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 offers total package waste and recycling management 	services to commercial, industrial and logistic customers nationwide, as 	well as providing recycling and scrap processing and waste handling 	equipment sales and service.
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 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.
Recycling 	Operations -- ISA Recycling
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 grade 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.
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, CWS creates waste and recycling 	programs tailored to each customer's needs. The services we offer include 	locating and contracting with a hauling company and recycler at a reasonable 	cost for each participating location. CWS does not own waste-transporting 	trucks or landfills. We do not operate or partner with any of the national 	hauling or recycling companies, and none of these companies own us. We are 	able to maintain a neutral position for the benefit of our customers. We 	have designed and developed proprietary computer software that provides our 	personnel with relevant information on each customer's locations, as well as 	pertinent information on service providers, disposal rates, costs of 	equipment, including installation and shipping, disposal rates and recycling 	prices. This software has allowed us to build a database for serving our 	customers that have locations nationwide as well as 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. 	
Prior to 	the expiration of the Home Depot contract on October 30, 2005, we derived a 	significant portion of our revenues from Home Depot, accounting for 	approximately 56% of 2005 and 51% of 2004 total revenues. The impact to our 	gross profit was limited to 24% in 2005 and 23% in 2004.
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 its 	marketing efforts, which are now nationwide as well as 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 are using 	this property as a transfer station for ferrous and nonferrous material. 	There are no processing operations at this facility. We have discontinued 	operations in this facility during the first quarter of 2007 and are now 	subleasing the property to an unaffiliated third party.
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.
	
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 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, 2006, ISA had one hundred and two (102) full-time employees as 	follows: recycling 69, management services 16, sales/leasing 4 and 	administration/information technology 13. 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.
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, 	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.
ITEM 	1A.
ITEM 	1A. Risk Factors
Risk Factors
This 	Annual Report on Form 10-K includes "forward-looking statements" within the 	meaning of Section 21E of the Securities Exchange Act of 1934, as amended, 	including, in particular, certain statements about our plans, strategies and 	prospects. Although we believe that our plans, intentions and expectations 	reflected in or suggested by such forward-looking statements are reasonable, 	we cannot assure you that such plans, intentions or expectations will be 	achieved. Important factors that could cause our actual results to differ 	materially from our forward-looking statements include those set forth in 	this Risk Factors section. All forward-looking statements attributable to us 	or any persons acting on our behalf are expressly qualified in their 	entirety by the cautionary statements set forth below. Unless the context 	requires otherwise, all references to the "company," "we," "us" or "our" 	include Industrial Services of America, Inc. and subsidiaries.
If any of 	the following risks, or other risks not presently known to us or that we 	currently believe to not be significant, develop into actual events, then 	our business, financial condition, results of operations, cash flows or 	prospects could be materially adversely affected.
Risks 	Related to Our Operations
Our business 	has increasing involvement in ferrous, non-ferrous and fiber recycling. 	Currently, the prices of metals are high, but changes in 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.
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 2004, 2005 and 2006, we 	experienced increases in the cost of fuel and other petroleum-based 	products. 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 2007. 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 	materials from our operations were disposed of, which could result in future 	expenditures that cannot be currently quantified 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, 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. 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:
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our quarterly operating results or the 				operating results of our companies in the waste management or 				ferrous, non-ferrous and fiber recycling industry;
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changes in general conditions in the economy, 				the financial markets or the ferrous, non-ferrous and fiber 				recycling industry;
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loss of significant customers, as was the 				case with the loss of Home Depot; and
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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.
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:
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an approximately 22,750 square foot 				building used as the corporate and CWS offices;
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an approximately 8,286 square foot building 				used for sales/leasing and information technology offices;
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an approximately 13,995 square foot building 				used as the paper recycling plant;
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an approximately 12,000 square foot building 				used for the metals recycling plant;
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an approximately 51,760 square foot building 				used as the recycling offices and warehouse space;
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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 is for ten years with two five-year option 	periods available thereafter. 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. 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 from 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 2005 and 2006, our payments to K&R of $4,000 for additional rent and 	the payment from K&R 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, 2007, 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. K&R 	shall provide strategic planning for mergers and acquisitions. We are 	responsible for all of K&R's expenses and 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 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; 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 	-- Pineville, 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.
Item 	3.
Item 	3. Legal Proceedings.
Effective 	as of May 5, 2006, we entered into an agreement with Andrew M. Lassak to 	settle Mr. Lassak's claims against us in Lassak v. Industrial Services of 	America, Inc., et al, No. 04-423-CA (Fla. 19th Cir. Ct. filed June 2, 	2004). Lassak's demands and claims included rights to purchase 240,500 	shares of our common stock for $1.25 per share, rights to purchase 149,500 	shares of our common stock for $3.00 per share, and demand and piggyback 	registration rights as well as cashless exercise rights with respect to such 	options. Since the inception of the suit, we had disputed Lassak's claims 	and had denied any liability for Lassak's claims and demands. Pursuant to 	the settlement agreement, we allowed Lassak to exercise a reduced number of 	the options he was seeking -- 40,000 at an exercise price of $1.25 per share. 	Lassak tendered to us the full exercise price for the 40,000 options and we 	filed a registration statement for the underlying shares with the Securities 	and Exchange Commission on May 24, 2006. The registration was declared 	effective by the Securities and Exchange Commission on June 12, 2006. We 	then delivered 40,000 registered shares to Lassak, thereby satisfying all 	our requirements under the settlement agreement and effectively concluding 	this matter.
Item 	4.
Item 	4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5.
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:
There were 	approximately 383 shareholders of record as of December 31, 2006.
On 	February 26, 2004, we approved a two for one stock split distributed on 	March 30, 2004 to shareholders of record on March 16, 2004. The stock split 	required retroactive restatement of all historical share and per share data. 	
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, which we did declare and pay on 	one occasion in the amount of $.10 per share on September 21, 2004. Our 	Board of Directors has the discretionary power to declare dividends within 	the constraints of our loan agreement with the Branch Banking and Trust 	Company.
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 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.
	
The following performance graph compares the 	performance of ISA's Common Stock to the Standard & Poors 500 and to a peer 	group for the period commencing December 2001. Since there is no nationally 	recognized industry index consisting of consultants in the business of 	retail and industrial waste management sales and service of waste handling 	equipment to be used as a peer group index, ISA constructed its own peer 	group. This peer group is comprised of four companies which represent the 	other public companies in the industry -- Casella Waste Systems, Inc., 	Republic Services, Inc., Waste Connections, Inc., and Waste Holdings, Inc. 	The returns of each member of the peer group are weighted according to each 	member's stock market capitalization as of the beginning of the period 	measured. The graph assumes that the value of the investment in ISA's 	Common Stock and each index was $100 at December 2001 and that all dividends 	were reinvested.
	
	
Item 	6.
Item 	6. Selected Financial Data.
Selected Financial Data
* adjusted for 	two-for-one stock split effective February 26, 2004
Item 	7.
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 1,721 customer 	locations throughout the United States and we utilize an active database of 	over 6,100 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 and Lexington, Kentucky, and Seymour, 	Indiana. We plan to close the Lexington location in the first quarter of 	2007. We do not have operating locations outside the United States.
	
Liquidity and Capital Resources
As of 	December 31, 2006, we held cash and cash equivalents of $1,331,807.
On 	December 22, 2006, ISA executed a new revolving credit facility with BB&T 	increasing the borrowing line from $5.0 million to $10.0 million to provide 	ISA with working capital to support the current needs of our business. This 	revolving credit facility has a three year term, 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 (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, 7.57% as of December 	31, 2006, and is secured by all ISA assets (except rental fleet equipment). 	The revolving credit facility contains certain restrictive and financial 	covenants. At December 31, 2006, ISA was 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, 2006 we 	had borrowed $1,929,016 and as of December 31, 2005, there were no 	borrowings 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, 2006, we were in compliance with 	all restrictive covenants.
During 	2006, we purchased $2,352,509 of property and equipment, including $186,178 	in equipment under a capital lease. In the recycling segment we spent 	$1,334,583 for an automobile crusher, a forklift, a loader, a Mack truck, a 	front scale, open top containers, crane improvements, and upgrades to our 	radiation detection system. In the equipment sales, leasing and service 	segment, we purchased $902,120 in rental equipment that we located at 	customer sites. This rental fleet equipment consists of solid waste 	handling and recycling equipment such as compactors, containers and balers. 	It is our intention to continue to pursue this market. We purchased office 	equipment of $78,251 and spent $37,555 on buildings and improvements.
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, 2006 was $687,437 with a due date of January 	27, 2007; the entire balance was paid before the due date. The card accrues 	interest at prime plus 5.9% after the first twenty-five days of the 	purchase; 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 2007.
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 	$100,000 and $50,000 at December 31, 2006 and 2005, respectively. 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.
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 during the period from 1998 to 2001 previously 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.
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, 2006, we determined no impairment 	existed.
Effective 	January 1, 2002, we adopted Statement of Financial Accounting Standards ("SFAS") 	No. 142, "Goodwill and Other Intangible Assets," which requires that we 	review goodwill at least annually for impairment based on the fair value 	method. At December 31, 2006, we determined, based on current industry and 	other market information, that no impairment existed.
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 	Operations bear to total revenues and other pertinent data:
Year ended December 31,
			
			
			
			
			
			
Consolidated Statements of Operations Data:
			
			
			
			
Total 			revenue .............................................
			
100.0%
100.0%
100.0%
Total cost of goods 			sold.............................
			
85.4%
93.5%
94.1%
Selling, general and 			administrative
			
			
			
			
Expenses 			......................................................
			
9.0%
5.0%
4.0%
Income before other income (expense).......
			
5.6%
1.5%
1.9%
Year Ended 	December 31, 2006 Compared to Year Ended December 31, 2005
Total 	revenue decreased $55,299,811 or 47.1% to $62,082,048 in 2006 compared to 	$117,381,859 in 2005. Management services revenue decreased $67,888,697 or 	84.2% to $12,712,073 in 2006 compared to $84,451,367 in 2005. This change 	is primarily to due to the loss of Home Depot as a customer in October 	2005. Recycling revenue increased $15,014,085 or 50.1% to $44,967,023 in 	2006 compared to $29,952,938 in 2005. This change is due to an increase of 	19% in the volume of shipments and an increase of 36% in average cost per 	ton. Equipment, service and leasing revenue decreased $1,249,770 or 42.0% 	to $1,727,784 in 2006 compared to $2,977,554 in 2005. This decrease is 	primarily due to decreases in equipment sales and service revenue, offset by 	growth in equipment rental revenue.
	Total cost of goods sold decreased $56,780,120 or 51.7% to $52,996,441 in 	2006 compared to $109,776,561 in 2005. Management services cost of 	goods sold decreased $66,616,456 or 82.6% to $13,984,314 in 2006 compared to 	$80,600,770 in 2005. This change is primarily due to the loss of Home 	Depot as a customer. Additionally, we reduced cost of goods sold by 	$1,272,241 in 2006 due to a change in management's estimate related to the 	liability associated with this operation which includes the contract 	settlement with our former customers. Recycling cost of goods sold increased $12,177,245 or 	44.7% to $39,448,957 in 2006 compared to $27,271,712 in 2005 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 55.6%. 	Equipment, service and leasing cost of goods sold decreased $1,068,668 or 	56.1% to $835,411 in 2006 compared to $1,904,079 in 2005. This decrease is 	primarily due to the decrease in equipment sales.
Selling, 	general and administrative expenses decreased $206,646 or 3.6% to $5,609,959 	in 2006 compared to $5,816,605 in 2005. The decrease in SG&A is due to a 	decrease in labor and related benefits ($306,000) offset by an increase in 	bad debt expense ($93,464).
- Labor 	and related benefits decreased $306,000 due to the loss of Home Depot as a 	customer.
- Bad debt 	expense increased $93,464 primarily due to the write-off of All County & 	Delta Management in 2006.
As a 	percentage of total revenue, selling, general and administrative expenses 	were 9.0% in 2006 compared to 5.0% in 2005.
Interest 	expense increased $138,706 or 187% to $212,722 in 2006 compared to $74,016 	in 2005 due to an increase in long term debt in 2006 compared to a payoff of 	debt during 2005. Other income was $32,930 in 2006 compared to other income 	of $3,424 in 2005. This increase of $29,506 is primarily due to bankruptcy 	recoveries.
	Significant components of other income (expense) are as follows:
Income tax provision increased $585,496 to $1,325,929 	in 2006 compared to $740,433 in 2005. The effective tax rate in 2006 was 	37.7 % compared to approximately 40.2% in 2005 based on federal and state 	statutory rates. The provision for income taxes increased 4.2% to 37.7% for 	the year ended December 31, 2006 compared to 33.5% for the nine months ended 	September 30, 2006.
	
The provision for income taxes increased 4.2% to 	37.7% for the year ended December 31, 2007 compared to 33.5% for the nine 	months ended September 30, 2006.
	
The parties agreed mutually to decrease the taxable 	base of the common stock awarded to Andrew M. Lassak on June 15, 2006. 	Based on the increase in profit in the fourth quarter of 2006, the impact of 	the tax benefit of the common stock had less impact on the income tax 	provision for the year ended December 31, 2006 compared to the income tax 	provision for the nine months ended September 30, 2006.
Financial 	Condition at December 31, 2006 compared to December 31, 2005
Cash and 	cash equivalents decreased $389,494 to $1,331,807 as of December 31, 2006 	compared to $1,721,301 as of December 31, 2005.
Net cash 	from operating activities decreased $5,075,653 to net cash used of 	($1,216,923) as of December 31, 2006 compared to $3,858,730 as of December 	31, 2005. This decrease was directly related to the decrease in accounts 	payable of $3.7 million which is primarily due to the loss of Home Depot as 	a customer in October 2005.
We used 	net cash from investing activities of $2,058,807 for the year ending 	December 31, 2006 compared to $1,678,318 for the same period in 2005. The 	difference of $380,489 was primarily due to $348,446 more in property and 	equipment purchases in 2006 than in 2005.
Net cash 	from financing activities increased $4,475,037 to $2,886,236 for the year 	ending December 31, 2006 compared to net cash used of ($1,588,801) for the 	same period in 2005. Proceeds from long term debt totaled $10,710,875 in 	2006, and payments on long-term debt were $7,770,984 in 2006 and $1,000,000 	in 2005.
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 (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, 2006 we had borrowed $1,010,875 and as of 	December 31, 2005, there were no borrowings against the credit facility. 	The revolving credit facility contains certain restrictive and financial 	covenants. At December 31, 2006, 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, 2006 	we had borrowed $1,929,016 and as of December 31, 2005, there were no 	borrowings 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, 2006, 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, 2006 was $687,437.
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 2007. 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 2007.
Trade 	accounts receivable after allowances for doubtful accounts increased 	$523,596 or 11.6% to $5,026,441 as of December 31, 2006. 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 $1,307,628 or 50.4% to $3,903,681 as of 	December 31, 2006 compared to $2,596,053 as of December 31, 2005. 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 15% as of December 31, 2006 	compared to December 31, 2005. On average, sales prices increased $20 per 	gross ton or 8.9% to $244 as of December 31, 2006 compared to $224 as of 	December 31, 2005. On average, volume of nonferrous shipments in pounds 	increased 13% as of December 31, 2006 compared to December 31, 2005. On 	average, sales prices increased 57.0% as of December 31, 2006 compared to 	December 31, 2005.
CWS 	accounts receivable decreased $704,467 or 39.3% to $1,089,080 as of December 	31, 2006 compared to $1,793,547 as of December 31, 2005. This change is 	primarily due to the loss of Home Depot as a customer.
WESSCO 	accounts receivable decreased $85,431 or 100% to $0 as of December 31, 2006 	compared to $85,431 as of December 31, 2005. This change is primarily due 	to a decrease in equipment sales.
	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 $939,617 or 37.8% to 	$3,428,226 as of December 31, 2006 compared to $2,488,609 as of December 31, 	2005. Inventories as of December 31, 2006 and December 31, 2005 consist of 	the following:
December 31,
December 31,
Ferrous
$ 1,667,937
$ 1,380,050
Non-Ferrous
1,678,655
961,085
Waste equipment machinery
56,200
120,922
Other
25,434
26,552
Total inventories
$ 3,428,226
$ 2,488,609
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. For the year ended December 31, 2005, we shipped 66,155 gross 	tons of ferrous material. During the same period, we purchased 66,947 gross 	tons of ferrous material. We did not write down ferrous inventory in 2006. 	As of December 31, 2005, ferrous inventory consisted of 7,750 gross tons at 	a unit cost of $178.07 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, 2006, the purchase price plus 	processing costs of ferrous material averaged $157.25 per gross ton compared 	to $136.31 per gross ton in 2005.
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. For the year ended December 31, 2005, we shipped 	19,622,793 pounds of nonferrous material. During the same period, we 	purchased 18,660,006 pounds of nonferrous material. We did not write down 	nonferrous inventory in 2006. As of December 31, 2006, nonferrous inventory 	consisted of 1,601,554 pounds with a unit cost of $0.960 per pound. As of 	December 31, 2005, nonferrous inventory consisted of 1,569,770 pounds at a 	unit cost of $0.612 per pound. For the year ended December 31, 2006, the 	purchase price plus processing costs of non-ferrous material has averaged 	$0.960 per pound compared to $0.608 per pound in 2005.
Year
Inventory Type
Gross Tons
Unit Cost
Amount
Ferrous
7,750
$178.07
$1,380,050
Ferrous
9,400
177.44
1,667,937
Year
Inventory Type
Pounds
Unit Cost
Amount
Nonferrous
1,569,770
$0.61
$ 961,085
Nonferrous
1,748,600
0.96
1,678,655
Accounts 	payable trade decreased $3,737,224 or 45.1% to $4,545,057 as of December 31, 	2006 compared to $8,282,281 as of December 31, 2005. Recycling accounts 	payable increased $202,592 or 18.5% to $1,298,537 as of December 31, 2006 	compared to $1,095,945 as of December 31, 2005. 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 decreased $3,886,325 or 56.7% to $2,969,252 as of December 	31, 2006 compared to $6,855,577 as of December 31, 2005. This change is 	primarily due to the loss of Home Depot as a customer.
WESSCO 	accounts payable decreased $51,159 or 20.0% to $205,168 as of December 31, 	2006 compared to $256,327 as of December 31, 2005. This change is due to a 	decrease in equipment sales.
Working 	capital increased $4,415,407 to $3,524,0982 as of December 31, 2006 compared 	to a deficit of $861,309 as of December 31, 2005. Net income of $2,188,579, 	depreciation of $1,745,905, and pay down of accounts payable of $3,737,224 	were positive contributors to working capital in 2006. During 2006, we used 	these positive working capital contributors to purchase property and 	equipment of $2,166,331.
Contractual 	Obligations
The 	following table provides information with respect to our known contractual 	obligations for the year ended December 31, 2006.
Payments due by 	period
			Obligation Description
			Total
Less
			than 1 year
			1-3 years
			3-5 years
More
			than 5 years
			Capital Lease Obligations (1)
296,386 			
228,533
67,853
			Operating Lease Obligations (2)
738,418
612,245
122,798
3,375
			Total
$1,034,804
$840,778
$190,651
$ 3,375
$0
(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 May 2008.
(2) We lease 	the Louisville, Kentucky facility from a related party under an operating 	lease expiring December 2007. We have monthly rental payments of $42,106 	through December 2007. 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 $2,525 are due 	through September 2007. 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 unaffiliated third 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.
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.
Year Ended 	December 31, 2005 Compared to Year Ended December 31, 2004
Total 	revenue decreased $22,206,217 or 15.9% to $117,381,859 in 2005 compared to 	$139,588,076 in 2004. Management services revenue decreased $8,823,712 or 	9.5% to $84,451,367 in 2005 compared to $93,275,079 in 2004. This change is 	primarily to due to the loss of Home Depot as a customer in October 2005. 	Recycling revenue decreased $13,309,875 or 30.8% to $29,952,938 in 2005 	compared to $43,262,813 in 2004. This change is due to a decrease of 31% in 	the volume of shipments (the volume of shipments in 2004 was abnormally 	high). Equipment, service and leasing revenue decreased $72,630 or 2.4% to 	$2,977,554 in 2005 compared to $3,050,184 in 2004. This decrease is 	primarily due to decreases in cardboard and rental equipment sales offset by 	growth in equipment sales attributable to a larger sales staff.
Total cost 	of goods sold decreased $21,609,599 or 16.4% to $109,776,561 in 2005 	compared to $131,386,160 in 2004. Management services cost of goods sold 	decreased $8,843,157 or 9.9% to $80,600,770 in 2005 compared to $89,443,927 	in 2004. This change is primarily due to the loss of Home Depot as a 	customer. Recycling cost of goods sold decreased $12,857,324 or 32.0% to 	$27,271,712 in 2005 compared to $40,129,036 in 2004 due to a decrease in the 	volume of shipments as well as a decrease in the volume of purchases of 	30%. Equipment, service and leasing cost of goods sold increased $90,882 	or 5.0% to $1,904,079 in 2005 compared to $1,813,197 in 2004. This increase 	is primarily due to the growth in equipment sales attributable to the 	expansion of the sales staff.
Selling, 	general and administrative expenses increased $252,582 or 4.5% to $5,816,605 	in 2005 compared to $5,564,023 in 2004. The increase in SG&A is due to 	increases in depreciation ($93,000), accounting ($45,000), insurance 	($44,000), legal ($35,000), labor ($26,000) and repairs and other expenses 	($72,000), offset by a decrease in operating supplies ($63,000) expense. 	
-
			Depreciation increased $93,000 due to a large purchase of containers 			in September 2004. We are using these containers in Florida 			and New Orleans, primarily for cleanup due to the hurricanes.
-
			Accounting expenses increased $45,000 due to consultations with our 			independent accountants on periodic SEC reviews, Sarbanes-Oxley 			compliance and increased tax work.
-
			Insurance increased $44,000 because of increases in general 			liability insurance and directors and officers insurance.
-
			Labor and consulting expenses increased $26,000 due to the addition 			of sales, accounting and administrative employees, and due to an 			increase in health insurance costs.
-
			Legal expenses increased $35,000 primarily due to expenses related 			to the Lassak 	case.
-
			Equipment repairs and maintenance increased $72,000 due to increased 			repairs and maintenance in the equipment, service and leasing 			segment. We have $877,751 more in rental equipment than we did 			in the fourth quarter of 2004. Additionally, the price of 			steel, used for fabrication, has increased since last year.
-
			Operating supplies decreased $63,000 because of a decrease in 			repairs on equipment in the recycling segment due to a lower volume 			of material that needed to be processed.
As a 	percentage of total revenue, selling, general and administrative expenses 	were 5.0% in 2005 compared to 4.0% in 2004.
Interest 	expense decreased $117,570 or 61.4% to $74,016 in 2005 compared to $191,586 	in 2004 due to payoff of debt during 2005. Other income was $3,424 in 2005 	compared to other income of $21,832 in 2004. This decrease of $18,408 is 	primarily due to 2004 income of $13,300 derived from Canadian exchange 	rates.
	Significant components of other income (expense) are as follows:
Income tax 	provision decreased $271,568 to $740,433 in 2005 compared to $1,012,001 in 	2004. The effective tax rate in 2005 and 2004 was approximately 40% based 	on the federal and state statutory rates.
Financial Condition at December 31, 2005 compared to December 	31, 2004
	
Cash and 	cash equivalents increased $591,611 to $1,721,301 as of December 31, 2005 	compared to $1,129,690 as of December 31, 2004.
Net cash 	from operating activities decreased $1,591,620 to $3,858,730 as of December 	31, 2005 compared to $5,450,350 as of December 31, 2004. This decrease was 	directly related to the decrease in accounts payable of $3,800,395 which is 	primarily due to the loss of Home Depot in October 2005.
We used 	net cash for investing activities of $1,678,318 for the year ending December 	31, 2005 compared to $2,144,045 for the same period in 2004. The difference 	was primarily due to an advance we made to a related party of $302,160 in 	2004, as compared to our receipt of payments on this note receivable 	totaling $37,770 in 2005.
We used 	net cash for financing activities of $1,588,801 for the year ending December 	31, 2005 compared to $2,839,387 for the same period in 2004. Payments on 	long-term debt were $1,000,000 in 2005 compared to $2,762,908 in 2004. The 	payments in 2004 included an advance principal payment of maturities of 	long-term debt due in 2005 of $180,000. We retired the remaining long-term 	debt of $1,000,000 in 2005.
We paid 	our first dividend of $353,547 in 2004. We will continue to monitor our 	cash position and may pay dividends in the future. We received proceeds of 	$436,141 from the exercise of common stock options in 2004. This strong 	cash flow from the exercise of common stock options will not continue in the 	future based on only 20,000 options remaining outstanding, all with an 	exercise price of $1.25 as of December 31, 2005. We did not plan to grant 	new stock options in the immediate future.
On January 	14, 2005, we replaced our previous $3.8 million senior revolving credit 	facility with a new $5 million senior revolving credit facility that expires 	in January 2008. At December 31, 2005, we did not have any short-term 	borrowings outstanding. The credit facility requires us to comply with 	certain debt covenants. We were in compliance with these covenants at 	December 31, 2005.
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, 2005 was $1,465,860.
Trade 	accounts receivable after allowances for doubtful accounts decreased 	$4,074,483 or 47.5% to $4,502,845 as of December 31, 2005. The primary 	reason for the decrease in trade accounts receivable after allowances for 	doubtful accounts is the loss of Home Depot as a customer.
Recycling 	accounts receivable decreased $188,806 or 6.8% to $2,596,053 as of December 	31, 2005 compared to $2,784,859 as of December 31, 2004. Aggressive 	collection methods had a direct impact on decreasing accounts receivable in 	the recycling segment, as well as decreases in the volume of shipments and 	sale prices. On average, volume of ferrous shipments in gross tons 	decreased 31% as of December 31, 2005 compared to December 31, 2004. On 	average, sales prices decreased $34 per gross ton or 13% to $224 as of 	December 31, 2005 compared to $258 as of December 31, 2004. On average, 	volume of nonferrous shipments in pounds decreased 22.7% as of December 31, 	2005 compared to December 31, 2004. On average, sales prices increased 6.2% 	as of December 31, 2005 compared to December 31, 2004.
CWS 	accounts receivable decreased $3,786,957 or 67.9% to $1,793,547 as of 	December 31, 2005 compared to $5,580,504 as of December 31, 2004. This 	change is primarily due to the loss of Home Depot as a customer.
WESSCO 	accounts receivable decreased $103,069 or 54.7% to $85,431 as of December 	31, 2005 compared to $188,500 as of December 31, 2004. This change is 	primarily due to decreases in cardboard and rental equipment sales.
	Inventories consisted principally of ferrous and nonferrous scrap materials 	and waste equipment machinery held for resale. We valued inventory at the 	lower of cost or market. Inventory increased $336,235 or 15.6% to 	$2,488,609 as of December 31, 2005 compared to $2,152,374 as of December 31, 	2004. Inventories as of December 31, 2005 and December 31, 2004 consisted 	of the following:
December 31,
December 31,
Ferrous
$ 1,380,050
$ 1,140,905
Non-Ferrous
961,085
870,038
Waste equipment machinery
120,922
118,249
Other
26,552
23,182
Total inventories
$ 2,488,609
$ 2,152,374
For the 	year ended December 31, 2005, we shipped 66,155 gross tons of ferrous 	material. During the same period, we purchased 66,947 gross tons of ferrous 	material. For the year ended December 31, 2004, we shipped 95,444 gross 	tons of ferrous material. During the same period, we purchased 94,552 gross 	tons of ferrous material. For the year ended December 31, 2004, we wrote 	down ferrous inventory by 3,131 gross tons. The remaining ferrous inventory 	was not impaired. We included the ferrous inventory charges of $721,382 in 	cost of sales in 2004. We took these ferrous inventory charges to adjust 	inventory for the accumulation of water, dirt, and other materials that had 	no value. These materials existed 	in almost every load and we needed to make periodic adjustments to correct 	the amount of inventory available for sale. We instituted new methods of 	purchasing to reduce the possibility of these types of write-downs in the 	future. We did not write down ferrous inventory in 2005. As of December 31, 	2004, ferrous inventory consisted of 5,763 gross tons with a unit cost of 	$197.97 per gross ton. As of December 31, 2005, ferrous inventory consisted 	of 7,750 gross tons at a unit cost of $178.07 per gross ton. For the year 	ended December 31, 2005, the purchase price plus processing costs of ferrous 	material averaged $136.31 per gross ton compared to $230.40 per gross ton in 	2004.
For the 	year ended December 31, 2005, we shipped 19,622,793 pounds of nonferrous 	material. During the same period, we purchased 18,660,006 pounds of 	nonferrous material. For the year ended December 31, 2004, we shipped 	26,497,088 pounds of nonferrous material. During the same period, we 	purchased 27,216,918 pounds of nonferrous material. For the year ended 	December 31, 2004, we wrote down nonferrous inventory by 13,438 pounds. The 	remaining nonferrous inventory was not impaired. We included the nonferrous 	inventory charges of $8,641 in cost of sales in 2004. We took these 	nonferrous inventory charges to adjust inventory for the accumulation of 	water, dirt, and other materials that had no value. These materials existed 	in almost every load and we needed to make periodic adjustments to correct 	the amount of inventory available for sale. We improved our training 	methods and instituted new methods of purchasing to reduce the possibility 	of these types of write-downs in the future. We did not write down 	nonferrous inventory in 2005. As of December 31, 2004, nonferrous inventory 	consisted of 1,364,863 pounds with a unit cost of $0.637 per pound. As of 	December 31, 2005, nonferrous inventory consisted of 1,569,770 pounds at a 	unit cost of $0.612 per pound. For the year ended December 31, 2005, the 	purchase price plus processing costs of non-ferrous material averaged $0.608 	per pound compared to $0.643 per pound in 2004.
Year
Inventory Type
Gross Tons
Unit Cost
Amount
Ferrous
5,763
$197.97
$1,140,905
Ferrous
7,750
$178.07
$1,380,050
Year
Inventory Type
Pounds
Unit Cost
Amount
Nonferrous
1,364,863
$0.64
$ 870,038
Nonferrous
1,569,770
$0.61
$ 961,085
Accounts 	payable trade decreased $3,800,395 or 31.5% to $8,282,281 as of December 31, 	2005 compared to $12,082,676 as of December 31, 2004. Recycling accounts 	payable decreased $438,030 or 28.6% to $1,095,945 as of December 31, 2005 	compared to $1,533,975 as of December 31, 2004. This decrease was primarily 	due to the decrease in volume of commodity purchases at respective year-ends 	and decreased commodity purchase prices of ferrous materials. Our accounts 	payable payment policy in the recycling segment was consistent between 	years.
CWS 	accounts payable decreased $3,569,331 or 34.2% to $6,855,577 as of December 	31, 2005 compared to $10,424,908 as of December 31, 2004. This change was 	primarily due to the loss of Home Depot as a customer.
WESSCO 	accounts payable increased $132,534 or 107.1% to $256,327 as of December 31, 	2005 compared to $123,793 as of December 31, 2004. This change was due to 	an increase in equipment sales, which was the result of an expansion of the 	sales staff.
Working 	capital increased $73,657 to a deficit of $861,309 as of December 31, 2005 	compared to a deficit of $934,966 as of December 31, 2004. Net income of 	$1,101,597, depreciation of $1,709,668 and tax benefits related to common 	stock options exercised of $451,377 were positive contributors to working 	capital in 2005. During 2005, we used these positive working capital 	contributors to make advance principal payments on debt of $1,000,000 and 	purchase property and equipment of $1,817,885.
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
SFAS No. 	154, Accounting Changes and Error Corrections, replaces APB Opinion No. 20, 	Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes 	in Interim Financial Statements, and changes the requirements for the 	accounting for and reporting of a change in accounting principle. SFAS No. 	154 applies to all voluntary changes in accounting principle. It also 	applies to changes required by an accounting pronouncement in the unusual 	instance that the pronouncement does not include specific transition 	provisions. SFAS No. 154 requires retrospective application to prior 	periods' financial statements of changes in accounting principle, unless it 	is impracticable to determine either the period-specific effects or the 	cumulative effect of the change. SFAS No. 154 was issued May 2005 and is 	effective for accounting changes and corrections of errors made in fiscal 	years beginning after December 15, 2005. We do not expect this standard to 	significantly impact our financial statements.
The 	Financial Accounting Standards Board has published SFAS No. 157, Fair Value 	Measurements, to eliminate the diversity in practice that exists due to the 	different definitions of fair value and the limited guidance for applying 	those definitions in GAAP that are dispersed among the many accounting 	pronouncements that require fair value measurements. SFAS No. 157 defines 	fair value 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 (an exit price). SFAS No. 157 also stipulates that, 	as a market-based measurement, fair value measurement should be determined 	based on the assumptions that market participants would use in pricing the 	asset or liability, and establishes a fair value hierarchy that 	distinguishes between (a) market participant assumptions developed based on 	market data obtained from sources independent of the reporting entity 	(observable inputs) and (b) the reporting entity's own assumptions about 	market participant assumptions developed based on the best information 	available in the circumstances (unobservable inputs).
SFAS No. 	157 is effective for financial statements issued for fiscal years beginning 	after November 15, 2007, and interim periods within those fiscal years, 	although earlier application is encouraged. Additionally, prospective 	application of the provisions of SFAS No. 157 is required as of the 	beginning of the fiscal year in which it is initially applied, except when 	certain circumstances require retrospective application.
	Interpretation No. 48, Accounting for Uncertainty in Income Taxes -- an 	interpretation of FASB Statement No. 109 (issued June 2006), clarifies the 	accounting for uncertainty in income taxes recognized in an enterprise's 	financial statements in accordance with FASB Statement No. 109, Accounting 	for Income Taxes. This Interpretation prescribes a recognition threshold and 	measurement attribute for the financial statement recognition and 	measurement of a tax position taken or expected to be taken in a tax return. 	This Interpretation also provides guidance on derecognition, classification, 	interest and penalties, accounting in interim periods, disclosure, and 	transition. This Interpretation is effective for fiscal years beginning 	after December 15, 2006. The adoption of this standard on January 1, 2007 	did not have an impact on our consolidated financial statements.
Item 	7A.
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 interest rate risk on our floating rate borrowings. As of 	December 31, 2006, variable rate borrowings consisted of outstanding 	borrowings of $1,010,875 under our credit agreement. Borrowings on our 	credit agreement bear interest at the prime rate less 1/8. Any increase in 	prime rate would lead to higher interest expense. We do not have any 	interest rate swaps or caps in place, which would mitigate our exposure to 	fluctuations in the interest rate on this indebtedness. Based on our average 	anticipated borrowings under our credit agreement in fiscal 2007, a 	hypothetical increase or decrease in the prime rate by 1% would increase or 	decrease interest expense on our variable borrowings by approximately 	$10,000 per year, with a corresponding change in cash flows.
Item 	8.
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.
Item 9. Changes 	in and Disagreements with Accountants on Accounting and Financial 	Disclosure.
None
Item 	9A.
Item 	9A. Controls and Procedures.
(a) Evaluation 	of disclosure controls and procedures.
Based on the 	evaluation of the ISA Chief Executive Officer and the ISA Chief Financial 	Officer of our disclosure controls and procedures as of December 31, 2006, 	it has been concluded that the disclosure controls and procedures are 	effective for the purposes contemplated by Rules 13a-15(e) and 15d - 15(e) 	promulgated by the Securities and Exchange Commission.
(b) Changes in 	internal controls over financial reporting.
There have been no 	significant changes to ISA's internal controls or in other factors that have 	materially affected, or are reasonably likely to materially affect, these 	controls over financial reporting subsequent to December 31, 2006.
Item 9B.
Item 9B. Other 	Information.
None
PART III
Item 10.
Item 10. ISA 	Directors and Executive Officers. *
Item 	11.
Item 	11. Executive Compensation *
Item 	12.
Item 	12. Security Ownership of Certain Beneficial Owners, Management and 	Related Stockholder Matters. *
Item 	13.
Item 	13. Certain Relationships and Related Transactions. *
Item 	14.
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 2007 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.
Item 	15. Exhibits and Consolidated Financial Statement Schedules.
	(a)(1) The following consolidated financial statements of Industrial 	Services of America, Inc. are filed as a part of this report:
Page
Report of Independent 			Registered Public Accounting Firms
Consolidated Balance 			Sheets as of December 31, 2006 and 2005
Consolidated Statements 			of Income for the years
ended December 31, 			2006, 2005 and 2004
Consolidated Statements 			of Shareholders' Equity for the years ended
December 31, 2006, 			2005 and 2004
Consolidated Statements 			of Cash Flows for the years ended December 31, 2006, 2005 and 2004
Notes to Consolidated 			Financial Statements
	(a)(2) Consolidated Financial Statement Schedules.
Schedule II--Valuation 			and Qualifying Accounts for the
			 years ended December 31, 2006, 2005 and 2004
	(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, 2006, 	2005 and 2004 are incorporated by reference at page 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 27, 	2007 By : /s/ Harry Kletter
	 	 Harry Kletter, Chairman of the Board
	 	 and Chief Executive Officer
Pursuant 	to the requirements of the Securities Exchange Act of 1934, this report has 	been signed below by the following persons on behalf of the Registrant and 	in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Harry 			Kletter
Chairman of the Board and 			Chief
March 27, 2007
Harry Kletter
Executive Officer 			(Principal Executive
			Officer)
/s/ Alan L. 			Schroering
Chief Financial Officer
March 27, 2007
Alan L. Schroering
(Principal Financial 			Officer and
Principal Accounting 			Officer)
/s/ David W. 			Lester
Director
March 27, 2007
David W. Lester
/s/ Orson 			Oliver
Director
March 27, 2007
Orson Oliver
/s/ Roman 			Epelbaum
Director
March 27, 2007
Roman Epelbaum
/s/ Albert Cozzi 			
Director
March 27, 2007
Albert Cozzi
			
			
			
			
/s/ Craig Feltner 			
Director
March 27, 2007
Craig Feltner
			
			
			
			
/s/ Richard 			Ferguson
			
Director
March 27, 2007
Richard Ferguson
			
			
			
INDEX TO 	EXHIBITS
INDUSTRIAL SERVICES OF 			AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL 			STATEMENTS
December 31, 2006, 2005 			and 2004
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, 	2006 and 2005 and the related consolidated statements of operations, 	shareholders' equity and cash flows for the years then ended. 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 examining, on a test basis, evidence supporting the amounts 	and disclosures in the financial statements. An audit also includes 	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, 	2006 and 2005, and the results of its operations and its cash flows for the 	years then ended, 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 19, 2007
____________________________________________________________________________________
1.
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 statements of operations, 	shareholders' equity and cash flows of Industrial Services of America, Inc. 	and Subsidiaries for the year ended December 31, 2004. 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 audits.
We conducted our audit 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 examining, on a test basis, evidence supporting the amounts 	and disclosures in the financial statements. An audit also includes 	assessing the accounting principles used and significant estimates made by 	management, as well as evaluating the overall financial statement 	presentation. We believe that our audit provides a reasonable basis for our 	opinion.
In our opinion, the consolidated financial statements referred to above 	present fairly, in all material respects, Industrial Services of America, 	Inc. and Subsidiaries' results of its operations and its cash flows for the 	year ended December 31, 2004, 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.
	Crowe Chizek and Company, LLC
Louisville, Kentucky
January 28, 2005, except for Notes 3 and 6,
as to which the date is March 25, 2005
____________________________________________________________________________________
2.
See accompanying notes to consolidated financial statements.
	____________________________________________________________________________________
3.
See accompanying notes to consolidated financial 	statements.
	____________________________________________________________________________________
4.
	
	__________________________________________________________________________________________________________________________________
5.
	____________________________________________________________________________________
6.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
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, Canada and Mexico. 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. 			
_____________________________________________________________________________________
(Continued)
7.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In 			our management services division, the customer contacts us for 			service. We determine the type of waste removal service required to 			meet the customer's needs, and we use our discretion to choose from 			a selection of approved third party service suppliers. Upon our 			authorization, the third party service supplier uses its own 			trucking to remove waste materials from the customer's location. We 			pay the third party service suppliers on several different payment 			terms after we have received payment from the customers who are 			billed monthly. We recognize revenue after assessing the 			satisfactory performance of the service by the third party service 			supplier. Assessment includes our review of landfill weight tickets 			provided by the third party service supplier documenting completion 			of the contracted service.
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 consist primarily of 			amounts due from customers from product and brokered sales. The 			allowance for doubtful accounts totaled $100,000 and $50,000 at 			December 31, 2006 and 2005, respectively. 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 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 used to derive 			a significant portion of our revenues from one primary customer, The 			Home Depot, accounting for approximately 56% and 51% of 2005 and 			2004 total revenues, respectively, and approximately 24% and 23% of 			2005 and 2004 total gross profit, respectively. The revenue from 			this former customer represented approximately 77% and 76% of CWS 			revenues in 2005 and 2004, respectively. At December 31, 2005, 			amounts due from this former customer were $293,936. 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. and ISA 			Recycling, LLC. Upon consolidation, all intercompany accounts, 			transactions and profits have been eliminated.
_____________________________________________________________________________________
(Continued)
8.
INDUSTRIAL SERVICES OF 			AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT 			ACCOUNTING POLICIES (Continued)
Common Control: The Company 			conducts significant levels of business (see Note 6) with K&R, LLC 			(K&R), which is owned by the Company's principal shareholder. 			Because these entities are under common control, operating results 			or the financial position of the Company 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.
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 would recognize inventory 			impairment when the market value, based upon current market pricing, 			falls below recorded value or when the estimated volume is less than 			the recorded volume of the inventory. We would record the loss in 			cost of goods sold in the period during which we identified the 			loss.
Some commodities are in saleable 			condition at acquisition. We purchase these commodities in small 			amounts until we have a truckload of material available for 			shipment. Some commodities are not in saleable condition at 			acquisition. These commodities must be 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 $387,751 at December 31, 2006 and $242,295 			at December 31, 2005. Processing costs in non-ferrous inventory 			totaled $86,101 at December 31, 2006 and $71,595 at December 31, 			2005. Ferrous inventory of $1,667,937 at December 31, 2006 was 			comprised of $382,445 in raw materials and $1,285,492 of finished 			goods. Ferrous inventory of $1,380,050 at December 31, 2005 was 			comprised of $402,041 in raw materials and $978,009 of finished 			goods. Non-ferrous inventory of $1,678,655 at December 31, 2006 was 			comprised of $451,289 in raw materials and $1,227,366 of finished 			goods. Non-ferrous inventory of $961,085 at December 31, 2005 was 			comprised of $196,508 in raw materials and $764,577 of finished 			goods. We charged $2,353,435 in general and administrative 			processing costs to COS for the year ended December 31, 2006 and 			$2,015,733 for the year ended December 31, 2005.
_____________________________________________________________________________________
(Continued)
9.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
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, 2006 and 2005 consist of the 			following:
			
Ferrous materials
$ 1,667,937
$ 1,380,050
Non-Ferrous materials
1,678,655
961,085
Waste Equipment Machinery
56,200
120,922
Other
25,434
26,552
			
			
			
			
$ 3,428,226
$ 2,488,609
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, 2006 and 2005 consist of 			the following:
Life
Land
$ 1,581,550
$ 1,581,550
Equipment and vehicles
1-10 years
9,759,509
8,535,479
Office equipment
1-7 years
1,600,034
1,521,783
Rental equipment
3-5 years
4,238,555
3,376,443
Building and leasehold improvements
5-40 years
2,329,886
2,292,331
19,509,534
17,307,586
Less accumulated depreciation and 			
amortization
11,356,928
9,702,874
$ 8,152,606
$ 7,604,712
Depreciation expense for the years 			ended December 31, 2006, 2005 and 2004 was $1,745,905, $1,709,668 			and $1,538,161. Of the $1,745,905 depreciation expense recognized 			in 2006, $1,325,035 was recorded in cost of sales, and $420,870 was 			recorded in general and administrative expense.
_____________________________________________________________________________________
(Continued)
10.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
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:
$1,586,285
1,350,700
1,200,620
786,468
293,990
			
$5,218,063
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.
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.
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.
_____________________________________________________________________________________
(Continued)
11.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Stock Option Plans: During the year ended December 31, 2004 we 			granted options to purchase shares of our common stock to several of 			our officers and outside directors. We applied APB Opinion No. 25 			in accounting for our employees' stock option agreements. There was 			no compensation charged to operations in 2006, 2005, and 2004 			related to these options.
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.
_____________________________________________________________________________________
(Continued)
12.
INDUSTRIAL SERVICES OF 			AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
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, 			2006, 2005 and 2004:
Maximum
Weighted
Weighted
Remaining
Average
Average
Exercise
Term of
Grant Date
Number of
Exercise Price
Price Per
Options
Fair Value
Shares
Per Share
Share
Granted
of Options
Balance as of January 1, 2004
591,000
$1.75
$1.25
1 to 5
$1.12
to $3.00
years
Exercised
(320,000)
$1.41
$1.41
-
-
Expired
(231,000)
$2.31
$1.25
-
-
to $3.00
Balance as of December 31, 2004
40,000
$1.25
$1.25
1 to 3
$1.21
years
Expired
(20,000)
$1.25
$1.25
-
-
Balance as of December 31, 2005
20,000
$1.25
$1.25
1 to 3
$1.21
Years
Exercised
(20,000)
$1.25
$1.25
-
-
Balance as of December 31, 2006
-
-
-
-
-
_____________________________________________________________________________________
(Continued)
13.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS No. 123 (Revised 2005), Share-Based Payment, applies to awards 			granted or modified by ISA after July 1, 2005. Compensation cost is 			also to be recorded for prior option grants that vest after that 			date. The effect of adopting SFAS 123R on ISA's 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 and, therefore, 			cannot currently be estimated. There is no significant effect on 			ISA's consolidated financial position since total stockholders' 			equity is not impacted.
Effective as of May 5, 2006, we entered into an agreement with 			Andrew M. Lassak to settle Mr. Lassak's claims against us in Lassak 			v. Industrial Services of America, Inc., et al, No. 04-423-CA (Fla. 			19th Cir. Ct. filed June 2, 2004). Lassak's demands and claims 			included rights to purchase 240,500 shares of our common stock for 			$1.25 per share, rights to purchase 149,500 shares of our common 			stock for $3.00 per share, and demand and piggyback registration 			rights as well as cashless exercise rights with respect to such 			options. Since the inception of the suit, we have disputed Lassak's 			claims and have denied any liability for Lassak's claims and 			demands. Pursuant to the settlement agreement, we allowed Lassak to 			exercise a reduced number of the options he was seeking - 40,000 at 			an exercise price of $1.25 per share. Lassak tendered to us the full 			exercise price for the 40,000 options and we filed a registration 			statement for the underlying shares with the Securities and Exchange 			Commission on May 24, 2006. The registration was declared effective 			by the Securities and Exchange Commission on June 12, 2006. We then 			delivered 40,000 registered shares to Lassak, thereby satisfying all 			our requirements under the settlement agreement and effectively 			concluding this matter. The estimated fair value of these options 			is approximately $270,000. Additional expense of $34,309 associated 			with the value of the options was recognized in the third quarter of 			2006 and the remaining $235,691 was recognized in prior years 			1998-2001.
Fair Values 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, 2006 and 2005, 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.
_____________________________________________________________________________________
(Continued)
14.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of Recently Issued Accounting Standards: 			
SFAS No. 154, Accounting Changes and Error Corrections, replaces APB 			Opinion No. 20, Accounting Changes, and FASB Statement No. 3, 			Reporting Accounting Changes in Interim Financial Statements, and 			changes the requirements for the accounting for and reporting of a 			change in accounting principle. SFAS No. 154 applies to all 			voluntary changes in accounting principle. It also applies to 			changes required by an accounting pronouncement in the unusual 			instance that the pronouncement does not include specific transition 			provisions. SFAS No. 154 requires retrospective application to prior 			periods' financial statements of changes in accounting principle, 			unless it is impracticable to determine either the period-specific 			effects or the cumulative effect of the change. SFAS No. 154 was 			issued May 2005 and is effective for accounting changes and 			corrections of errors made in fiscal years beginning after December 			15, 2005. We do not expect this standard to significantly impact 			our financial statements.
SFAS No. 157, Fair Value Measurements, defines fair value 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 (an exit price). SFAS No. 157 also stipulates 			that, as a market-based measurement, fair value measurement should 			be determined based on the assumptions that market participants 			would use in pricing the asset or liability, and establishes a fair 			value hierarchy that distinguishes between (a) market participant 			assumptions developed based on market data obtained from sources 			independent of the reporting entity (observable inputs) and (b) the 			reporting entity's own assumptions about market participant 			assumptions developed based on the best information available in the 			circumstances (unobservable inputs). SFAS No. 157 is effective for 			financial statements issued for fiscal years beginning after 			November 15, 2007, and interim periods within those fiscal years, 			although earlier application is encouraged. We do not expect this 			standard to significantly impact our financial statements.
Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an 			interpretation of FASB Statement No. 109 (issued June 2006), 			clarifies the accounting for uncertainty in income taxes recognized 			in an enterprise's financial statements in accordance with FASB 			Statement No. 109, Accounting for Income Taxes. This Interpretation 			prescribes a recognition threshold and measurement attribute for the 			financial statement recognition and measurement of a tax position 			taken or expected to be taken in a tax return. This Interpretation 			also provides guidance on derecognition, classification, interest 			and penalties, accounting in interim periods, disclosure, and 			transition. This Interpretation is effective for fiscal years 			beginning after December 15, 2006. The adoption of this standard on 			January 1, 2007 did not have an impact on our consolidated financial 			statements.
_____________________________________________________________________________________
(Continued)
15.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 2 - NOTE PAYABLE TO BANK
On 			December 22, 2006, ISA executed a new revolving credit facility with 			BB&T increasing the borrowing line from $5.0 million to $10.0 			million to provide ISA 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 (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 which was 7.57% as of December 31, 2006, 			and is secured by all ISA assets (except rental fleet equipment). 			The revolving credit facility contains certain restrictive and 			financial covenants. At December 31, 2006, ISA was in compliance 			with all restrictive covenants.
NOTE 3 - LONG-TERM DEBT
Long-term debt as of December 31, 2006 and 2005 consists of the 			following:
Note payable to a 			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.
$ 1,929,016 			
$ -
Revolving credit 			facility with a bank 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 December 2009.
1,010,875
-
2,939,891
-
Less current 			maturities
149,431
-
$2,790,460
$ -
The annual maturities of long-term debt as of December 31, 2004 are as 	follows:
$ 149,431
159,962
1,182,111
183,305
			and thereafter
1,265,082
Total
$ 2,939,891
_____________________________________________________________________________________
(Continued)
16.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 4 -- INCOME 			TAXES
The income tax 			provision (benefit) consists of the following for the years ended 			December 31, 2006, 2005 and 2004:
A 			reconciliation of income taxes at the statutory rate to the reported 			provision is as follows:
Federal income tax at statutory rate
$1,194,933
$ 629,083
$ 853,127
State and local income taxes, net of
federal income tax effect
212,787
106,257
145,074
Permanent differences
(43,702)
-
-
Other differences, net
(38,089)
5,093
13,800
$1,325,929
$ 740,433
$ 1,012,001
The 			permanent differences of $(43,702) and the other differences, net of 			$(38,089) are due to a decreased taxable base of the common stock 			awarded to Andrew J. Lassak in the second quarter of 2006. This 			decrease was mutually agreed upon in the fourth quarter of 2006.
_____________________________________________________________________________________
(Continued)
17.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 4 - INCOME 			TAXES (Continued)
Significant 			components of the Company's deferred tax liabilities and assets as 			of December 31, 2006 and 2005 are as follows:
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, 2006 are as 				follows:
$ 			94,020
84,920
66,720
50,040
Minimum lease payments receivable
295,700
Less unearned income
(58,899)
Net investment in sales-type leases
236,801
Less current portion
(50,586)
$ 186,215
_____________________________________________________________________________________
(Continued)
18.
INDUSTRIAL 				SERVICES OF AMERICA, INC.
				AND SUBSIDIARIES
				NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
				December 31, 2006, 2005 and 2004
				____________________________________________________________________________________
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:
			
			
			
Balance sheet accounts:
			
			
			
			
			
Accounts receivable
$ -
			
$ -
			
$ -
			
			
			
			
			
			
Notes receivable
$ 238,566
			
$ 264,390
			
$ 302,160
			
			
			
			
			
			
Deposits (included in other long-term assets)
$ 62,106
			
$ 62,106
			
$ 62,106
			
			
			
			
			
			
			
			
			
			
			
			
Income statement activity:
			
			
			
			
			
Rent expense
$ 505,272
			
$ 505,272
			
$ 505,272
			
			
			
			
			
			
Consulting 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, 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. 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 2005 and 2006, 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.
_____________________________________________________________________________________
(Continued)
19.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 6 - RELATED 			PARTY TRANSACTIONS (Continued)
The Company 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 remains in 			effect until December 31, 2007, with automatic renewals thereafter 			unless one party provides written notice to theother party of its 			intent not to renew at least six months in advance of the next 			renewal date. 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. ISA's Chairman is compensated through these 			consulting fees .
NOTE 7 - EMPLOYEE RETIREMENT PLAN 			
The Company maintains 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, the Company 			matches 25% of each employee's voluntary contribution up to 6% of 			their gross salary. The expense under the plan for 2006, 2005 and 			2004 was $33,438, $31,996 and $28,950, respectively.
NOTE 8 - LEASE COMMITMENTS
Operating Leases:
The Company 			leases its Louisville, Kentucky facility from a related party (see 			Note 6) under an operating lease expiring December 2007. The rent 			was adjusted in January 2003 per the agreement to monthly payments 			of $42,106 through December 2007. In addition, the Company is also 			responsible for real estate taxes, insurance, utilities and 			maintenance expense.
The Company 			leases a facility in Dallas, Texas for management services 			operations. The agreement provided that monthly payments of $2,457 			were paid through September 2005. The lease was renewed effective 			October 1, 2005 for a period of two years with monthly payments of 			$2,525. The Company also leases other machinery and equipment 			under operating leases which expire through February 2009.
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.
______________________________________________________________________________________
(Continued)
20.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 8 -- LEASE 			COMMITMENTS (Continued)
Future minimum 			lease payments for operating leases as of December 31, 2006 are as 			follows:
$ 612,246
80,554
42,243
3,375
Future minimum lease payments
$ 738,418
Total rent 			expense for the years ended December 31, 2006, 2005 and 2004 was 			$784,954, $809,270 and $773,139, respectively.
Capital Leases:
The Company leases various pieces of equipment which 			qualify as capital leases. These lease arrangements require monthly 			lease payments expiring at various dates through November 2009.
The following is a summary of assets held under 			capital leases which are included in property and equipment:
Equipment
$ 757,513
$ 571,335
Less accumulated depreciation
168,904
159,525
$ 588,609
$ 411,810
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, 2006.
$ 233,992
60,786
7,475
Total future minimum lease 				payments
302,253
Lessamount representing 				interest
(5,867)
Present value of net minimum
lease payments
296,386
Less current portion
(228,533)
Capital Lease Obligations
$ 67,853
_____________________________________________________________________________________
(Continued)
21.
INDUSTRIAL SERVICES OF 			AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 9 - PER 			SHARE DATA
			
The computation for basic and diluted earnings per share is as 			follows:
NOTE 10 - 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.
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.
_____________________________________________________________________________________
(Continued)
22.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 10 - SEGMENT INFORMATION 			(Continued)
_____________________________________________________________________________________
(Continued)
23.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
_____________________________________________________________________________________
(Continued)
24.
INDUSTRIAL SERVICES OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
			
____________________________________________________________________________________
			
NOTE 11-- CONTINGENCY/LITIGATION 			SETTLEMENT
On June 2, 2004, Andrew M. 			Lassak filed a Complaint against us in the City of Stuart, Martin 			County, Florida. In the complaint, Lassak alleged that we breached 			our contracts with him by failing and refusing to release and 			register 390,000 shares of stock. He claims he was entitled to 			"piggyback" registration rights relating to the Form S-3 			Registration Statement that we filed for the benefit of Falkner as 			well as "demand" registration rights. He sought specific performance 			of the contracts and damages that occurred by ISA not releasing and 			registering the underlying shares relating to his options sooner.
On August 6, 2004 we filed a 			Motion to Dismiss or in the Alternative Motion for More Definite 			Statement. At a hearing before the Court on September 20, 2004, the 			judge granted our Motion without prejudice, allowing Lassak to amend 			the Complaint. Lassak filed an Amended Complaint on December 27, 			2004, which restated his previous claims and made a number of new 			claims including claims of federal and state securities fraud. The 			Amended Complaint also named Harry Kletter individually as a 			defendant. In June 2005, Lassak filed a Second Amended Complaint 			which is substantially similar to the first Amended Complaint. We 			filed an Answer and Affirmative Defenses to the Second Amended 			Complaint as well as a Motion to Dismiss on behalf of Harry Kletter 			that remains pending.
Effective as of May 5, 2006, 			we entered into an agreement with Mr. Lassak to settle Mr. Lassak's 			claims against us in Lassak v. Industrial Services of America, Inc., 			et al, No. 04-423-CA (Fla. 19th Cir. Ct. filed June 2, 2004). 			Lassak's demands and claims included rights to purchase 240,500 			shares of our common stock for $1.25 per share, rights to purchase 			149,500 shares of our common stock for $3.00 per share, and demand 			and piggyback registration rights as well as cashless exercise 			rights with respect to such options. Since the inception of the 			suit, we have disputed Lassak's claims and have denied any liability 			for Lassak's claims and demands. Pursuant to the settlement 			agreement, we allowed Lassak to exercise a reduced number of the 			options he was seeking -- 40,000 at an exercise price of $1.25 per 			share. Lassak tendered to us the full exercise price for the 40,000 			options and we filed a registration statement for the underlying 			shares with the Securities and Exchange Commission on May 24, 2006. 			The registration was declared effective by the Securities and 			Exchange Commission on June 12, 2006. We then delivered 40,000 			registered shares to Lassak, thereby satisfying all our requirements 			under the settlement agreement and effectively concluding this 			matter. The estimated fair value of these options is approximately 			$270,000. We recognized additional expense of $34,309 associated 			with the value of the options in the third quarter of 2006 and we 			had recognized the remaining $235,691 in prior years 1998-2001.
_________________________________________________________________________________________
(Continued)
25.
INDUSTRIAL SERVICES 			OF AMERICA, INC.
			AND SUBSIDIARIES
			NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
			December 31, 2006, 2005 and 2004
____________________________________________________________________________________
NOTE 12 -- SELECTED QUARTERLY 			FINANCIAL DATA (UNAUDITED)
1st
2nd
3rd
4th
Year
Revenue
$14,484,020
$17,702,634
$ 15,331,235
$14,564,159
$ 62,082,048
Income before other
income (expense)
688,693
1,007,525
511,167
1,268,263
3,475,648
Net income
416,526
602,757
439,568
729,728
2,188,579
Basic earnings per 			share
0.12
0.17
0.12
0.20
0.61
Diluted earnings per 			share
0.12
0.17
0.12
0.20
0.61
1st
2nd
3rd
4th
Year
Revenue
$29,674,470
$33,399,907
$ 34,579,729
$19,727,753
$117,381,859
Income before other
income (expense)
257,610
52,887
546,168
632,028
1,788,693
Net income
149,088
211,679
325,294
415,536
1,101,597
Basic earnings per 			share
0.04
0.06
0.09
0.12
0.31
Diluted earnings per 			share
0.04
0.06
0.09
0.12
0.31
1st
2nd
3rd
4th
Year
Revenue
$34,764,205
$34,054,273
$ 38,223,906
$32,545,692
$139,588,076
Income before other
income (expense)
803,300
613,084
798,076
423,433
2,637,893
Net income
449,284
363,693*
429,584
254,633
1,497,194
Basic earnings per 			share
0.14
0.10*
0.12
0.07
0.43
Diluted earnings per 			share
0.13
0.10*
0.12
0.07
0.42
* In the second quarter 2004, the 			net income amount of $363,693 (with basic and diluted earnings per 			share of $0.10) shown above is $127,300 less (with basic and diluted 			earnings per share of $0.04) than the net income amount of $490,933 			(with basic and diluted earnings per share of $0.14) previously 			reported in the second quarter report on Form 10-Q.
In the second quarter of 2004, a 			permanent tax benefit related to the exercise of non-employee 			options was inadvertently recorded as a reduction to income tax 			expense. After further review, we have determined that the tax 			benefit should instead be reported as an increase to additional paid 			in capital.
_________________________________________________________________________________________
26.
SUPPLEMENTARY INFORMATION