FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004

OR

[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to ________

Commission File Number 0-20979

INDUSTRIAL SERVICES OF AMERICA, INC.
(Exact Name of Registrant as specified in its Charter)

Florida

59-0712746

(State or other jurisdiction of

(IRS Employer

Incorporation or Organization)

Identification No.)

7100 Grade Lane, PO Box 32428
Louisville, Kentucky 40232
(Address of principal executive offices)

(502) 368-1661
(Registrant's Telephone Number, Including Area Code)

Check whether the registrant (1) has filed all Reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES    X      NO ___

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Act). Yes        No   X   

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 2004: 3,535,468.

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

INDEX

Page No.

Part I

Financial Information

Condensed Consolidated Balance Sheets

   June 30, 2004 and December 31, 2003 (Unaudited)

3

Condensed Consolidated Statements of

   Income - Three Months Ended

   June 30, 2004 and 2003 (Unaudited)

5

Condensed Consolidated Statements of

   Income - Six Months Ended

   June 30, 2004 and 2003 (Unaudited)

6

Condensed Consolidated Statements of Shareholders' Equity

   June 30, 2004 and December 31, 2003 (Unaudited)

7

Condensed Consolidated Statements of

   Cash Flows - Six Months Ended

   June 30, 2004 and 2003 (Unaudited)

8

Notes to Condensed Consolidated

   Financial Statements (Unaudited)

9

Management's Discussion and Analysis

   of Financial Condition and Results

   of Operations

13

Part II

Other Information

17

Part I -- FINANCIAL INFORMATION

ITEM 1: Condensed CONSOLIDATED FINANCIAL STATEMENTS.

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

ASSETS

June 30,
2004

December 31,
2003

Current assets

  Cash and cash equivalents

$  4,055,031

$   662,772

  Accounts receivable - trade (after allowance
    for doubtful accounts of $100,000 in 2004
    and $60,000 in 2003)

8,815,631

9,053,986

Net investment in sales-type leases

81,725

79,754

  Inventories

2,782,181

1,532,138

  Deferred income taxes

504,400

110,700

  Other current assets

       115,116

       185,768

        Total current assets

16,354,084

11,625,118

Net property and equipment

6,915,736

7,487,901

Other Assets

  Goodwill

560,005

560,005

  Net investment in sales-type leases

166,877

208,238

  Notes receivable

17,756

27,008

  Other assets

       153,942

         79,941

       898,580

       875,192

$ 24,168,400

$ 19,988,211

_______________________________________

See accompanying notes to consolidated financial statements.

3.

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

CONTINUED

(UNAUDITED)

LIABILITIES AND STOCKHOLDERS' EQUITY

June 30,
2004

December 31,
2003

Current liabilities

  Current maturities of long-term debt

899,373 

845,383 

  Current maturities of capital lease obligation

562,743 

159,073 

  Accounts payable

13,869,158 

10,502,503 

  Income tax payable

57,216 

27,280 

  Other current liabilities

      755,015 

      364,008 

       Total current liabilities

16,143,505 

11,898,247 

Long-term liabilities

  Long-term debt

1,749,918 

2,917,525 

  Capital lease obligation

348,838 

830,873 

  Deferred income taxes

      472,934 

     324,400 

2,571,690 

4,072,798 

Stockholders' equity

  Common stock, $.005 par value, 10,000,000 shares authorized,
    4,215,000 and 3,935,000 shares issued in 2004 and 2003,
    3,535,468 and 3,205,800 shares outstanding in 2004 and 2003

21,075 

19,675 

  Additional paid-in capital

2,393,647 

1,950,221 

  Retained earnings

3,741,444 

2,801,167 

  Treasury stock, 679,532 and 729,200 shares at average cost

    in 2004 and 2003

    (702,961)

     (753,897)

   5,453,205 

    4,017,166 

$ 24,168,400 

$ 19,988,211 

_______________________________________

See accompanying notes to consolidated financial statements.

4.

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED JUNE 30, 2004 AND 2003

(UNAUDITED)

2004

2003

Revenue

$ 34,054,273 

$ 30,860,180 

Cost of goods sold

  32,062,199 

 28,611,559 

Selling, general and administrative expenses

    1,378,990 

    1,254,013 

Income before other expenses

613,084 

994,608 

Other expenses, net

      (38,194)

        (233,563)

Income before income taxes

574,890 

761,045 

Provision for income taxes

     83,897 

      304,418 

Net income

$     490,993 

$     456,627 

Basic earnings per share

$           0.14 

$           0.14 

Diluted earnings per share

$           0.14 

$           0.14 

Weighted average shares outstanding:

   Basic

3,498,545 

3,220,952 

   Diluted

3,571,194 

3,220,952 

_______________________________________

See accompanying notes to consolidated financial statements.

5.

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(UNAUDITED)

2004

2003

Revenue

$ 68,818,478 

$ 56,701,262 

Cost of goods sold

  64,603,036 

 53,312,819 

Selling, general and administrative expenses

    2,799,058 

    2,634,327 

Income before other expenses

1,416,384 

754,116 

Other expenses, net

      (92,687)

        (297,443)

Income before income taxes

1,323,697 

456,673 

Provision for income taxes

     383,420 

      182,669

Net income

$     940,277 

$     274,004 

Basic earnings per share

$           0.28 

$           0.09 

Diluted earnings per share

$           0.26 

$           0.09 

Weighted average shares outstanding:

   Basic

3,401,519 

3,225,252 

   Diluted

3,588,186 

3,225,252 

_______________________________________

See accompanying notes to consolidated financial statements.

6.

INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2004

(UNAUDITED)

_________________________________________________________________________________________________________________________

Additional

Common Stock

Paid-in

Retained

Treasury Stock

Shares

Amount

Capital

Earnings

Shares

Cost

Total

Balance as of December 31, 2003

3,935,000

$19,675

$1,950,221

$2,801,167

(729,200)

$ (753,897)

$4,017,166

Exercise of common stock options

280,000

1,400

384,741

-

-

- 

386,141

Treasury stock distribution to employees

-

-

58,685

-

49,668

50,936

109,621

Net income

               -

            -

                 -

      940,277

            -

                - 

     940,277

Balance as of June 30, 2004

4,215,000

$21,075

$2,393,647

$3,741,444

(679,532)

$ (702,961)

$5,453,205

_______________________________________

See accompanying notes to consolidated financial statements.

7.

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(UNAUDITED)

2004

2003

Cash flows from operating activities

  Net income

$    940,277 

$    274,004 

  Adjustments to reconcile net income to
    net cash from operating activities:

      Depreciation and amortization

752,652 

905,454 

      Treasury stock distribution to employees

109,621 

- 

      Deferred income tax

(245,166) 

3,300 

      Loss on sale of property and equipment

11,931 

12,743 

      Change in assets and liabilities

        Receivables

247,607 

(2,473,777)

        Inventories

(1,250,043)

325,324 

        Other assets

(3,349)

(195,022)

        Accounts payable

3,366,655 

2,315,256 

        Other current liabilities

      420,947 

      199,952 

            Net cash from operating activities

4,351,132 

1,367,234 

Cash flows from investing activities

  Proceeds from equipment under sales-type leases

214,348 

11,103 

  Purchases of equipment under sales-type leases

-

75,196 

  Proceeds from sale of property and equipment

1,000 

13,600 

  Purchases of property and equipment

    (368,380)

  (2,069,226)

          Net cash from investing activities

(153,032)

(1,969,327)

Cash flows from financing activities

  Net payments on note payable to bank

- 

(1,750,000)

  Purchase of common stock

- 

(14,910)

  Proceeds from exercise of common stock options, net

    of stock issuance costs

386,141 

- 

 Payments on capital lease obligations

(78,365)

(53,762)

  Proceeds on long-term debt

-

1,500,000 

  Payments on long-term debt

(1,113,617)

     (362,773)

          Net cash from financing activities

    (805,841)

     (681,445)

Net increase (decrease) in cash

3,392,259 

(1,283,538)

Cash at beginning of period

    662,772 

   1,630,028 

Cash at end of period

$ 4,055,031 

$     346,490 

_______________________________________

See accompanying notes to consolidated financial statements.

8.

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 -- BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with standards of the Public Company Accounting Oversight Board (United States) for interim financial reporting. They do not include all information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. The information furnished includes all adjustments which are, in the opinion of management, necessary to present fairly the Registrant's financial position as of June 30, 2004 and the results of its operations and changes in its cash flow for the periods ended June 30, 2004 and 2003. Results of operations for the period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the entire year. Additional information, including the audited December 31, 2003 consolidated financial statements and the Summary of Significant Accounting Policies, is included in the Registrant's Annual Report on Form 10-K for the y ear ended December 31, 2003 on file with the Securities and Exchange Commission.

NOTE 2 -- ESTIMATES

In preparing the condensed consolidated financial statements in conformity with standards of the Public Company Accounting Oversight Board (United States), 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.

NOTE 3 -- LONG TERM DEBT AND NOTES PAYABLE TO BANK

The terms of the loan agreements with the Company's Bank place certain covenants on the Company, including maintenance of a specified tangible net worth, debt to net worth and EBITDA ratio. At June 30, 2004, the Company was in compliance with all covenants. There were no borrowings against this line of credit as of June 30, 2004 or December 31, 2003.

NOTE 4 -- ACCOUNTS PAYABLE

The Company has implemented a purchasing card with a credit limit of six million dollars in the second quarter of 2004. The balance due on the purchasing card is included as part of Accounts Payable. The outstanding balance on the purchasing card at June 30, 2004 was $0. The card accrues interest at prime plus 5.9% after the first twenty-five days of the purchase. The card requires monthly minimum payments on any balance outstanding at month end. The Company receives rebates on an annual basis for all purchases made with the card.

NOTE 5 -- 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 vendors, centralized billing, invoice auditing, and centralized dispatching. WESSCO sells, leases, and services waste handling and recycling equipment.

The Company's three 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 Company evaluates 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.

For the
SIX months ended
JUNE 30, 2004

ISA
Recycling

Computerized
Waste
Systems

Waste
Equipment
Sales &
Services

Corporate

Segment
Totals

Recycling revenues

$ 21,279,893 

$                  - 

$               - 

$               - 

$21,279,893 

Equipment sales, service

   and leasing revenues

- 

- 

1,537,277 

- 

1,537,277 

Management fees

- 

46,001,308 

- 

- 

46,001,308 

Cost of goods sold

(19,590,450)

(44,143,023)

  (869,563)

- 

(64,603,036)

Selling, general and

   administrative expenses

     (399,939)

      (957,739)

    (267,143)

  (1,174,237)

  (2,799,058)

Segment profit (loss)

$     1,289,504 

$      900,546 

$    400,571 

$(1,174,237)

Segment assets

$11,012,323 

$  8,446,021 

$ 1,669,410 

$3,040,646

$24,168,400 

For the
SIX months ended
JUNE 30, 2003

ISA
Recycling

Computerized
Waste
Systems

Waste
Equipment
Sales &
Services

Corporate

Segment
Totals

Recycling revenues

$ 13,129,519 

$                 - 

$              - 

$               - 

$ 13,129,519 

Equipment sales, service

   and leasing revenues

- 

- 

1,122,108

- 

1,122,108 

Management fees

- 

42,449,635 

- 

- 

42,449,635 

Cost of goods sold

(12,896,262)

(39,848,775)

(567,782)

- 

(53,312,819)

Selling, general and

   administrative expenses

      (516,761)

      (970,559)

   (314,746)

   (832,261)

  (2,634,327)

Segment profit (loss)

$    (283,504)

$    1,630,301 

$    239,580 

$  (832,261)

$    754,116

Segment assets

$  9,709,705

$   6,403,538 

$ 2,148,201 

$ 3,113,001

$21,374,445 

NOTE 6 -- INVENTORIES

Inventories consist of the following:

June 30,
2004

December 31,
2003

Equipment and parts

$      82,544

$      91,485

Ferrous materials

2,126,885

1,098,771

Non-ferrous materials

    572,752

     341,882

   Total inventories

$ 2,782,181

$ 1,532,138

NOTE 7 -- Stock Option Information

Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has elected to account for its employee stock options using the intrinsic value method under ABP No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for employee options.

No options were issued in 2004. Compensation cost for employee options based on the fair value method at the grant date consistent with SFAS No. 123 would have been $0 for the six months ended June 30, 2004. As of June 30, 2004 and 2003, all outstanding options were fully vested. Accordingly, there is no difference between reported and proforma net income, or the basic and diluted earnings per share and the proforma basic and diluted earnings per share for the periods ended June 30, 2004 and 2003.

NOTE 8 -- EMPLOYEE STOCK BONUS

The Company granted certain employees a stock bonus on January 5, 2004. The total number of shares issued as a bonus was 49,668 with a value of $109,621 which was expensed in the first quarter of 2004. The shares have a one-year holding period requirement. The Company has no formal plan to grant additional Stock Bonuses.

NOTE 9 -- EFFECTIVE TAX RATE

The effective tax rate for the six months ended June 30, 2004 and 2003 was 29% and 40%, respectively. The drop in the effective tax rate for six months ended June 30, 2004 related to a permanent tax deduction of approximately $320,000.

NOTE 10 -- PER SHARE DATA

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

Six months ended June 30, 2004 compared to six months ended June 30, 2003:

2004

2003

Basic earnings per share

Net income

$     940,277 

$     274,004

Weighted average shares outstanding

    3,401,519 

     3,225,252

Basic earnings per share

$             .28 

$             .09

Diluted earnings per share

Net income

$     940,277 

$  274,004

Weighted average shares outstanding

3,401,519 

3,225,252

Add dilutive effect of assumed exercising
  of stock options

       186,667 

                 - 

Diluted average shares outstanding

    3,588,186 

    3,225,252 

Diluted earnings per share

$             .26 

$             .09

Three months ended June 30, 2004 compared to three months ended June 30, 2003:

2004

2003

Basic earnings per share

Net income

$     490,993 

$     456,627

Weighted average shares outstanding

   3,498,545 

    3,220,952

Basic earnings per share

$             .14 

$             .14

Diluted earnings per share

Net income

$     490,993 

$     456,627

Weighted average shares outstanding

3,498,545 

3,220,952

Add dilutive effect of assumed exercising
  of stock options

        72,649 

                  - 

Diluted average shares outstanding

    3,571,194 

   3,220,952

Diluted earnings per share

$             .14 

$             .14

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with the information set forth under Item 5, "Segment Information" and the condensed financial statements of the Registrant 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 such financial predictions, forecasts and projections will be achieved. Factors that could affect financial predictions, forecasts and projections include the fluctuations in the commodity price index and any conditions internal to the major customers of the Registrant, including loss of their accounts.

General

      The Registrant continued to pursue a growth strategy in the waste management services arena servicing customer locations throughout the United States, Canada, Mexico, and Puerto Rico. This strategy will allow for diversity of business opportunities so that the Registrant is not as dependent upon the operating results of the recycling division. This diversity has helped to stabilize revenues and gross profit during a period of time when commodity prices fluctuate and affect the ferrous and non-ferrous markets. Much of management's focus and attention now and in the future is directed towards the growth of the management services business segment through expansion in the existing markets and through an acquisition strategy. The Registrant is also focused on technology enhancements that can be provided to the new and existing customer base to further solidify customer relationships. Additionally, the Registrant is exploring strategic alliances and relationships that will enable it to effectively execute its growth and acquisition strategy.

      It is management's plan to expand the management services segment in 2004. At the same time, the Registrant will be seeking more operational cost control, increased efficiency in the information technology area and emphasize sales and marketing efforts.

      Management continues to maintain and grow the recycling business within its existing structure and is not actively seeking any further acquisitions or mergers in this segment. It is the plan of management to maximize profits through the reduction of surplus inventory and fixed assets.

Liquidity and Capital Resources

        As of June 30, 2004 the Registrant held cash and cash equivalents of $4,055,031.

        The Registrant derives its revenues from several sources, including management services, equipment sales and leasing and from its recycling operations. Management services comprised approximately 66.8% and 74.9% of the Registrant's total revenues for the six months ended June 30, 2004 and 2003, respectively.

        The Registrant currently maintains a $3.8 million senior revolving credit facility with a bank. Outstanding principal under this credit facility bears interest at the Bank's prime rate and the line matures in September 2004. At June 30, 2004 there were no borrowings against this line of credit.

Results of Operations

        The following table presents, for the periods indicated, the percentage relationship which certain captioned items in the Registrant's Statements of Operations bear to total revenues and other pertinent data:

Six months ended June 30,

2004

2003

Statements of Operations Data:

Total Revenue ..................................................................................

100.0%

100.0%

Cost of goods sold............................................................................

93.9%

94.0%

Selling, general and administrative expenses ......................................

4.1%

4.7%

Income before other expenses.........................................................

2.0%

1.3%

Six months ended June 30, 2004 compared to six months ended June 30, 2003

        Total revenue increased $12,117,216 or 21.4% to $68,818,478 in 2004 compared to $56,701,262 in 2003. Recycling revenue increased $8,150,374 or 62.1% to $21,279,893 in 2004 compared to $13,129,519 in 2003. This is due to an increase of approximately 14% in the volume of shipments as well as an increase of approximately 61% in the average selling price of the commodities. Management services revenue increased $3,551,673 or 8.4% to $46,001,308 in 2004 compared to $42,449,635 in 2003. This is due to an increase in revenues per the customer locations while maintaining a customer base that is substantially the same from 2003 to 2004. Equipment sales, service and leasing revenue increased $415,169 or 37.0% to $1,537,277 in 2004 compared to $1,122,108 in 2003. This increase is primarily due to an increase in equipment sales.

     Total cost of goods sold increased $11,290,217 or 21.2% to $64,603,036 in 2004 compared to $53,312,819 in 2003. Recycling cost of goods sold increased $6,694,188 or 51.9% to $19,590,450 in 2004 compared to $12,896,262 in 2003. This is due to higher commodity purchase prices in the recycling market. Management services cost of goods sold increased $4,294,248 or 10.8% to $44,143,023 in 2004 compared to $39,848,775 in 2003. This is due to increases in vendor service fees. Equipment, service and leasing cost of goods sold increased $301,781 or 53.2% to $869,563 in 2004 compared to $567,782 in 2003. This increase is primarily due to an increase in equipment cost of goods sold.

     Selling, general and administrative expenses increased $164,731 or 6.3% to $2,799,058 in 2004 compared to $2,634,327 in 2003. This is primarily due to increases in consulting, maintenance, and legal expenses. As a percentage of revenue, selling, general and administrative expenses were 4.1% in 2004 compared to 4.7% in 2003.

     Other expense decreased $204,756 to other expense of $92,687 in 2004 compared to other expense of $297,443 in 2003. This decrease was primarily due to a payment of $156,000 for terminating a property lease agreement in the recycling division in 2003.

Three months ended June 30, 2004 compared to three months ended June 30, 2003

     Total revenue increased $3,194,093 or 10.4% to $34,054,273 in 2004 compared to $30,860,180 in 2003. Recycling revenue increased $3,403,995 or 50.7% to $10,115,745 in 2004 compared to $6,711,750 in 2003. This is due to an increase of approximately 12% in the volume of shipments as well as an increase of approximately 63% in the average selling price of the commodities. Management services revenue decreased $287,805 or 1.2% to $23,288,963 in 2004 compared to $23,576,768 in 2003. This is due to a decrease in revenues per the customer locations while maintaining a customer base that is substantially the same from 2003 to 2004. Equipment sales, service and leasing revenue increased $77,903 or 13.6% to $649,565 in 2004 compared to $571,662 in 2003. This increase is due to an increase in equipment sales.

     Total cost of goods sold increased $3,450,640 or 12.1% to $32,062,199 in 2004 compared to $28,611,559 in 2003. Recycling cost of goods sold increased $2,926,844 or 44.8% to $9,463,136 in 2004 compared to $6,536,292 in 2002. This is due to higher commodity purchase prices in the recycling market. Management services cost of goods sold increased $410,167 or 1.9% to $22,196,372 in 2004 compared to $21,786,205 in 2003. This is due to increases in vendor service fees. Equipment, service and leasing cost of goods sold increased $113,629 or 39.3% to $402,691 in 2004 compared to $289,062 in 2003.

     Selling, general and administrative expenses increased $124,977 or 10.0% to $1,378,990 in 2004 compared to $1,254,013 in 2003. This is primarily due to increases in consulting, maintenance, and legal expenses. As a percentage of revenue, selling, general and administrative expenses were 4.0% in 2004 compared to 4.1% in 2003.

     Other expense decreased $195,369 to other expense of $38,194 in 2004 compared to other expense of $233,563 in 2003. This decrease was primarily due to a payment of $156,000 for terminating a property lease agreement in the recycling division in 2003.

Financial condition at June 30, 2004 compared to December 31, 2003

        Accounts receivable trade decreased $238,355 or 2.6% to $8,815,631 as of June 30, 2004 compared to $9,053,986 as of December 31, 2003. Average days outstanding in 2004 were 23.4 days versus 24.1 days in 2003. This decrease reflects management's focus on the collection of accounts receivable.

        Inventory increased $1,250,043 or 81.6% to $2,782,181 as of June 30, 2004 compared to $1,532,138 as of December 31, 2003. This increase is primarily due to the purchasing of ferrous material of approximately 8.4% more than shipments for the first six months of 2004.

      Accounts payable trade increased $3,366,655 or 32.1% to $13,869,158 as of June 30, 2004 compared to $10,502,503 as of December 31, 2003. Accounts payable trade increased due to an increase in expenses per the customer locations while maintaining a customer base that is substantially the same from 2003 to 2004 in the Management Services segment as well as an increase in the volume of commodity purchases and an increase in the purchase prices in the Recycling segment.

     Working capital increased $483,708 to $210,579 as of June 30, 2004 compared to a deficit of $273,129 as of December 31, 2003.

Contractual Obligations

        Long-term debt, including the current maturities of long-term debt, decreased $1,113,617 or 29.6% to $2,649,291 as of June 30, 2004 compared to $3,762,908 as of December 31, 2003. Ordinary principal payments of long-term debt for the first six months of 2004 were $463,617. Additionally, proceeds from the exercise of stock options and the sale of leasing equipment were used to pay down long-term debt by $650,000 during the first six months of 2004.

Item 3:    Quantitative and Qualitative Disclosures About Market Risk.

        There is market risk in our recycling segment, since it is driven by fluctuating commodity prices. Management mitigates this risk by selling our product on a monthly contract basis, insulating the Registrant from large fluctuations in the commodity prices.

ITEM 4:    CONTROLS AND PROCEDURES

(a)       Evaluation of disclosure controls and procedures.

        Based on the evaluation of the Chief Executive Officer and the Chief Financial Officer of the Registrant of its internal controls and procedures as of June 30, 2004, it has been concluded that the disclosure controls and procedures are effective for the purposes contemplated by Rule 13a-15 (e) promulgated by the Securities and Exchange Commission.

(b)       Changes in internal controls.

        There have been no significant changes to the Registrant's internal controls or in other factors that could significantly affect these controls as of June 30, 2004.

PART II -- OTHER INFORMATION

Item 1.

Legal Proceedings

On June 2, 2004, Andrew M. Lassak commenced an action entitled Andrew M. Lassak v. Industrial Services of America, Inc. in the Circuit Court of the Nineteenth Judicial Circuit, in and for Martin County, Florida (Case No. 04-423-CA). In the complaint, Mr. Lassak, a former outside consultant to the Registrant, alleges that the Registrant breached two stock option contracts granted to him by failing and refusing to release and register 390,000 (post-split) shares of the Registrant's common stock. The suit seeks specific performance of the contracts and an unspecified amount of damages allegedly caused by the Registrant not registering the underlying shares sooner. The Registrant believes that the claims of Mr. Lassak are without merit.

Item 2.

Changes in Securities and Use of Proceeds

None

Item 3.

Defaults upon Senior Securities

None

Item 4.

Submission of Matters to a Vote of Security Holders

(a)

At the Annual Meeting of Shareholders held on May 18, 2004, the following proposals were adopted by the margins indicated:

(b)

PROPOSAL 1: Annual Election of Directors. The nominees for election as directors were Harry Kletter, Bob Cuzzort, Roman Epelbaum, David W. Lester, and James E. Vining. The five director positions were filled based upon the five receiving the most votes:

For

Withheld

Broker Non-
Votes And
Abstentions

Harry Kletter

2,520,978

1,020

-

Bob Cuzzort

2,480,152

41,846

-

Roman Epelbaum

2,520,698

1,300

-

David W. Lester

2,520,998

1,000

-

James E. Vining

2,520,998

1,000

-

(c)

PROPOSAL 2: Ratification of Crowe Chizek & Company LLP as the Company's independent auditors.

For

Against

Broker Non-Votes
And Abstentions

2,518,598

2,000

1,400

Item 5.

Other Information

The Board of Directors, at its August 4, 2004 meeting, declared a first time cash dividend payment of ten cents per share, for shareholders of record as of September 7, 2004 with a payment date of September 21, 2004.

The Board of Directors of the Registrant appointed Ed List as Chief Operating Officer on May 18, 2004.

The Board of Directors of the Registrant accepted the resignation of Pat McGruder as Chief Operating Officer on April 16, 2004, effective April 12, 2004.

Item 6.

Exhibits and Reports on Form 8-K

(a)

Exhibits.

(b)

Reports on Form 8-K.

1. Form 8-K was filed on April 8, 2004 related to Item 7. Financial Statements and Exhibits for press release for preliminary earnings results for the period ended March 31, 2004, and Item 12. Results of Operations and Financial Condition for the period ended March 31, 2004.

2. Form 8-K was filed on May 7, 2004 related to Item 7. Financial Statements and Exhibits for press release for earnings results for the period ended March 31, 2004, and Item 12. Results of Operations and Financial Condition for the period ended March 31, 2004.

SIGNATURES

Pursuant to the requirements 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.

DATE: August 6, 2004

    /s/  Harry Kletter                                 

Chairman and Chief Executive Officer

DATE: August 6, 2004

   /s/  Alan L. Schroering                         
Chief Financial Officer