Summary of INDUSTRIAL SERVICES OF AMERICA INC /FL

ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this report.
The following discussion and analysis contains certain financial predictions, forecasts and projections which constitute "forward-looking statements" within the meaning of the federal securities laws. Actual results could differ materially from those financial predictions, forecasts and projections and there can be no assurance that we will achieve such financial predictions, forecasts and projections. Factors that could affect financial predictions, forecasts and projections include the fluctuations in the commodity price index and any conditions internal to our major customers, including loss of their accounts and other factors as listed in our Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission. General
We are primarily focusing our attention now and in the future towards our recycling business. We sell processed ferrous and non-ferrous scrap material to end-users such as steel mini-mills, integrated steel makers, foundries and refineries. We deliver all scrap ourselves or through third parties via truck, rail car, and/or barge. Some customers choose to send their own delivery trucks, which are weighed and loaded at one of our sites based on the sales order. We purchase ferrous and non-ferrous scrap material primarily from industrial and commercial generators of steel, iron, aluminum, copper, stainless steel and other metals as well as from other scrap dealers who deliver these materials directly to our facilities. We process these materials by shredding, sorting, shearing, cutting and/or baling. We will also continue to focus on initiating growth in our waste services business segment, which includes management services and waste and recycling equipment sales, service and leasing. We continue to pursue a growth strategy in the waste management services arena by adding new locations of existing customers as well as marketing our services to potential customers. Currently, we service approximately 900 customer locations throughout the United States and we utilize an active database of over 7,000 vendors to provide timely, thorough and cost-effective service to our customers. Along with positioning ourselves to efficiently service our customers, our management services division methods of competition include offering our clients competitive pricing, superior customer service and industry expertise.
Although our focus is on the recycling industry, our goal is to remain dedicated to the management services and equipment industries as well, while sustaining steady growth at an acceptable profit, adding to our net worth, and providing positive returns for stockholders. We intend to increase efficiencies and productivity in our core business while remaining alert for possible acquisitions, strategic partnerships, mergers and joint-ventures that would enhance our profitability.
We have operating locations in Louisville, Kentucky, Seymour and New Albany, Indiana. We do not have operating locations outside the United States. Liquidity and Capital Resources
As of March 31, 2012 we held cash and cash equivalents of $1.7 million. Included in the $1.7 million is a cash account on deposit with BB&T which serves as collateral for our swap agreements. As of March 31, 2012, the balance in this account was $488.0 thousand. Other than this balance, our cash accounts are available to us without restriction.
On March 2, 2012, Industrial Services of America, Inc. and ISA Indiana, Inc. (the "Companies") entered into a Third Amendment to Credit Agreement (the "Third Amendment") with Fifth Third Bank (the "Bank") which amended the July 30, 2010 Credit Agreement (the "Credit Agreement"), including the First Amendment to Credit Agreement dated as of April 14, 2011 (the "April Amendment") and the Second Amendment to Credit Agreement dated as of November 16, 2011 (the "November Amendment"), as follows. The Third Amendment redefines the calculation period for the purpose of measuring compliance with our covenant to maintain a ratio of debt to adjusted EBITDA (the "Senior Leverage Ratio") and a ratio of adjusted EBITDA to aggregate cash payments of interest expense and scheduled payment of principal of not more than 1.20 to 1 (the "Fixed Charge Coverage Ratio") such that each ratio will be calculated quarterly for the period beginning January 1, 2012 through the end of each quarter of 2012. Prior to the Third Amendment, the ratios were calculated on a rolling 12 month basis. The Third Amendment also changed the Senior Leverage Ratio from 3.5 to 1 in the original Credit Agreement to (i) 4.25 to 1 in the first quarter of 2012, (ii) 3.50 to 1 in the second and third quarter of 2012, and (iii) 3.25 to 1 in the fourth quarter of 2012 and thereafter. The Third Amendment also increased the unused line fee by 0.25% to 0.75% and provided a waiver of the Senior Leverage Ratio and Fixed Charge Coverage Ratio covenant defaults for the quarter ending December 31, 2011. In addition, the Companies also agreed to perform other customary commitments and pay a fee of $10.0 thousand to the Bank.

In our Credit Agreement with the Bank, we agreed to certain covenants, including
(i) maintenance of a ratio of debt to adjusted EBITDA for the preceding 12 months of not more than 3.5 to 1 (or, if measured as of December 31 of any fiscal year, 4.0 to 1), (ii) maintenance of a ratio of adjusted EBITDA for the preceding twelve months to aggregate cash payments of interest expense

and scheduled payment of principal in the preceding 12 months of not less than 1.20 to 1, and (iii) a limitation on capital expenditures of $4.0 million in any fiscal year. Pursuant to the Third Amendment, the Senior Leverage Ratio will increase to 4.25 to 1 for the period ending March 31, 2012. The Senior Leverage Ratio will then decrease to 3.5 to 1 for the periods ending June 30 and September 30, 2012 and decrease to 3.25 to 1 for the period ending December 31, 2012 and thereafter. The Senior Leverage Ratio will, in each quarter, be calculated using a measurement period beginning January 1, 2012 and ending at the end of the quarterly measurement period. The other covenants will remain the same going forward. As of March 31, 2012, we were in compliance with all debt covenants. As of March 31, 2012, our ratio of debt to adjusted EBITDA was 3.52; our ratio of adjusted EBITDA to aggregate cash payments of interest expense and scheduled principal payments was 1.8, and our capital expenditures totaled $164.4 thousand. As of March 31, 2012, we have $20.4 million available to us under our existing credit facilities.
We have long term debt comprised of the following:

                           March 31,      December 31,
                             2012             2011
                          (Unaudited)
                                 (in thousands)
Revolving line of credit       19,625            20,083
Notes payable                   7,955             8,426
                         $     27,580    $       28,509

We expect that existing cash flow from operations and available credit under our existing credit facilities will be sufficient to meet our cash needs for the next year and beyond, assuming compliance with the covenants in our Credit Agreement or continued waivers thereof. As of March 31, 2012, we do not have any material commitments for capital expenditures. Results of Operations
The following table presents, for the years indicated, the percentage relationship that certain captioned items in our Consolidated Statements of Operations bear to total revenues:

                                               Three months ended
                                                    March 31,
                                                2012         2011
Statements of Operations Data:
Total Revenue                                  100.0 %       100.0 %
Cost of goods sold                              94.0 %        92.3 %
Selling, general and administrative expenses     5.2 %         3.7 %
Income before other expenses                     0.8 %         4.0 %

Three months ended March 31, 2012 compared to three months ended March 31, 2011 Total revenue decreased $44.7 million or 42.0% to $61.7 million in the first quarter of 2012 compared to $106.4 million in the same period in 2011. Recycling revenue decreased $44.6 million or 42.7% to $59.9 million in 2012 compared to $104.5 million in 2011. This is primarily due to a decrease of 30.4 million pounds, or 54.8%, in the volume of stainless steel materials shipments due to a decrease in worldwide stainless steel demand beginning in the second quarter of 2011. Substantially all of our stainless steel sales are to one customer. In response to the overall decrease in demand for stainless steel, this customer decreased our sales orders received in both the second and third quarters of 2011. As demand began to recover, this customer increased sales orders in the fourth quarter of 2011 and again in the first quarter of 2012, but not to the levels seen in the first quarter of 2011. The volume of ferrous materials shipments also decreased by 14.3 thousand gross tons, or 25.0%, as compared to the same period in 2011. In 2012, sales to existing Recycling dealers decreased by approximately $42.7 million, or 43.7%, compared to the same period in 2011. New dealer sales in 2012 totaled approximately $5.0 million, while lost dealer sales totaled $5.9 million in the first quarter of 2011. In addition to the reduction in volume, total revenue was also affected by the decrease in overall average price for all commodities shipped by $209.00 per gross ton, or 19.6%. Specifically, average nickel prices on the London Metal Exchange decreased $3.31 per pound, or 27.1%, in the first quarter of 2012 as compared to the first quarter of 2011. Nickel is a key commodity used in stainless steel blends. These decreases were partially offset by an increase of 918.3 thousand pounds, or 11.8%, in the volume of nonferrous materials shipments.

Waste Services revenue decreased $154.0 thousand or 7.9% to $1,795.0 thousand in 2012 compared to $1,949.0 thousand in 2011 primarily due to lower cardboard prices in January and February of 2012 as compared to the same period in 2011, which lowered cardboard recycling revenue by $92.8 thousand. In general, the timing of services provided or equipment installed will cause fluctuations in this revenue between periods.
Total cost of goods sold decreased $40.2 million or 40.9% to $58.0 million in the first quarter of 2012 compared to $98.2 million for the same period in 2011. Recycling cost of goods sold decreased $40.1 million or 41.5% to $56.6 million in 2012 compared to $96.7 million for the same period in 2011. This decrease is primarily due to the decrease in the volume of stainless steel and ferrous materials shipments along with a decrease in the volume of stainless steel materials purchases of 19.0 million pounds, or 36.7%, and a decrease in the volume of ferrous materials purchases of 14.6 thousand gross tons, or 21.3%. Overall average price for all commodities purchased decreased $156.76, or 16.1%. Direct labor costs also decreased by $345.3 thousand, and repair and maintenance expenses decreased by $155.9 thousand. These decreases are partially offset by the increase in the volume of nonferrous materials shipments as noted above and an increase in the volume of nonferrous materials purchases of 3.8 million pounds, or 48.0%. Processing costs increased $89.4 thousand in 2012 as compared to 2011.
Waste Services cost of goods sold decreased $134.0 thousand or 9.0% to $1,356.0 thousand in 2012 compared to $1,490.0 thousand in 2011 primarily due to the timing of third party haulers' services provided and their invoices received along with the decrease in cardboard prices mentioned above.
Selling, general and administrative expenses decreased $0.7 million or 17.9% to $3.2 million in the first quarter of 2012 compared to $3.9 million in the same period in 2011. As a percentage of revenue, selling, general and administrative expenses were 5.2% in 2012 compared to 3.7% in 2011. The primary driver of the decrease in total expenses was a decrease in bonus expense of $513.4 thousand. Additional decreases include the following:
� A decrease in management fees, directors' fees, and consulting fees of $152.8 thousand;

� A decrease in property taxes, license taxes and fees of $84.6 thousand;

� A decrease in legal expenses of $69.6 thousand;

� A decrease in fuel, lubricant, and hauling expenses of $69.4 thousand;

� A decrease in repair and maintenance expenses of $62.5 thousand; and

� A decrease in operating supplies expenses of $59.4 thousand.

These decreases were partially offset by an increase in labor expenses of $277.3 thousand, of which $211.3 thousand relates to a provision for termination and severance expenses in the first quarter of 2012.
Other expense decreased $367.9 thousand to other expense of $462.6 thousand in the first quarter of 2012 compared to other expense of $830.5 thousand in the same period in 2011. This was primarily due to a decrease in interest expense of $401.7 thousand due to lower debt levels in 2012, partially offset by a decrease in the gain on sale of assets of $30.6 thousand.
The income tax provision decreased $1.3 million to $5.7 thousand in the first quarter of 2012 compared to $1.3 million in the same period in 2011 due to the decreased net income reported in 2012. The effective tax rates in 2012 and 2011 were 40.7% and 37.0%, respectively, based on federal and state statutory rates. Beginning in the first quarter of 2011, we were able to take advantage of the Domestic Production Activities Deduction available to US-based manufacturing companies.
Financial condition at March 31, 2012 compared to December 31, 2011 Cash and cash equivalents decreased $520.4 thousand to $1,746.7 thousand as of March 31, 2012 compared to $2,267.1 thousand as of December 31, 2011. Net cash from operating activities was $542.3 thousand for the three month period ended March 31, 2012. The net cash from operating activities is primarily due to an increase in accounts payable of $4,699.6 thousand and a decrease in income tax receivable of $1,521.0 thousand, partially offset by increases in inventories of $5,831.8 thousand and accounts receivable of $302.7 thousand and a decrease of $515.3 thousand in deferred income taxes. The increases in inventory, accounts receivable and accounts payable relate to the increase in demand for stainless steel and other nickel-based scrap metal since year end, which increased overall sales and purchasing activity in the first quarter. Accounts receivable and payable balances are also affected by the timing of shipments, receipts, and payments throughout the quarter.

We used net cash from investing activities of $133.3 thousand for the three month period ended March 31, 2012. In the first quarter of 2012, we used $18.2 thousand for building improvements. We purchased recycling and rental fleet equipment and office equipment of $146.2 thousand. The rental fleet equipment consists of solid waste handling and recycling equipment such as compactors, waste edge monitors, and balers. It is our intention to continue to pursue this market. We received $20.0 thousand from sales of our rental fleet compactors. Net cash used in financing activities was $929.4 thousand for the three month period ended March 31, 2012. In the first quarter of 2012, we made payments on debt obligations of $1,799.4 thousand, and received $870.0 thousand in proceeds from debt.
Accounts receivable trade increased $0.3 million or 1.7% to $17.5 million as of March 31, 2012 compared to $17.2 million as of December 31, 2011. The volume of stainless steel materials shipments increased 5.7 million pounds, or 29.7%, and the volume nonferrous materials shipments increased 505.2 thousand pounds, or 6.1%, in the first quarter of 2012 as compared to the fourth quarter of 2011. The volume of ferrous materials shipments decreased by 112.0 gross tons, or 0.3% in this same period. In general, the accounts receivable balance fluctuates due to the timing of shipments and receipt of customer payments.
Inventories consist principally of stainless steel, ferrous and nonferrous scrap materials and waste equipment machinery held for resale. We value inventory at the lower of cost or market. Inventory increased $5.9 million or 31.9% to $24.4 million as of March 31, 2012 compared to $18.5 million as of December 31, 2011. The increase in shipments in the first quarter of 2012 required an increase in purchasing activity to supply the sales demand. The volume of stainless steel materials, ferrous materials, and nonferrous materials purchases increased by 16.9 million pounds, or 107.4%, 8.6 thousand gross tons, or 18.9%, and 439.2 thousand pounds, or 3.9%, respectively, in the first quarter of 2012 as compared to the fourth quarter of 2011. Increased demand also put pressure on metal prices as well causing the overall average price of all commodities purchased to increase by $107.39, or 15.2%, during this time period.
Inventory aging for the period ended March 31, 2012 (Days Outstanding):

(in thousands)

      Description           1 - 30         31 - 60         61 - 90         Over 90         Total
Stainless steel, ferrous
and non-ferrous
materials                $   16,810     $     1,788     $       446     $     3,543     $   22,587
Replacement parts             1,654               -               -               -          1,654
Waste equipment
machinery                         -              12               -              43             55
Other                            80               -               -               -             80
Total                    $   18,544     $     1,800     $       446     $     3,586     $   24,376

Inventory aging for the period ended December 31, 2011 (Days Outstanding):

(in thousands)

      Description           1 - 30         31 - 60         61 - 90         Over 90         Total
Stainless steel, ferrous
and non-ferrous
materials                $   11,160     $     1,475     $       424     $     3,760     $   16,819
Replacement parts             1,623               -               -               -          1,623
Waste equipment
machinery                         -               -               -              39             39
Other                            63               -               -               -             63
Total                    $   12,846     $     1,475     $       424     $     3,799     $   18,544

Inventory in the "Over 90 days" category as of March 31, 2012 and December 31, 2011 includes several materials that were bought in bulk that had intrinsic values for stainless steel blends. We purchased these materials in anticipation of continued high demand for stainless steel shipments as well as other specialty metal shipments. These materials are low value items that can only be used in limited quantities. If demand increases, these items will be slowly worked out of the system. Inventory controls have been put into place to assure proper turnover ratios.
Accounts payable trade increased $4.7 million or 43.9% to $15.4 million as of March 31, 2012 compared to $10.7 million as of December 31, 2011, primarily due to increased purchasing activity in the first quarter of 2012 as compared to the fourth quarter of 2011, noted above, and the timing of payments made to our vendors.

Working capital decreased $0.6 million to $28.8 million as of March 31, 2012 compared to $29.4 million as of December 31, 2011. The decrease was primarily driven by the $4.7 million increase in accounts payable, along with a $1.5 million decrease in income tax receivable and a $0.5 million decrease in cash. These decreases were partially offset by the $5.8 million increase in inventories and the $0.3 million increase in accounts receivable. Contractual Obligations
The following table provides information with respect to our known contractual obligations for the quarter ended March 31, 2012.

                                              Payments due by period (in thousands)
                                        Less than                                              More than
                         Total            1 year         1 - 3 years       3 - 5 years          5 years
Obligation
Description (2)
Long-term debt
obligations          $     27,580     $      1,769     $      25,798     $          13     $             -
Operating lease
obligations (1)               940              568               252               120                   -
Total                $     28,520     $      2,337     $      26,050     $         133     $             -

(1) We lease the Louisville, Kentucky facility from K&R, LLC, the sole member of which is Harry Kletter, our chief executive officer, under an operating lease expiring December 2012. We have monthly rental payments of $48.5 thousand through December 2012. In the event of a change of control, the monthly payments become $62.5 thousand.

We also lease equipment from K&R, LLC for which monthly payments of $5.5 thousand are due through October 2015 and monthly payments of $5.0 thousand are due through April 2016.

We subleased the Lexington property to an unaffiliated third party for a term commencing on March 1, 2007 and ending January 31, 2012 for $4.5 thousand per month. We leased this property from an unrelated party for $4.5 thousand per month. The lease terminated February 10, 2012.

We also lease office space in Dallas, Texas for which monthly payments of $1.0 thousand are due through September 2012.

(2) All interest commitments under interest-bearing debt are included in this table, excluding the interest rate swaps, for which changes in value are accounted for in other comprehensive income.

Long-term debt, including the current portions thereof, decreased $0.9 million to $27.6 million as of March 31, 2012 compared to $28.5 million as of December 31, 2011.
Impact of Recently Issued Accounting Standards In September 2011, the Financial Accounting Standards Board ("FASB") issued ASU 2011-08, an amendment to Topic 350, Intangibles-Goodwill and Other, which simplifies how entities test goodwill for impairment. Previous guidance under Topic 350 required an entity to test goodwill for impairment using a two-step process on at least an annual basis. First, the fair value of a reporting unit was calculated and compared to its carrying amount, including goodwill. Second, if the fair value of a reporting unit was less than its carrying amount, the amount of impairment loss, if any, was required to be measured. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that it is more likely than not that its fair value is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test is unnecessary. If the entity concludes otherwise, then it is required to test goodwill for impairment under the two-step process as described under paragraphs 350-20-35-4 and 350-20-35-9 under Topic 350. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, the quarter ending March 31, 2012 for us, and early adoption was permitted. The adoption of ASU 2011-08 did not have a material impact on our Condensed Consolidated Financial Statements.
In June 2011, the FASB issued ASU 2011-05, which is an update to Topic 220, "Comprehensive Income." This update eliminates the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders' equity, requires consecutive presentation of the statement of net income and other comprehensive income and requires reclassification adjustments from other comprehensive income to net income to be shown on the financial statements. ASU 2011-05 is effective for all interim and annual reporting periods beginning after December 15, 2011, the quarter ending March 31, 2012 for us. However, in December 2011, the FASB issued ASU 2011-12, which has deferred the specific requirement within ASU 2011-05 to present

on the face of the financial statements items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. Entities should continue to report reclassifications out of accumulated comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. As ASU 2011-05 relates only to the presentation of Comprehensive Income, the adoption of such did not have a material impact on our Condensed Consolidated Financial Statements.
In May 2011, the FASB issued ASU 2011-04, which is an update to Topic 820, "Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS"). The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRS. The amendments are effective for interim and annual periods beginning after December 15, 2011, the quarter ending March 31, 2012 for us, and are to be applied prospectively. Early application was not permitted. The adoption of ASU 2011-04 did not have a material impact on our Condensed Consolidated Financial Statements.