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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q



[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended November 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 0-22496





SCHNITZER STEEL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)



OREGON 93-0341923
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)



3200 N.W. Yeon Ave.
P.O Box 10047
Portland, OR 97296-0047
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)



(503) 224-9900
----------------------------------------------------
(Registrant's telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]

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

The Registrant had 22,409,911 shares of Class A Common Stock, par value of $1.00
per share, and 8,012,366 shares of Class B Common Stock, par value of $1.00 per
share, outstanding at December 31, 2004.

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INDEX
-----



PAGE NO.
--------
PART I. FINANCIAL INFORMATION

Consolidated Balance Sheets at November 30, 2004
and August 31, 2004...................................................... 3

Consolidated Statement of Operations for the
Three Months Ended November 30, 2004 and 2003............................ 4

Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 2004 and the Three Months
Ended November 30, 2004.................................................. 5

Consolidated Statement of Cash Flows for the
Three Months Ended November 30, 2004 and 2003............................ 6

Notes to Consolidated Financial Statements................................... 7

Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 16

Quantitative and Qualitative Disclosures about Market Risk................... 28

Controls and Procedures...................................................... 28




PART II. OTHER INFORMATION

Legal Proceedings ........................................................... 29

Other Information............................................................ 29

Exhibits..................................................................... 29


SIGNATURE PAGE............................................................... 31





2

SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited)



NOV. 30, 2004 AUG. 31, 2004
------------ ------------

ASSETS
------
Current Assets:
Cash $ 23,955 $ 11,307
Accounts receivable, less allowance for
doubtful accounts of $785 and $772 29,211 43,179
Accounts receivable from related parties 261 265
Inventories (Note 2) 92,754 80,167
Deferred income taxes 5,383 5,383
Prepaid expenses and other 6,967 6,859
------------ ------------
Total current assets 158,531 147,160

Net property, plant and equipment 140,828 138,438

Other assets:
Investment in and advances to joint venture partnerships 182,631 182,845
Notes receivable, less current portion 1,489 1,337
Goodwill 131,178 131,178
Intangibles and other 4,666 5,015
------------ ------------
$ 619,323 $ 605,973
============ ============


LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 202 $ 225
Accounts payable 30,719 31,881
Accrued payroll liabilities 14,140 20,183
Current portion of environmental liabilities 5,941 9,373
Accrued income taxes 1,227 4,954
Other accrued liabilities 8,925 7,450
------------ ------------
Total current liabilities 61,154 74,066

Deferred income taxes 24,884 24,884

Long-term debt, less current portion 50,277 67,801

Environmental liabilities, net of current portion 12,402 12,126

Other long-term liabilities 2,340 2,295

Minority interests 5,669 5,921

Commitments and contingencies -- --

Shareholders' equity:
Preferred stock--20,000 shares authorized, none issued -- --
Class A common stock--75,000 shares $1 par value
authorized, 22,400 and 22,022 shares issued and outstanding 22,400 22,022
Class B common stock--25,000 shares $1 par value
authorized, 8,013 and 8,306 shares issued and outstanding 8,013 8,306
Additional paid-in capital 111,274 110,177
Retained earnings 320,795 278,374
Accumulated other comprehensive income:
Foreign currency translation adjustment 115 1
------------ ------------
Total shareholders' equity 462,597 418,880
------------ ------------
$ 619,323 $ 605,973
============ ============


The accompanying notes to the unaudited consolidated
financial statements are an integral part of this statement.

3

SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)



FOR THE THREE MONTHS ENDED NOVEMBER 30,
--------------------------------------
2004 2003
------------ ------------

Revenues $ 198,961 $ 128,376

Operating Expenses:
Cost of goods sold 139,455 106,698
Selling 1,282 1,278
General and administrative 11,084 8,232
------------ ------------

Income from wholly-owned operations 47,140 12,168

Operating income from joint ventures 20,464 5,937
------------ ------------

Operating income 67,604 18,105

Other income (expense):
Interest expense (284) (440)
Other income (expense) (446) 204
------------ ------------

(730) (236)
------------ ------------

Income before income tax 66,874 17,869

Income tax provision (23,272) (5,182)
------------ ------------

Income before minority interests 43,602 12,687

Minority interests, net of tax (666) (510)
------------ ------------

Net income $ 42,936 $ 12,177
============ ============


Net income per share - basic: $ 1.41 $ 0.41
============ ============

Net income per share - diluted: $ 1.38 $ 0.39
============ ============



The accompanying notes to the unaudited consolidated
financial statements are an integral part of this statement.

4

SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)





CLASS A CLASS B ACCUMULATED
COMMON STOCK COMMON STOCK ADDITIONAL OTHER
---------------------- ---------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance at August 31, 2003 12,445 $ 12,445 7,061 $ 7,061 $ 104,249 $ 179,242 $ $ 302,997

Net income 111,181 111,181
Foreign currency translation
adjustment 1 1
----------
111,182
Class B common stock converted
to Class A common stock 1,743 1,743 (1,743) (1,743) --
Class A common stock issued 802 802 5,928 6,730
Stock dividend 7,032 7,032 2,988 2,988 (10,020) --
Cash dividends paid - common
($0.068 per share) (2,029) (2,029)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance at August 31, 2004 22,022 22,022 8,306 8,306 110,177 278,374 1 418,880

Net income 42,936 42,936
Foreign currency translation
adjustment 114 114
----------
43,050
Class B common stock converted
to Class A common stock 293 293 (293) (293) --
Class A common stock issued 85 85 1,097 1,182

Cash dividends paid - common
($0.017 per share) (515) (515)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance at November 30, 2004 22,400 $ 22,400 8,013 $ 8,013 $ 111,274 $ 320,795 $ 115 $ 462,597
========== ========== ========== ========== ========== ========== ========== ==========







The accompanying notes to the unaudited consolidated
financial statements are an integral part of this statement.

5

SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)



FOR THE THREE MONTHS ENDED NOVEMBER 30,
--------------------------------------
2004 2003
------------ ------------

Operations:
Net income $ 42,936 $ 12,177
Noncash items included in income:
Depreciation and amortization 5,050 5,050
Minority interests 1,021 718
Equity in income of joint ventures (20,464) (5,937)
Deferred income tax -- (5,400)
Gain on disposal of assets (127) (341)
Cash provided (used) by changes in
working capital:
Accounts receivable 13,972 16,774
Inventories (12,587) (6,245)
Prepaid expenses and other (108) (123)
Accounts payable (1,162) (2,251)
Accrued liabilities (8,295) (2,198)
Environmental liabilities (3,156) (803)
Other assets and liabilities 212 973
------------ ------------

Net cash provided by operations 17,292 12,394
------------ ------------

Investing:
Capital expenditures (7,531) (6,209)
Investment in subsidiaries -- (4,695)
Cash received from joint ventures 20,955 42
Cash paid to joint ventures (313) (433)
Proceeds from sale of assets 398 395
------------ ------------

Net cash provided (used) by investments 13,509 (10,900)
------------ ------------

Financing:
Issuance of Class A common stock 1,182 4,796
Distributions to minority interests (1,273) (440)
Dividends declared and paid (515) (500)
Decrease in long-term debt (17,547) (2,047)
------------ ------------

Net cash (used) provided by financing (18,153) 1,809
------------ ------------

Net increase in cash 12,648 3,303

Cash at beginning of period 11,307 1,687
------------ ------------

Cash at end of period $ 23,955 $ 4,990
============ ============



The accompanying notes to the unaudited consolidated
financial statements are an integral part of this statement.

6

SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2004 AND 2003


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited condensed interim financial statements of Schnitzer
Steel Industries, Inc. (the Company) have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in annual financial
statements have been condensed or omitted pursuant to those rules and
regulations. In the opinion of management, all adjustments, consisting only of
normal, recurring adjustments considered necessary for a fair presentation, have
been included. Although management believes that the disclosures made are
adequate to ensure that the information presented is not misleading, management
suggests that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
for the fiscal year ended August 31, 2004. The results for the three months
ended November 30, 2004 and 2003 are not necessarily indicative of the results
of operations for the entire year.

RECLASSIFICATIONS
- -----------------
Certain prior year amounts have been reclassified to conform to the current year
presentation. These changes had no impact on previously reported results of
operations or shareholder's equity.

EARNINGS AND DIVIDENDS PER SHARE
- --------------------------------
Basic earnings per share (EPS) are computed based upon the weighted average
number of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock.

The following represents reconciliation from basic EPS to diluted EPS (in
thousands, except per share amounts):

FOR THE THREE MONTHS ENDED
NOVEMBER 30,
---------------------------
2004 2003
------------ ------------
Net income $ 42,936 $ 12,177
============ ============
Computation of shares (1):
Average common shares outstanding 30,350 29,582
Stock options 793 1,365
------------ ------------
Diluted average common shares outstanding 31,143 30,947
============ ============

Basic net income per share $ 1.41 $ 0.41
============ ============

Diluted net income per share $ 1.38 $ 0.39
============ ============

Dividend per share $ 0.017 $ 0.017
============ ============

(1) Basic and diluted earnings per share and dividends per common share for the
three months ended November 30, 2003, have been adjusted to reflect the
one-for-two stock dividend paid on March 25, 2004.


7

SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2004 AND 2003


STOCK INCENTIVE PLAN
- --------------------
The Company's compensation expense for its stock incentive plans is determined
using the intrinsic value method. Accordingly, because the exercise price equals
the market price on the date of the grant, no compensation expense is recognized
by the Company for stock options issued to employees and directors. The Company
recorded compensation expense in the first quarter of fiscal 2005 of $0.3
million due to the accelerated vesting period on stock options for a retiring
employee. If the fair value based method had been applied in measuring stock
compensation expense, the pro forma effect on net income per share would have
been as follows (in thousands, except earnings per share):

THREE MONTHS ENDED
NOVEMBER 30,
---------------------------
2004 2003
------------ ------------
Reported net income $ 42,936 $ 12,177
Stock compensation expense, net of tax (187) (--)
------------ ------------
Pro forma net income $ 42,749 $ 12,177
============ ============

Reported basic income per share $ 1.41 $ 0.41
Pro forma basic income per share $ 1.41 $ 0.41

Reported diluted income per share $ 1.38 $ 0.39
Pro forma diluted income per share $ 1.37 $ 0.39


All of the options for fiscal 2005 and fiscal 2004 are considered to be dilutive
and are reflected in the table above.

On December 16, 2004 the FASB finalized SFAS No. 123R "Shared-Based Payment"
which will be effective for interim or annual reporting periods beginning after
June 15, 2005. The new standard will require the Company to expense stock. The
Company has begun the process to analyze how the utilization of a binomial
lattice model could impact the valuation of the options. The effect of expensing
stock options on our financial results using the Black-Scholes model is
presented in the table above.

GOODWILL AND INTANGIBLE ASSETS
- ------------------------------
The changes in the carrying amount of goodwill for the three months ended
November 30, 2004, are as follows (in thousands):

METALS
RECYCLING AUTO PARTS
BUSINESS BUSINESS TOTAL
--------- --------- ---------
Balance as of August 31, 2004 $ 34,771 $ 96,407 $ 131,178
--------- --------- ---------

Balance as of November 30, 2004 $ 34,771 $ 96,407 $ 131,178
========= ========= =========

The Company performs impairment tests annually and whenever events and
circumstances indicate that the value of goodwill and other indefinite-lived
intangible assets might be impaired. Due to the operating results of each of the
businesses identified above, the Company determined that none of the above
balances were considered impaired.


8

SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2004 AND 2003


NOTE 2 - INVENTORIES:

Inventories consisted of the following (in thousands):

NOVEMBER 30, AUGUST 31,
2004 2004
------------ ------------
Recycled metals $ 33,989 $ 34,551
Work in process 9,373 10,045
Finished goods 37,669 23,808
Supplies 11,723 11,763
------------ ------------
$ 92,754 $ 80,167
============ ============


NOTE 3 - ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES

PORTLAND HARBOR
In December 2000, the United States Environmental Protection Agency (EPA) named
the Portland Harbor, a 5.5 mile stretch of the Willamette River in Portland,
Oregon, as a Superfund site. The Company's metals recycling and deep water
terminal facility in Portland, Oregon is located adjacent to the Portland
Harbor. Crawford Street Corporation, a Company subsidiary, also owns property
adjacent to the Portland Harbor. The EPA has identified 69 potentially
responsible parties (PRPs), including the Company and Crawford Street
Corporation, which own or operate sites adjacent to the Portland Harbor
Superfund site. The Company leases the metals recycling and deep water terminal
facility from Schnitzer Investment Corp. (SIC), a related party, and is
obligated under its lease with SIC to bear the costs relating to the
investigation and remediation of the property. The precise nature and extent of
any clean-up of the Portland Harbor, the parties to be involved, and the process
to be followed for such a clean-up have not yet been determined. It is unclear
whether or to what extent the Company or Crawford Street Corporation will be
liable for environmental costs or damages associated with the Superfund site. It
is also unclear whether natural resource damage claims or third party
contribution or damages claims will be asserted against the Company. While the
Company and Crawford Street Corporation participated in certain preliminary
Portland Harbor study efforts, they are not parties to the consent order entered
into by the EPA with other PRPs (Lower Willamette Group) for a Remedial
Investigation/Feasibility Study; however the Company could become liable for a
share of the costs of this study at a later stage of the proceedings.

Separately, the Oregon Department of Environmental Quality (DEQ) has requested
operating history and other information from numerous persons and entities which
own or conduct operations on properties adjacent to or upland from the Portland
Harbor, including the Company and Crawford Street Corporation. The DEQ
investigations at the Company and Crawford Street sites are focused on
controlling any current releases of contaminants into the Willamette River. The
Company has agreed to a voluntary Remedial Investigation/Source Control effort
with the DEQ regarding its Portland, Oregon deep water terminal facility and the
site owned by Crawford Street Corporation. DEQ identified these sites as
potential sources of contaminants that could be released into the Willamette
River. The Company believes that improvements in the operations at these sites,
often referred to as Best Management Practices (BMPs), will be sufficient to
effectively provide source control and avoid the release of contaminants from
these sites, and has proposed to DEQ the implementation of BMPs as the
resolution of this investigation.

While the cost of the investigations associated with these properties and the
cost of employment of source control BMPs are not expected to be material at
November 30, 2004, $0.3 million has been accrued for studies related to the
pending Portland Harbor Superfund site. No estimate is currently possible and
none has been made as to the cost of remediation for the Portland Harbor or the
Company's adjacent properties.

9

SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2004 AND 2003


MANUFACTURING MANAGEMENT, INC.
In 1994, Manufacturing Management, Inc. (MMI) recorded a reserve for the
estimated cost to cure certain environmental liabilities. This reserve was
carried over to the Company's financial statements when MMI was acquired in
1995. The reserve is evaluated quarterly according to Company policy. On
November 30, 2004, the reserve aggregated $11.9 million.

General Metals of Tacoma (GMT), a subsidiary of MMI, owns and operates a metals
recycling facility located in the State of Washington on the Hylebos Waterway, a
part of Commencement Bay, which is the subject of an ongoing remediation project
by the United States Environmental Protection Agency (EPA) under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).
GMT and more than 60 other parties were named potentially responsible parties
(PRPs) for the investigation and clean-up of contaminated sediment along the
Hylebos Waterway. On March 25, 2002, EPA issued Unilateral Administrative Orders
(UAOs) to GMT and another party (Other Party) to proceed with Remedial Design
and Remedial Action (RD/RA) for the head of the Hylebos and to two other parties
to proceed with the RD/RA for the balance of the waterway. The issuance of the
UAOs did not require the Company to change its previously recorded estimate of
environmental liabilities for this site. The UOA for the head of the Hylebos
Waterway was converted to a voluntary consent decree in May 2004, pursuant to
which GMT and the Other Party agreed to remediate the head of the Hylebos
Waterway. The consent decree was finalized and entered by the court in September
2004, at which time approximately $7.0 million in settlement funds previously
collected by the EPA from other PRPs became available for reimbursement of
remediation costs incurred by GMT and the Other Party. As of May 31, 2004, the
Company recorded $3.5 million in other current assets representing the Company's
share of the expected EPA reimbursements and, because the expectation of
contributions from other PRPs in this amount had previously been taken into
account as a reduction in the Company's reserve for environmental liabilities,
the Company also recorded a $3.5 million increase in environmental liabilities.

There are two phases to the Clean-up of the Hylebos Waterway. The first phase
was the intertidal and bank remediation, which was conducted in 2003 and early
2004. The second phase is dredging in the Head of Hylebos Waterway, which began
on July 15, 2004. Approximately 275,000 cubic yards of an estimated 370,000
cubic yards total have been removed as of November 30, 2004. Dredging and other
in-water work is scheduled to be completed during fiscal 2005.

GMT and the Other Party may pursue legal actions against other non-settling,
non-performing PRPs to recover additional amounts that may be applied against
the head of the Hylebos remediation costs. Significant uncertainties continue to
exist regarding the total cost to remediate this site as well as the Company's
share of those costs; nevertheless, the Company's estimate of its liabilities
related to this site is based on information currently available.

The Natural Resource Damage Trustees (Trustees) for Commencement Bay have
asserted claims against GMT and other PRPs within the Hylebos Waterway area for
alleged damage to natural resources. In March 2002, the Trustees delivered a
draft settlement proposal to GMT and others in which the Trustees suggested a
methodology for resolving the dispute, but did not indicate any proposed damages
or cost amounts. In June 2002, GMT responded to the Trustees' draft settlement
proposal with various corrections and other comments, as did twenty other
participants. It is unknown at this time whether, or to what extent, GMT will be
liable for natural resource damages. The Company's previously recorded
environmental liabilities include an estimate of the Company's potential
liability for these claims.

The Washington State Department of Ecology named GMT, along with a number of
other parties, as Potentially Liable Parties (PLPs) for a site referred to as
Tacoma Metals. GMT operated on this site under a lease prior to 1982. The
property owner and current operator have taken the lead role in performing a
Remedial Investigation and Feasibility Study (RI/FS) for the site. The RI/FS is
now completed and the parties are currently involved in a mediation settlement
process to address cost allocations. The Company's previously recorded
environmental liabilities include an estimate of the Company's potential
liability at this site.

10

SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2004 AND 2003


MMI is also a named PRP at two third-party sites at which it allegedly disposed
of transformers. At one site, MMI entered into a settlement under which it paid
$825,000 towards remediation of the site. Remediation of the site has been
completed and it is now subject to a five year monitoring program. The other
site has not yet been subject to significant remedial investigation. MMI has
been named as a PRP at several other sites for which it has agreed to de minimis
settlements. In addition to the matters discussed above, the Company's
environmental reserve includes amounts for potential future cleanup of other
sites at which MMI has conducted business or has allegedly disposed of other
materials.

PROLER
In 1996, prior to the Company's acquisition of Proler International Corp.
(Proler), Proler recorded a liability for the probable costs to remediate its
wholly-owned properties. This reserve was carried over to the Company's
financial statements upon acquiring Proler in 1996. The reserve is evaluated
quarterly according to Company policy. On November 30, 2004, the reserve
aggregated $3.4 million.

As part of the Proler acquisition, the Company became a 50% owner of Hugo
Neu-Proler Company (HNP). HNP has agreed, as part of its 1996 lease renewal with
the Port of Los Angeles (POLA), to conduct a multi-year, phased remedial
clean-up project involving certain environmental conditions on its metals
recycling facility at its Terminal Island site in Los Angeles, California, which
was completed in 2002. HNP is waiting for final certification from POLA and the
regulatory agencies overseeing the cleanup. Remediation included excavation and
off-site disposal of contaminated soils, paving and groundwater monitoring.
Other environmentally protective actions included installation of a stormwater
management system and construction of a noise barrier and perimeter wall around
a substantial portion of the facility.

Additionally, other Proler joint venture sites with potential environmental
clean-up issues have been identified. Estimated clean-up costs associated with
these sites have been accrued for by the joint ventures.

AUTO PARTS BUSINESS
In connection with the acquisition of a former joint venture partner's interest
in the Auto Parts Business in fiscal 2003, the Company conducted an
environmental due diligence investigation. Based upon new information obtained
in this investigation, the Company accrued $2.1 million in environmental
liabilities in fiscal 2003 for remediation costs at the Auto Parts Business's
store locations. No environmental proceedings are pending at any of these sites.

On January 6, 2004, the Auto Parts Business was served with a Notice of
Violation (NOV) of the general permit requirements on its diesel powered car
crushers at the Rancho Cordova and Sacramento locations from the Sacramento
Metropolitan Air Quality Management District (SMAQMD). The NOV required us to
cease operation of the car crushers at these locations. Since receiving the NOV,
the Sacramento and Rancho Cordova locations have converted their diesel powered
car crushers to electric powered. The Company is engaged in an ongoing
evaluation of our car crushing systems and discussions with the SMAQMD to assure
compliance and address the potential regulatory enforcement penalties. As a
result, the Company recorded a reserve during 2004 for the estimated potential
exposure for this matter.

The Company considers various factors when estimating its environmental
liabilities. Adjustments to the liabilities are made when additional information
becomes available that affects the estimated costs to remediate. The factors,
which the Company considers in its recognition and measurement of environmental
liabilities, include the following:

11

SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2004 AND 2003


o Current regulations both at the time the reserve is established and
during the course of the clean-up which specify standards for
acceptable remediation;
o Information about the site, which becomes available as the site is
studied and remediated;
o The professional judgment of both senior-level internal staff and
external consultants who take into account similar, recent instances
of environmental remediation issues, among other considerations;
o Technologies available that can be used for remediation; and
o The number and financial condition of other potentially responsible
parties and the extent of their responsibility for the remediation.

OTHER CONTINGENCIES
The Company and Hugo Neu Corporation ("HNC") are the 50% members of Hugo Neu
Schnitzer Global Trade, LLC ("HNSGT"), a joint venture engaged in global
brokering of recycled metals. HNC manages the day-to-day activities of HNSGT. In
January 2004, HNC advised the Company that it would charge HNSGT a 1% commission
on HNSGT's recycled metal sales, and began deducting those commissions. While
some reasonable reimbursement of HNC's costs may be appropriate, the Company has
responded that the 1% commission is excessive and that HNC had no authority to
unilaterally impose such commissions on HNSGT. The Company has not yet commenced
litigation in this dispute. As of November 30, 2004, the Company estimated that
its 50% share of the disputed commissions totaled $3.1 million. In recording
operating income from joint ventures, the Company has excluded from joint
venture expenses the excess of these disputed commissions over the Company's
estimate of reasonable reimbursements.

Until recently, the Company had a practice of paying commissions to the
purchasing managers of customers in connection with export sales of recycled
ferrous metals to the Far East. The Company was recently advised that this
practice may raise questions of possible violations of U.S. and foreign laws,
and the practice was stopped. Thereafter, the Audit Committee was advised and
conducted a preliminary compliance review. On November 18, 2004, on the
recommendation of the Audit Committee, the Board of Directors authorized the
Audit Committee to engage independent counsel and conduct a thorough,
independent investigation and directed that the existence and the results of the
investigation be voluntarily reported to the U.S. Department of Justice and the
Securities and Exchange Commission, and that the Company cooperate fully with
those agencies. The investigation is ongoing, and is not expected to affect the
Company's previously reported financial results, including those reported in
these consolidated financial statements. The Company cannot predict the results
of the investigation or whether the Company or any of its employees will be
subject to any penalties or other remedial actions following completion of the
investigation.


NOTE 4 - EMPLOYEE BENEFITS

Primary actuarial assumptions are determined as follows:

o The expected long-term rate of return on plan assets is based on our
estimate of long-term returns for equities and fixed income securities
weighted by the allocation of assets in the plans. The rate is
impacted by changes in general market conditions, but because it
represents a long-term rate, it is not significantly impacted by
short-term market swings. Changes in the allocation of plan assets
would also impact this rate.
o The assumed discount rate is used to discount future benefit
obligations back to today's dollars. The U.S. discount rate is as of
the measurement date, August 31. This rate is sensitive to changes in
interest rates. A decrease in the discount rate would increase our
obligation and expense.
o The expected rate of compensation increase is used to develop benefit
obligations using projected pay at retirement. This rate represents
average long-term salary increases and is influenced by our
compensation policies. An increase in this rate would increase our
obligation and expense.

12

SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2004 AND 2003


DEFINED BENEFIT PENSION PLAN
- ----------------------------
For certain nonunion employees, the Company maintains a defined benefit pension
plan. The components of net periodic pension benefit cost are (in thousands):

FOR THE THREE MONTHS ENDED
NOVEMBER 30,
---------------------------
2004 2003
------------ ------------
Service cost $ 164 $ 138
Interest cost 106 89
Expected return on plan assets (121) (102)
Amortization of past service cost 1 1
Recognized actuarial loss 30 25
------------ ------------
Net periodic pension benefit cost $ 180 $ 151
============ ============

For the year ended August 31, 2005, the Company expects to contribute $1.0
million to its defined benefit pension plan. As of November 30, 2004, the
Company has not made contributions to this plan. The Company typically makes
annual contributions to the plan after it receives the annual actuarial
valuation report. These payments are typically made in the Company's third and
fourth fiscal quarters.

DEFINED CONTRIBUTION PLANS
- --------------------------
The Company has several defined contribution plans covering nonunion employees.
Company contributions to the defined contribution plans were as follows (in
thousands):

FOR THE THREE MONTHS ENDED
NOVEMBER 30,
---------------------------
2004 2003
------------ ------------
Company contributions to the defined
contribution plans $ 346 $ 365


MULTIEMPLOYER PENSION PLANS
- ---------------------------
In accordance with collective bargaining agreements, the Company contributes to
multiemployer pension plans. Company contributions are as follows (in
thousands):

FOR THE THREE MONTHS ENDED
NOVEMBER 30,
---------------------------
2004 2003
------------ ------------
Company contributions to multiemployer plans $ 738 $ 777


The Company is not the sponsor or administrator of these multiemployer plans.
Contributions were determined in accordance with provisions of negotiated labor
contracts. The Company is unable to determine its relative portion of or
estimate its future liability under the plans.

The Company learned during fiscal 2004 that one of the multiemployer plans would
not meet ERISA minimum funding standards for the plan year ending September 30,
2004. The trustees of that plan have applied to the Internal Revenue Service for
certain relief from this minimum funding standard, but cannot determine whether
this relief will be granted. Absent relief, the plan's contributing employers
will be required to make additional contributions or pay excise tax that may
equal or exceed the full amount of that deficiency. The Company estimates its
share of the required additional contribution for the 2004 plan year is
approximately $1.1 million and accrued for such amount in fiscal 2004.

13

SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2004 AND 2003


NOTE 5 - SEGMENT INFORMATION:

The Company operates in three industry segments: metal processing and recycling
(Metals Recycling Business), mini-mill steel manufacturing (Steel Manufacturing
Business) and self-service used auto parts (Auto Parts Business). Additionally,
the Company is a non-controlling partner in joint ventures, which are in the
metals recycling business. The Joint Ventures in the metals recycling business
sell recycled metals that have been processed at their facilities (Processing)
and also buy and sell third parties' processed metals (Brokering). The Company
considers these joint ventures to be separate segments because they are managed
separately. These joint ventures are accounted for using the equity method. As
such, the operating information related to the joint ventures is shown
separately from consolidated information, except for the Company's equity in the
net income of, investments in and advances to the joint ventures. Additionally,
assets and capital expenditures are not shown for the joint ventures as
management does not use that information to allocate resources or assess
performance. The Company does not allocate corporate interest income and
expense, income taxes or other income and expenses related to corporate activity
to its operating segments.

Revenues from external customers for the Company's consolidated operations are
as follows (in thousands):

FOR THE THREE MONTHS ENDED
NOVEMBER 30,
---------------------------
2004 2003
------------ ------------
Metals Recycling Business $ 144,532 $ 79,602
Auto Parts Business 23,386 17,660
Steel Manufacturing Business 70,022 53,219
Intersegment revenues (38,979) (22,105)
------------ ------------
Consolidated revenues $ 198,961 $ 128,376
============ ============

The joint ventures' revenues from external customers are as follows (in
thousands):

FOR THE THREE MONTHS ENDED
NOVEMBER 30,
---------------------------
2004 2003
------------ ------------
JOINT VENTURES:
Processing $ 312,474 $ 158,395
Brokering 199,932 109,946
------------ ------------
Total Joint Venture revenues $ 512,406 $ 268,341
============ ============



14

SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2004 AND 2003


The Company's operating income (loss) is as follows (in thousands):

FOR THE THREE MONTHS ENDED
NOVEMBER 30,
---------------------------
2004 2003
------------ ------------
Metals Recycling Business $ 33,788 $ 9,923
Auto Parts Business 7,346 5,889
Steel Manufacturing Business 12,760 (142)
Joint Ventures 20,464 5,937
Corporate expense (3,591) (2,646)
Intercompany profit eliminations (3,163) (856)
------------ ------------
Total Operating Income $ 67,604 $ 18,105
============ ============


Income from operations generated by the joint ventures represents the Company's
equity in the income or loss of these entities. The Company's share of
depreciation and amortization expense included in the determination of the Joint
Ventures' income from operations is $1.7 million for the quarters ended November
30, 2004 and 2003.


NOTE 6 - SUBSEQUENT EVENT:

On December 30, 2004, Pick-N-Pull Auto Dismantlers, a wholly-owned subsidiary of
the Company, signed a definitive agreement to buy the assets and lease the sites
for four self service used auto parts stores in St. Louis and Kansas City,
Missouri; Columbus, Ohio; and Virginia Beach, Virginia from Vehicle Recycling
Solutions, LLC and certain of its wholly-owned subsidiaries ("VRS") for a
purchase price of approximately $18.5 million. The transaction is expected to
close on January 10, 2005. The St. Louis, Kansas City and Columbus stores will
increase the Company's existing mid-west store base. The Virginia Beach store is
expected to provide Pick-N-Pull with an eastern presence giving it the ability
to expand along the East Coast. The four new stores will be operated under the
Pick-N-Pull name and will increase the total number of stores to 30 for the
Company's Auto Parts Business segment. The results of operations for these four
stores will be reflected in the consolidated results of the Company's Auto Parts
Business during the second fiscal 2005 quarter.




15

SCHNITZER STEEL INDUSTRIES, INC.


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

GENERAL

Schnitzer Steel Industries, Inc. (the Company) operates in three vertically
integrated business segments that include the wholly-owned and joint venture
metals recycling businesses, the Auto Parts Business and the Steel Manufacturing
Business. The wholly-owned Metals Recycling Business and certain joint venture
businesses collect, process and recycle metals by operating one of the largest
metals recycling businesses in the United States. The Auto Parts Business
operates as Pick-N-Pull in the United States and Canada, and the Company
believes it is one of the country's leading self-service used auto parts
networks with 26 retail store locations. Additionally, Pick-N-Pull is a supplier
of autobodies to the Metals Recycling Business which processes the autobodies
into sellable recycled metal. The Steel Manufacturing Business purchases
recycled metals from the Metals Recycling Business and uses its mini-mill to
process the recycled metals into finished steel products. As a result of the
Company's vertically integrated business, it is able to transform autobodies and
other unprocessed metals into finished steel products. The joint ventures in the
metals recycling business sell recycled metals that have been processed at their
facilities (Processing) and also buy and sell third parties' processed metals
(Brokering).


RESULTS OF OPERATIONS

The Company's revenues and operating results by business segment are summarized
below (in thousands):

FOR THE THREE MONTHS ENDED
NOVEMBER 30,
--------------------------
2004 2003
---------- ----------
REVENUES:
Metals Recycling Business:
Ferrous sales $ 126,832 $ 65,894
Nonferrous sales 15,654 12,409
Other sales 2,046 1,299
---------- ----------
Total Metals Recycling Business revenues 144,532 79,602

Auto Parts Business 23,386 17,660
Steel Manufacturing Business 70,022 53,219
Intercompany sales eliminations (38,979) (22,105)
---------- ----------
Total Revenues $ 198,961 $ 128,376
========== ==========

OPERATING INCOME (LOSS):
Metals Recycling Business $ 33,788 $ 9,923
Auto Parts Business 7,346 5,889
Steel Manufacturing Business 12,760 (142)
Joint Ventures 20,464 5,937
Corporate expense (3,591) (2,646)
Intercompany profit eliminations (3,163) (856)
---------- ----------
Total Operating Income $ 67,604 $ 18,105
========== ==========

NET INCOME $ 42,936 $ 12,177
========== ==========

16

SCHNITZER STEEL INDUSTRIES, INC.



The Joint Ventures' revenues and operating income were as follows (in
thousands):

FOR THE THREE MONTHS ENDED
NOVEMBER 30,
--------------------------
2004 2003
---------- ----------
Total revenues from external customers
recognized by:

JOINT VENTURES:
Processing $ 312,474 $ 158,395
Brokering 199,932 109,946
---------- ----------
$ 512,406 $ 268,341
========== ==========

Operating income from Joint Ventures $ 20,464 $ 5,937
========== ==========

The following table summarizes certain selected operating data for the Company
and its joint venture businesses:

FOR THE THREE
MONTHS ENDED
NOVEMBER 30,
-------------------
2004 2003
-------- --------
METALS RECYCLING BUSINESS:
Ferrous Recycled Metal Sales Prices ($/ton) (1,2)
Domestic $ 221 $ 135
Export $ 245 $ 144
Average $ 233 $ 140

Ferrous recycled metal shipments (tons in thousands) (2)
To Steel Manufacturing Business 159 158
To other unaffiliated domestic customers 17 15
To export customers 295 236
-------- --------
Total ferrous recycled metal 471 409
======== ========

Nonferrous metal shipments (pounds in thousands)
29,400 28,300
======== ========

STEEL MANUFACTURING BUSINESS:
Average Sales Prices ($/ton) (1,2) $ 534 $ 310

Finished steel products shipments (tons in
thousands) (2) 126 163
======== ========

JOINT VENTURES:
Ferrous recycled metal shipments (tons in thousands) (2)
Processed 929 675
Brokered 665 677
-------- --------
1,594 1,352
======== ========

(1) The Company reports revenues that include shipping costs billed to
customers. However, average net selling prices are shown net of shipping
costs.
(2) Tons for ferrous recycled metals are long tons (2,240 pounds) and for
finished steel products are short tons (2,000 pounds).

17

SCHNITZER STEEL INDUSTRIES, INC.



FIRST QUARTER FISCAL 2005 COMPARED TO FIRST QUARTER FISCAL 2004

RESULTS OF OPERATIONS

During the first quarter of fiscal 2005, the Company's operations improved
dramatically compared to the first quarter of fiscal 2004 as a result of higher
pricing on our products, which is directly a result of strong worldwide
consumption of both recycled metal and finished steel products.

The results of operations of the Company depend in large part upon demand and
prices for recycled metals in world markets and steel products in the Western
United States. Beginning in fiscal 2004, and continuing into the first quarter
of fiscal 2005, strong worldwide demand combined with a tight supply of recycled
metals drove the Metals Recycling Business' average selling prices to all time
highs. Market prices for recycled ferrous metals fluctuate periodically and have
a significant impact on the results of operations for the wholly-owned and Joint
Ventures in the metals recycling business.

The Auto Parts Business purchases used and salvaged vehicles, sells parts from
those vehicles through its retail facilities and wholesale operations and sells
the remaining portion of the vehicles to metal recyclers. The retail operations
are somewhat seasonal and affected by weather conditions and promotional events.
Since the stores are open to the natural elements, during periods of prolonged
wet, cold or extreme heat, the retail business tends to slow down due to the
difficult customer working conditions. As a result, the Company's first and
third fiscal quarters tend to generate the most retail sales and the second and
fourth fiscal quarters are the slowest in terms of retail sales. The Auto Parts
Business' other primary source of revenue is the sale of scrap metal and other
parts wholesale. Revenues for the wholesale product lines are principally
affected by commodity prices and shipping schedules. As mentioned earlier in the
discussions regarding the Metal Recycling Business, recycled metal prices have
increased dramatically over the last year, which positively affected the
revenues and profits of the Auto Parts Business.

Domestic consumption of finished steel was strong during the first quarter of
fiscal 2005. However, the Steel Manufacturing Businesses' sales volumes were
unusually low during the same period due primarily to abnormally high inventory
levels held by its customers who fabricate and distribute steel. Throughout the
second half of fiscal 2004, demand and selling prices for finished steel grew
quickly. The rise in selling prices caused many fabricators and distributors to
buy ahead of end user demand in anticipation of even higher prices. This buying
pattern resulted in unusually high market inventory levels of finished steel. In
anticipation of seasonal declines in consumption that occur in the late fall and
winter months, many distributors and fabricators reduced their steel purchases
to balance their inventories. Sales volumes of rebar products were also
adversely affected by rising levels of Japanese steel imports.

REVENUES. Consolidated revenues for the quarter ended November 30, 2004
increased $70.6 million or 55% to $199.0 million from $128.4 million in the
first quarter of fiscal 2004. Revenues in the first quarter of fiscal 2005
increased for all Company business segments primarily as a result of increased
prices and demand in the worldwide ferrous metals market. Significant
improvements in demand, coupled with higher raw material cost led to increases
in selling prices for finished steel products sold by the Steel Manufacturing
Business. The Auto Parts Business benefited from the increased ferrous metals
prices in the sales of autobodies and higher core sale revenues. In addition,
the Auto Parts Business acquired three retail locations in Canada in the third
quarter of fiscal 2004 that added revenue and operating income to the segment.

The Metals Recycling Business generated revenues of $144.5 million for the
quarter ended November 30, 2004, before intercompany eliminations, which is an
increase of $64.9 million or 82% over the same period of the prior year. Ferrous
revenues increased $60.9 million, or 92% to $126.8 million as a result of higher
average selling prices net of shipping cost (average net selling prices), higher
shipping costs billed to customers and an increase in the volume sold. The
average net sales price for ferrous metals increased $96 per ton or 69%, to $236
per ton which represents $45.2 million of the revenue increase over the prior
year quarter. The cost of

18

SCHNITZER STEEL INDUSTRIES, INC.



freight that is included in revenues increased by $7.0 million over the fiscal
2004 first quarter due primarily to ocean chartering costs. Average export
shipping costs increased 47% over the prior year quarter. Total ferrous sales
volumes increased by approximately 62,000 tons or 15%, which represents $8.7
million of the revenue increase over the prior year quarter.

Sales to the Steel Manufacturing Business increased by 1,500 tons or 1% to
159,000 tons. Nonferrous revenue increased $3.2 million or 26% to $15.7 million
due primarily to higher average selling prices. The average net nonferrous
selling price in the first quarter of fiscal 2005 was $0.53 per pound, an
increase of $0.09 per pound or 22%. In addition, sales volume increased 4% to
29.4 million pounds. The increases in average selling price and volume are
related to strong worldwide demand, especially from Asia.

The Auto Parts Business generated revenue of $23.4 million, before intercompany
eliminations, for the quarter ended November 30, 2004, which is an increase of
$5.7 million or 32% over the same period of the prior year. This increase is a
result of higher wholesale revenues driven by higher average sales prices for
scrapped autobodies due to rising ferrous recycled metal prices, higher core
sale revenues and the acquisition of three retail store locations in Canada in
March 2004. During the second quarter of fiscal 2005, the Company announced the
acquisition of four retail store locations for the Auto Parts Business. The
Company expects these new stores to be accretive to earnings upon completion of
the acquisition.

The Steel Manufacturing Business generated revenues of $70.0 million for the
quarter ended November 30, 2004, which is an increase of $16.8 million, or 32%
over the prior year quarter. Average net selling price increased $224 per ton,
or 72% to $534 per ton, which represents a $28.3 million revenue increase. The
increase in average net selling prices was due to a combination of factors
including increased steel consumption. Sales volumes decreased 22% to 126,000
tons, which reduced revenues by $11.3 million. The lower sales volume during the
first quarter of fiscal 2005 is primarily due to abnormally high inventory
levels held by fabricators and distributors of steel, as discussed above. Many
of the Company's customers are using the normal seasonal decline in consumption
during the winter months to reduce their inventory levels.

COST OF GOODS SOLD. Consolidated cost of goods sold increased $32.8 million or
31% for the first quarter ended November 30, 2004, compared with the same period
last year. Cost of goods sold decreased as a percentage of revenues from 83% to
70%. Gross profit increased $37.8 million to $59.5 million during the latest
quarter compared to the prior year quarter driven by profit margin improvements
at the Company's Metal Recycling and Steel Manufacturing Business segments.

Cost of goods sold for the Metal Recycling Business increased $40.5 million or
62% to $105.7 million. As a percentage of revenues, cost of goods sold decreased
compared with the first quarter of fiscal 2004 from 82% to 73%. Gross profit
increased by $24.5 million to $38.9 million. The increase in gross profit was
attributable to higher average net selling prices per ton and higher sales
volumes. Compared with the first quarter of last year, the average ferrous
metals cost of sales per ton increased 43% due primarily to higher purchase
costs for unprocessed ferrous metals. Generally, a change in the cost of
unprocessed metal has a strong correlation to changes in the average selling
price. Thus, as selling prices rose compared with last year's quarter, so did
the cost of unprocessed metal.

The Auto Parts Business' cost of goods sold was $3.1 million or 30% higher
during the first quarter of fiscal 2005 as compared to the cost of goods sold
for the fiscal 2004 first quarter. The higher cost of sales was primarily due to
higher car purchase costs that result from higher scrap metal prices. As a
percentage of revenues, cost of goods sold remained consistent with the prior
year quarter. Gross profit increased $2.6 million or 35% over the prior year
quarter related to increased revenue.

The Steel Manufacturing Business' cost of goods sold was $3.7 million or 7%
higher during the first quarter of fiscal 2005 as compared to the cost of goods
sold for the fiscal 2004 first quarter. As a percentage of revenues, cost of
goods sold decreased compared with the first quarter of fiscal 2004 from 99% to
80%. Average cost of

19

SCHNITZER STEEL INDUSTRIES, INC.



goods sold per ton increased $119 per ton or 39% compared to the prior year
quarter, which was primarily caused by higher raw material costs for recycled
metal and alloys, and a higher mix of the higher cost wire rod sales. As this
increase in cost of sales was more than offset by the $224 per ton increase in
average net selling price, gross profit improved by $13.1 million, to $13.8
million for the quarter.

JOINT VENTURES. The Joint Ventures in the metals recycling business
predominantly sell recycled ferrous and nonferrous metals. Revenues for this
segment in the first quarter of fiscal 2005 increased $244.1 million or 91%
compared with the prior year quarter primarily due to a 68% higher average net
selling price per ton and an 18% increase in the volume of ferrous recycled
metal sold, over the prior year quarter. The increase in average net selling
price per ton was due to the same supply and demand circumstances described
earlier for the Company's wholly-owned businesses.

The Company's share of Joint Venture operating income for the first quarter of
fiscal 2005 increased to $20.5 million from $5.9 million in the first quarter of
fiscal 2004. The increase in income from these Joint Ventures was primarily
caused by higher selling prices and volumes. The Company's share of operating
income from the global brokering joint venture increased from $1.9 million in
the first quarter of fiscal 2004 to $4.2 million in the first quarter of fiscal
2005, a 121% increase. The increase in the global brokering operating income is
a result of higher selling prices. The Company's share of joint venture
operating income in the first quarter of fiscal 2005 included an estimated $1.5
million from a joint venture contract with New York City for the processing and
disposal of curbside recycling materials that commenced in April 2004. The
contract with New York City is an interim contract, and the Company's present
intention is not to participate in the anticipated long-term contract.
Therefore, the income stream from this contract could end at any time.

GENERAL AND ADMINISTRATIVE EXPENSE. Compared with the first quarter of fiscal
2004, general and administrative expense for the same quarter this fiscal year
increased $2.9 million or 35%. Approximately $1.0 million of the change is
related to increased headcount primarily related to the Auto Parts Business and
development of their management infrastructure that will allow management to
grow this business segment. In addition, the Company has incurred increases in
expenses related to Sarbanes-Oxley compliance and other professional fees. As a
percentage of revenues, general and administrative expense has decreased by 0.8%
percentage points, from 6.4% to 5.6% due to spreading these expenses over higher
revenues.

INTEREST EXPENSE. Interest expense for the first quarter of fiscal 2005
decreased 35% to $0.3 million compared with the first quarter of fiscal 2004.
The decrease was a result of lower average debt balances during the fiscal 2005
first quarter compared with the fiscal 2004 quarter.

INCOME TAX PROVISION. The tax rate of 34.8% for the first quarter of fiscal 2005
was higher than the 29.0% for the same quarter last year because of a projected
decrease in the Extraterritorial Income Exclusion (ETI) tax benefit on export
sales, and because last year's final release of a valuation allowance that had
once offset net operating losses (NOLs) from an earlier business acquisition
means that no further releases of valuation allowances can benefit income tax
expense in fiscal 2005 and beyond. The 34.8% rate approximates the 35% Federal
statutory rate because the projected ETI benefits are largely offset by the
projected state income taxes.

LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations for the three
months ended November 30, 2004 was $17.3 million compared with $12.4 million for
the same period in the prior fiscal year. The increase in cash flow from
operations was primarily related to an improvement in net income of wholly-owned
businesses, offset by an increase in inventories, which is a result of higher
inventory quantities on hand at November 30, 2004 and increased inventory costs
for raw materials at all divisions.

Capital expenditures for the three months ended November 30, 2004 were $7.5
million compared with $6.2 million during the first three months of fiscal 2004.
The increase was primarily due to improvement projects at the Company's Oakland,
California recycling facility and furnace installation at the Company's steel
mill. The

20

SCHNITZER STEEL INDUSTRIES, INC.



Company expects to spend approximately $37.0 million on capital improvement
projects during the remainder of fiscal 2005.

Accrued environmental liabilities as of November 30, 2004 were $18.3 million.
Over the next 12 months, the Company expects to pay approximately $5.9 million
relating to a previously accrued remediation project in connection with one of
its metals recycling facilities located in the State of Washington on the
Hylebos Waterway. Additionally, the Company anticipates future cash outlays as
it incurs the actual cost relating to the remediation of identified
environmental liabilities. The future cash outlays are anticipated to be within
the amounts established as environmental liabilities.

As of November 30, 2004, the Company had a committed unsecured bank credit
facility totaling $150 million that matures in May 2006. The credit facility
contains a provision whereby the Company may, upon obtaining consent of the bank
group, extend the term of the agreement by one year to May 2007. The Company has
provided notice of its intention to request such an extension and the bank group
has agreed to the request. The extension is subject to the Company providing
standard representations and warranties as of the May 2006 original maturity
date. The Company currently anticipates it will be able to provide the required
representations and warranties and the agreement will be extended. The Company
also has additional unsecured credit lines totaling $20 million, which are
uncommitted. The Company's debt agreements have certain restrictive covenants.
As of November 30, 2004, the Company had aggregate bank borrowings outstanding
under these facilities of $42.5 million and was in compliance with such
covenants.

In July 2002, the Company's metals recycling joint ventures with Hugo Neu
Corporation entered into a revolving credit facility (JV Credit Facility) with a
group of banks for working capital and general corporate purposes. Prior to that
time, the joint ventures' working capital and other cash needs had been met by
advances provided equally by the Company and its partner, Hugo Neu Corporation.
During February 2004, the facility was increased to $110 million. The JV Credit
Facility expires on January 26, 2005 and is secured by the inventory and
receivables of the joint venture businesses. The Company is not a guarantor of
the JV Credit Facility. The JV Credit Facility has a number of covenants and
restrictions, including restrictions on the level of distributions to the joint
venture partners. The joint ventures were in compliance with these covenants as
of November 30, 2004. As of November 30, 2004, $82.9 million was outstanding
under the JV Credit Facility. The increase from no borrowings outstanding as of
August 31, 2004 primarily resulted from increases in accounts receivable and
inventories of the joint venture brokering business. Although the Company
previously disclosed its intention to not renew the facility upon its
expiration, the Company has consented to the joint ventures' request for a
six-month extension of the JV Credit Facility to avoid disruption of the joint
venture businesses. Upon expiration of the JV Credit Facility, the Company and
its partner will need to revert to funding the cash needs of the joint ventures
on an equal basis.

The joint venture agreements allow for distributions to the joint venture
partners. Over the fifteen month period ended November 30, 2004, the Company
recorded $82.0 million in operating income representing its share in the
earnings of the joint ventures. During the quarter ended November 30, 2004, the
joint ventures distributed cash of $21.0 million to the Company. The difference
between the operating income recognized and cash distributions received has been
utilized by the joint ventures to fund expansion of working capital, business
growth, and investment in state-of-the-art equipment to improve the efficiencies
and capabilities of their business.

The joint ventures in the metals recycling business are purchasing and
installing one new mega-shredder and related equipment in fiscal 2005 for an
estimated cost of $12 million. In addition, the joint ventures will purchase
equipment and begin the long-term construction planning for the installation of
two additional mega-shredders and related equipment that are anticipated to be
completed in fiscal 2006. The joint venture partners anticipate using a
long-term equipment financing facility to support the purchase. Under the
proposed agreement, the joint ventures would make principal and interest
payments on the financing facility from operating income.

The Company makes contributions to a defined benefit pension plan, several
defined contribution plans and several multiemployer pension plans.
Contributions vary depending on the plan and are based upon plan provisions,

21

SCHNITZER STEEL INDUSTRIES, INC.



actuarial valuations and negotiated labor agreements. The Company anticipates
making contributions of approximately $6.0 million to the various pension plans
in fiscal 2005.

Pursuant to a stock repurchase program, the Company is authorized to repurchase
up to 3.0 million shares of its stock when the market price of the Company's
stock is not reflective of management's opinion of an appropriate valuation of
the stock. Management believes that repurchasing shares under these conditions
enhances shareholder value. During the first three months of fiscal 2005, the
Company made no share repurchases. As of November 30, 2004, the Company had
repurchased a total of 1.3 million shares under this program.

The Company believes its current cash resources, internally generated funds,
existing credit facilities and access to the capital markets will provide
adequate financing for capital expenditures, working capital, joint ventures,
stock repurchases, debt service requirements, post retirement obligations and
future environmental obligations for the next twelve months. In the longer term,
the Company may seek to finance business expansion with additional borrowing
arrangements or additional equity financing.

OUTLOOK. Over the last three quarters, the Company saw recycled metal markets
experience unusual levels of price volatility. However, consumption of recycled
metal continued to remain strong. Based upon the Company's wholly-owned Metals
Recycling Businesses' current order backlog, contracted average selling prices
that are expected to be shipped in the second quarter of fiscal 2005 approximate
price levels reported in the first quarter of fiscal 2005 and remain well ahead
of the averages realized during the second quarter of fiscal 2004. The Metals
Recycling Business' second quarter 2005 ferrous sales volume is anticipated to
be in the 430,000 to 475,000 ton range. Ocean freight rates remain high from a
historical context and are expected to approximate first quarter 2005 levels.
The cost of unprocessed ferrous metal remains very competitive and is
anticipated to generally follow the trend of selling prices.

The joint venture processors in the metals recycling business are expected to
experience similar market trends as the Company's wholly owned Metals Recycling
Business; however, their financial results may vary depending on geographical
locations, competition and other factors.

The Auto Parts Business generally experiences its weakest period for retail
sales in the second quarter of the fiscal year due to cold and wet weather
conditions slowing demand. The Auto Parts Business has experienced increasing
costs to procure inventory due to rising ferrous metal prices. This trend is
expected to continue into the second quarter of fiscal 2005 and may impact
margins.

During the second fiscal quarter of each year, demand for finished steel
declines due to the seasonal nature of the construction industry. It is also
expected that fabricators and distributors will continue to reduce inventory
levels and purchases of finished steel. Importers of finished steel are
anticipated to continue to aggressively compete for certain product categories.
Also, as planned, in December 2004 the Company's steel mill temporarily
shut-down its melt shop to replace its electric arc furnace. The furnace
replacement, completed in late December, reduced the production of billets and
caused production costs to rise. Raw material costs, including the costs of
alloys, are expected to increase modestly relative to the first quarter of 2005.

The Company's effective second quarter tax rate is expected to approximate 35%.

The Company estimates its second quarter 2005 operating income to be in the $50
million to $56 million range. This amount compares to operating income of $24.2
million reported for the second quarter of fiscal 2004.

FACTORS THAT COULD AFFECT FUTURE RESULTS. Management's Discussion and Analysis
of Financial Condition and Results of Operations, particularly "Outlook" above,
contains forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Act of 1934, that are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. One can generally identify these forward-looking statements
because they contain "expect", "believe" "anticipate",

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SCHNITZER STEEL INDUSTRIES, INC.



"estimate" and other words which convey a similar meaning. One can also identify
these statements as they do not relate strictly to historical or current facts.
Examples of factors affecting Schnitzer Steel Industries, Inc.'s consolidated
operations and its joint ventures (the Company) that could cause actual results
to differ materially are the following:

Cyclicality and General Market Considerations: Purchase and selling prices for
recycled metals are highly cyclical in nature and subject to worldwide economic
conditions. In addition, the cost and availability of recycled metals are
subject to global supply and demand conditions which are volatile and beyond the
Company's control, resulting in periodic fluctuations in recycled metals prices
and working capital requirements. While the Company attempts to maintain and
grow margins by responding to changing recycled metals selling prices through
adjustments to its metals purchase prices, the Company's ability to do so is
limited by competitive and other market factors. Additionally, changing prices
could potentially impact the volume of recycled metal available to the Company,
the subsequent volume of processed metal sold by the Company, inventory levels
and the timing of collections and levels relating to the Company's accounts
receivable balances. Moreover, increases in recycled metals selling prices can
adversely affect the operating results of the Company's Steel Manufacturing
Business because increases in steel prices generally lag increases in ferrous
recycled metals prices.

The steel industry is also highly cyclical in nature and sensitive to general
economic conditions. Future economic downturns or a stagnant economy may
adversely affect the performance of the Company.

The Company expects to continue to experience seasonal fluctuations in its
revenues and net income. Revenues can fluctuate significantly quarter to quarter
due to factors such as the seasonal slowdown in the construction industry, which
is an important buyer of the Company's finished steel products. The timing and
extent of the slowdown is also dependent on the weather.

Another factor which may affect revenues relates to the seasonal reduction in
demand from foreign customers who tend to reduce their finished steel production
and corresponding scrap metal requirements, during the summer months to offset
higher energy costs. Also, severe weather conditions may affect the Company's
global market conditions.

The Company makes a number of large ferrous recycled metals shipments to foreign
steel producers each year. Customer requirements, shipping schedules and other
factors limit the Company's control over the timing of these shipments.
Variations in the number of foreign shipments from quarter to quarter will
result in fluctuations in quarterly revenues and earnings. The Company's
expectations regarding ferrous metal sales prices and volumes, as well as
earnings, are based in part on a number of assumptions which are difficult to
predict (for example, uncertainties relating to customer orders, metal
availability, estimated freight rates, ship availability, weather, cost and
volume of unprocessed inventory and production output, etc.).

The Auto Parts Business experiences modest seasonal fluctuations in demand. The
retail stores are open to the elements. During periods of extreme temperatures
and precipitation, customers tend to delay their purchases and wait for milder
conditions. As a result, retail sales are generally higher during the spring and
fall of each calendar year and lower in the winter and summer months.

Additionally, the Auto Parts Business is subject to a number of other risks that
could prevent it from maintaining or exceeding its current levels of
profitability, such as volatile supply and demand conditions affecting prices
and volumes in the markets for its products, services and raw materials;
environmental issues; local and worldwide economic conditions; increased
competition; the ultimate success of the Company's growth and acquisition plans;
and business integration and management transition issues.

Competition: The recycled metals industry is highly competitive, with the volume
of purchases and sales subject to a number of competitive factors, principally
price. The Company competes with both large and numerous smaller

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SCHNITZER STEEL INDUSTRIES, INC.


companies in its markets for the purchase of recyclable metals. The Company also
competes with a number of domestic and foreign recycled metals processors and
brokers for processed and unprocessed metal as well as for sales to domestic and
foreign customers. For example, in 2001 and 2002, lower cost ferrous recycled
metals supplies from certain foreign countries adversely affected market selling
prices for ferrous recycled metals. Since then, many of these countries have
imposed export restrictions which have significantly reduced their export
volumes and lowered the worldwide supply of ferrous recycled metals. These
restrictions are believed to have had a positive effect on the Company's selling
prices. Given the intricacies in which the global markets operate, the Company
cannot predict when or if foreign countries will change their trading policies
and what effect, if any, such changes might have on the Company's operating
results.

From time to time, both the United States and foreign governments impose
regulations and restrictions on trade in the markets in which the Company
operates. In fiscal 2004, the Company completed filing requirements with China
to continue to allow the shipment of recycled metals into China. The documents
are part of a certification process to ensure safe industrial and agricultural
production in China. Also, it is not unusual for various constituencies to
petition government entities to impose new restrictions or change current laws.
If imposed, these restrictions could affect the Company's margins as well as its
ability to ship goods to foreign customers. Alternatively, restrictions could
also affect the global availability of ferrous recycled metals, thereby
affecting the Company's volumes and margins. As a result, it is difficult to
predict what, if any, impact pending or future trade restrictions will have on
the operations of the Company.

For the Metals Recycling Business, some of the more significant domestic
competitors include regional steel mills and their brokers who compete for
recycled metal for the purpose of providing the mill with feedstock to produce
finished steel. During periods when market supplies of metal are in short
supply, these buyers may, at times, react by raising buying prices to levels
that are not reasonable in relation to more normal market conditions. As a
result, the Company may have to raise its buying prices to maintain its
production levels which may result in compressed margins.

The Auto Parts Business competes with both full-service and self-service auto
dismantlers as well as larger well financed retail auto parts chains for retail
customers. Periodically, the Auto Parts Business increases prices, which may
affect customer flow and buying patterns. Additionally, in markets where the
Company has only a few stores, it does not have the same pricing power it
experiences in markets where it has more than one store in which it operates. As
this segment expands, the Company may experience new competition from others
attempting to replicate the Company's business model. The ultimate impact of
these dynamics cannot be predicted. Also, the business competes for its
automobile inventory with other dismantlers, used car dealers, auto auctions and
metal recyclers. Inventory costs can fluctuate significantly depending on market
conditions and prices for recycled metal.

The domestic steel industry also is highly competitive. Steel prices can be
highly volatile and price is a significant competitive factor. The Company
competes domestically with several steel producers in the Western United States
for sales of its products. In recent years, the Company has experienced
significant foreign competition, which is sometimes subsidized by large
government agencies. There can be no assurance that such competition will not
increase in the future. In the spring of 2002, the U.S. Government imposed
anti-dumping and countervailing duties against wire rod products from eight
foreign countries. These duties have assisted the Company in increasing sales of
wire rod products; any expiration or termination of the duties could have a
corresponding adverse effect.

In December 2002, Nucor Corporation ("Nucor") assumed ownership of the assets of
Birmingham Steel Corp., and acquired a steel manufacturing business in Seattle,
Washington. Nucor Corporation, the leader in setting finished steel prices in
the Company's finished steel markets, has a significant share of the West Coast
steel market and is considered an aggressive competitor. Nucor has consolidated
much of the West Coast domestic steel production with the 2002 purchase of the
former Birmingham Steel Mill in Seattle, Washington and the former North Star
mill in Kingman, Arizona. The Kingman mill has been idle since 2003; any future
start-up of its operations could

24

SCHNITZER STEEL INDUSTRIES, INC.



negatively impact the Company's recycled metal and finished steel markets,
prices, margins and, potentially, cash flow.

Geographical Concentration: The Company competes in the scrap metal business
through its wholly-owned Metals Recycling Business as well as through its joint
venture businesses. Over the last few years, a significant portion of the
revenues and operating profits earned in these segments have been generated from
sales to Asian countries, principally China and South Korea. In addition, the
Company's sales in these countries are also concentrated with relatively few
customers that vary depending on buying cycles and general market conditions.
Due to the concentration of sales in these countries and to a relatively small
customer base, a significant change in buying patterns, change in political
events, change in regulatory requirements, tariffs and other export restrictions
within the United States or these foreign countries, severe weather conditions
or general changes in economic conditions could adversely affect the financial
results of the Company.

Ferrous Sales to Far East: As discussed in Part II, Item 1 "Legal Proceedings"
in this Form 10-Q, the Company recently terminated its practice of paying
commissions to the purchasing managers of customers in connection with export
sales of recycled ferrous metals to the Far East. Termination of this practice
could put the Company at a competitive disadvantage and could have a negative
impact on the Company's ferrous metal sales volumes and prices. In addition,
termination of this practice could have a greater impact under weaker ferrous
metal market conditions. The Company is therefore unable to determine whether
the termination of this practice will have an adverse effect on its customer
relationships or business.

Union Contracts: The Company has a number of union contracts that expire in
fiscal year 2005. Labor contract negotiations have not commenced with any of
these unions. If the Company is unable to reach agreement on the terms of a new
contract with any of these unions, the Company could be subject to work
slowdowns or work stoppages.

Post Retirement Benefits: The Company has a number of post retirement benefit
plans that include defined benefit, Supplemental Executive Retirement Benefit
Plan (SERBP) and multiemployer plans. The Company's contributions to the defined
benefit and SERBP plans are based upon actuarial calculations which are based on
a number of estimates including the expected long-term rate of return on plan
assets, allocation of plan assets between equity or fixed income investments,
expected rate of compensation increases as well as other factors. Changes in
these actual rates from year to year cause increases or decreases in the
Company's annual contributions into the defined benefit plans and changes to the
expenses recognized in a current fiscal year. Management and the actuary
evaluate these rates annually and adjust if necessary.

The Company's union employees participate in a number of multiemployer pension
plans. The Company is not the sponsor or administrator of these multiemployer
plans. Contributions are determined in accordance with provisions of the
negotiated labor contracts. The Company is unable to determine its relative
portion or estimate its future liability under the multiemployer pension plans.

The Company learned during the fourth quarter of 2004 that one of the
multiemployer plans would not meet ERISA minimum funding standards for the plan
year ending September 30, 2004. The trustees of that plan have applied to the
Internal Revenue Service for certain relief from this minimum funding standard,
but cannot determine whether this relief will be granted. Absent relief, the
plan's contributing employers will be required to make additional contributions
or pay excise tax that may equal or exceed the full amount of that deficiency.
The Company estimates its share of the required additional contribution for the
2004 plan year is approximately $1.1 million and has accrued for such amount in
fiscal 2004.

Joint Ventures: The Company has significant investments in joint venture
companies, the most substantial of which are its five metals recycling joint
ventures with Hugo Neu Corporation (HNC). In each case, the day-to-day
activities of the joint venture business are managed by the Company's joint
venture partner, not the Company. As a result, the Company does not have the
same ability to control or predict the operations, cash

25

SCHNITZER STEEL INDUSTRIES, INC.


flow, expenditures, debt, and related financial results as it does with its
consolidated businesses. Therefore, it is difficult to predict the financial
results of the joint ventures.

In recent years, the Company's relationship with the chief executive officer of
HNC, its most significant joint venture partner, has deteriorated. There have
been disagreements regarding business decisions as well as personality clashes,
but the Company does not believe that these issues have materially affected the
operations or operating results of the joint ventures, which have shown dramatic
financial improvement since fiscal 2000. The Company is currently disputing
HNC's recent unilateral assertion of a right to be paid certain commissions on
sales by the joint venture engaged in global brokering of recycled metals, as
described in more detail in Note 3 of Notes to Consolidated Financial
Statements.

The Company believes it desirable for the Company and HNC to end the current
joint venture relationships; however, the joint venture agreements do not
provide for a mechanism to break up the ventures. Preliminary discussions
regarding possible transactions to terminate the relationship occur from time to
time, but these discussions have not resulted in any agreement regarding the
structure, valuation or terms of such a transaction. As such discussions
periodically continue, the Company will evaluate its disclosure obligations, but
does not presently intend to make any further disclosure regarding the existence
or status of such discussions unless and until an agreement is reached, if ever.

The joint venture businesses are affected by many of the same risk factors
mentioned in this document. Additionally, two of these joint ventures continue
to use LIFO inventory accounting, which tends to defer income taxes.
Historically, the effects of LIFO adjustments, which are recorded during the
fourth quarter of each fiscal year, have been difficult to predict.

Replacement or Installation of Capital Equipment: The Company and its joint
venture partners install new equipment and construct facilities or overhaul
existing equipment and facilities (including export terminals) from time to
time. Some of these projects take several months to complete, require the use of
outside contractors and experts, require special permits and easements and have
higher degrees of risk. Examples of such major capital projects include the
installation of a mega-shredder at a metal recycling yard, the overhaul of an
export loading facility or the furnace replacement at the steel mill. Many times
in the process of preparing the site for installation, the Company is required
to temporarily halt or limit production for a period of time. If problems are
encountered during the installation and construction process, the Company may
lose the ability to process materials which may impact the amount of revenue it
is able to earn or may increase operating expenses. In either case, the
Company's ability to reasonably predict financial results may be hampered.

Energy Supply: The Company and its joint ventures utilize various energy sources
to operate their facilities. In particular, electricity and natural gas
currently represent approximately 9% of the cost of steel manufactured for the
Company's Steel Manufacturing Business. The Steel Manufacturing Business
purchases electric power under a long-term contract from McMinnville Water &
Light (McMinnville) which in turn relies on the Bonneville Power Administration
(BPA). Historically, these contracts have had favorable prices and are long-term
in nature. The Company's electrical power contract expires in September 2011. On
October 1, 2001, the BPA increased its electricity rates due to increased demand
on the West Coast and lower supplies. This increase was in the form of a Cost
Recovery Adjustment Clause (CRAC) added to BPA's contract with McMinnville. The
CRAC is an additional monthly surcharge on selected power charges to recover
costs associated with buying higher priced power during the West Coast power
shortage. Because BPA can adjust the CRAC every six months, it is not possible
to predict future rate changes.

The Steel Manufacturing Business also has a contract for natural gas at $4.50
per MMBTU. The current contract expires on May 31, 2009 and obligates the
business to purchase minimum amounts of gas at a fixed rate. Effective November
1, 2004, the natural gas rate will be reduced to $4.39 per MMBTU. This is a take
or pay contract with a

26

SCHNITZER STEEL INDUSTRIES, INC.



minimum average usage of 3,575 MMBTU per day. Gas not used is sold on the open
market and gains or losses are recorded in cost of sales.

If the Company is unable to negotiate favorable terms of electricity, natural
gas and other energy sources, this could adversely affect the performance of the
Company.

Tax Laws: The Company has been able to reduce its effective tax rate below the
federal statutory tax rate for each of the last three years by using a
combination of Net Operating Loss carryforwards (NOLs), tax credits in State of
California Enterprise Zones, and federal Extraterritorial Income Exclusion (ETI)
tax benefits associated with making foreign sales. In response to recent
determinations by the World Trade Organization that the ETI tax benefit
constituted an illegal export subsidy, Congress passed the American Jobs
Creation Act of 2004 (the Act), which became law on October 22, 2004. A key
provision of the Act eliminates the ETI deduction over the next two years,
offsetting it in part with a deduction for "qualified production activities
income." Until regulations are issued explaining the new deduction, any
projection of its effect on the Company's worldwide tax rate would necessarily
be imprecise, but the current projection is that the tax rate would be in the
34% to 37% range in fiscal 2005.

Currency Fluctuations: Demand from the Company's foreign customers is partially
driven by foreign currency fluctuations relative to the U.S. dollar. Recent
weakness of the U.S. dollar relative to foreign currencies has been a
significant factor in the increases in recycled metals prices over the last
year, as well as resulted in increasing the cost of certain finished steel
imports. Strengthening of the U.S. dollar could adversely affect the
competitiveness of the Company's products in the markets in which the Company
competes. The Company has no control over such fluctuations and, as such, these
dynamics could affect the Company's revenues and earnings.

Shipping and Handling: Both the Metals Recycling Business and the Steel
Manufacturing Business often rely on third parties to handle and transport their
products to end users in a timely manner. The cost to transport the products, in
particular by ocean freight, can be affected by circumstances over which the
Company has no control such as fuel prices, political events, governmental
regulations on transportation and changes in market rates due to carrier
availability. In estimating future operating results, the Company makes certain
assumptions regarding shipping costs. Given the recent tightness in the ocean
freight market, the Company has experienced significant increases in its
shipping costs which have adversely affected operating income. Since it is
difficult to predict the future costs for shipping the Company's products,
actual results could differ materially from forecasts.

Insurance: The cost of the Company's insurance is affected not only by its own
loss experience but also by cycles in the insurance market. The Company cannot
predict future events and circumstances which could cause rates to materially
change such as war, terrorist activities or natural disasters.

Asset Acquisition and Disposition: Throughout the Company's history, it has made
a number of acquisitions and divestures as management attempts to improve the
value of the Company for its shareholders. Over the last few years this activity
has principally been limited to acquisitions related to the Auto Parts Business.
It is anticipated that the Company will continue to pursue additional expansion
of the Auto Parts Business as well as other business segments. Each acquisition
or disposition comes with its own inherent risks that make it difficult to
predict the ultimate success of the transaction. An acquisition or disposition
may have a negative and/or unexpected impact on the Company's cash flow,
operating income, net income, earnings per share and financial position.

Intercompany Sales: The Auto Parts Business sells autobodies to the Metals
Recycling Business, and the Metals Recycling Business sells ferrous recycled
metal to the Steel Manufacturing Business, at prices that are intended to
approximate market. When the Company consolidates its results in accordance with
generally accepted accounting principles, the Company eliminates the
intercompany sales and purchases and also eliminates the estimated profit
remaining in inventory ("Profit Elimination") at the end of each reporting
period. In estimating future operating

27

SCHNITZER STEEL INDUSTRIES, INC.



and financial performance, the Company makes assumptions regarding the
forecasted Profit Elimination computation and its impact on the quarterly
financial results of the Company. Small variations in price, sales volume,
production volume, and purchase prices and volumes from both within the Company
and from third parties can result in significant differences between forecasted
Profit Elimination and actual results.

It is not possible to predict or identify all factors that could cause actual
results to differ from the Company's forward-looking statements. Consequently,
the reader should not consider any such list to be a complete statement of all
potential risks or uncertainties. Further, the Company does not assume any
obligation to update any forward-looking statement.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company periodically uses derivative financial instruments to limit exposure
to changes in interest rates. Because such derivative instruments are used
solely as hedges and not for speculative trading purposes, they do not represent
incremental risk to the Company. For further discussion of derivative financial
instruments, refer to "FAIR VALUE OF FINANCIAL INSTRUMENTS" in the consolidated
Financial Statements included in Item 8 of Form 10-K for the fiscal year ended
August 31, 2004.


ITEM 4. CONTROLS AND PROCEDURES

Schnitzer Steel Industries, Inc. management, under supervision of the Chief
Executive Officer and Chief Financial Officer, is responsible for establishing
and maintaining disclosure controls and procedures for Schnitzer Steel
Industries, Inc. and its subsidiaries. As of November 30, 2004, with the
participation of the Chief Executive Officer and the Chief Financial Officer,
management completed an evaluation of the Company's disclosure controls and
procedures. Based upon this evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded that the disclosure controls and
procedures are effective to ensure that all material information relating to
Schnitzer Steel Industries, Inc. and its subsidiaries is made known to them by
others within the organization as appropriate to allow timely decisions
regarding required disclosures.

There were no changes in the Company's internal control over financial reporting
during the first fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the internal control over financial reporting.






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SCHNITZER STEEL INDUSTRIES, INC.



PART II

ITEM 1. LEGAL PROCEEDINGS

Until recently, the Company had a practice of paying commissions to the
purchasing manager of customers in connection with export sales of recycled
ferrous metals to the Far East. The Company was recently advised that this
practice may raise questions of possible violations of U.S. and foreign laws,
and the practice was stopped. Thereafter, the Audit committee was advised and
conducted a preliminary compliance review. On November 18, 2004, on the
recommendation of the Audit Committee, the Board of Directors authorized the
Audit Committee to engage independent counsel and conduct a thorough,
independent investigation and directed that the existence and the results of the
investigation be voluntarily reported to the U.S. Department of Justice and the
Securities and Exchange Commission, and that the Company cooperate fully with
those agencies. The investigation is ongoing, and is not expected to affect the
Company's previously reported financial results, including those reported in
this 10-Q. The Company cannot predict the results of the investigation or
whether the Company or any of its employees will be subject to any penalties or
other remedial actions following completion of the investigation.


ITEM 5. OTHER INFORMATION

On October 18, 2004, stock options were granted under the Company's 1993 Stock
Incentive Plan to Robert W. Philip for 67,500 shares, Gary Schnitzer for 25,000
shares, and Jay Robinovitz for 10,000 shares. All such options have an exercise
price of $28.41 per share (which was the closing market price on the grant
date), a ten-year term, and vest 20% per year over five years.


ITEM 6. EXHIBITS

(A) EXHIBITS

2.1 Agreement of Purchase and Sale dated December 30, 2004, among Vehicle
Recycling Solutions, LLC, a Delaware limited liability company,
several wholly-owned subsidiaries of Vehicle Recycling Solutions, LLC,
and Pick-N-Pull Auto Dismantlers, a California general partnership and
wholly-owned subsidiary of the Company.

The following schedules and exhibits to the Agreement of Purchase and
Sale have been omitted and will be provided to the Securities and
Exchange Commission upon request.

Schedule 11.1 Exceptions to Seller's Representations and Warranties
Schedule 11.2 Bridgewater Power Point Presentation
Schedule 13(a) Buyer Activities
Schedule 13(b) Seller Activities

Exhibit A Equipment
Exhibit B Elko Leases
Exhibit C Lease Agreement
Exhibit D Confidentiality, Non-Compete and Non-Solicitation
Agreement
Exhibit E Seller's Liabilities and Obligations to be Assumed by
Buyer
Exhibit F Allocation of Purchase Price
Exhibit G Escrow Agreement
Exhibit H Closing Costs
Exhibit I Equipment Lease


29


Exhibit J Estoppel and Consent to Sublease by Landlord and Owner
Exhibit K Owner's and Tenant's Affidavit
Exhibit L Intellectual Property License Agreement
Exhibit M Software and Know-How License Agreement
Exhibit N Access Agreement


31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002

31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.



















30


SCHNITZER STEEL INDUSTRIES, INC.



SIGNATURE

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.




SCHNITZER STEEL INDUSTRIES, INC.
(Registrant)




Date: January 7, 2005 By: /s/ Barry A. Rosen
--------------- ---------------------------
Barry A. Rosen
Vice President, Finance and
Chief Financial Officer




















31