administrative expenses were 10.1% in 2007
compared to 9.0% in 2006.



Interest
expense increased $77,967 or 36.7% to $290,689 in 2007 compared to $212,722 in
2006 due to an increase in long term debt in 2007 compared to 2006.  Other
income was $22,741 in 2007 compared to other income of $32,930 in 2006, a
decrease of $10,189.



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



Fiscal Year Ended December 31Description
			2007
			
			2006Reversal of tax accrual for rental
			containers
			$
			20,670Bankruptcy recoveries
			-
			
			22,787Interest on K&R note
			-
			
			6,845Other
			2,071
			
			3,298Total other income, net
			$
			22,741
			
			$  32,930




The income
tax provision is 36.2% for the year ended December 31, 2007 compared to 37.7%
for the year ended December 31, 2006.  The impact of the tax credit of $99,358
was to lower the provision by 2.5%.



Financial Condition at December 31, 2007 compared to December 31, 2006



Cash and
cash equivalents increased $169,878 to $1,501,685 as of December 31, 2007
compared to $1,331,807 as of December 31, 2006.



---





Net cash
from operating activities increased $1,853,222 to $636,299 as of December 31,
2007 compared to net cash used of ($1,216,923) as of December 31, 2006.  This
increase was primarily due to net income of $2,563,833 and noncash stock
transactions of $426,364 offset by increases in accounts receivable and
inventory of $1,738,410 and $1,199,055, respectively.



We used net
cash from investing activities of $4,251,092 for the year ending December 31,
2007 compared to $2,058,807 for the same period in 2006.  The difference of
$2,192,285 was primarily due to the $2,173,076 deposit for the shredder system.



Net cash
from financing activities increased $898,435 to $3,784,671 for the year ending
December 31, 2007 compared to $2,886,236 for the same period in 2006.  Proceeds
from long term debt totaled $7,850,000 in 2007 and $10,710,875 in 2006, and
payments on long-term debt were $3,010,306 in 2007 and $7,770,984 in 2006.



On December
22, 2006, we executed a new revolving credit facility with BB&T increasing the
borrowing line from $5.0 million to $10.0 million to provide us with working
capital to support the current needs of our business.  This revolving credit
facility has a three year term expiring December 22, 2009, and provides for
advances of up to eighty percent (80%) of ISA's eligible accounts receivable and
up to the  forty percent (40%) of eligible inventory, and up to one hundred
percent (100%) of ISA's net book value of eligible equipment less an outstanding
indebtedness on the equipment.  The revolving credit facility bears interest at
the one month Libor rate, as published in the Wall Street Journal, plus two and
twenty-five one-hundredths percent (2.25%) per annum, and is secured by all our
assets (except rental fleet equipment).  As of December 31, 2007 we had borrowed
$6,000,000 and as of December 31, 2006 we had borrowed $1,010,875 against the
credit facility.  The revolving credit facility contains certain restrictive and
financial covenants.  At December 31, 2007, we were in compliance with all
restrictive covenants.



We also have a
$2.0 million loan with Fifth Third Bank secured by our rental fleet equipment. 
Indebtedness under this loan agreement accrues interest at a fixed interest rate
of 6.83%.  The maturity date under this agreement is June 2011 with a ten-year
amortization schedule.   As of December 31, 2007 we had borrowed $1,779,585 and
as of December 31, 2006 we had borrowed $1,929,016 against this loan.  The terms
of the loan agreement place certain restrictive covenants on us, including
maintenance of a specified tangible net worth, debt to net worth and EBITDA
ratio.  Consequently, these covenants restrict our ability to incur as much
additional debt as we may desire for future growth.  At December 31, 2007, we
were in compliance with all restrictive covenants.



We implemented
the use of a purchasing card with a credit limit of $6.0 million in the second
quarter of 2004.  We include the balance due on the purchasing card as part of
accounts payable.  The outstanding balance on the purchasing card at December
31, 2007 was $885,537.



We believe our
principal sources of liquidity from available funds on hand, cash generated from
operations and the availability of borrowing under our senior revolving credit
facility and purchasing card will be sufficient to fund operations in fiscal
year 2008. Our primary sources of funds are our ability to generate cash from
operations and the availability of borrowing under our senior revolving credit
facility to meet our liquidity obligations, which could be affected by factors
such as a decline in demand for our products, loss of key contract customers
such as occurred with Home Depot in 2005, our ability to generate profits and
other unforeseen circumstances. The availability of our revolving credit
facility is contingent on complying with certain debt covenants.  We do not
expect the covenants to limit or restrict our ability to borrow on the facility
in fiscal year 2008.



Trade
accounts receivable after allowances for doubtful accounts increased $1,738,410
or 34% to $6,764,851 as of December 31, 2007.  The primary reason for the
increase in trade accounts receivable after allowances for doubtful accounts is
an increase in the volume of shipments and an increase in the selling prices in
the recycling segment.



Recycling
accounts receivable increased $910,290 or 23% to $4,813,971 as of December 31,
2007 compared to $3,903,681 as of December 31, 2006.  This change is primarily
due to an increase in the volume of shipments and an increase in the selling
prices in the recycling segment.  On average, volume of ferrous shipments in
gross tons increased 7% as of December 31, 2007 compared to December 31, 2006. 
On average, sales prices increased $12 per gross ton or 4% to $256 as of
December 31, 2007 compared to $244 as of December 31, 2006.  On average, volume
of nonferrous shipments in pounds increased 29% as of December 31, 2007 compared
to December 31, 2006.  On average, sales prices increased 9.7% as of December
31, 2007 compared to December 31, 2006.



CWS accounts
receivable increased $779,020 or 71% to $1,868,100 as of December 31, 2007
compared to $1,089,080 as of December 31, 2006.  This change is primarily due to
new customers.



WESSCO
accounts receivable increased $69,960 or 100% to $69,960 as of December 31, 2007
compared to $0 as of December 31, 2006.  This change is primarily due to
increased rental revenues from new customers.



---





Inventories
consist principally of ferrous and nonferrous scrap materials and waste
equipment machinery held for resale.  We value inventory at the lower of cost or
market.  Inventory increased $1,199,055 or 34% to $4,627,281 as of December 31,
2007 compared to $3,428,226 as of December 31, 2006.  Inventories as of December
31, 2007 and December 31, 2006 consist of the following:



December 31,2007
			
			December 31,2006Ferrous
			$  1,848,445
			
			$  1,667,937Non-Ferrous
			2,715,703
			
			1,678,655Waste equipment
			machinery
			36,498
			
			56,200Other
			26,635
			
			25,434Total inventories
			$
			 4,627,281
			
			$
			 3,428,226




For the year
ended December 31, 2007, we shipped 81,947 gross tons of ferrous material. 
During the same period, we purchased 76,659 gross tons of ferrous material.  For
the year ended December 31, 2006, we shipped 76,331 gross tons of ferrous
material.  During the same period, we purchased 72,475 gross tons of ferrous
material.  As of December 31, 2007, ferrous inventory consisted of 7,713 gross
tons at a unit cost of $239.65 per gross ton.  As of December 31, 2006, ferrous
inventory consisted of 9,400 gross tons at a unit cost of $177.44 per gross
ton.  For the year ended December 31, 2007, the purchase price plus processing
costs of ferrous material averaged $201.13 per gross ton compared to $157.25 per
gross ton in 2006.



For the year
ended December 31, 2007, we shipped 28,840,349 pounds of nonferrous material.
During the same period, we purchased 24,314,589 pounds of nonferrous material. 
For the year ended December 31, 2006, we shipped 22,258,977 pounds of nonferrous
material. During the same period, we purchased 20,362,645 pounds of nonferrous
material.  As of December 31, 2007, nonferrous inventory consisted of 1,992,954
pounds with a unit cost of $1.3626 per pound.  As of December 31, 2006,
nonferrous inventory consisted of 1,601,554 pounds at a unit cost of $0.960 per
pound.  For the year ended December 31, 2007, the purchase price plus processing
costs of non-ferrous material has averaged $1.363 per pound compared to $0.960
per pound in 2006.



Year
			Inventory Type
			Gross Tons
			Unit Cost
			Amount2007
			Ferrous
			7,713
			$
			239.65
			$1,848,4452006
			Ferrous
			9,400
			177.44
			1,667,937Year
			Inventory Type
			Pounds
			Unit Cost
			Amount2007
			Nonferrous
			1,992,954
			1.36
			$
			2,715,7032006
			Nonferrous
			1,748,600
			0.96
			1,678,655




Inventory Aging for the year ended December 31, 2007
(Days Outstanding)



Description
			1-30
			
			31-60
			
			61-90
			
			Over
			90
			
			TotalEquipment & parts
			$     36,498
			
			$               -
			
			$            -
			
			$           -
			
			$     36,498Ferrous Materials
			1,163,306
			
			566,774
			
			78,183
			
			40,182
			
			1,848,445Non-ferrous materials
			1,885,783
			
			553,049
			
			129,552
			
			147,319
			
			2,715,703Other
			26,635
			
			-
			
			-
			
			-
			
			26,635$3,112,222
			
			$1,119,823
			
			$
			207,735
			
			$187,501
			
			$4,627,281




---





Inventory aging for the year
ended December 31, 2006 (Days Outstanding):



Description
			1-30
			
			31-60
			
			61-90
			
			Over
			90
			
			TotalEquipment & parts
			$     33,720
			
			$  22,480
			
			$            -
			
			$           -
			
			$     56,200Ferrous Materials
			864,489
			
			448,842
			
			166,509
			
			188,097
			
			1,667,937Non-ferrous materials
			1,467,679
			
			41,840
			
			42,989
			
			126,147
			
			1,678,655Other
			25,434
			
			-
			
			-
			
			-
			
			25,434$2,391,322
			
			$513,162
			
			$
			209,498
			
			$314,244
			
			$3,428,226




Accounts
payable trade increased $120,574 or 2.6% to $4,665,631 as of December 31, 2007
compared to $4,545,057 as of December 31, 2006.  Recycling accounts payable
increased $33,750 or 2.5% to $1,332,287 as of December 31, 2007 compared to
$1,298,537 as of December 31, 2006.  This increase is primarily due to the
increase in volume of commodity purchases at respective year-ends and increased
commodity purchase prices of ferrous and nonferrous materials.  Our accounts
payable payment policy in the recycling segment is consistent between years.



CWS accounts
payable increased $94,580 or 3.1% to $3,063,832 as of December 31, 2007 compared
to $2,969,252 as of December 31, 2006.  This change is primarily due to new
customers.



WESSCO
accounts payable decreased $120,784 or 58.8% to $84,384 as of December 31, 2007
compared to $205,168 as of December 31, 2006.



Working capital
increased $4,415,942 to $7,940,040 as of December 31, 2007 compared to
$3,524,098 as of December 31, 2006.  Net income of $2,464,475, depreciation of
$1,954,023 and an increase in inventories of $1,199,055 were positive
contributors to working capital in 2007.  During 2007, we used these positive
working capital contributors to purchase property and equipment of $2,169,829.



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 focused
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



Effective
January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements, for financial
assets and liabilities.  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 SFAS No. 157, Fair Value Measurements, 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 and
foreign exchange 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, asset- and mortgage-backed
securities and certain derivative instruments 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 SFAS 157 to value the assets and liabilities for
cash and debt. All of our cash and debt are defined as Level 1.  In accordance
with SFAS 157, the following table represents our fair value hierarchy for
financial instruments at December 31, 2008:



Level 1
			
			Level 2
			
			TotalAssetsCash and cash equivalents
			
			$1,103,842
			
			-
			
			$1,103,842LiabilitiesLong term debt
			
			-
			
			$ (9,367,877)
			
			$(9,367,877)Derivative contract, net of tax
			
			
			
			(792,236)
			
			(792,236)






In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to report selected financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings at each subsequent
reporting date. SFAS 159 is effective for fiscal years beginning after November
15, 2007, the year beginning January 1, 2008 for us. While we continue to review
the provisions of SFAS 159, we have not yet identified any assets or liabilities
for which we currently believe we will elect the fair value reporting option.



In March 2008, the FASB issued
SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities"
("SFAS 161").  SFAS 161 amends and expands the disclosure requirements in SFAS
133, "Accounting for Derivative Instruments and Hedging Activities".  SFAS 161
is effective for fiscal years and interim periods beginning after November 15,
2008, the year beginning January 1, 2009 for ISA





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



We are exposed
to interest rate risk on our floating rate borrowings. We maintain a $10.0
million senior revolving credit facility with the Branch Banking and Trust
Company which had no outstanding borrowings as of December 31, 2008.  This
revolving credit facility bears interest at the one month LIBOR rate, as
published in the Wall Street Journal, plus two and twenty-five one-hundredths
percent (2.25%) per annum which was 4.0% as of December 31, 2008.   On February
11, 2009, we executed a promissory note with Branch Banking and Trust Company in
the amount of $12,000,000 for the purpose of financing our acquisition of
inventory and fixed assets from Venture Metals, and real estate at 3409 Camp
Ground Road, Louisville, Kentucky, from Luca Investments, LLC, an affiliate of
Venture Metals.  This note bears interest at the adjusted LIBOR rate of one
month LIBOR plus 2.25% per annum with a floor of 4%.  As of February 11, 2009,
the applicable interest rate was 4% since the calculated rate was 2.67%.  Based
on our average anticipated



---





borrowings
under our credit agreements in fiscal 2009, a hypothetical increase or decrease
in the LIBOR rate by 1% would increase or decrease interest expense on our
variable borrowings by 1% of the outstanding balance, with a corresponding
change in cash flows.



We 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(T)      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, 2008, ISA's disclosure controls and procedures were effective for the
purpose of ensuring that the information required to be disclosed in the reports
that ISA files under the Exchange Act with the Securities and Exchange
Commission  (1) is recorded, processed, summarized and reported within the time
periods specific in the SEC's rules and forms, and (2) is accumulated and
communicated to ISA's management, including our principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
the required disclosure.



(b)     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 report 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, 2008, and concluded that such internal
control over financial reporting was effective as of December 31, 2008.



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 temporary rules of the SEC that require only
management's report in this Annual Report on Form 10-K.



(c)     Changes
to internal control over financial reporting



There were no changes in ISA's
internal control over financial reporting during the three months ended December
31, 2008 that have materially affected, or are reasonably likely to affect ISA's
internal control over financial reporting.



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 2008 Annual Meeting of Shareholders of ISA which is to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after ISA's year end for the year covered by this report under
the Securities Exchange Act of 1934, as amended.  Such definitive proxy
statement relates to an annual meeting of shareholders and the portions
therefrom required to be set forth in this Form 10-K by Items 10, 11, 12, 13 and
14 are incorporated herein by reference pursuant to General Instruction G(3) to
Form 10-K.



---







PART IV



Item 15.        Exhibits and Consolidated Financial
Statement Schedules.



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



PageReport of
			Independent Registered Public Accounting Firms
			F-1Consolidated
			Balance Sheets as of December 31, 2008 and 2007
			F-3Consolidated
			Statements of Income for the yearsended December
			31, 2008, 2007 and 2006
			F-4Consolidated
			Statements of Shareholders' Equity for the years endedDecember 31,
			2008, 2007 and 2006
			F-5Consolidated
			Statements of Cash Flows for the years ended December 31, 2008, 2007
			and 2006
			F-6Notes to
			Consolidated Financial Statements
			F-7




(a)(2)    Consolidated Financial
Statement Schedules.



Schedule
			II--Valuation and Qualifying Accounts for the
			  years ended December 31, 2008, 2007 and 2006
			F-28




(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
14(c) 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 year ended December 31, 2008, 2007 and 2006 are incorporated by reference at
page F-32 of the ISA Consolidated Financial Statements.



---





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 31, 2009
			By :
			/s/ Harry KletterHarry Kletter, Chairman of the Boardand 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
			March
			31, 2009Harry Kletter
			
			Executive Officer (Principal Executive 
			Officer)/s/  Alan L. Schroering
			
			Chief Financial Officer
			March
			31, 2009Alan L. Schroering
			
			(Principal Financial Officer andPrincipal Accounting Officer)/s/  Orson Oliver
			
			Director
			March
			31, 2009Orson Oliver/s/  Roman Epelbaum
			
			Director
			March
			31, 2009Roman Epelbaum/s/  Albert Cozzi
			
			Director
			March
			31, 2009Albert Cozzi/s/  Richard Ferguson
			
			Director
			March
			31, 2009Richard Ferguson




---





INDEX TO
EXHIBITS



Exhibit Number
				
				Description of Exhibits3.1
			**
			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
			**
			Independent
			Consulting Services Agreement, dated as of March 31, 1995, and
			executed on June 25, 1996, by and between ISA and Douglas I.
			Maxwell, III ("Maxwell"), is incorporated by reference to Exhibit
			4(a) of ISA Statement on Form S-8 of the Registration, filed on June
			26, 1996 (File No. 333-06915).10.2
			**
			Confidential
			Information and Non-Competition Agreement Independent Contractor,
			dated as of March 31, 1995, and executed on June 26, 1996, by and
			between ISA and Maxwell, is incorporated by reference to Exhibit
			10.1 of Registration Statement on Form S-8 of ISA, filed on June 26,
			1996 (File No. 333-06915).10.3
			**
			Stock Option
			Agreement, dated as of March 31, 1995, and executed on June 26,
			1996, by and between ISA and Maxwell, is incorporated by reference
			to Exhibit 4(b) of Registration Statement on Form S-8 of ISA, filed
			on June 26, 1996 (File No. 333-06915).10.4
			**
			Independent
			Consulting Services Agreement, dated as of March 31, 1995, and
			executed on June 26, 1996, by and between ISA and Neil C. Sullivan
			("Sullivan"), is incorporated by reference to Exhibit 4(a) of
			Registration Statement on Form S-8 of ISA, filed on June 26, 1996
			(File No. 333-06909).10.5
			**
			Confidential
			Information and Non-Competition Agreement Independent Contractor,
			dated as of March 31, 1995, and executed on June 26, 1996, by and
			between ISA and Sullivan, is incorporated by reference to Exhibit
			10.1 of Registration Statement on Form S-8 of ISA, filed on June 26,
			1996 (File No. 333-06909).10.6
			**
			Stock Option
			Agreement, dated as of March 31, 1995, and executed on June 26,
			1996, by and between ISA and Sullivan, is incorporated by reference
			to Exhibit 4(b) of Registration Statement on Form S-8 of ISA, filed
			on June 26, 1996 (File No. 333-06909).10.7
			**
			Acquisition of
			Assets Agreement, dated as of July 1, 1997, by and between ISA and
			The Metal Center set forth in an Asset Purchase Agreement, is
			incorporated by reference, as the sole Exhibit on Form 8-K of ISA,
			filed July 15, 1997 (File No. 0-20979).10.8
			**
			Assignment of
			Contracts, dated September 4, 1997, by and between ISA and MGM
			Services, Inc. is incorporated by reference to Exhibit 10.11 of
			ISA's report on Form 10-K for the year ended December 31, 1997.10.9
			**
			Employment
			Agreement, dated as of October 15, 1997, by and between ISA and
			Garber is incorporated by reference to Exhibit 10.12 of ISA's report
			on Form 10-K for the year ended December 31, 1997.10.10
			**
			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).*10.11
			**
			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).*     Exhibit Number
				
				Description of Exhibits10.12
			**
			Amendment to
			Employment Agreement, dated as of February 5, 1998, by and between
			ISA and Garber, amending original agreement dated October 15, 1997
			is incorporated by reference to Exhibit 10.15 of ISA's report on
			Form 10-K for the year ended December 31, 1997.10.13
			**
			Stock Option
			Agreement, effective as of October 31, 1997, by and between ISA and
			Glenn Bierman is incorporated by reference herein to Exhibit 10.13
			of ISA's report on Form 10-K for the year ended December 31, 1999,
			as filed on April 14, 2000.10.14
			**
			Stock Option
			Agreement, effective as of October 27, 1997, by and between ISA and
			Sean Garber is incorporated by reference herein to Exhibit 10.14 of
			ISA's report on Form 10-K for the year ended December 31, 1999, as
			filed on April 14, 2000.10.15
			**
			Stock Option
			Agreement, effective as of October 31, 1997, by and between ISA and
			Sean Garber is incorporated by reference herein to Exhibit 10.15 of
			ISA's report on Form 10-K for the year ended December 31, 1999, as
			filed on April 14, 2000.10.16
			**
			Amendment No. 1 to
			Option Agreement, effective as of February 5, 1998, by and between
			ISA and Sean Garber is incorporated by reference herein to Exhibit
			10.16 of ISA's report on Form 10-K for the year ended December 31,
			1999, as filed on April 14, 2000.10.17
			**
			Stock Option
			Agreement, effective as of February 16, 1998, by and between ISA and
			Harry Kletter is incorporated by reference herein to Exhibit 10.17
			of ISA's report on Form 10-K for the year ended December 31, 1999,
			as filed on April 14, 2000.10.18
			**
			Consulting
			Agreement, dated as of June 2, 1998, by and between ISA and Andrew
			M. Lassak is incorporated by reference herein to Exhibit 10.18 of
			ISA's report on Form 10-K for the year ended December 31, 1999, as
			filed on April 14, 2000.10.19
			**
			Consulting
			Agreement, dated as of June 2, 1998, by and among ISA, Joseph
			Charles & Associates, Inc. and Andrew M. Lassak is incorporated by
			reference herein to Exhibit 10.19 of ISA's report on Form 10-K for
			the year ended December 31, 1999, as filed on April 14, 2000.10.20
			**
			Asset Purchase
			Agreement, effective as of June 1, 1998, by and among ISA, ISA
			Indiana, Inc., R.J. Fitzpatrick Smelters, Inc., and R.K. Fitzpatrick
			and Cheryl Fitzpatrick is incorporated by reference herein to
			Exhibit 10.20 of ISA's report on Form 10-K for the year ended
			December 31, 1999, as filed on April 14, 2000.10.21
			**
			Lease Agreement,
			effective June 1, 1998, by and between R.K. Fitzpatrick and Cheryl
			Fitzpatrick, R.J. Fitzpatrick Smelters, Inc., and ISA Indiana, Inc.
			is incorporated by reference herein to Exhibit 10.21 of ISA's report
			on Form 10-K for the year ended December 31, 1999, as filed on April
			14, 2000.10.22
			**
			Environmental
			Indemnity Agreement, effective as of June 1, 1998, by and between
			R.K. Fitzpatrick and Cheryl Fitzpatrick, R.J. Fitzpatrick Smelters,
			Inc., and ISA Indiana, Inc. is incorporated by reference herein to
			Exhibit 10.22 of ISA's report on Form 10-K for the year ended
			December 31, 1999, as filed on April 14, 2000.10.23
			**
			Promissory Note
			dated May 8, 1997, from Registrant to Bank of Louisville in the
			original principal amount of $2,000,000.00 is incorporated by
			reference herein to Exhibit 10.23 of ISA's report on Form 10-K for
			the year ended December 31, 2000, as filed on March 30, 2001.10.24
			**
			Loan Agreement dated
			November 30, 2000, by and between ISA and Bank of Louisville is
			incorporated by reference herein to Exhibit 10.24 of ISA's report on
			Form 10-K for the year ended December 31, 2000, as filed on March
			30, 2001.10.25
			**
			Change in Terms
			Agreement dated November 30, 2000, by and between ISA and Bank of
			Louisville is incorporated by reference herein to Exhibit 10.25 of
			ISA's report on Form 10-K for the year ended December 31, 2000, as
			filed on March 30, 2001.10.26
			**
			Change in Terms
			Agreement dated March 26, 2001, by and between ISA and Bank of
			Louisville is incorporated by reference herein to Exhibit 10.26 of
			ISA's report on Form 10-K for the year ended December 31, 2000, as
			filed on March 30, 2001.     Exhibit Number
				
				Description of Exhibits10.27
			**
			Penske Lease and
			Purchase Agreement effective July 8, 2004, for three years at a
			rental of $3,000 per month with an option to purchase for $425,000.10.28
			**
			Stock Option
			Agreement, dated June 11, 1996, by and between ISA and R. Jerry
			Falkner, is incorporated by reference to Exhibit 10.3 of ISA's
			report on Form 10-K for the year ended December 31, 1996.10.29
			**
			Stock Option
			Agreement, dated March 1, 2000, by and between ISA and Andrew M.
			Lassak and related letter agreement dated November 3, 1999 is
			incorporated by reference herein to Exhibit 10.29 of ISA's report on
			Form 10-K for the year ended December 31, 2004, as filed on March 4,
			2005.10.30
			**
			Contract of
			Purchase, dated March 24, 2005, by and between the Southern States
			Cooperative, Incorporated and the Harry Kletter Family Limited
			Partnership (HKFLP), as assigned by assignment of contract of
			purchase, dated April 24, 2005 from HKFLP to ISA Real Estate, LLC is
			incorporated by reference herein to Exhibit 10.30 of ISA's report on
			Form 10-K for the year ended December 31, 2004, as filed on March 4,
			2005.10.31
			**
			Lease, dated April
			30, 2005, from ISA Real Estate, LLC to Southern States Cooperative,
			Incorporated is incorporated by reference herein to Exhibit 10.31 of
			ISA's report on Form 10-K for the year ended December 31, 2004, as
			filed on March 4, 2005.10.32
			**
			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, 2006.10.33
			**
			Loan and Security
			Agreement dated June 30, 2006, by and between ISA and Fifth Third
			Bank is incorporated by reference herein to Exhibit 10.33 of ISA's
			report on Form 10-K for the year ended December 31, 2006, as filed
			on March 27, 2007.10.34
			**
			Promissory Note
			dated June 30, 2006, from ISA to Fifth Third Bank is incorporated by
			reference herein to Exhibit 10.34 of ISA's Report on Form 10-K for
			the year ended December 31, 2006, as filed on March 27, 2007.10.35
			**
			Revolving Credit
			Facility Agreement dated December 22, 2006, by and between ISA and
			BB&T is incorporated by reference herein to Exhibit 10.35 of ISA's
			report on Form 10-K for the year ended December 31, 2006, as filed
			on March 27, 2007.10.36
			**
			Promissory Note
			dated December 22, 2006 from ISA to BB&T is incorporated by
			reference herein to Exhibit 10.36 of ISA's report on Form 10-K for
			the year ended December 31, 2006, as filed on March 27, 2007.10.37
			**
			Lease dated as of
			February 6, 2007, by and between Parks Wood Products, as lessor, and
			ISA Real Estate, LLC, as lessee, is incorporated by reference herein
			to Exhibit 10.37 of ISA's report on Form 10-K for the year ended
			December 31, 2006, as filed on March 27, 2007.10.38
			**
			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, 2007.10.39
			**
			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, 2007.10.40
			**
			Executive Employment
			Agreement dated as of August 2, 2007, between ISA and Brian G.
			Donagy 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.     Exhibit Number
				
				Description of Exhibits10.41
			**
			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, 2007.10.42
			**
			Loan Agreement dated May 7, 2008, 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 May 14, 2008, as filed on May 22, 2008.10.43
			**
			Promissory Note in
			the amount of $6,000,000 dated May 7, 2008, 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
			May 14, 2008, as filed on May 22, 2008.10.44
			**
			Loan Agreement dated
			May 7, 2008, by and between ISA and Branch Banking and Trust Company
			is incorporated by reference herein to Exhibit 10.3 of ISA's Report
			on Form 8-K for the event reported on May 14, 2008, as filed on May
			22, 2008.10.45
			**
			Promissory Note in
			the amount of $3,000,000 dated May 7, 2008, from ISA to Branch
			Banking and Trust Company is incorporated by reference herein to
			Exhibit 10.4 of ISA's Report on Form 8-K for the event reported on
			May 14, 2008, as filed on May 22, 2008.10.46
			**
			Note Modification
			Agreement, dated October 15, 2008, in the amount of $2,897,114.77
			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, 2008,
			as filed on November 5, 2008.10.47
			**
			Note Modification
			Agreement, dated October 15, 2008, in the amount of $6,000,000 from
			ISA in favor of Branch Banking and Trust Company of North Carolina
			is incorporated by reference herein to Exhibit 10.2 of ISA's Report
			on Form 10-Q for the quarter ended September 30, 2008, as filed on
			November 5, 2008.10.48
			**
			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, 2008.10.49
			**
			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, 2008.10.50
			**
			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, 2008.11
			
			Statement of
			Computation of Earnings Per Share (See Note 9 to Notes to
			Consolidated Financial Statements).16
			
			Letter from Crowe Chizek and Company, LLC dated
			April 28, 2005, regarding change in certifying accountant is
			incorporated by reference herein to Exhibit 16 of ISA's report on
			Form 8-K/A, as filed on April 28, 2005.31.1
			
			Rule 13a-14(a) Certification of Harry Kletter
			for the Form 10-K for the year ended December 31, 2008.31.2
			
			Rule 13a-14(a) Certification of Alan Schroering
			for the Form 10-K for the year ended December 31, 2008.     Exhibit Number
				
				Description of Exhibits32.1
			
			Section 1350 Certification of Harry Kletter and
			Alan Schroering for the Form 10-K for the year ended December 31,
			2008.




*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.



---





INDUSTRIAL SERVICES OF AMERICA, INC.

AND SUBSIDIARIES



CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
Louisville, Kentucky



CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006











CONTENTS



REPORTS OF INDEPENDENT REGISTERED
			PUBLIC ACCOUNTING FIRMS
			1FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS
			3CONSOLIDATED STATEMENTS OF
			INCOME
			4CONSOLIDATED STATEMENTS OF
			SHAREHOLDERS' EQUITY
			5CONSOLIDATED STATEMENTS OF
			CASH FLOWS
			6NOTES TO CONSOLIDATED
			FINANCIAL STATEMENTS
			7SUPPLEMENTARY INFORMATIONVALUATION AND QUALIFYING
			ACCOUNTS
			28




---





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, 2008 and 2007 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, 2008. 
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, 2008 and 2007, and the
results of its operations and its cash flows for each of the years in the three
year period ended December 31, 2008, 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 & Bressler, LLP

Louisville, Kentucky

March 31, 2009



___________________________________________________________________________________________________



See accompanying notes to consolidated financial
statements.



1.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007



_________________________________________________________________________________________________



2008
			
			2007ASSETSCurrent assetsCash
			$  1,103,842
			
			$    1,501,685Income tax receivable
			36,016
			
			100,737Accounts receivable - trade (after
			allowance for doubtfulaccounts of $490,000 in 2008 and
			$100,000 in 2007) (Note 1)
			3,811,484
			
			6,764,851Net investment in sales-type leases (Note
			5)
			54,629
			
			60,364Inventories (Note 1)
			4,371,348
			
			4,627,281Deferred income taxes (Note 4)
			912,337
			
			141,636Other
			126,902
			
			318,496Total current assets
			10,416,558
			
			13,515,050Shredder system construction in progress
			6,547,902
			
			2,173,076Net property and equipment (Note 1)
			10,895,477
			
			9,537,345Other assetsNet investment in sales-type leases (Note
			5)
			71,222
			
			125,851Notes receivable - related party (Note 6)
			167,594
			
			204,053Goodwill  (Note 1)
			560,005
			
			560,005Other assets
			132,672
			
			169,142931,493
			
			1,059,051$ 28,791,430
			
			$ 26,284,522




___________________________________________________________________________________________________



See accompanying notes to consolidated financial
statements.



2.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007



LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilitiesCurrent maturities of long term debt 
			(Note 3)
			$      857,863
			
			$     338,913Current maturities of capital lease
			obligations (Note 8)
			80,771
			
			133,675Accounts payable
			3,701,895
			
			4,665,631Income tax payable
			566,025
			
			-Liability for legal settlements  (Note 11)
			1,037,165
			
			10,000Interest rate swap agreement liability,
			net of tax (Note 1)
			792,236
			
			-Other current liabilities
			391,731
			
			426,791Total current liabilities
			7,427,686
			
			5,575,010Long-term liabilitiesLong-term debt (Note 3)
			8,510,014
			
			8,393,784Capital lease obligations (Note 8)
			20,798
			
			101,569Deferred income taxes (Note 4)
			491,715
			
			194,7219,022,527
			
			8,690,074Commitments (Note 8)Shareholders' equityCommon stock, $.005 par value: 10,000,000
			shares authorized,4,295,000 shares issued in 2008 and
			2007,3,575,292 shares outstanding in 2008 and
			3,620,899 in 2007respectively
			21,475
			
			21,475Additional paid-in capital
			3,742,373
			
			3,599,624Retained earnings
			10,601,102
			
			9,434,733Accumulated other comprehensive loss
			(475,342)
			
			-Treasury stock at cost, 719,708 shares in
			2008 and 674,101 in 2007
			(1,548,391)
			
			(1,036,394)12,341,217
			
			12,019,438$  28,791,430
			
			$  26,284,522




___________________________________________________________________________________________________



See accompanying notes to consolidated financial
statements.



3.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2008, 2007 and 2006



____________________________________________________________________________________________



2008
			
			2007
			
			2006Revenue from services
			$ 18,182,726
			
			$ 17,234,194
			
			$ 15,387,241Revenue from product sales
			81,859,765
			
			59,721,347
			
			46,694,807Total Revenue
			100,042,491
			
			76,955,541
			
			62,082,048Cost of goods sold for services
			16,502,452
			
			15,233,788
			
			13,984,314Cost of goods sold for product sales
			68,639,348
			
			50,639,372
			
			40,284,368Inventory adjustment for lower cost or
			market
			1,228,352
			
			-
			
			-Reduction of cost of goods sold
			-
			
			(858,249)
			
			(1,272,241)Total Cost of goods sold
			86,370,152
			
			65,014,911
			
			52,996,441Selling, general and administrative
			expenses
			10,215,904
			
			7,766,915
			
			5,609,959Income before other income (expense)
			3,456,435
			
			4,173,715
			
			3,475,648Other income (expense)Interest expense
			(372,444)
			
			(290,689)
			
			(212,722)Interest income
			85,598
			
			119,762
			
			195,662Gain (loss) on sale of assets
			34,842
			
			(3,696)
			
			22,990Provision for lawsuit settlement (Note 11)
			(990,000)
			
			-
			
			-Other income, net
			336,802
			
			22,741
			
			32,930(905,202)
			
			(151,882)
			
			38,860Income before income taxes
			2,551,233
			
			4,021,833
			
			3,514,508Income tax provision (Note 4)
			1,023,635
			
			1,458,000
			
			1,325,929Net income
			$  1,527,598
			
			$ 2,563,833
			
			$ 2,188,579Basic earnings per share
			$             .43
			
			$            .71
			
			$           .61Diluted earnings per share
			$             .43
			
			$            .71
			
			$           .61




___________________________________________________________________________________________________



See accompanying notes to consolidated financial
statements.



4.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2008, 2007 and 2006



______________________________________________________________________________________________________________________________________________





Common Stock
			
			Additional
			Paid-inCapital
			
			RetainedEarnings
			
			Accumulated
			Other
			ComprehensiveLoss
			
			Treasury Stock
			
			TotalShares
			
			Amount
			
			
			
			
			Shares
			
			CostBalance as of
			January 1, 2006
			
			4,255,000
			
			$   21,275
			
			$  3,113,819
			
			$  5,046,411
			
			$                     -
			
			(688,592)
			
			$  (731,750)
			
			$  7,449,755Treasury stock
			purchase
			
			-
			
			-
			
			-
			
			-
			
			-
			
			(5,509)
			
			(16,338)
			
			(16,338)Exercise of stock options
			and related tax benefits
			
			40,000
			
			200
			
			80,997
			
			-
			
			-
			
			40,000
			
			43,112
			
			124,309Net income
			
			-
			
			-
			
			-
			
			2,188,579
			
			-
			
			-
			
			-
			
			2,188,579Balance as of
			December 31, 2006
			
			4,295,000
			
			21,475
			
			3,194,816
			
			7,234,990
			
			-
			
			(654,101)
			
			(704,976)
			
			9,746,305Cash dividend
			
			-
			
			-
			
			-
			
			(364,090)
			
			-
			
			-
			
			-
			
			(364,090)Repurchase of common
			stock
			
			-
			
			-
			
			-
			
			-
			
			-
			
			(40,000)
			
			(352,974)
			
			(352,974)Stock bonus
			
			-
			
			-
			
			194,244
			
			-
			
			-
			
			20,000
			
			21,556
			
			215,800Tax benefits related
			to common stock options
			
			
			
			
			
			210,564
			
			
			
			-
			
			
			
			
			
			210,564Net income
			
			-
			
			-
			
			-
			
			2,563,833
			
			-
			
			-
			
			-
			
			2,563,833Balance as of
			December 31, 2007
			
			4,295,000
			
			21,475
			
			3,599,624
			
			9,434,733
			
			-
			
			(674,101)
			
			(1,036,394)
			
			12,019,438Net unrealized loss
			on derivative instruments
			
			
			
			
			
			
			
			
			
			(475,342)
			
			
			
			
			
			(475,342)Stock repurchase
			
			-
			
			-
			
			-
			
			2,961
			
			-
			
			(55,607)
			
			(530,648)
			
			(527,687)Stock bonus
			
			-
			
			-
			
			142,749
			
			-
			
			-
			
			10,000
			
			18,651
			
			161,400Cash dividend
			
			-
			
			-
			
			-
			
			(364,190)
			
			-
			
			-
			
			-
			
			(364,190)Net income
			
			-
			
			-
			
			-
			
			1,527,598
			
			-
			
			-
			
			-
			
			1,527,598Balance as of
			December 31, 2008
			
			4,295,000
			
			$   21,475
			
			$  3,742,373
			
			$  10,601,102
			
			$      (475,342)
			
			(719,708)
			
			$ (1,548,391)
			
			$12,341,217




___________________________________________________________________________________________________



See accompanying notes to consolidated financial
statements.



5.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2008, 2007 and 2006



______________________________________________________________________________________



2008
			
			2007
			
			2006Cash flows from operating activitiesNet income
			
			$ 1,527,598
			
			$  2,563,833
			
			$ 2,188,579Adjustments to reconcile net income to netcash from operating activitiesDepreciation
			
			2,122,167
			
			1,954,023
			
			1,745,905Inventory write-down
			
			1,228,352
			
			-
			
			-Stock distribution to employees
			
			161,400
			
			215,800
			
			-Deferred income taxes
			
			(156,813)
			
			(59,589)
			
			(222,511)Tax benefit of stock options exercised
			
			-
			
			210,564
			
			-Provision for doubtful accounts
			
			390,000
			
			-
			
			50,000(Gain) loss on sale of property and
			equipment
			
			(34,842)
			
			3,696
			
			(22,990)Change in assets and liabilitiesReceivables
			
			2,563,367
			
			(1,738,410)
			
			(573,596)Net investment in sales-type leases
			
			60,364
			
			50,586
			
			65,797Inventories
			
			(972,419)
			
			(1,199,055)
			
			(939,617)Other assets
			
			292,785
			
			(337,735)
			
			110,987Accounts payable
			
			(963,736)
			
			120,574
			
			(3,737,224)Other current liabilities
			
			1,558,130
			
			(1,147,988)
			
			117,747Net cash from operating activities
			
			7,776,353
			
			636,299
			
			(1,216,923)Cash flows from investing activitiesProceeds from sale of property and
			equipment
			
			126,283
			
			57,300
			
			81,700Purchases of property and equipment
			
			(3,571,740)
			
			(2,169,829)
			
			(2,166,331)Payments for shredder system
			
			(4,374,826)
			
			(2,173,076)
			
			-Payments from related party
			
			36,459
			
			34,513
			
			25,824Net cash from investing activities
			
			(7,783,824)
			
			(4,251,092)
			
			(2,058,807)Cash flows from financing activitiesPayments on capital lease obligation
			
			(133,675)
			
			(337,959)
			
			(161,626)Proceeds from long-term debt
			
			8,773,555
			
			7,850,000
			
			10,710,875Payments on long-term debt
			
			(8,138,375)
			
			(3,010,306)
			
			(7,770,984)Proceeds from exercise of common stock
			options
			
			-
			
			-
			
			124,309Payment of cash dividend
			
			(364,190)
			
			(364,090)
			
			-Purchases of common stock
			
			(527,687)
			
			(352,974)
			
			(16,338)Net cash from financing activities
			
			(390,372)
			
			3,784,671
			
			2,886,236Net change in cash
			
			(397,843)
			
			169,878
			
			(389,494)Cash at beginning of year
			
			1,501,685
			
			1,331,807
			
			1,721,301Cash at end of year
			
			$  1,103,842
			
			$  1,501,685
			
			$ 1,331,807Supplemental disclosure of cash flow
			informationCash paid for interest
			
			$     372,444
			
			$     332,745
			
			$    212,722Cash paid for taxes
			
			617,675
			
			2,593,479
			
			604,652Supplemental
			disclosure of noncash investing and financing activities:Equipment purchased
			under capital leases
			
			-
			
			-
			
			186,178Equipment purchased
			through seller financing
			
			-
			
			1,010,040
			
			-




___________________________________________________________________________________________________



See accompanying notes to consolidated financial
statements.



6.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



____________________________________________________________________________________



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 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).  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.  Our management services 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 and  Canada.  ISA's waste equipment sales and
services division (WESSCO) installs or repairs equipment and rental equipment on
a same day 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.



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 division provides our
customers 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, 2008, 2007 and 2006



____________________________________________________________________________________



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



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.



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 $490,000 at December 31, 2008 and $100,000 at December 31, 2007.  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.  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.  We charge
off losses to the allowance when we deem further collection efforts will not
provide additional recoveries.



Major Customer:  We currently have no
significant customer concentration.



Principles of Consolidation:  The consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries, ISA Indiana, Inc., ISA Recycling, LLC, and Industrial Logistics. 
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 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.



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.



8.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006

____________________________________________________________________________________



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)



Inventories:  Our inventories primarily consist
of ferrous and non-ferrous scrap metals 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 recognize inventory write-down when the market value, based upon
current market pricing, falls below recorded value or when the estimated volume
is less than the recorded volume of the inventory.  We would record the loss in
cost of goods sold in the period during which we identified the loss.



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.



We believe that the long-term fundamentals supporting
the prices for recycled metals remain positive; however, given the current
trends in the market for ferrous and nonferrous metal, we believe that fiscal
2009 selling prices will be lower than those seen in 2008.  Due to the high
level of uncertainty regarding the economic environment, our past trends of
sales volumes may not be indicative of expected volumes in fiscal 2009.



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
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 ferrous inventory totaled
$535,874 at December 31, 2008 and $432,377 at December 31, 2007.  Processing
costs in non-ferrous inventory totaled $237,436 at December 31, 2008 and $66,912
at December 31, 2007.   Ferrous inventory of $2,162,149 at December 31, 2008 was
comprised of $418,035 in raw materials and $1,744,114 of finished goods. 
Ferrous inventory of $1,848,445 at December 31, 2007 was comprised of $686,332
in raw materials and $1,162,113 of finished goods.  Non-ferrous inventory of
$2,033,154 at December 31, 2008 was comprised of $362,065 in raw materials and
$1,671,089 of finished goods.  Non-ferrous inventory of $2,715,703 at December
31, 2007 was comprised of $372,949 in raw materials and $2,342,754 of finished
goods.  We charged $3,098,870 in general and administrative processing costs to
cost of sales for the year ended December 31, 2008 and $2,671,089 for the year
ended December 31, 2007.



In the fourth quarter 2008, demand and prices for
inventory 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.  In addition, continued weak
demand and the impact of declines in anticipated future selling prices which
outpaced the decline in inventory costs, results in ISA recording a non-cash net
realizable value ("NRV") inventory write-down of $1.2 million.



9.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



____________________________________________________________________________________



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Inventory also includes all types of industrial waste handling equipment and
machinery held for resale such as compactors, balers, and containers.  Other
inventory includes cardboard and baling wire.  Inventories as of December 31,
2008 and 2007 consist of the following:



2008
			
			2007Ferrous materials
			
			$ 2,162,149
			
			$ 1,848,445Non-ferrous materials, high grade
			
			2,033,154
			
			2,689,635Non-ferrous materials, low grade
			
			-
			
			26,068Waste Equipment Machinery
			
			95,675
			
			36,498Other
			
			80,370
			
			26,635$4,371,349
			
			$4,627,281




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 are amortized over the
term of the capital lease.



Property and equipment as of December 31, 2008 and 2007 consist of the
following:



Life
			
			
			2008
			
			2007Land
			
			
			
			$ 2,265,310
			
			$ 1,676,810Equipment and vehicles
			1-10 years
			
			
			12,351,205
			
			11,189,279Office equipment
			1-7 years
			
			
			1,686,177
			
			1,560,081Rental equipment
			3-5 years
			
			
			5,098,708
			
			4,720,483Building and leasehold
			improvements
			5-40 years
			
			
			3,568,083
			
			2,788,56024,969,483
			
			21,935,213Less accumulated depreciation andamortization
			
			
			
			14,074,006
			
			12,397,868$ 10,895,477
			
			$ 9,537,345




Depreciation expense for the years ended December 31,
2008, 2007 and 2006 was $2,122,167, $1,954,023
and $1,745,905.   Of the $2,122,167 depreciation expense recognized in 2008,
$1,480,734 was recorded in cost of sales, and $641,433 was recorded in general
and administrative expense.



10.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



____________________________________________________________________________________



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)



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:



2009
			
			$1,877,5642010
			
			1,511,2002011
			
			1,077,5002012
			
			589,4372013
			
			161,487$5,217,188




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 unit to which all the goodwill is related.  We determine
whether to impair goodwill by comparing the fair value of the recycling
reporting unit as a whole (the present value of expected cash flows) to its
carrying value including goodwill.  Since the recycling reporting unit's fair
value exceeds its carrying value, no further computations are required.



Derivative and Hedging Activities:  SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, and
subsequent amendments (hereinafter collectively referred to as SFAS No. 133),
contains 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
SFAS No. 133, depending on the nature of the hedge, changes in the fair value of
the derivative are either offset against the corresponding change in fair value
of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income (loss) until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value is immediately recognized in the statement of operations.



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





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,
2008 and 2007.



12/31/2008
			
			12/31/2007Net unrealized losses on
			derivative instruments, net of tax
			$    475,342
			
			$                  -Total accumulated other
			comprehensive income (loss)
			$    475,342
			
			$                  -




Income Taxes:  Income taxes are accounted for under the asset and
liability method.  Deferred tax assets and liabilities are recognized 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 carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled.  The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.



11.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006

____________________________________________________________________________________



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



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.



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.



2008
			
			2007
			
			2006Net income (loss)Net income, as reported
			
			$  1,527,598
			
			$  2,563,833
			
			$ 2,188,579Basic earnings (loss) per
			shareAs reported
			
			$          .43
			
			$            .71
			
			$             .61Diluted earnings (loss) per
			shareAs reported
			
			$          .43
			
			$            .71
			
			$            .61




Stock Option Plans:  We have an employee stock option plan under which we
may grant options for up to 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.



On January 1, 2006, we adopted SFAS No. 123R (Revised 2004), Share-Based
Payment, using the modified prospective method.  The impact of adopting SFAS
123R 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 SFAS
123R since all outstanding options were fully vested.



12.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



____________________________________________________________________________________



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Following is a summary of stock option activity and number of shares reserved
for outstanding options for the years ended December 31, 2008, 2007 and 2006:



Number
			ofShares
			
			Weighted
			Average
			Exercise 
			PricePer Share
			
			Exercise
			Price PerShare
			
			Maximum
			Remaining
			Term of
			OptionsGranted
			
			Weighted
			Average
			Grant Date
			Fair Valueof OptionsBalance as of January 1, 2006
			20,000
			
			$1.25
			
			$1.25
			
			1 to 3
			
			$1.21yearsExpired
			(20,000)
			
			$1.25
			
			$1.25Balance as of December 31,
			2006
			-
			
			-Balance as of December 31,
			2007
			-
			
			-Balance as of December 31,
			2008
			-
			
			-






Derivative Financial Instruments:  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.



13.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



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, 2008, 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 prime
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.



Impact of Recently Issued Accounting Standards:



Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements, for
financial assets and liabilities.  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 SFAS No. 157, Fair Value Measurements, 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 and foreign exchange 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, asset- and mortgage-backed
securities and certain derivative instruments with little or no market activity
and a resulting lack of price transparency.



14.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Level 1
			Level 2
			TotalAssetsCash and cash equivalents
			$1,103,842
			-
			$1,103,842LiabilitiesLong term debt
			-
			$(9,367,877)
			$(9,367,877)Derivative contract, net of tax
			-
			(792,236)
			(792,236)




In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to report selected financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings at each subsequent
reporting date. SFAS 159 is effective for fiscal years beginning after November
15, 2007, the year beginning January 1, 2008 for us. While we continue to review
the provisions of SFAS 159, we have not yet identified any assets or liabilities
for which we currently believe we will elect the fair value reporting option.



In March 2008, the FASB issued SFAS No. 161,
"Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). 
SFAS 161 amends and expands the disclosure requirements in SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities".  SFAS 161 is effective for
fiscal years and interim periods beginning after November 15, 2008, the year
beginning January 1, 2009 for ISA



15.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



____________________________________________________________________________________



NOTE 2 - NOTE PAYABLE TO BANK



On February 11, 2009, we executed a promissory note,
loan agreement and related security documents with Branch Banking and Trust
Company in the amount of $12,000,000 for the purpose of financing our
acquisition of inventory and fixed assets from Venture Metals, and real estate
at 3409 Camp Ground Road, Louisville, Kentucky, from Luca Investments, LLC, an
affiliate of Venture Metals (Note 14).  The maturity date of this note is
February 11, 2010.  Interest is payable monthly commencing March 11, 2009, and
the note bears interest at the adjusted LIBOR rate of one month LIBOR plus 2.25%
per annum with a floor of 4%.  As of February 11, 2009, the applicable interest
rate was 4% since the calculated rate was 2.67%.  All ISA's assets (except
rental fleet equipment) secure this note.  As a result of this note and related
loan documents, ISA and BB&T undertook amendments to existing security
agreements related to the $10,000,000 borrowing line from BB&T, dated December
22, 2006 (see below), a BB&T Bankcard Corporation Commercial Card Application
and BB&T Bankcard Corporation Commercial Card Plan Agreement, executed December
9, 2003 and December 8, 2003, and a $6,000,000 equipment loan to purchase the
ISA shredder system and complementary facility improvements, dated May 7, 2008,
so as to provide that the security for each of the above loans also secures the
$12,000,000 loan of February 11, 2009.



This $12,000,000 loan provides for advances of up to
80% of ISA's eligible accounts receivable, 80% of eligible real estate, 35% of
eligible raw materials inventory, and up to 100% of ISA's net book value of
eligible equipment less any outstanding indebtedness on the equipment.  This
$12,000,000 loan contains restrictive, affirmative, negative and financial
covenants.  Events of default include failure to promptly pay principal or
interest on the note, proof of a false or misleading representation or warranty
in any loan document, default on the performance by ISA of any other obligation
or indebtedness when due or in connection with money borrowed, breach of any
covenant, condition or agreement made under any of the loan documents,
bankruptcy of ISA, final judgment for payment of money remaining undischarged
for 30 days after judgment against ISA which is not otherwise covered by
insurance, BB&T in good faith deeming itself unsafe or insecure, or the failure
of any lien or security interest granted to BB&T by ISA to have the priority
agreed to by BB&T on the date granted or otherwise becomes unperfected or
invalid for any reason.  Remedies include the declaration by BB&T of the
balances of the ISA notes to be immediately due and payable, the pledge of
additional collateral, the taking of the collateral as security for the note, or
the exercise of any other remedies under the Kentucky Uniform Commercial Code.



Since ISA has entered into this $12,000,000 loan
partially to reimburse itself for the acquisition of the inventory from Venture
Metals under the inventory purchase agreement, and its proceeds are available
for payment upon exercise of the option to purchase the fixed assets of Venture
Metals and also to purchase real estate in the event ISA elects to purchase such
real estate, then this $12,000,000 facility becomes a source of payment for the
purchase of those various assets.



16.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



____________________________________________________________________________________



NOTE 2 - NOTE PAYABLE TO BANK(Continued)



We maintain a $10.0 million senior revolving credit
facility with the Branch Banking and Trust Company.  This revolving credit
facility has a three year term expiring January 1, 2012, providing for advances
of up to eighty percent (80%) of our eligible accounts receivable and up to
forty percent (40%) of eligible inventory, and up to one hundred percent (100%)
of our net book value of eligible equipment less an outstanding indebtedness on
the equipment.  The revolving credit facility bears interest at the one month
LIBOR rate, as published in the Wall Street Journal, plus two and twenty-five
one-hundredths percent (2.25%) per annum, and is secured by all our assets
(except rental fleet equipment).  As of December 31, 2008, we had paid off this
credit facility in full.



NOTE 3 - LONG-TERM DEBT



Long-term debt as of December 31, 2008 and 2007
consists of the following:



2008
			
			2007Note
			payable to Fifth Third Bank secured by our rental fleet equipment
			with a fixed interest rate of 6.83% and monthly payments of
			$23,047.  The maturity date under this agreement is June 2011 with a
			ten-year amortization schedule.
			
			$               -
			
			$ 1,779,585Revolving credit facility 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 maturity date
			under this agreement is January 1, 2012.
			
			-
			
			6,000,000Note
			payable to Branch Banking and Trust Company in the amount of $3.0
			million secured by our rental fleet equipment with a fixed interest
			rate of 5.65%.  The repayment terms are principal and interest paid
			monthly commencing on November 7, 2008 with one final payment of all
			remaining principal and accrued interest due at maturity on May 7,
			2013.  The maturity date under this agreement is May 2013.
			
			2,838,094
			
			-Note
			payable to Branch Banking and Trust Company in the amount of $6.0
			million secured by our shredder system assets with a fixed interest
			rate of 5.89%.   The repayment terms are principal and interest paid
			monthly commencing on November 7, 2008 with one final payment of all
			remaining principal and accrued interest due at maturity on April 7,
			2014.   The maturity date under this agreement is April 2014.
			
			5,000,000
			
			-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 are principal and interest paid monthly
			beginning December 1, 2008 with one final payment of all remaining
			principal and accrued interest due at maturity in December 2013.
			
			602,153
			
			-Note
			payable to Paccar Financial Corp. in the amount of $163,655 secured
			by two Kenworth trucks.  Payments are $3,395.36 per month with an
			effective interest rate of 6.5%. The maturity date under this
			agreement is September 2011.
			
			153,469
			
			-Note
			payable to ILS for various assets including tractor trailers, trucks
			and containers. The repayment terms are $20,000 per month for 60
			months at a seven percent (7%) interest rate.  The maturity date
			under this agreement is August 2012.
			
			774,161
			
			953,1129,367,877
			
			8,732,697Less
			current maturities
			
			857,863
			
			338,913$   8,510,014
			
			$  8,393,784  17.     INDUSTRIAL SERVICES OF AMERICA, INC.
	AND SUBSIDIARIES
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	December 31, 2008, 2007 and 2006  ____________________________________________________________________________________  NOTE 3 - LONG-TERM DEBT (Continued)   The annual maturities of
			long-term debt as of December 31, 2008 are as follows:2009
			
			$     857,8632010
			
			1,022,4492011
			
			1,115,6182012
			
			1,028,798Thereafter
			
			5,343,149Total
			
			$9,367,877




On May 14, 2008, we executed a loan agreement with
Branch Banking and Trust Company in the amount of $3.0 million secured by our
rental fleet equipment.  This note replaces the $2.0 million rental fleet loan
with Fifth Third Bank.  Until October 15, 2008, indebtedness under this loan
agreement accrued interest at the one month Libor rate, as published in the Wall
Street Journal, plus 1.625% per annum.  Fifty-nine (59) monthly principal and
interest payments of $30,966.76 commenced on June 7, 2008 with one final payment
of all remaining principal and accrued interest due on May 7, 2013.  Effective
October 15, 2008, we converted this revolving credit facility with a variable
interest rate into a fixed interest rate of 5.65% by executing a floating to
fixed interest rate swap with BB&T as the counterparty to the ISDA Master
Agreement, Schedule and confirmation.  The maturity date under this revised
agreement is May 2013.  The repayment terms are principal paid in twelve (12)
monthly payments of $19,673.54 plus interest commencing on November 7, 2008 and
continuing through October 7, 2009, principal paid in 12 monthly payments of
$20,835.07 plus interest commencing on November 7, 2009 and continuing through
October 7, 2010, principal paid in 12 monthly payments of $22,065.17 plus
interest commencing on November 7, 2010 and continuing through October 7, 2011,
principal paid in 12 monthly payments of $23,367.89 plus interest commencing on
November 7, 2011 and continuing through October 7, 2012, principal paid in six
(6) monthly payments of $24,747.53 plus interest commencing on November 7, 2012
and continuing through April 7, 2013, with one final payment of all remaining
principal and accrued interest due at maturity on May 7, 2013.  The principal
and interest payments of this facility are calculated on the basis of a ten (10)
year amortization, resulting in a principal balance of approximately $1.7
million due at maturity.  The terms of the loan agreement place certain
restrictive covenants on us, including maintenance of a specified tangible net
worth, debt to net worth and EBITDA ratio.  Consequently, these covenants
restrict our ability to incur as much additional debt as we may desire for
future growth.  At December 31, 2008, we were in compliance with all restrictive
covenants.



On May 14, 2008, we executed a loan agreement with
Branch Banking and Trust Company in the amount of $6.0 million to finance the
purchase of our shredder system and complementary facility improvements.  The
security for this facility is the shredder and assets being purchased.  Our
Board approved the acquisition and installation of the shredder system and
complementary facility improvements on June 21, 2007.  The note has a term
beginning May 2008 and originally expiring November 2013.  Until October 15,
2008, the facility bore interest at the one month Libor rate, as published in
the Wall Street Journal, plus 1.625% per annum.  The facility originally
provided for interest only monthly payments which commenced June 7, 2008 and
continue through November 7, 2008.  Effective October 15, 2008, we converted
this revolving credit facility into a fixed interest rate of 5.89% by executing
a floating to fixed interest rate swap with BB&T as the counterparty to the ISDA
Master Agreement, Schedule and confirmation.  The maturity date under this
revised agreement is April 2014.  The repayment terms are interest only paid in
6 monthly payments starting on November 7, 2008 and continuing through April 7,
2009, principal paid in twelve (12) monthly payments of $37,636.11



18.



---





plus interest commencing on May 7, 2009 and continuing
through April 7, 2010, principal paid in 12 monthly payments of $39,957.42 plus
interest commencing on May 7, 2010 and continuing through April 7, 2011,
principal paid in 12 monthly payments of $42,421.91 plus interest commencing on
May 7, 2011 and continuing through April 7, 2012, principal paid in 12 monthly
payments of $45,038.40 plus interest commencing on May 7, 2012 and continuing
through April 7, 2013, principal paid in eleven (11) monthly payments of
$47,816.27 plus interest commencing on May 7, 2013 and continuing through March
7, 2014, with one final payment of all remaining principal and accrued interest
due at maturity on April 7, 2014.  The principal and interest payments of the
facility are calculated on the basis of a ten (10) year amortization, resulting
in a principal balance of approximately $3.5 million being due on or before
April 7, 2014, at which time we anticipate that we will refinance.  The terms of
the loan agreement place certain restrictive covenants on us, including
maintenance of a specified tangible net worth, debt to net worth and EBITDA
ratio.  Consequently, these covenants restrict our ability to incur as much
additional debt as we may desire for future growth.  At December 31, 2008, we
were in compliance with all restrictive covenants.



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%) 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, 2008 of
$774,161.



We entered into three interest rate swap agreements swapping variable rates for
fixed rates. The first swap agreement covers $6 million in debt and commenced October 15, 2008 and matures on April
7, 2014. The second swap agreement covers approximately $2.9 million in debt and
commenced October 15, 2008 and matures on May 7, 2013.  The third swap agreement
covers $606,027 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, 2008, we recorded the estimated fair value of the three
swaps as approximately $792,000. 
Accounting rules require us to recognize all derivatives on the balance sheet at
estimated fair value.   We have designated this agreement as a cash
flow hedge.



19.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



____________________________________________________________________________________



NOTE 4 - INCOME TAXES



The income tax provision (benefit) consists
of the following for the years ended December 31, 2008, 2007 and 2006:



2008
			
			2007
			
			2006FederalCurrent
			$    912,289
			
			$ 1,254,133
			
			$   1,178,483Deferred
			(128,610)
			
			(51,814)
			
			(174,958)783,679
			
			1,202,319
			
			1,003,525StateCurrent
			268,159
			
			356,943
			
			369,957Refundable state tax credits
			-
			
			(99,358)
			
			-Deferred
			(28,203)
			
			(1,904)
			
			(47,553)239,956
			
			255,681
			
			322,404$1,023,635
			
			$ 1,458,000
			
			$ 1,325,929




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



2008
			
			2007
			
			2006Federal income tax at statutory
			rate
			$   868,584
			
			$ 1,352,831
			
			$ 1,194,933State and local income taxes, net
			offederal income tax effect
			158,370
			
			202,927
			
			212,787Permanent differences
			8,855
			
			(173,485)
			
			(43,702)Stock options exercised
			-
			
			210,564
			
			-Refundable state tax credits
			-
			
			(99,358)
			
			-Other differences, net
			(12,174)
			
			(35,479)
			
			(38,089)$1,023,635
			
			$1,458,000
			
			$1,325,929








20.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



____________________________________________________________________________________



NOTE 4 - INCOME
TAXES(Continued)



Significant
components of the Company's deferred tax liabilities and assets as of December
31, 2008 and 2007 are as follows:



2008
			
			2007Deferred tax liabilitiesTax depreciation in excess of
			book
			$  (764,263)
			
			$ (202,313)Interest rate swap
			316,894
			
			-Tax amortization in excess of
			book
			(160,533)
			
			(137,600)Gross deferred tax liabilities
			$  (607,902)
			
			$ (339,913)Deferred tax assetsProperty taxes
			42,945
			
			38,077Allowance for doubtful accounts
			210,700
			
			43,867Book amortization in excess of
			tax
			116,187
			
			145,192Inventory capitalization
			69,809
			
			59,692Reserve for CWS
			129,000
			
			-Litigation settlement
			425,700
			
			-Other
			34,183
			
			-Gross deferred tax assets
			1,028,524
			
			286,828Net deferred tax assets
			(liabilities)
			$   420,622
			
			$ (53,085)




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.



Future lease
payments receivable under sales-type leases at December 31, 2008 are as follows:



2009
			$66,7202010
			74,355Minimum lease payments receivable
			141,075Less unearned income
			15,224Net investment in sales-type
			leases
			125,851Less current portion
			(54,629)$ 71,222




21.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



____________________________________________________________________________________



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:





2008
			
			2007
			
			2006Balance sheet accounts:Accounts receivable
			$               -
			
			$              -
			
			$               -Notes receivable
			$   182,868
			
			$  204,053
			
			$  238,566Deposits (included in
			other long-term assets)
			$     62,106
			
			$    62,106
			
			$     62,106Income statement activity:Rent expense
			$   505,272
			
			$  505,272
			
			$  505,272Consulting fees
			$   240,000
			
			$  240,000
			
			$  240,000




ISA leases its corporate offices, processing property and buildings in
Louisville, Kentucky for $42,106 per month from K&R pursuant to the K&R Lease. 
Deposits include one month of 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 $3,147.50 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%) per annum and we have the
right to exercise our remedies to collect full payment of the note.



In an addendum to the K&R lease as of January 1, 2006, the rent was increased
$4,000 as a result of the improvements made to the property in 2004.  For years
2008 and 2007, the payments to K&R by the Company of $4,000 for additional rent
and the payment from K&R to the Company of $3,897.66 for the promissory note
were offset.





22.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



____________________________________________________________________________________



NOTE 6 -
RELATED PARTY TRANSACTIONS(Continued)



We entered into an agreement with K&R for consulting services related to the
scrap metal and paper recycling operations and related equipment sales and
services.  The agreement requires that we make annual payments to K&R of
$240,000 in equal monthly installments of $20,000.  Deposits include one month
of consulting services in advance in the amount of $20,000.  Our Chairman is
compensated through these consulting fees.  In 2008, we extended this consulting
agreement for one year according to the terms of the contract.





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% of their annual salary.  Under the
plan, we match 25% of each employee's voluntary contribution up to 6% of their
gross salary.  The expense under the plan for 2008, 2007 and 2006 was $46,814,
$42,810 and $33,438, 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
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, 2007 for a period of two years with
monthly payments of $2,750.   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.



On February 6, 2007, we leased 7.7 acres of real
property, including a 38,000 square foot warehouse and a 400 square foot office,
in Pineville, Louisiana for $5,250 per month for twenty-four months beginning
March 1, 2007 and ending February 28, 2009, with an option to purchase the
property for a purchase price of $575,000.  On January 18, 2008, we sold our
position in this property, including the lease and the option, for $25,000.



23.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006

____________________________________________________________________________________



NOTE 8 - LEASE
COMMITMENTS (Continued)



Future minimum
lease payments for operating leases as of December 31, 2008 are as follows:



2009
			
			$     684,8822010
			
			639,6792011
			
			636,0002012
			
			636,0002013
			
			-Future minimum lease payments
			
			$  2,596,561




Total rent expense
for the years ended December 31, 2008, 2007 and 2006 was $876,312, $832,733 and
$784,954, respectively.



Capital Leases:



We lease various pieces of equipment which qualify as
capital leases.  These lease arrangements require monthly lease payments
expiring at various dates through September 2011.



The following is a summary of assets held under
capital leases which are included in property and equipment:



2008
			
			2007Equipment
			
			$   978,677
			
			$ 1,881,607Less accumulated depreciation
			
			269,960
			
			273,005$   708,717
			
			$ 1,608,602




The following is a
schedule of future annual minimum lease payments under the capitalized lease
arrangements, together with the present value of net minimum lease payments at
December 31, 2008.



2009
			
			$    80,7712010
			
			20,798Total future minimum lease
			payments
			
			101,569Less amount representing interest
			
			-Present value of net minimumlease payments
			
			101,569Less current portion
			
			(80,771)Capital Lease Obligations
			
			$    20,798




24.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006

____________________________________________________________________________________



NOTE  9 - CASH DIVIDEND



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



The Board of Directors, at our May 15, 2007 annual
meeting, declared a cash dividend payment of ten cents per share for
shareholders of record as of June 15, 2007 with a payment date of July 20,
2007.



NOTE 10 - PER SHARE DATA



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



2008
			
			2007
			
			2006Basic earnings per shareNet income
			$ 1,527,598
			
			$ 2,563,833
			
			$ 2,188,579Weighted average shares
			outstanding
			3,595,813
			
			3,638,215
			
			3,602,872Basic earnings per share
			$             .43
			
			$           .71
			
			$              .61Diluted earnings per shareNet income
			$ 1,527,598
			
			$ 2,563,833
			
			$ 2,188,579Weighted average shares
			outstanding
			3,595,813
			
			3,638,215
			
			3,602,872Add dilutive effect of assumed
			exercising
			  of stock options
			-
			
			-
			
			10,218Diluted average shares
			outstanding
			3,595,813
			
			3,638,215
			
			3,613,090Diluted earnings per share
			$             .43
			
			$             .71
			
			$            .61




NOTE 11 - LEGAL PROCEEDINGS



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.  On
January 14, 2009, a Jefferson County, Kentucky Circuit Court jury awarded AAR
approximately $990,000 primarily for a breach by ISA of the agreement that
required ISA to provide referrals to AAR.  ISA reserved for the loss in an
approximate amount of $990,000 in its financial statements for the year ended
December 31, 2008, and we paid the settlement amount of $990,000 in February
2009.  On February 2, 2009, the parties to the lawsuit entered into a settlement
agreement that resulted in the dismissal of the case with prejudice on February
17, 2009 and provided for , among other items, the payment of the jury



25.



---



INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006

____________________________________________________________________________________



NOTE 11 - LEGAL PROCEEDINGS(Continued)



award on February 9, 2009, by the defendants to the
plaintiffs.  In addition, AAR agreed to vacate by March 31, 2009 the premises at
Grade Lane, Louisville, Kentucky, that AAR subleased from ISA.  AAR also agreed
to be subject to a non-competition and non-solicitation term beginning February
2, 2009, for one year, wherein AAR has agreed not to engage in competition with,
or solicit business or employees from, ISA during that period and within a
distance of 2.5 miles of the ISA Grade Lane facilities.



After AAR leaves the Grade Lane facilities, ISA
intends to relocate the stainless steel inventory operations of Venture Metals
from the Camp Ground Road location to the vacated premises on Grade Lane.  ISA
then intends to renovate the Camp Ground Road facilities to become a
full-service yard for the purpose of providing ferrous, non-ferrous and
stainless material for the Grade Lane operations.



On January 4, 2007, Lennox Industries, Inc., a
commercial heating and air-conditioning manufacturer, filed suit against us in
the Arkansas County, Arkansas Circuit Court in the case styled Lennox
Industries, Inc. v. Industrial Services of America, Inc., Case No.
CV-2007-004.  Because of settlement negotiations, Lennox did not serve us until
May 23, 2007.  Lennox alleges that we breached a 2001 contract with Lennox where
we agreed to act as agent for Lennox, by our failure to properly evaluate,
categorize, classify and value the production scrap and waste of Lennox, thereby
brokering such products at prices below market value.  Lennox also alleges
negligence and breach of fiduciary duty related to the same alleged failure. 
Lennox is taking the position that ISA had a duty to obtain a price that was
consistent with the materials being sold on their behalf that it failed to show
a proper duty of care in its dealings with Lennox.   On July 9, 2008, Lennox
Amended its Complaint to add a cause of action based on fraud and
misrepresentation (civil fraud). The Lennox complaint does not state any
specific monetary damages.  We have filed an answer denying all claims.  The
litigation is in its discovery phase.   We currently believe that the claims
have no merit.



Lennox is claiming they are owed in excess of $1.9MM. 
The case lends itself to the filing of a Partial Motion for Summary Judgment. 
Such a motion is currently being prepared and will be filed no less than 45 days
prior to the Trial.  The case is currently in discovery and scheduled for trial
July 15-17, 2009.



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 three primary
segments:  ISA Recycling, Computerized Waste Systems (CWS), and Waste Equipment
Sales & Service (WESSCO).  ISA Recycling provides products and services to meet
the needs of its customers related to ferrous, non-ferrous and fiber recycling
at two locations in the Midwest.  CWS provides waste disposal services including
contract negotiations with service providers, centralized billing, invoice
auditing, and centralized dispatching.  WESSCO sells, leases, and services waste
handling and recycling equipment.



The Company's three 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 and fiber
scrap; CWS's revenues consist of charges to customers for waste disposal
services; and WESSCO sales and lease income comprise the primary source of
revenue for this segment.  The components of the column labeled "other" are
selling, general and administrative expenses that are not directly related to
the three primary segments.



26.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006

____________________________________________________________________________________



NOTE 12 - SEGMENT INFORMATION(Continued)



The accounting policies of the three 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.



ISA Recycling
			
			CWS
			
			WESSCO
			
			Other
			
			SegmentTotals2008Recycling revenues
			
			$  79,545,562
			
			$                -
			
			$                -
			
			$                -
			
			$  79,545,562Equipment sales, servicesand leasing revenues
			
			-
			
			-
			
			2,314,203
			
			-
			
			2,314,203Management fees
			
			-
			
			18,182,726
			
			-
			
			-
			
			18,182,726Cost of goods sold
			
			(69,027,772)
			
			(16,502,452)
			
			(839,928)
			
			-
			
			(86,370,152)Selling, general andadministrative expenses
			
			(5,396,460)
			
			(1,530,606)
			
			(418,415)
			
			(2,870,423)
			
			(10,215,904)Segment profit (loss)
			
			$  5,121,330
			
			$     149,668
			
			$  1,055,860
			
			$(2,870,423)
			
			$  3,456,435SegmentISA Recycling
			
			CWS
			
			WESSCO
			
			Other
			
			Totals2008Cash
			
			$     237,914
			
			$      15,132
			
			$                -
			
			$    850,796
			
			$  1,103,842Accounts receivable
			
			2,084,702
			
			1,669,842
			
			44,594
			
			12,346
			
			3,811,484Inventories
			
			4,255,802
			
			-
			
			115,546
			
			-
			
			4,371,348Net property and equipment,including shredder system
			
			13,736,644
			
			5,449
			
			1,627,225
			
			2,074,061
			
			17,443,379Goodwill
			
			560,005
			
			-
			
			-
			
			-
			
			560,005Other assets
			
			179,393
			
			13,952
			
			3,001
			
			1,305,026
			
			1,501,372Segment assets
			
			$ 21,054,460
			
			$  1,704,375
			
			$  1,790,366
			
			$  4,242,229
			
			$ 28,791,430




SegmentISA Recycling
			
			CWS
			
			WESSCO
			
			Other
			
			Totals2007Recycling revenues
			
			$ 57,603,071
			
			$                -
			
			$                -
			
			$                 -
			
			$ 57,603,071Equipment sales, servicesand leasing revenues
			
			-
			
			-
			
			2,118,276
			
			-
			
			2,118,276Management fees
			
			-
			
			17,234,194
			
			-
			
			-
			
			17,234,194Cost of goods sold
			
			(50,407,072)
			
			(14,375,539)
			
			(232,300)
			
			-
			
			(65,014,911)Selling, general andadministrative expenses
			
			(2,963,996)
			
			(1,048,347)
			
			(1,316,435)
			
			(2,438,137)
			
			(7,766,915)Segment profit (loss)
			
			$   4,232,003
			
			$  1,810,308
			
			$    569,541
			
			$(2,438,137)
			
			$  4,173,715




27.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006

____________________________________________________________________________________



NOTE 12 - SEGMENT INFORMATION (Continued)



SegmentISA Recycling
			
			CWS
			
			WESSCO
			
			Other
			
			Totals2007Cash
			
			$      390,868
			
			$      15,229
			
			$                -
			
			$  1,095,588
			
			$   1,501,685Accounts receivable
			
			4,813,971
			
			1,868,100
			
			69,960
			
			12,820
			
			6,764,851Inventories
			
			4,574,648
			
			-
			
			52,633
			
			-
			
			4,627,281Net property andequipment
			
			5,694,134
			
			27,089
			
			1,851,916
			
			1,964,206
			
			9,537,345Goodwill
			
			560,005
			
			-
			
			-
			
			-
			
			560,005Other assets
			
			2,572,723
			
			18,249
			
			198,491
			
			503,892
			
			3,293,355Segment assets
			
			$ 18,606,349
			
			$  1,928,667
			
			$  2,173,000
			
			$  3,576,506
			
			$ 26,284,522




SegmentISA Recycling
			
			CWS
			
			WESSCO
			
			Other
			
			Totals2006Recycling revenues
			
			$ 44,967,023
			
			$                -
			
			$               -
			
			$                -
			
			$ 44,967,023Equipment sales, servicesand leasing revenues
			
			-
			
			-
			
			1,727,784
			
			-
			
			1,727,784Management fees
			
			-
			
			15,387,241
			
			-
			
			-
			
			15,387,241Cost of goods sold
			
			(39,448,957)
			
			(12,712,073)
			
			(835,411)
			
			-
			
			(52,996,441)Selling, general andadministrative expenses
			
			(1,431,251)
			
			(1,479,302)
			
			(542,433)
			
			(2,156,973)
			
			(5,609,959)Segment profit (loss)
			
			$  4,086,815
			
			$  1,195,866
			
			$    349,940
			
			$ (2,156,973)
			
			$  3,475,648




28.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



____________________________________________________________________________________



NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)



1st
			
			2nd
			
			3rd
			
			4th
			
			Year2008Revenue
			
			$26,083,395
			
			$34,511,085
			
			$28,837,828
			
			$10,610,183
			
			$100,042,491Inventory write-down
			
			-
			
			-
			
			-
			
			(1,228,352)
			
			(1,228,352)Income before otherincome (expense)
			
			1,884,895
			
			2,814,162
			
			1,940,416
			
			(3,183,038)
			
			3,456,435Legal settlement
			
			-
			
			-
			
			-
			
			(990,000)
			
			(990,000)Net income
			
			1,086,551
			
			1,662,632
			
			1,280,115
			
			(2,501,700)
			
			1,527,598Basic earnings per share
			
			0.30
			
			0.46
			
			0.36
			
			(0.69)
			
			0.43Diluted earnings per share
			
			0.30
			
			0.46
			
			0.36
			
			(0.69)
			
			0.431st
			
			2nd
			
			3rd
			
			4th
			
			Year2007Revenue
			
			$17,904,749
			
			$19,528,096
			
			$17,928,810
			
			$21,593,886
			
			$76,955,541Income before otherincome (expense)
			
			1,298,974
			
			1,406,383
			
			652,605
			
			815,753
			
			4,173,715Net income
			
			793,080
			
			821,299
			
			383,159
			
			566,295
			
			2,563,833Basic earnings per share
			
			0.22
			
			0.22
			
			0.11
			
			0.16
			
			0.71Diluted earnings per share
			
			0.22
			
			0.22
			
			0.11
			
			0.16
			
			0.711st
			
			2nd
			
			3rd
			
			4th
			
			Year2006Revenue
			
			$14,484,020
			
			$17,702,634
			
			$15,331,235
			
			$14,564,159
			
			$ 62,082,048Income before otherincome (expense)
			
			688,693
			
			1,007,525
			
			511,167
			
			1,268,263
			
			3,475,648Net income
			
			416,526
			
			602,757
			
			439,568
			
			729,728
			
			2,188,579Basic earnings per share
			
			0.12
			
			0.17
			
			0.12
			
			0.20
			
			0.61Diluted earnings per share
			
			0.12
			
			0.17
			
			0.12
			
			0.20
			
			0.61




NOTE 14 - SUBSEQUENT EVENTS



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 Branch Banking & Trust Company.



29.



---





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006



____________________________________________________________________________________



NOTE 14 - SUBSEQUENT EVENTS (Continued)



Under the agreement, we also have 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% each by Messrs.
Jones and Valentine.  We have 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. Jones, Valentine and Corona are our
employees.



On February 18, 2009, and effective February 11, 2009,
ISA entered into a lease agreement with Venture Metals, LLC, leasing from
Venture Metals all of the fixed assets of Venture Metals, located at 3409 Camp
Ground Road, Louisville, Kentucky.  ISA has agreed to pay rent in the amount of
$15,000 per month commencing March 1, 2009, with a pro rata amount to be paid
for the period from February 11, 2009 through February 28, 2009.  The term of
the lease ends of February 28, 2011 and is automatically renewable for a period
of 12 months unless terminated 30 days prior to the scheduled expiration date by
ISA.  ISA assumes the risk of loss related to the fixed assets and is
indemnifying Venture Metals related to the manufacture, sale, purchase and use
of the fixed assets except for the gross negligence or willful misconduct of
Venture Metals.  ISA is responsible for all taxes and insurance on the fixed
assets.



Venture Metals has represented that certain fixed
assets are subject to prior leases with third party equipment lessors and may be
subject to liens under financing provided to Venture Metals.  Venture Metals has
agreed to remain primarily liable for these obligations and shall not incur any
additional financing on the fixed assets or permit any future liens or
encumbrances to be placed on the fixed assets.  The lease has no force and
effect with respect to any fixed asset that is subject to a prior lease or lien
for financing if the existence of the lease is a default under any document
evidencing such prior lease or financing.



Events of default include the failure of the lessee to
pay rent, the failure to perform or breach any of the covenants for a period of
30 days after notice from Venture Metals, the removal, sale or subletting of any
fixed asset without the consent of Venture Metals, the creation, incurrence or
suffering to exist of any mortgage, lien or other encumbrance upon the fixed
assets by ISA, except for any lien or encumbrance created as a result of ISA's
prior financing with and granting of a security interest to Branch Banking and
Trust Company, the bankruptcy or insolvency of ISA, or any material
misrepresentation or warranty made by ISA under the lease.  As a consequence of
any such default, Venture Metals may declare the entire amount of rent due and
payable for the lease term, take immediate possession of the fixed assets, sell
or lease any of the fixed assets, demand payment of all reasonable costs or upon
notice to ISA, terminate the lease.



ISA may sublease the fixed assets to an affiliate
without the consent of Venture Metals.  ISA, as long as no event of default
under the lease has occurred and is continuing, has the option at any time and
upon 5 days prior written notice to Venture Metals to purchase all, but not less
than all, of the fixed assets for approximately $1,498,885, less all rent paid
through the date ISA notifies Venture Metals of ISA's election to exercise the
purchase option.  In addition, ISA has the right upon the 5 days' prior written
notice to terminate the lease without further rent obligation owed from ISA to
Venture Metals.



In the event ISA acquires the fixed assets through the
purchase option, Venture Metals must satisfy any outstanding obligations Venture
Metals has with respect to the fixed assets.  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.



In connection with an inventory purchase agreement,
dated January 13, 2009, between ISA and Venture Metals, ISA verified the amount
of and on February 11, 2009, paid for the remaining inventory of stainless steel
and high temperature alloys sold by Venture Metals to ISA, thus concluding the
sale of all of the applicable inventory assets to ISA.



30.



---





SUPPLEMENTARY INFORMATION





INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2008, 2007 and 2006



______________________________________________________________________________



Balance at
			Beginningof Period
			
			Additions 
			Charged to
			Costs andExpenses
			
			Deductions *
			
			Balance atEnd of PeriodDescriptionAllowance for doubtfulaccounts 2008 (deductedfrom accounts receivable)
			
			$   100,000
			
			$   390,000
			
			$                -
			
			$      490,000Allowance for doubtfulaccounts 2007 (deductedfrom accounts receivable)
			
			$   100,000
			
			$                -
			
			$                -
			
			$      100,000Allowance for doubtfulaccounts 2006 (deductedfrom accounts receivable)
			
			$     50,000
			
			$     50,000
			
			$                -
			
			$       100,000Accrual for legalsettlements for 2008
			
			$               -
			
			$   990,000
			
			$                -
			
			$       990,000




*  uncollected amounts written off, net of recoveries



31.



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---