================================================================================

                                  
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 May 31, 2005 or

  [_]   Transition report pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934 for the transition period from _______ to _______.


        
xQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended November 30, 2005 or

oTransition 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
(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)


                                 


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
(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]o  No [_]

x

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

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x

The Registrant had 22,486,28022,493,105 shares of Class A Common Stock, par value of $1.00 per share, and 7,985,366 shares of Class B Common Stock, par value of $1.00 per share, outstanding at June 30,December 31, 2005.

================================================================================

                                      INDEX




                                                                        PAGE NO.
PART I.   FINANCIAL INFORMATION

Condensed Consolidated Balance Sheets at May 31, 2005
    and August 31, 2004.......................................................3

Condensed Consolidated Statement of Operations for the
    Three Months and Nine Months Ended May 31, 2005 and 2004..................4

Condensed Consolidated Statement of Shareholders' Equity for the
    Year Ended August 31, 2004 and the Nine Months Ended May 31, 2005.........5

Condensed Consolidated Statement of Cash Flows for the
    Nine Months Ended May 31, 2005 and 2004...................................6

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

Management's Discussion and Analysis of Financial Condition
    and Results of Operations................................................18

Quantitative and Qualitative Disclosures about Market Risk...................37

Controls and Procedures......................................................37



PART II.  OTHER INFORMATION

Legal Proceedings ...........................................................38

Exhibits.....................................................................38


SIGNATURE PAGE...............................................................39





                                        2


SCHNITZER STEEL INDUSTRIES, INC.
INDEX




PAGE
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets at November 30, 2005
and August 31, 20054
Condensed Consolidated Statement of Operations for the
Three Months Ended November 30, 2005 and 20045
Condensed Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 2005 and the Three Months
Ended November 30, 20056
Condensed Consolidated Statement of Cash Flows for the
Three Months Ended November 30, 2005 and 20047
Notes to Consolidated Financial Statements8
Management's Discussion and Analysis of
Financial Condition and Results of Operations23
Quantitative and Qualitative Disclosures about Market Risk41
Controls and Procedures41
PART II. OTHER INFORMATION
Legal Proceedings42
Exhibits43
SIGNATURE PAGE44


2
EXPLANATORY NOTE
Schnitzer Steel Industries, Inc. recently determined that it was required to file financial statements with the Securities and Exchange Commission with respect to the businesses it acquired through the termination and separation of its joint ventures with Hugo Neu Corporation on September 30, 2005. The Company did not previously file the financial statements because of the application of a methodology for valuing the businesses that resulted in an initial conclusion that no such filing was required. The Company will make the required filing with the SEC once the audited financial statements of the acquired businesses are available.

3
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
               (Unaudited,SHEET
(Unaudited, in thousands, except per share amounts)

                                                                       MAY 31, 2005   AUG. 31, 2004
                                                                       ------------   -------------

                                 Assets
                                 ------
Current assets:
     Cash and cash equivalents                                         $      5,328   $     11,307
     Accounts receivable, less allowance for doubtful
        accounts of $812 and $772                                            49,964         43,444
     Inventories (Note 2)                                                    94,975         80,167
     Deferred income taxes                                                    5,404          5,383
     Prepaid income taxes                                                     5,046             --
     Prepaid expenses and other                                               8,614          6,859
                                                                       ------------   ------------
            Total current assets                                            169,331        147,160

Net property, plant and equipment                                           165,225        138,438

Other assets:
     Investment in and advances to joint venture partnerships               188,262        182,845
     Notes receivable, less current portion                                   1,216          1,337
     Goodwill                                                               151,181        131,178
     Intangibles and other                                                    6,091          5,015
                                                                       ------------   ------------
                                                                       $    681,306   $    605,973
                                                                       ============   ============

                  Liabilities and Shareholders' Equity
                  ------------------------------------
Current liabilities:
     Current portion of long-term debt                                 $        110   $        225
     Accounts payable                                                        36,112         31,881
     Accrued payroll liabilities                                             20,703         20,183
     Current portion of environmental liabilities                             6,205          9,373
     Accrued income taxes                                                       246          4,954
     Other accrued liabilities                                                7,232          7,450
                                                                       ------------   ------------
            Total current liabilities                                        70,608         74,066

Deferred income taxes                                                        24,884         24,884

Long-term debt, less current portion                                         15,442         67,801

Environmental liabilities, net of current portion                            15,598         12,126

Other long-term liabilities                                                   2,335          2,295

Minority interests                                                            6,002          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, 22,482 and 22,022 shares issued and outstanding         22,482         22,022
     Class B common stock--25,000 shares $1 par value
         authorized, 7,986 and 8,306 shares issued and outstanding            7,986          8,306
     Additional paid-in capital                                             126,585        110,177
     Retained earnings                                                      389,254        278,374
     Accumulated  other comprehensive income:
        Foreign currency translation adjustment                                 130              1
                                                                       ------------   ------------
            Total shareholders' equity                                      546,437        418,880
                                                                       ------------   ------------
                                                                       $    681,306   $    605,973
                                                                       ============   ============

  Nov. 30, 2005  Aug. 31, 2005  
      
Assets
     
Current assets:     
Cash and cash equivalents $36,776 $20,645 
Accounts receivable, less allowance for       
doubtful accounts of $1,296 and $810  106,813  51,101 
Accounts receivable from related parties  273  226 
Inventories  211,728  106,189 
Deferred income taxes  4,094  3,247 
Prepaid expenses and other  13,126  15,505 
Total current assets  372,810  196,913 
        
Property, plant and equipment, net  254,365  166,901 
        
Other assets:       
Investment in and advances to joint venture partnerships  7,505  184,151 
Notes receivable, less current portion  3,098  1,234 
Goodwill  266,827  151,354 
Intangibles and other assets  5,019  8,905 
        
  $909,624 $709,458 
        
 
Liabilities and Shareholders’ Equity
       
Current liabilities:       
Current portion of long-term debts $64 $71 
Accounts payable  56,645  33,192 
Accrued payroll liabilities  16,132  21,783 
Current portion of environmental liabilities  6,881  7,542 
Accrued income taxes  23,656  140 
Other accrued liabilities  37,462  8,307 
Total current liabilities  140,840  71,035 
        
Deferred income taxes  8,753  26,987 
        
Long-term debt, less current portion  85,966  7,724 
        
Environmental liabilities, net of current portion  38,497  15,962 
        
Other long-term liabilities  3,899  3,578 
        
Minority interests  10,679  4,644 
        
Commitments and contingencies  —  — 
        
Shareholders’ equity:
       
Preferred stock--20,000 shares authorized, none issued  —  — 
Class A common stock--75,000 shares $1 par value       
authorized, 22,493 and 22,490 shares issued and outstanding  22,493  22,490 
Class B common stock--25,000 shares $1 par value       
authorized, 7,986 shares issued and outstanding  7,986  7,986 
Additional paid-in capital  126,353  125,845 
Retained earnings  464,189  423,178 
Accumulated other comprehensive income/(loss):       
Foreign currency translation adjustments  (31) 29 
Total shareholders’ equity
  620,990  579,528 
        
  $909,624 $709,458 
        
The accompanying notes to the unaudited condensed consolidated financial statements
are an integral part of these statements.
4
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
   
For The Three Months Ended
November 30,
 
   2005  (1)  2004 
        
Revenues $388,673 $198,961 
        
Operating Expenses:       
Cost of goods sold  326,710  139,752 
Selling, general and administrative  41,990  (2)  11,867 
Environmental matter  —  500  (3) 
        
Income from wholly-owned operations  19,973  46,842 
        
Operating income from joint ventures  1,752  20,464 
        
Operating income  21,725  67,306 
        
Other income (expense):       
Interest expense  (981) (284)
Other income (expense)  64,441  (4)(5)  (148)
        
   63,460  (432)
        
Income before income tax and minority interests  85,185  66,874 
        
Income tax provision  (35,557) (23,272)
        
Income before minority interests  49,628  43,602 
        
Minority interests, net of tax  (153) (666)
        
Pre-acquisition interests, net of tax  (7,945) — 
        
Net income $41,530 $42,936 
        
Net income per share - basic: $1.36 $1.41 
        
Net income per share - diluted: $1.34 $1.38 
        
(1)
The Company elected to consolidate results of the businesses formed from the Hugo Neu Corporation (HNC) Separation Agreement as well as the Regional and GreenLeaf acquisitions (see Notes 1 and 3) as though the transactions had occurred at the beginning of the fiscal year. As a result, revenues increased and income from operations increased, which is offset by pre-acquisition interests.
(2)
Includes a charge of $11.0 million associated with the investigation reserve (see Note 4).
(3)
Fiscal 2005 amounts relate to environmental matters primarily associated with the Hylebos Waterway project.
(4)
Other income includes a $9.1 million gain related to debt extinguishment associated with the Greenleaf acquisition, which is eliminated by pre-acquisition interests.
(5)
Includes a gain on disposition of joint ventures of $54.6 million.
The accompanying notes to the unaudited condensed consolidated financial statements
are an integral part of these statements.
5
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited, in thousands, except per share amounts)

                   Accumulated    
  Class A   Class B   Additional     Other    
  Common Stock   Common Stock   Paid-in Retained  Comprehensive    
  Shares Amount Shares Amount Capital Earnings  Income/(Loss) Total 
                        
Balance at August 31, 2004  22,022 $22,022  8,306 $8,306 $110,177 $278,374 $1 $418,880 
                          
Net income                 146,867     146,867 
Foreign currency translation adjustment                    28  28 
                        146,895 
Class B common stock converted                         
to Class A common stock  320  320  (320) (320)          — 
Class A common stock issued  148  148        1,511        1,659 
Tax benefits from stock options exercised              14,157        14,157 
Cash dividends paid - common                         
($0.068 per share)                 (2,063)    (2,063)
                          
Balance at August 31, 2005  22,490  22,490  7,986  7,986  125,845  423,178  29  579,528 
                          
Net income                 41,530     41,530 
Stock-based compensation              494        494 
Foreign currency translation adjustment                    (60) (60)
                        41,964 
Class A common stock issued  3  3        14        17 
Cash dividends paid - common                         
($0.017 per share)                 (518)    (518)
                          
Balance at November, 2005  22,493 $22,493  7,986 $7,986 $126,353 $464,190 $(31)$620,991 
                          


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

                                        3
these statements.

6
SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
               (Unaudited,CASH FLOWS
(Unaudited, in thousands, except per share amounts)




                                                     FOR THE THREE MONTHS ENDED      FOR THE NINE MONTHS ENDED
                                                    ----------------------------    ----------------------------
                                                    MAY 31, 2005    MAY 31, 2004    MAY 31, 2005    MAY 31, 2004
                                                    ------------    ------------    ------------    ------------

Revenues                                            $    226,789    $    193,750    $    641,496    $    483,729

Operating Expenses:
     Cost of goods sold                                  167,721         140,179         462,787         384,046
     Selling, general and administrative                  15,135          14,269          39,321          32,679
     Environmental matter                                     --              --           8,225              --
                                                    ------------    ------------    ------------    ------------

Income from wholly-owned operations                       43,933          39,302         131,163          67,004

Operating income from joint ventures                      11,152          28,013          47,821          42,634
                                                    ------------    ------------    ------------    ------------

Operating income                                          55,085          67,315         178,984         109,638

Other expense, net:
     Interest expense                                       (110)           (562)           (740)         (1,488)
     Other expense, net                                     (195)           (315)           (555)           (161)
                                                    ------------    ------------    ------------    ------------
                                                            (305)           (877)         (1,295)         (1,649)
                                                    ------------    ------------    ------------    ------------



Income before income taxes and minority interests         54,780          66,438         177,689         107,989

Income tax provision                                     (20,485)        (23,187)        (63,257)        (32,951)
                                                    ------------    ------------    ------------    ------------

Income before minority interests                          34,295          43,251         114,432          75,038

Minority interests, net of tax                              (787)           (737)         (2,007)         (1,797)
                                                    ------------    ------------    ------------    ------------

Net income                                          $     33,508    $     42,514    $    112,425    $     73,241
                                                    ============    ============    ============    ============

     Net income per share - basic:                  $       1.10    $       1.41    $       3.70    $       2.45
                                                    ============    ============    ============    ============

     Net income per share - diluted:                $       1.08    $       1.37    $       3.61    $       2.36
                                                    ============    ============    ============    ============

thousands)
  
For The Three Months Ended
November 30, 
 
  
2005
 2004 
      
Operations:      
Net income   $41,530 $42,936 
Noncash items included in net income:        
 Depreciation and amortization  6,241  5,050 
 Minority interest & pre-acquisition earnings  493  1,021 
 Equity in income of joint ventures  (1,345) (20,464)
 Stock based compensation expense  494  - 
 Deferred income tax  (10,206) - 
 Gain on dispositions  (54,617) (127)
Cash provided by (used in) changes in working capital:        
 Accounts receivable  21,321  13,972 
 Inventories  (7,753) (12,587)
 Prepaid expenses and other current assets  11,556  (108)
 Accounts payable  (12,684) (1,162)
 Accrued liabilities  27,553  (8,295)
 Environmental liabilities  (2,958) (3,156)
 Other assets and liabilities  3,546  212 
        
Net cash provided by operations   23,151  17,292 
        
Investing:        
Capital expenditures   (15,823) (7,531)
Acquisitions, net of cash acquired  (85,641)  - 
Cash received from joint ventures   17,957  20,955 
Cash paid to joint ventures   (163) (313)
Proceeds from sale of assets   12  398 
        
Net cash (used in) provided by investing   (83,658) 13,509 
        
Financing:        
Issuance of Class A common stock   17  1,182 
Distributions to minority interests   (1,045) (1,273)
Dividends declared and paid   (518) (515)
Increase (decrease) in long-term debt   78,185  (17,547)
        
Net cash provided by (used in) financing   76,638  (18,153)
        
Net increase in cash   16,131  12,648 
        
Cash at beginning of period   20,645  11,307 
        
Cash at end of period  $36,776 $23,955 
        

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

                                        4
these statements.
7
SCHNITZER STEEL INDUSTRIES, INC.
            CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                            (Unaudited, in thousands)





                                   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                                                                                    112,425                       112,425
Foreign currency
  translation adjustment                                                                                         129            129
                                                                                                                       ------------
                                                                                                                            112,554
Class B common stock
  converted to Class A
  common stock                   320          320        (320)        (320)                                                      --
Class A common stock issued      140          140                                  1,469                                      1,609
Tax benefits from employee
  stock option plan                                                               14,939                                     14,939
Cash dividends paid -
  common ($0.051 per share)                                                                    (1,545)                       (1,545)
                            --------    ---------    --------    ---------    ----------    ---------   ------------   ------------

Balance at May 31, 2005       22,482    $  22,482       7,986    $   7,986    $  126,585    $ 389,254   $        130   $    546,437
                            ========    =========    ========    =========    ==========    =========   ============   ============




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

                                        5

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




                                                         FOR THE NINE MONTHS ENDED
                                                       ----------------------------
                                                       MAY 31, 2005    MAY 31, 2004
                                                       ------------    ------------

Operations:
Net income                                             $    112,425    $     73,241
Noncash items included in income:
   Depreciation and amortization                             15,554          15,020
   Minority interests                                         3,085           2,514
   Equity in income of joint ventures                       (47,821)        (42,634)
   Deferred income tax                                          (21)        (10,677)
   Tax benefit from employee stock option plan               14,939              --
   (Gain) loss on disposal of assets                            108            (212)
Cash provided (used) by changes in working capital:
   Accounts receivable                                       (6,520)        (29,408)
   Inventories                                              (14,808)        (26,828)
   Prepaid expenses and other                                (6,801)          2,631
   Accounts payable                                           4,231           9,865
   Accrued liabilities                                       (4,406)         23,243
   Environmental liabilities                                 (2,496)         (1,428)
   Other assets and liabilities                                (506)            195
                                                       ------------    ------------

Net cash provided by operations                              66,963          15,522
                                                       ------------    ------------

Investing:
Capital expenditures                                        (40,759)        (17,046)
Investment in subsidiaries                                  (22,331)        (23,861)
Cash received from joint ventures                            46,212             470
Cash paid to joint ventures                                  (1,295)         (2,595)
Proceeds from sale of assets                                    645           1,628
                                                       ------------    ------------

Net cash used by investments                                (17,528)        (41,404)
                                                       ------------    ------------

Financing:
Issuance of Class A common stock                              1,609           5,333
Distributions to minority interests                          (3,004)         (1,824)
Dividends declared and paid                                  (1,545)         (1,514)
Increase (decrease) in long-term debt                       (52,474)         25,821
                                                       ------------    ------------

Net cash provided (used) by financing                       (55,414)         27,816
                                                       ------------    ------------

Net increase (decrease) in cash and cash equivalents         (5,979)          1,934

Cash and cash equivalents at beginning of period             11,307           1,687
                                                       ------------    ------------

Cash and cash equivalents at end of period             $      5,328    $      3,621
                                                       ============    ============



              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 MAY 31,NOVEMBER 30, 2005 AND 2004


NOTE
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION
- ---------------------
Summary of Significant Accounting Policies:

Basis of Presentation
The accompanying unaudited condensed interimconsolidated financial statements of Schnitzer Steel Industries, Inc. (the Company) have been prepared pursuant to generally accepted accounting principles and 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, 2004.2005. The results for the three and nine
months ended May 31,November 30, 2005 and 2004 are not necessarily indicative of the results of operations for the entire year.

RECLASSIFICATIONS
- -----------------


Note 3 to the condensed consolidated financial statements describes acquisitions that occurred during the first fiscal quarter of 2006. Under Statement of Financial Accounting Standards No. 141 (SFAS 141), “Business Combinations,” the business acquisitions under the Hugo Neu Corporation (HNC) separation and termination agreement were treated as “step” acquisitions because the Company had a significant joint venture interest in the acquired businesses for a number of years. In addition, the Company acquired the assets of Regional Recycling LLC (Regional) and purchased GreenLeaf Auto Recyclers, LLC (GreenLeaf) during the first quarter of fiscal 2006, two businesses in which the Company did not have a previous interest. Since all of these acquisitions occurred early in the fiscal year, the Company elected to include them in the consolidated results as though they had occurred at the beginning of fiscal 2006. Thus, the statement of operations and statement of cash flows are presented as if all three acquisitions had occurred as of September 1, 2005. Additionally, consolidation accounting requires the Company to adjust its earnings for the ownership interests it did not own during the reporting period. As a result, net income was reduced by $7.9 million of pre-acquisition earnings, net of income taxes, representing the share of income attributable to the former joint venture partner prior to the separation of the HNC joint ventures as well as the other equity interests in acquired companies closed during the three month period ended November 30, 2005. Of that amount, $0.6 million represents the share of income attributable to the former joint venture partner for the period from September 1, 2005 through September 30, 2005. The financial results of the businesses acquired as a result of the HNC separation for periods prior to fiscal 2006 continue to be accounted for using the equity method and are included in the Joint Venture Businesses reporting segment.

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 shareholders'shareholders’ equity.

CASH AND CASH EQUIVALENTS
- -------------------------


Cash and Cash Equivalents
Cash and cash equivalents include short-term securities that are not restricted by third parties and have an original maturity date of 90 days or less.

EARNINGS AND DIVIDENDS PER SHARE
- --------------------------------


Earnings and Dividends per Share
Basic earnings per share (EPS) areis 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.
8
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005 AND 2004
The following represents the reconciliation from basic EPS to diluted EPS (in thousands, except per share amounts):

                                       FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31, 2005   MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------
                                                              (Unaudited)

Net income                             $     33,508   $     42,514   $    112,425   $     73,241
                                       ============   ============   ============   ============

Computation of shares:
   Average common shares outstanding         30,463         30,088         30,412         29,897
   Stock options                                680            971            748          1,152
                                       ------------   ------------   ------------   ------------
   Diluted average common shares
      outstanding                            31,143         31,059         31,160         31,049
                                       ============   ============   ============   ============

   Basic net income per share          $       1.10   $       1.41   $       3.70   $       2.45
                                       ============   ============   ============   ============

   Diluted net income per share        $       1.08   $       1.37   $       3.61   $       2.36
                                       ============   ============   ============   ============

Dividends per share                    $      0.017   $      0.017   $      0.051   $      0.050
                                       ============   ============   ============   ============




                                        7

                        SCHNITZER STEEL INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE THREE MONTHS ENDED MAY 31, 2005 AND 2004


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 generally
recognized by the Company for stock options issued to employees
  
For the Three Months Ended
November 30,
 
  2005 2004 
Net Income $41,530 $42,936 
        
Computation of shares:       
Average common shares outstanding
  30,477  30,350 
Stock options
  560  793 
Diluted average common shares outstanding
  31,037  31,143 
        
Basic EPS $1.36 $1.41 
        
Diluted EPS $1.34 $1.38 
        
Dividend per share $0.017 $0.017 

Goodwill and directors.
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):


                                        FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31, 2005   MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------
                                                              (Unaudited)

Reported net income                    $     33,508   $     42,514   $    112,425   $     73,241
Add:  Stock based compensation
expense included in reported net
income, net of tax                              224             --            673             --

Deduct:  Total stock based employee
compensation benefit (expense) under
fair value based method for all
awards, net of tax                               24           (139)          (377)          (405)
                                       ------------   ------------   ------------   ------------

Pro forma net income                   $     33,756   $     42,375   $    112,721   $     72,836
                                       ============   ============   ============   ============

Reported basic income per share        $       1.10   $       1.41   $       3.70   $       2.45
Pro forma basic income per share       $       1.11   $       1.41   $       3.71   $       2.44

Reported diluted income per share      $       1.08   $       1.37   $       3.61   $       2.36
Pro forma diluted income per share     $       1.08   $       1.36   $       3.62   $       2.35




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

The Company obtains an income tax benefit related to stock issued to employees
through stock options plans, which is recorded as additional paid-in capital
and, therefore, does not benefit the income tax provision. For income tax
purposes the Company can deduct the amount an employee would report as ordinary
income. The deduction is allowed in the year the employee exercises the stock
option. In the second fiscal quarter of 2005, the Company recorded a tax benefit
from employee stock option plans of $14.4 million as a result of amending or
planning to amend the previous year's tax returns to include the deduction.

On December 16, 2004, the FASB finalized SFAS No. 123R "Shared-Based Payment"
which will be effective for the first interim reporting period of the first
fiscal year beginning after June 15, 2005. The new standard will require the
Company to expense stock options beginning in the first quarter of fiscal 2006.
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.

                                        8

                        SCHNITZER STEEL INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE THREE MONTHS ENDED MAY 31, 2005 AND 2004


GOODWILL AND INTANGIBLE ASSETS
- ------------------------------
Intangible Assets
The changes in the carrying amount of goodwill for the ninethree months ended May 31,November 30, 2005 are as follows (in thousands):

                                                      METALS
                                                    RECYCLING    AUTO PARTS
                                                     BUSINESS     BUSINESS       TOTAL
                                                    ----------   ----------   ----------
     
     Balance as of  August 31, 2004                 $   34,771   $   96,407   $  131,178
     Auto Parts Business Acquisition (see Note 3)           --       20,003       20,003
                                                    ----------   ----------   ----------
     Balance as of May 31, 2005                     $   34,771   $  116,410   $  151,181
                                                    ==========   ==========   ==========


  
Metals Recycling
Business
 
 
Auto Parts
Business
 
 
 
Total
 
Balance as of August 31, 2005 $34,771 
$
116,583
 $151,354 
Acquisition of GreenLeaf Auto Recyclers,
LLC (see Note 3)
     
14,001
  
14,001
 
Separation and termination of joint venture
relationships with Hugo Neu Corporation (see
Note 3)
  
61,557
     61,557 
Acquisition of Regional Recycling LLC assets
(see Note 3)
  
39,915
      
39,915
 
 
Balance as of November 30, 2005
 
$
136,243
 
$
130,584
 
$
266,827
 

The Company performs impairment tests annually during the second quarter of the fiscal year and whenever events and circumstances indicate that the value of goodwill and other indefinite-lived intangible assets might be impaired. DueBased on to the operating results of each of the businesses identified above and based upon the Company'sCompany’s impairment testing completed in the second quarter of fiscal 2005, the Company determined that none of the above balances were considered impaired.

NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------


New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS 151, "Inventory Costs"“Inventory Costs”. This statement clarifies the accounting for abnormal amounts of idle facility expense and freight and handling costs when those costs may be so abnormal as to require treatment as period charges. This statement is effective for fiscal years beginning after June 15, 2005. The Company does not
anticipate this pronouncement to have aadopted SFAS 151 on September 1, 2005 with no material impact on the consolidated financial statements.

9
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005 AND 2004
In December 2004, the FASB issued SFAS 153, "Exchanges“Exchanges of Nonmonetary Assets".Assets.” This statement explains that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. This statement is effective for fiscal years beginning after June 15, 2005. The Company does not anticipate this
pronouncement to have aadopted SFAS 153 on September 1, 2005 with no material impact on the consolidated financial statements.

In June 2005, the FASB issued SFAS 154, "Accounting“Accounting Changes and Error Corrections".Corrections.” This statement revises the reporting requirements related to changes in accounting principles or adoption of new accounting pronouncements. This statement is effective for fiscal years beginning after December 15, 2005. The Company does not anticipate this pronouncement to have a material impact on the consolidated financial statements.


NOTE

In December 2004, the FASB finalized SFAS No. 123(R) “Share-Based Payment“, which will be effective for the first interim reporting period of the first fiscal year beginning after June 15, 2005. The new standard requires the Company to expense stock options beginning in the first quarter of fiscal 2006. The Company adopted SFAS No. 123(R), effective September 1, 2005. SFAS 123(R) requires the recognition of the fair value of stock-based compensation in net income. The Company recognizes stock-based compensation expense over the requisite service period of the individual grants, which generally equals the vesting period. See Note 7 for further information regarding stock based compensation.


Note 2 - INVENTORIES:

Inventories:

Inventories consisted of the following (in thousands):

                                          MAY 31,      AUGUST 31,

  
November 30,
2005
 
August 31,
2005
 
Recycled metals $124,702 $38,027 
Work in process  8,084  17,124 
Finished goods  62,984  36,304 
Supplies  
15,958
  14,734 
  $211,728 $106,189 
Note 3 - Business Combinations
Hugo Neu Corporation Separation and Termination Agreement
On September 30, 2005, 2004
                                       ------------   ------------
     Recycledthe Company, HNC and certain of their subsidiaries closed a transaction to separate and terminate their metals $     30,136   $     34,551
     Work in process                         15,384         10,045
     Finished goods                          36,031         23,808
     Supplies                                13,424         11,763
                                       ------------   ------------
                                       $     94,975   $     80,167
                                       ============   ============


                                        9
recycling joint venture relationships. The Company received the following as a result of the HNC joint venture separation and termination:
·  The assets and related liabilities of Hugo Neu Schnitzer Global Trade related to a trading business in parts of Russia and the Baltic region, including Poland, Denmark, Finland, Norway and Sweden, and a non-compete agreement from HNC that bars it from buying scrap metal in certain areas in Russia and the Baltic region for a five-year period ending on June 8, 2010.
·  The joint ventures’ various interests in the New England operations that primarily operate in Massachusetts, New Hampshire, Rhode Island and Maine.
·  Full ownership in the Hawaii metals recycling business that was previously owned 100% by HNC.
·  A payment of $36.6 million in cash, net of debt paid, subject to post-closing adjustments.

10
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 31,NOVEMBER 30, 2005 AND 2004


NOTE 3 - ACQUISITIONS


HNC received the following as result of the HNC joint venture separation and termination:
·  The joint venture operations in New York, New Jersey and California, including the scrap processing facilities, marine terminals and related ancillary satellite sites, the interim New York City recycling contract, and other miscellaneous assets.
·  The assets and related liabilities of Hugo Neu Schnitzer Global Trade that are not related to the Russian and Baltic region trading business.

The agreement provides for potential purchase price adjustments based on the closing date working capital of the acquired Hawaii business as well as the joint ventures’ ending balances. The Company has not determined whether any purchase price adjustments will be necessary.

In accordance with SFAS 141, “Business Combinations,” the purchase price of the assets and liabilities acquired under the separation and termination agreement is the fair value of the joint venture interests given up as part of the exchange as well as other liabilities assumed and acquisition costs, net of cash received. As a result, the purchase price is estimated to be $165.1 million.

The purchase price was allocated to tangible and intangible identifiable assets acquired and liabilities assumed based on an estimate of the respective fair values. Final valuation reports are pending from an independent third party. The excess of the aggregate purchase price over the fair value of the identifiable net assets acquired of approximately $57.6 million was recognized as goodwill. Approximately $4.0 million of goodwill existed on the joint ventures’ balance sheets prior to the separation and termination but was not shown separately in accordance with the equity method of accounting. Therefore, the total increase to goodwill related to the HNC Separation and Termination Agreement was $61.6 million.

The purchase price allocation has been prepared on a preliminary basis, and reasonable changes are expected as additional information, such as final valuation reports and any purchase price adjustments, becomes available. The following is a summary of the estimated fair values as November 30, 2005, for the assets acquired and liabilities assumed as of the date of the acquisition (in millions):

    
Cash, net of debt paid $36.6 
Property, plant and equipment  26.1 
Inventory  35.4 
Other assets  30.8 
Identified intangible assets  3.0 
Liabilities  (24.4)
Goodwill  57.6 
Total purchase price $165.1 
11
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005 AND 2004
GreenLeaf Acquisition
On January 10,September 30, 2005, Pick-N-Pull Auto Dismantlers, a wholly-owned subsidiary of the Company acquired the assets andGreenLeaf, five properties previously leased 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, LLCby GreenLeaf and certain GreenLeaf debt obligations. GreenLeaf is engaged in the business of auto dismantling and recycling and sells its wholly-owned subsidiaries ("VRS"). The totalproducts primarily to collision and mechanical repair shops. GreenLeaf currently operates in one wholesale sales office and 19 commercial locations throughout the United States. Total purchase price for the acquisition cost of $22.2, including acquisition costs, was $44.7 million, consisted of a cashsubject to post-closing adjustments.

The purchase price of $18.8the GreenLeaf acquisition was allocated to tangible and intangible identifiable assets acquired and liabilities assumed based on an estimate of fair value. Certain tangible assets had been valued by a third party in recent years, and those valuations are being relied upon in determining fair value. The machinery and equipment is being valued by the Company’s management. The excess of the aggregate purchase price over the estimated fair value of the identifiable net assets acquired of $14.0 million $0.6was recognized as goodwill.

The purchase price allocation has been prepared on a preliminary basis, and reasonable changes are expected as additional information becomes available, such as final valuation reports and any post-closing adjustments. The following is a summary of the estimated fair values as of November 30, 2005, for the assets acquired and liabilities assumed on the date of the acquisition (in millions):

Property, plant and equipment $14.6 
Inventory  20.8 
Other assets  18.8 
Liabilities  (23.5)
Goodwill  14.0 
Total purchase price $44.7 

Regional Recycling Acquisition
On October 31, 2005, the Company purchased substantially all of the assets of Regional for $65.5 million in cash and the assumption of certain liabilities, a working capital adjustment of $2.9 million and acquisition expensescosts of approximately $0.5 million. Regional operates 10 metals recycling facilities located in the states of Georgia and Alabama which process ferrous and nonferrous scrap metals without the use of shredders.
The purchase price of the Regional acquisition was allocated to tangible and intangible identifiable assets acquired and liabilities assumed based on an estimate of the respective fair values. Final valuation reports are pending from an independent third party. The excess of the aggregate purchase price over the estimated fair value of the identifiable net assets acquired of approximately $39.9 million was recognized as goodwill.

The purchase price allocation has been prepared on a preliminary basis, and reasonable changes are expected as additional environmental reservesinformation becomes available, such as final valuation reports. The following is a summary of the estimated fair values as November 30, 2005, for the assets acquired and liabilities assumed as of the date of the acquisition (in millions):

    
Property, plant and equipment $10.6 
Accounts Receivable  27.7 
Inventory  4.9 
Other assets  1.1 
Liabilities  (15.3)
Goodwill  39.9 
Total purchase price $68.9 

12
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005 AND 2004
The total aggregate goodwill recognized from the recent acquisitions amounted to $115.5 million. In accordance with SFAS 142, goodwill is not amortized and will be tested for impairment at least annually. Goodwill recognized in connection with the HNC separation and termination and the Regional acquisition is deductible for tax, whereas that recognized in connection with GreenLeaf, an acquisition of equity interests, is not. Payment of the consideration for the recently acquired businesses was funded by the Company’s existing cash balances and credit facility.

During the first quarter of fiscal 2006, the Company recorded a gain of $54.6 million related to the disposition of assets acquired pursuant to the HNC separation and termination. The transaction, which included selling certain assets previously owned through the joint venture, was recorded using the fair value of the assets as a resultdetermined by business valuations performed by an outside third party. The fair value of net assets received exceeded the carrying value of the assets sold, resulting in the gain recorded. Any change to the fair value in the final independent third party valuations would directly impact the gain recorded.

In connection with the HNC separation and termination, and the GreenLeaf and Regional acquisitions, the Company conducted environmental due diligence reviews of $2.8 million. the acquired assets. Based upon the information obtained in the reviews in the first quarter of fiscal 2006, the Company accrued $24.8 million in environmental liabilities for probable and reasonably estimable future remediation costs at the acquired facilities. No environmental proceedings are pending with respect to any of these facilities.

The St. Louis, Kansas City and Columbus stores
increase the Company's existing mid-west store base. The Virginia Beach store
provides 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 increase the total number of stores to 30following table is prepared on a pro forma basis, for the Company's Auto Parts
Business segment. The results of operations for these four stores afterthree month period ended November 30, 2005 and 2004, respectively, as though the acquisition date are reflected inbusinesses formed from the consolidated resultsHNC separation and termination agreement and GreenLeaf and Regional had been acquired as of the Company's Auto
Parts Businessbeginning of the periods presented (in thousands, except per share amounts). 

  
For the Three Months Ended
November 30,
 
  2005 2004 
  (unaudited) (pro forma) 
Gross revenues $388,673 $409,900 
Net Income $49,475 $45,830 
Net Income per share:       
Basic $1.62 $1.51 
Diluted $1.59 $1.47 

The pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the second fiscalperiods presented. In addition, the pro forma results are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combining operations.
13
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005 quarter.


NOTEAND 2004
Note 4 - ENVIRONMENTAL LIABILITIES

Environmental Liabilities and Other Contingencies:

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.study or remediate any environmental issues. The factors which the Company considers in its recognition and measurement of environmental liabilities include the following:

     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.

PORTLAND HARBOR


·  Current regulations, both at the time the reserve is established and during the course of the remediation, which specify standards for acceptable remediation;
·  Information about the site that becomes available as the site is studied and remediated;
·  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;
·  Available technologies that can be used for remediation; and
·  The number and financial condition of other potentially responsible parties and the extent of their responsibility for the remediation.

Metals Recycling Business
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 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 associatedconnection 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

                                       10

                        SCHNITZER STEEL INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE THREE MONTHS ENDED MAY 31, 2005 AND 2004


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 improvementsacquisitions in the operations at
these sites, often referred to as Best Management Practices (BMPs), will be
sufficient to effectively provide source controlMetals Recycling Business in 1995 and avoid1996, 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 May
31, 2005, $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.

MANUFACTURING MANAGEMENT, INC.
In 1994, Manufacturing Management, Inc. (MMI) recorded a reserve for the
estimated cost to cure certain environmental liabilities. This reserve wasCompany carried over to the Company'sits financial statements when MMI wasreserves for environmental liabilities previously recorded by the acquired in
1995. The reserve iscompanies. These reserves are evaluated quarterly according to Company policy. On May 31,November 30, 2005, environmental reserves for the reserveMetals Recycling Business aggregated $10.0$26.7 million.

Hylebos Waterway Remediation. General Metals of Tacoma (GMT), a subsidiary of MMI,the Company, 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 UAO for the head of the Hylebos Waterway was converted to a voluntary consent decree in 2004, pursuant to which GMT and the Other Party agreed to remediate the head of the Hylebos Waterway.

There are two phases to the remediation of the head 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 the Hylebos Waterway, which began on July 15, 2004. During the first nine months of fiscal 2005, the Company paid remediation costs of $13.8$15.9 million related to Hylebos dredging which were charged toresulted in a reduction of the recorded environmental reserve.liability. The Company'sCompany’s cost estimates were based on the assumption that dredge removal of contaminated sediments would be accomplished within one dredge season during July 2004 - February 2005. However, due to a variety of factors, including equipment failures, dredge contractor operational issues and other dredge related delays, the dredging was not completed during the first dredge season. As a result, the Company recorded environmental charges of $8.2$13.5 million in the first half of fiscal 2005 primarily to account for additional estimated costs to complete this work during a second dredging season.season, and the total reserve for this site was $10.6 million at August 31, 2005. In the first quarter of fiscal 2006, the Company incurred remediation costs of $3.9 million which were charged to the environmental reserves, and on November 30, 2005, environmental reserves for the Hylebos Waterway aggregated $6.7 million. The Company and the Other Party have filed a complaint in the United States Federal District Court for the Western District of Washington against the dredge contractor to recover damages and a significant portion of the increased costs.costs incurred in the second dredging season to complete the project. However, generally accepted accounting principles do not allow the Company to recognize the benefits of any such recoveryrecoveries until receipt is highly probable.

probable and can be reasonably estimated.
14
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005 AND 2004
GMT and the Other Party are pursuing settlement negotiations and 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. During fiscal 2005, the Company recovered $0.7 million from four non-performing PRPs. This amount had previously been taken into account as a reduction in the Company's reserve for environmental liabilities. Uncertainties continue to exist regarding the total cost to remediate this site as well as the Company'sCompany’s share of those costs; nevertheless, the Company'sCompany’s estimate of its liabilities related to this site is based on information currently available.

                                       11

                        SCHNITZER STEEL INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE THREE MONTHS ENDED MAY 31, 2005 AND 2004




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'Trustees’ draft settlement proposal with various corrections and other comments, as did twenty other participants. In February 2004, GMT submitted a settlement proposal to the Trustees for a complete settlement of Natural Resource Damage liability for the GMT site. The proposal included three primary components: (1) an offer to perform a habitat restoration project; (2) reimbursement of Trustee past assessment costs; and (3) payment of Trustee oversight costs. The agreement would also address liability sub-allocation to other parties historically associated with the facility. In December 2005 the Trustees responded to the GMT proposal. There remain significant differences between the parties and negotiations are continuing. It is unknown at this time whether, or to what extent, GMT will be liable for natural resource damages. The Company'sCompany’s previously recorded environmental liabilities include an estimate of the Company'sCompany’s potential liability for these claims.

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 (CSC), a Company subsidiary, also owns property adjacent to the Portland Harbor. The EPA has identified 69 PRPs, including the Company and CSC, which own or operate sites adjacent to the Portland Harbor Superfund site. The precise nature and extent of any clean-up of the Portland Harbor, the parties to be involved, the process to be followed for such a clean-up, and the allocation of any costs for the clean-up among responsible parties have not yet been determined. It is unclear whether or to what extent the Company or CSC will be liable for environmental costs or damages associated with the Superfund site. It is also unclear whether or to what extent natural resource damage claims or third party contribution or damages claims will be asserted against the Company. While the Company and CSC 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 (RI/FS); however, the Company and CSC 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 CSC. The DEQ investigations at the Company and CSC 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 CSC. 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 provide effective 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.
15
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005 AND 2004
The cost of the investigations associated with these properties and the cost of employment of source control BMPs are not expected to be material. No estimate is currently possible, and none has been made, as to the cost of remediation for the Portland Harbor or the Company’s or CSC’s adjacent properties.

Other Metals Recycling Business Sites. For a number of years prior to the Company’s 1996 acquisition of Proler International Corp. (Proler), Proler operated an industrial waste landfill in Texas, which Proler utilized to dispose of auto shredder residue (ASR) from one of its operations. In August 2002, Proler entered the Texas Commission on Environmental Quality (TCEQ) Voluntary Cleanup Program (VCP) toward the pursuit of a VCP Certificate of Completion for the former landfill site. In fiscal 2005, TCEQ issued a Conditional Certificate of Completion, requiring the Company to perform on-going groundwater monitoring and annual inspections, maintenance and reporting. As a result of the resolution of this issue, the Company reduced its reserve related to this site by $1.6 million in fiscal 2005.

During the second quarter of fiscal 2005, in connection with the negotiation of the separation and termination agreement relating to the Company’s metals recycling joint ventures with HNC (see Note 3), the Company conducted an environmental due diligence investigation of certain joint venture businesses it proposed to acquire. As a result of this investigation, the Company identified certain environmental risks and accrued $2.6 million for its share of the estimated costs to remediate these risks upon completion of the separation. During the first quarter of fiscal 2006, an additional $12.8 million was recorded representing the remaining portion of the environmental liabilities associated with the separation and termination agreement as well as the Regional acquisition of which $0.3 million was expended in remediation efforts. No environmental proceedings are pending with respect to any of these sites.

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'sCompany’s previously recorded environmental liabilities include an estimate of the Company'sCompany’s potential liability at this site.

MMI

A Company subsidiary is also a named PRP at another third-party site at which it allegedly disposed of automobile shredder residue (ASR).residue. The 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 hasthe Company or its acquired subsidiaries have conducted business or has allegedly disposed of other materials.

PROLER AND JOINT VENTURES
In 1996, prior to

Auto Parts Business
From fiscal 2003 through 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 May 31, 2005, 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.

During the secondfirst quarter of fiscal 2005, in connection with the negotiation of
the separation and termination of the Company's metals recycling joint ventures
with Hugo Neu Corporation (see Note 9),2006, the Company conducted an environmental
due diligence investigation of certain joint venture businesses it has now
agreed to directly acquire. As a result of this investigation, the Company
identified certain environmental risks and accrued $2.6 million for its share of
the estimated costs to remediate these risks.

AUTO PARTS BUSINESS
Since 2003, the Company has completed threefour acquisitions of businesses in the Auto Parts Business segment. At the time of each acquisition, the Company conductsconducted an environmental due diligence investigation related to locations involved in the acquisition. As a result of the environmental due diligence investigations, the Company recordsrecorded a reserve for the estimated cost to cureaddress certain environmental liabilities.matters. The reserve is evaluated quarterly 12

                        SCHNITZER STEEL INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE THREE MONTHS ENDED MAY 31, 2005 AND 2004


according to the Company policy. On May 31,November 30, 2005, environmental reserves for the Auto Parts Business aggregated $18.7 million, which includes an environmental reserve aggregated $5.5
million and includes $2.8 million added infor the second quarter of fiscal 2005 in
connection with anGreenLeaf acquisition. No environmental proceedings are pending atwith respect to any of these sites, other than discussed below.

On January 6,sites.
16
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005 AND 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). Since receiving the NOV,
the Sacramento and Rancho Cordova locations have converted their diesel powered
car crushers to electric powered. 

Other Contingencies
The Company has settled this matter which will
result in payment ofhad a fine to SMAQMD during the Company's fourth fiscal
quarter. The settlement amount is less than the $0.6 million the Company had
previously reserved for this matter.


NOTE 5 - 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 trading
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. As of May 31, 2005, the Company
estimated that its 50% share of the disputed commissions totaled $5.5 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. As part of the negotiated
separation and termination of the Company's joint ventures with HNC (as
discussed in Note 9), the Company has agreed, subject to closing of the
transaction, to release its claim for reimbursement of the excess commissions.
The amount accrued for this claim will be treated as purchase price in the
purchase accounting for the transaction.

The Company was advised in 2004 that itspast practice of paying commissionsmaking improper payments to the purchasing managers of customers in Asia in connection with export sales of recycled ferrous metals to the Far East may raisemetals. The Company stopped this practice after it was advised in 2004 that it raised questions of possible violations of U.S. and foreign laws, and the practice was stopped.laws. 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 investigationinvestigation. The Board of Directors also authorized and directed that the existence and the results of the investigation be voluntarily reported to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC),SEC, and that the Company cooperate fully with those agencies. The Board, through its Audit Committee is continuing its independent investigation, which is being conducted
by an outside law firm. The Company has notified the DOJ and the SEC of the investigation; hasindependent investigation, engaged outside counsel to assist in the independent investigation and instructed outside counsel to fully cooperate with the outside law firmDOJ and the SEC and to provide those agencies with the information obtained as a result of the investigation; andindependent investigation. On August 23, 2005, the Company received from the SEC a formal order of investigation related to the independent investigation. The Audit Committee is cooperatingcontinuing its independent investigation. The Company, including the Audit Committee, continues to cooperate fully with those agencies.the DOJ and the SEC. The investigation isinvestigations of the Audit committee, the DOJ and the SEC are not expected to affect the Company's previously reported financial results, including those
reported in this 10-Q.results. However, the Company expects to enter into agreements with the DOJ and the SEC to resolve the above-referenced matters and believes that it is probable that the DOJ and SEC will impose penalties on, and require disgorgement of certain profits by, the Company as a result of their investigations.  The Company estimates that the total amount of these penalties and disgorgement will be within a range of $11 million to $15 million. In the first quarter of 2006, the Company established a reserve totaling $11 million in connection with this estimate. The precise terms of any agreements to be entered into with the DOJ and the SEC, however, remain under discussion with these two agencies. The Company, therefore, cannot predict with certainty the results of the investigationaforementioned investigations or whether the Company or any of its employees will be subject to any penalties or otheradditional remedial actions following completion of these investigations.

Note 5 - Long Term Debt

On November 8, 2005, the investigation.


NOTECompany entered into an amended and restated unsecured committed bank credit agreement with Bank of America, N.A., as administrative agent, and the other lenders party thereto. The agreement provides for a five-year, $400 million revolving credit facility loan maturing in November 2010. The agreement prior to restatement provided for a $150 million revolving credit facility maturing in May 2006. Interest on outstanding indebtedness under the restated agreement is based, at the Company’s option, on either LIBOR plus a spread of between 0.625% and 1.25%, with the amount of the spread based on a pricing grid tied to the Company’s leverage ratio, or the greater of the prime rate or the federal funds rate plus 0.50%. In addition, annual commitment fees are payable on the unused portion of the credit facility at rates between 0.15% and 0.25% based on a pricing grid tied to the Company’s leverage ratio. The restated agreement contains various representations and warranties, events of default and financial and other covenants, including covenants requiring maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. The Company also has an additional unsecured credit line totaling $10 million, which is uncommitted. This additional debt agreement also has certain restrictive covenants. The fair value of long-term debt is deemed to be the same as that reflected in the condensed consolidated balance sheets given the variable interest rates. As of November 30, 2005, the Company had aggregate borrowings outstanding under its credit facilities of $86 million and was in compliance with the representations, warranties and covenants of its debt agreements.

17
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005 AND 2004
Note 6 - RELATED PARTY TRANSACTIONS

PURCHASE OF PORTLAND METALS RECYCLING REAL PROPERTY
Related Party Transactions

The Company's Portland metals recycling facility, includingCompany leases its deep water
terminal facilities are located on an approximately 60-acre industrial site (the
Portland Property) that has been leasedadministrative offices under operating leases from Schnitzer Investment Corp. (SIC)
pursuant, a Schnitzer family controlled business engaged in real estate. The current leases expire in 2013, and annual rent was $0.4 million in fiscal 2005. Lease amendments have been executed under which, upon completion of tenant improvements, one lease will be terminated; the premises leased under the other lease will be increased; annual rent will accordingly increase to $0.5 million; and the lease term will be extended to 2015.

The Company and SIC are parties to a Lease Agreement datedshared services agreement. Starting in fiscal 2005 and continuing into fiscal 2006, the Company has reduced or ceased the sharing of administrative services with SIC and other Schnitzer family companies in a number of areas as part of a process expected to eliminate substantially all the sharing of services between the Company and SIC in fiscal 2006. All transactions with the Schnitzer family (including Schnitzer family companies) require the approval of the Company’s Audit Committee, and the Company is in compliance with this policy.

Thomas D. Klauer, Jr., President of the Company’s Pick-N-Pull Auto Dismantlers subsidiary, is the sole shareholder of a corporation that is the 25% minority partner in a partnership with the Company that operates four Pick-N-Pull stores in Northern California. Mr. Klauer’s 25% share of the profits of this partnership totaled $0.4 million in the first fiscal quarter of 2006 and $1.6 million in fiscal 2005. Mr. Klauer also owns the property at one of these stores which is leased to the partnership under a lease providing for annual rent of $0.2 million, subject to annual adjustments based on the Consumer Price Index, and a term expiring in December 2010. The partnership has the option to renew the lease, upon its expiration, for a five-year period.


Note 7 - Stock Incentive Plan

The Company has adopted the 1993 Stock Incentive Plan (Plan) for its employees, consultants, and directors. Pursuant to the provisions of the Plan, as amended, the Company is authorized to issue up to 7,200,000 shares of Class A Common Stock. Stock options are granted to employees at exercise prices equal to the fair market value of the Company’s stock at the dates of grant. Generally, stock options granted to employees fully vest five years from the date of grant and have a contractual term of 10 years.

Adoption of SFAS 123(R).The Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” effective September 1, 1988, as amended (the Lease).
In2005. SFAS 123(R) requires the summerrecognition of 2004, SIC notifiedthe fair value of stock-based compensation in net income. The Company recognizes stock-based compensation expense over the requisite service period of the individual grants, which generally equals the vesting period.

Prior to September 1, 2005, the Company accounted for the Plan under the intrinsic value method described in Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. The Company, applying the intrinsic value method, did not record stock-based compensation cost in net income because the exercise price of its intentionstock options equaled the market price of the underlying stock on the date of grant. The Company has elected to sellutilize the Portland Property. Duemodified prospective transition method for adopting SFAS 123(R). Under this method, the provisions of SFAS 123(R) apply to all awards granted or modified after the strategic significancedate of this key

                                       13
adoption. In addition, the unrecognized expense of awards unvested at the date of adoption, determined under the original provisions of SFAS 123, will be recognized in net income in the periods after the date of adoption.

The Company recognized stock-based compensation costs in the amount of $0.5 million for the three months ended November 30, 2005. All of the options issued through and outstanding as of November 30, 2005, except for 155,900 shares granted on November 29, 2005, are considered to be dilutive.
18
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 31,NOVEMBER 30, 2005 AND 2004


asset
The fair value of each option grant under the Plan was estimated at the date of grant using the Black-Scholes Option Pricing Model, which utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield, and employee exercise behavior. Expected volatilities utilized in the impactmodel are based primarily on the metals recycling business, the Company decided to
enter into negotiations to purchase the Portland property. On May 11, 2005, the
Company purchased the Portland Property from SIC for $20 million pursuant to the
terms of a Purchase and Sale Agreement dated May 4, 2005 (the Agreement). The
Agreement, and the purchasehistorical volatility of the Portland Property contemplated thereby, were
approved byCompany’s stock price and other factors. The risk-free interest rate is derived from the Company's Audit CommitteeU.S. Treasury yield curve in accordance with the Company's
policy on related party transactions.

As the Company has been responsible for the operation and maintenance of the
Portland Property under the terms of the Lease, the Portland Property was
purchased "as is, with all faults" and with very limited representations and
warranties from SIC. In addition, under the terms of the Lease, the Company was
obligated to indemnify SIC against any environmental liabilities associated with
the Portland Property, and this obligation of the Company survived the
termination of the Lease.

In connection with the purchase of the Portland Property, the Lease was
terminated. The rent under the Leaseeffect at the time of terminationgrant. The model incorporates exercise and post-vesting forfeiture assumptions based on an analysis of historical data. The expected lives of the grants are derived from historical data and other factors.

As of November 30, 2005, the total remaining unrecognized compensation cost related to non-vested stock options amounted to $5.8 million. The weighted average remaining requisite service period of the non-vested stock options was $1.8 million27 months.

In accordance with the applicable provisions of SFAS 123(R) and FASB Staff Position (FSP) FAS 123(R)-3 issued on November 10, 2005, the Company elected to use the short-form method to calculate the Windfall tax pool (Windfall) as of September 1, 2005, against which any future deficiency in actual tax benefits from exercises of stock options as compared to tax benefits recorded under SFAS 123(R), defined as “Shortfall,” will be offset.

Periods Prior to Adoption.SFAS 123(R) requires the Company to present pro forma information for periods prior to adoption as if the Company had accounted for all stock-based compensation under the fair value method of that statement. For purposes of pro forma disclosure, the estimated fair value of the options at the date of grant is amortized over the requisite service period, which generally equals the vesting period. The following table illustrates the effect on net income and earnings per year, subjectshare as if the Company had applied the fair value recognition provisions of SFAS 123(R) to periodic adjustment for market rates and Consumer and
Producer Price indices. The Lease was scheduled to expire in 2063.


NOTE 7its stock-based employee compensation: 

  
For the Three Months Ended
November 30, 2004 
 
    
Reported net income $42,936 
Add: Stock based compensation costs included in
reported net income, net of tax
  
—
 
Deduct: Total stock based employee
compensation benefit (expense) under fair value
based method for all awards, net of tax
  
(126
)
     
Pro forma net income $42,810 
     
Reported basic income per share $1.41 
Pro forma basic income per share $1.41 
     
Reported diluted income per share $1.38 
Pro forma diluted income per share $1.37 
19
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005 AND 2004
Note 8 - EMPLOYEE BENEFITS

Employee Benefits

The Company has a number of retirement benefit plans that cover both union and non-union employees. The Company makes contributions following the provisions in each plan.

Primary actuarial assumptions are determined as follows:

     o    
·  The expected long-term rate of return on plan assets is based on the Company’s estimate of long-term returns for equities and fixed income securities weighted by the allocation of assets in the plans. The rate is affected by changes in general market conditions, but because it represents a long-term rate, it is not significantly affected by short-term market swings. Changes in the allocation of plan assets would also impact this rate.
·  The assumed discount rate is used to discount future benefit obligations back to current dollars. The U.S. discount rate is as of the measurement date of August 31, 2005. This rate is sensitive to changes in interest rates. A decrease in the discount rate would increase the Company’s obligation and expense.
·  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 the Company’s compensation policies. An increase in this rate would increase the Company’s obligation and expense.

Defined Benefit Pension Plan
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
          affected by changes in general market conditions, but because it
          represents a long-term rate, it is not significantly affected 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, 2004. 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.

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

                                        FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31, 2005   MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------
                                                              (Unaudited)

Service cost                           $        296   $        260   $        824   $        691
Interest cost                                   181            169            504            448
Expected return on plan assets                 (222)          (192)          (618)          (511)
Amortization of past service cost                 1              1              3              3
Recognized actuarial loss                        52             48            143            127
                                       ------------   ------------   ------------   ------------
Net periodic pension benefit cost      $        308   $        286   $        856   $        758
                                       ============   ============   ============   ============



                                       14

                        SCHNITZER STEEL INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE THREE MONTHS ENDED MAY 31, 2005 AND 2004

For the year ended August 31, 2005, the

  
For the Three Months Ended
November 30,
 
  2005 2004 
Service cost $294 $164 
Interest cost  180  106 
Expected return on plan assets  (220) (121)
Amortization of past service cost  1  1 
Recognized actuarial loss  51  30 
Net periodic pension benefit cost $306 $180 

The Company expects to contribute $1.2 million to its defined benefit pension plan. As of Mayplan for the year ending August 31, 2006.  During the quarter ended November 30, 2005, the Company has
contributed $0.4 millionmade no contributions to the defined benefit pension 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'sCompany’s third and fourth fiscal quarters.

DEFINED CONTRIBUTION PLANS
- --------------------------


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     FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31, 2005   MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------
                                                              (Unaudited)

Plan costs                             $        294   $        358   $        803   $      1,087



MULTIEMPLOYER PENSION PLANS
- ---------------------------


  
For the Three Months Ended
November 30,
 
  2005 2004 
Plan costs  $521 $346 
20
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005 AND 2004
Multiemployer Pension Plans
In accordance with collective bargaining agreements, the Company contributes to multiemployer pension plans. Company contributions arewere as follows (in thousands):

                                       For the Three Months Ended     For the Nine Months Ended
                                       ---------------------------   ---------------------------
                                       May 31, 2005   May 31, 2004   May 31, 2005   May 31, 2004
                                       ------------   ------------   ------------   ------------
                                                              (Unaudited)

Plan contributions                     $        713   $        832   $      2,049   $      2,322


  
For the Three Months Ended
November 30,
 
  2005 2004 
Plan contributions  $870 $738 

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 for the Steel Manufacturing Business would not meet ERISAEmployee Retirement Income Security Act of 1974 minimum funding standards for the plan year endingended September 30, 2004. The trustees of that plan have applied to the Internal Revenue Service (IRS) for certain relief from this minimum funding standard. The IRS has tentatively responded, indicating a willingness to consider granting the relief provided the plan'splan’s contributing employers, including the Company, agree to increased contributions. The increased contributions are estimated to average 6% per year, compounded annually, until the plan reaches the fundedfunding status required by the IRS. These increases would be based on the Company'sCompany’s current contribution level to the plan of approximately $2.2$1.7 million per year. The Plan TrusteesBased on commitments from the majority of employers participating in the plan to make the increased contributions, the plan trustees have provided
information toproceeded with the plan's contributing employers regarding the IRS proposed
contribution rate increasesrelief request and are awaiting a commitmentformal approval from the employers
before proceeding with the relief request.

IRS.

Absent relief by the IRS, the plan'splan’s contributing employers will be required to make additional contributions or pay an excise tax that may equal or exceed the full amount of thatthe funding deficiency. The Company estimated its share of the required additional contribution for the 2004 plan year to be approximately $1.1 million and accrued for such amount in fiscal 2004. NOTE 8The Company did not accrue additional amounts for fiscal 2005 or the first quarter of fiscal 2006, based on the Company’s belief that it is probable the IRS will grant relief.


Note 9 - SEGMENT INFORMATION:

Segment Information

The Company operates in three industry segments: metal processing and recycling (Metals Recycling Business), self-service and full-service used auto parts sales (Auto Parts Business) and 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 whichthat are suppliers of unprocessed metals and, prior to October 1, 2005, other joint ventures in the metals recycling business. The Joint Ventures inIn prior fiscal years, the metals recycling business
sell recycled metals that have been processed at their facilities (Processing)
and also buy and sell third parties' processed metals (Trading). The

                                       15

                        SCHNITZER STEEL INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE THREE MONTHS ENDED MAY 31, 2005 AND 2004


Company considersconsidered these joint ventures to be separate segments because they arewere 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'sCompany’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.
21
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005 AND 2004
Revenues from external customers and from intersegment transactions for the Company'sCompany’s consolidated operations are as follows (in thousands):

                                        FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31, 2005   MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------

Metals Recycling Business              $    150,654   $    137,997   $    447,266   $    326,926
Auto Parts Business                          30,980         23,294         78,814         58,199
Steel Manufacturing Business                 91,351         72,048        228,193        185,128
Intersegment revenues                       (46,196)       (39,589)      (112,777)       (86,524)
                                       ------------   ------------   ------------   ------------
Consolidated revenues                  $    226,789   $    193,750   $    641,496   $    483,729
                                       ============   ============   ============   ============



Total revenues from external customers recognized by the joint ventures (in
thousands):


                                        FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31, 2005   MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------

Joint Ventures:
       Processing                      $    296,777   $    347,753   $    972,879   $    738,413
       Trading                              256,450        193,946        693,660        424,406
                                       ------------   ------------   ------------   ------------
Total revenues                         $    553,227   $    541,699   $  1,666,539   $  1,162,819
                                       ============   ============   ============   ============


  
For the Three Months Ended
November 30, 
 
      
  2005 2004 
Metals Recycling Business
 $281,396
 (1)
$144,532 
Auto Parts Business
  53,397
(1)
 23,386 
Steel Manufacturing Business
  89,156  70,022 
Intersegment revenues
  (35,276) (38,979)
Consolidated revenues
 $388,673 $198,961 

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

  
For the Three Months Ended
November 30, 
 
      
  2005 2004 
Metals Recycling Business $15,575
(1)
$34,288 
Auto Parts Business  8,356
(1)
 7,048 
Steel Manufacturing Business  16,070  12,760 
Joint Ventures  1,752  20,464 
Corporate expense  (19,499) (3,591)
Intercompany profit eliminations  (529) (3,163)
Environmental matter  
—
  
(500
)(2)
Total operating income $21,725 
$
67,306
 


                                        FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31,
(1)The Company elected to consolidate results of the businesses formed from the HNC separation and termination and the Regional and GreenLeaf acquisitions as though the transactions had occurred at the beginning of the fiscal year. As a result, revenues and income from operations increased, which is offset by pre-acquisition interests. See Note 3.
(2)
Fiscal 2005 MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------

Metals Recycling Business              $     27,441   $     32,462   $    101,210   $     55,547
Auto Parts Business                           8,548          8,554         23,139         19,537
Steel Manufacturing Business                 13,408          6,956         31,526          9,506
Joint Ventures (1)                           11,152         28,013         47,821         42,634
Corporate expense                            (5,894)        (6,053)       (14,493)       (11,717)
Intercompany profit eliminations                430         (2,617)        (1,994)        (5,869)
Environmentalenvironmental matter --             --         (8,225)            --
                                       ------------   ------------   ------------   ------------
     Total operating income            $     55,085   $     67,315   $    178,984   $    109,638
                                       ============   ============   ============   ============
is related to the Hylebos Waterway project.


(1)  Operating income from the joint ventures includes environmental expenses of
     $2.6 million for the nine months ended May 31, 2005.

                                       16

22
SCHNITZER STEEL INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE THREE MONTHS ENDED MAY 31, 2005 AND 2004


The Company's share of depreciation and amortization expense included in the
determination of joint ventures' income from operations is as follows (in
thousands):



                                        FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31, 2005   MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------

Joint Ventures                         $      1,824   $      2,000   $      5,524   $      5,359

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



NOTE 9 - SUBSEQUENT EVENT:

On June 9, 2005, the Company and Hugo Neu Corporation (HNC) announced that they
and certain of their subsidiaries entered into a Master Agreement providing for
the separation and termination of their metals recycling joint venture
relationships and certain other transactions. Pursuant to the Master Agreement,
the Company and its subsidiary, Joint Venture Operations, Inc. (JVOI), and HNC
and its subsidiaries, Hugo Neu Co., LLC, HNE Recycling LLC and HNW Recycling
LLC, have agreed to take the following steps relating to the dissolution of
their joint venture relationships:

     o    JVOI will acquire the 50% interests in the joint ventures based in New
          England that are owned by a Hugo Neu subsidiary with the result that
          these joint ventures will become wholly-owned by JVOI;

     o    Subsidiaries of HNC will acquire the 50% interests in the joint
          ventures based in New Jersey, New York and California that are owned
          by a Schnitzer subsidiary with the result that these joint ventures
          will become wholly-owned by subsidiaries of HNC;

     o    Hugo Neu Schnitzer Global Trade LLC (Global Trade), a joint venture
          engaged primarily in scrap metal trading, will redeem JVOI's 50%
          membership interest in it in exchange for the assets and liabilities
          of Global Trade's trading business in Russia and certain Baltic
          Countries and Global Trade will retain the trading business operating
          outside of Russia and the Baltic Countries;

     o    JVOI will acquire HNC's metal recycling and greenwaste recycling
          businesses in Hawaii;

     o    A subsidiary of HNC will pay JVOI approximately $52 million in cash;

     o    The Company and HNC and certain of their affiliates will enter into a
          number of related agreements governing, among other things, employee
          transitional issues, benefit plans, scrap sales and other transitional
          services; and

     o    The Company and HNC and certain of their affiliates will execute and
          deliver mutual global releases.


The Master Agreement has been approved by the Board of Directors of each of the
Company and HNC and the transactions contemplated by the Master Agreement are
subject to a number of conditions, including obtaining certain third party
consents, permit amendments or transfers, HNC obtaining required financing and
other customary closing conditions. With respect to the financing contingency,
HNC has confirmed to the Company that it has entered into a definitive credit
agreement sufficient to provide the required financing, subject to customary
closing conditions. The Company currently expects the closing of the transaction
will occur around the end of the Company's fiscal year.

                                       17

                        SCHNITZER STEEL INDUSTRIES, INC.


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

GENERAL



General

Schnitzer Steel Industries, Inc. (the Company) operates in three vertically integrated business segments that include the wholly-ownedmetal processing and joint venture
metals recycling businesses, the Auto(Metals Recycling Business), self-service and full-service used auto parts sales (Auto Parts BusinessBusiness) and the Steelmini-mill steel manufacturing (Steel Manufacturing Business.Business). The wholly-owned Metals Recycling Business collects, processes and certain joint venture
businesses collect, process and recyclerecycles 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, andwhich the Company believes it is one of the country'scountry’s leading self-service used auto parts networks, with 30 retail store locations.and GreenLeaf, the acquisition of which positions the Company in the full-service market. Additionally, Pick-N-Pull is a supplier of autobodiesauto bodies to the Metals Recycling Business, which processes the autobodiesauto bodies into sellable recycled metal. The Steel Manufacturing Business purchases recycled metals from the Metals Recycling Business and other sources and uses its mini-mill to process the recycled metals into finished steel products. As a result of the Company's vertically integrated business, itvertical integration the Company is able to transform autobodiesauto bodies and other unprocessed metals into finished steel products.

Metals Recycling Business
The joint venturesCompany operates one of the largest metal recycling businesses in the United States. The Company buys, processes and sells ferrous metals to foreign and domestic steel producers, including its Steel Manufacturing Business and nonferrous metals to both the domestic and export markets. In addition, the Metals Recycling Business including Schnitzer Global Exchange engage in the metals recyclingtrading business sellby purchasing processed metal from other recycled metals that have been processed at their
facilities (Processing) and also buy and sellprocessors for shipment to either the Steel Manufacturing Business or third parties' processed metals
(Trading).

party customers without further processing.

On June 9,September 30, 2005, the Company announced the signing of an agreementand Hugo Neu Corporation (HNC) closed a transaction to separate and terminate itstheir metals recycling joint ventures with Hugo Neu Corporation,
with closingventure relationships as discussed below under “acquisitions and transactions”. As a result of the transaction expected near the end of fiscal 2005. See Note 9
of Notes to Consolidated Financial Statements for details of the agreement. Upon completion of this transaction, in addition to its existingprevious recycling operations in Northern California, Washington and Oregon, the Company's Metals Recycling
Business will be the largest metals recyclerCompany now has significant recycling operations in New England and in Hawaii and will operateoperates, through its wholly owned subsidiary Schnitzer Global Exchange Corp. (Schnitzer Global Exchange), a metals trading business which purchases metals in parts of Russia and the Baltic Sea region. RESULTS OF OPERATIONS

In addition, as discussed below under “Acquisitions and Transactions”, on October 31, 2005, the Company purchased substantially all of the assets of Regional, which operates metals recycling facilities located in the southeastern United States and gives the Company a significant presence in this growing market. For a more detailed discussion of the HNC joint venture separation and termination and the Regional acquisition, see “Acquisitions and Transactions” and Note 3 to the consolidated financial statements.

Auto Parts Business
The Company'sAuto Parts Business operates as Pick-N-Pull in the United States and Canada. The Company believes Pick-N-Pull is one of the country’s leading self-service used auto parts networks. The Auto Parts Business purchases salvaged vehicles, sells used parts from those vehicles through its retail stores and wholesale operations, and sells the remaining portion of the vehicles to metal recyclers, including the Company’s Metals Recycling Business. Until September 30, 2005, the Auto Parts Business consisted of a network of retail locations operating exclusively as self-service used auto parts stores. These stores are self-service in that customers themselves remove used auto parts from vehicles in inventory.

During the first quarter of fiscal 2006, the Company acquired GreenLeaf, which is engaged in the business of full-service auto dismantling and recycling and sells its products primarily to collision and mechanical repair shops. This acquisition significantly increased Pick-N-Pull’s presence in the Southern, Eastern and Midwestern United
23
SCHNITZER STEEL INDUSTRIES, INC.
States and represents the Company’s initial venture into the substantial full-service segment of the recycled auto parts market that services commercial customers. In full-service stores, professional staff members dismantle, test and inventory individual parts, which are then delivered to business or wholesale customers. Full-service stores also generally maintain newer cars in inventory. The Company is in the process of integrating GreenLeaf’s operations into Pick-N-Pull. Management has identified several GreenLeaf stores to convert to self-service locations; others will combine both full-service and self-service and some will remain exclusively full service. For a more detailed discussion of the Greenleaf acquisition, see “Acquisitions and Transactions” and Note 3 to the condensed consolidated financial statements.

Steel Manufacturing Business
The Steel Manufacturing Business purchases recycled metals from the Metals Recycling Business as well as from third parties and uses its mini-mill to process the recycled metals into finished steel products, including steel reinforcing bar (rebar), wire rod, merchant bar, coiled rebar and other specialty products.

Acquisitions and Transactions

Metals Recycling Business. On September 30, 2005, the Company, HNC and certain of their subsidiaries closed a transaction to separate and terminate their metals recycling joint venture relationships. The Company received the following as a result of the HNC joint venture separation and termination:
·  The assets and related liabilities of Hugo Neu Schnitzer Global Trade related to a trading business in parts of Russia and the Baltic region, including Poland, Denmark, Finland, Norway and Sweden, and a non-compete agreement from HNC that bars it from buying scrap metal in certain areas in Russia and the Baltic region for a five-year period ending on June 8, 2010.
·  The joint ventures’ various interests in the New England operations that primarily operate in Massachusetts, New Hampshire, Rhode Island and Maine.
·  Full ownership in the Hawaii metals recycling business that was previously owned 100% by HNC.
·  A payment of $36.6 million in cash, net of debt paid, subject to post-closing adjustments.

HNC received the following as result of the HNC joint venture separation and termination:
·  The joint venture operations in New York, New Jersey and California, including the scrap processing facilities, marine terminals and related ancillary satellite sites, the interim New York City recycling contract, and other miscellaneous assets.
·  The assets and related liabilities of Hugo Neu Schnitzer Global Trade that are not related to the Russian and Baltic region trading business.

As described above, the separation resulted in the exchange of the joint venture interests, as well as cash and other assets, to provide for an equitable division. The agreement provides for potential purchase price adjustments based on the closing date working capital of the acquired Hawaii business as well as the joint ventures’ ending balances. The Company has not determined whether any purchase price adjustment will be necessary.

On October 31, 2005, the Company purchased substantially all of the assets of Regional for $65.5 million in cash and the assumption of certain liabilities. Regional operates 10 metals recycling facilities located in the states of Georgia and Alabama which process ferrous and nonferrous scrap metals without the use of shredders.

Auto Parts Business. On September 30, 2005, the Company acquired GreenLeaf, five properties previously leased by GreenLeaf and certain GreenLeaf debt obligations. GreenLeaf currently operates its full-service auto dismantling business in one wholesale sales office and 19 commercial locations throughout the United States. Total purchase price for the acquisition was $44.7 million, subject to post-closing adjustments. This acquisition may have a modestly dilutive to neutral effect on earnings in fiscal 2006 as the conversion process is executed, but is expected to provide earnings growth in future years.
24
SCHNITZER STEEL INDUSTRIES, INC.
Management believes that the HNC joint venture separation and termination and the Regional and GreenLeaf acquisitions position the Company well as it continues to execute its growth strategy. Consideration for these recently acquired businesses was funded by the Company’s cash balances on hand and borrowings under its bank credit facility. The Company has recorded estimated environmental liabilities as a result of due diligence performed in connection with these acquisitions. See Note 4 to the condensed consolidated financial statements for further information regarding contingencies.

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, 
 
REVENUES: 2005 2004 
Metals Recycling Business: 
     
Ferrous sales
 $233,960 $126,832 
Nonferrous sales
  45,759  15,654 
Other sales
  
1,677
  2,046 
Total sales
  281,396
(1)
 144,532 
        
Auto Parts Business  53,397
(1)
 23,386 
Steel Manufacturing Business  89,156  70,022 
Intercompany sales eliminations  (35,276) (38,979)
Total revenues
 
$
388,673
 $198,961 

  
For the Three Months Ended
November 30,
 
  2005 2004 
OPERATING INCOME:     
Metals Recycling Business $15,575
(1)
$34,288 
Auto Parts Business  8,356
(1)
 7,048 
Steel Manufacturing Business  16,070  12,760 
Joint Ventures  1,752
(1)
 20,464 
Corporate expense  (19,499) (3,591)
Intercompany profit eliminations  (529) (3,163)
Environmental matter  
—
  (500
)(2)
Total operating income
 $21,725 $67,306 
        
NET INCOME $41,530 $42,936 


                                        FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31,
(1)  The Company elected to consolidate results of the businesses formed from the HNC separation and termination and the Regional and GreenLeaf acquisitions as though the transactions had occurred at the beginning of the fiscal year. As a result, revenues and income from operations increased, which is offset by pre-acquisition interests. For more detailed discussion of the HNC joint venture separation and termination and the Regional and GreenLeaf acquisitions, see Note 3 to the condensed consolidated financial statements.
(2)  Fiscal 2005 MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------
                                                              (Unaudited)

REVENUES:
Metals Recycling Business:
     Ferrous sales                     $    129,495   $    121,086   $    389,974   $    282,526
     Nonferrous sales                        19,440         15,174         52,037         39,661
     Other sales                              1,719          1,737          5,255          4,739
                                       ------------   ------------   ------------   ------------
           Total sales                      150,654        137,997        447,266        326,926

Auto Parts Business                          30,980         23,294         78,814         58,199
Steel Manufacturing Business                 91,351         72,048        228,193        185,128
Intercompany sales eliminations             (46,196)       (39,589)      (112,777)       (86,524)
                                       ------------   ------------   ------------   ------------
           Total revenues              $    226,789   $    193,750   $    641,496   $    483,729
                                       ============   ============   ============   ============
environmental matter is related to the Hylebos Waterway project.



                                       18

25
SCHNITZER STEEL INDUSTRIES, INC.

                                        FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31, 2005   MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------
                                                              (Unaudited)

OPERATING INCOME:
Metals Recycling Business              $     27,441   $     32,462   $    101,210   $     55,547
Auto Parts Business                           8,548          8,554         23,139         19,537
Steel Manufacturing Business                 13,408          6,956         31,526          9,506
Joint Ventures (1)                           11,152         28,013         47,821         42,634
Corporate expense                            (5,894)        (6,053)       (14,493)       (11,717)
Intercompany profit eliminations                430         (2,617)        (1,994)        (5,869)
Environmental matters                                                      (8,225)
                                       ------------   ------------   ------------   ------------
           Total operating income      $     55,085   $     67,315   $    178,984   $    109,638
                                       ============   ============   ============   ============
NET INCOME                             $     33,508   $     42,514   $    112,425   $     73,241
                                       ============   ============   ============   ============



(1)  Operating income from the joint ventures includes environmental expenses of
     $2.6 million for the nine months ended May 31, 2005.


The Joint Ventures' revenues and results of operations were as follows (in
thousands):


                                        FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31, 2005   MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------
                                                              (Unaudited)

Joint Ventures
   Processing                          $    296,777   $    347,753   $    972,879   $    738,413
   Trading                                  256,450        193,946        693,660        424,406
                                       ------------   ------------   ------------   ------------
                                       $    553,227   $    541,699   $  1,666,539   $  1,162,819
                                       ============   ============   ============   ============
Operating income from
Joint Ventures (1)                     $     11,152   $     28,013   $     47,821   $     42,634
                                       ============   ============   ============   ============



(1)  Operating income from the joint ventures includes environmental expenses of
     $2.6 million for the nine months ended May 31, 2005.





                                       19

                        SCHNITZER STEEL INDUSTRIES, INC.



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

  
For the Three Months Ended
November 30, 
 
  2005  2004  
METALS RECYCLING BUSINESS:     
Average Ferrous Recycled Metal Sales Prices ($/LT)(1)
   
Domestic $207 $221 
International $209 $245 
Average $209 $236 
        
Ferrous Domestic Sales Volume (LT, in thousands)(2)(3)
   
Processed  267  134 
Brokered  
31
  42 
Total  298  176 
        
Ferrous International Sales Volume (LT, in thousands)(3)
       
Processed  364  295 
Trading  306  — 
Total  670  295 
        
Total Ferrous Sales Volume (LT, in thousands)(2)(3)
  968  471 
        
Ferrous Volumes Sold to Steel Manufacturing Business (LT, in thousands)  154  159 
        
Nonferrous Sales Volumes (pounds, in thousands) (3)
  68,614  29,400 
        
STEEL MANUFACTURING BUSINESS:       
Average Sales Price ($/ton ) (1)
 $517 $534 
        
Finished Steel Products Sold (tons, in thousands)  166  126 
      
AUTO PARTS BUSINESS     
Number of Self-Service Locations at End of Quarter  30  26 
Number of Full-Service Locations at End of Quarter(4)
  19  - 

                                        FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31, 2005   MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------
                                                              (Unaudited)

METALS RECYCLING BUSINESS:
Ferrous recycled metal average net
(1)Price information is shown after a reduction for the cost of freight incurred to deliver the product to the customer.
(2)Includes sales prices ($/ton) (1,2)
   Domestic                            $        222   $        228   $        221   $        177
   Export                              $        236   $        243   $        243   $        180
   Average                             $        230   $        237   $        236   $        179

Ferrous recycled metal shipments
(tons in thousands) (2)
   Toto the Steel Manufacturing Business.
(3)The Company elected to consolidate results of the businesses formed from the HNC separation and termination and Regional acquisition as though the transactions had occurred at the beginning of the fiscal year. As a result, ferrous volume increased on a pro forma basis by 220,000 tons and nonferrous volume increased by 24,000 pounds. See Note 1 to the condensed consolidated financial statements.
(4)Reflects the addition of GreenLeaf to the Auto Parts Business 190            158            459            448
   To other unaffiliated domestic
     customers                                   17              7             43             36
   To export customers                          289            280            941            871
                                       ------------   ------------   ------------   ------------
       Total ferrous recycled metal             496            445          1,443          1,355
                                       ============   ============   ============   ============
Nonferrous metal shipments (pounds
in thousands)                                33,600         28,100         93,900         81,300
                                       ============   ============   ============   ============
AUTO PARTS BUSINESS
Numberthe first quarter of stores open at quarter end             30             26             30             26



                                        FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                       ---------------------------   ---------------------------
                                       MAY 31, 2005   MAY 31, 2004   MAY 31, 2005   MAY 31, 2004
                                       ------------   ------------   ------------   ------------
                                                              (Unaudited)

STEEL MANUFACTURING BUSINESS:
Average sales price ($/ton) (1,2)      $        510   $        448   $        519   $        368

Finished steel products sold
(tons in thousands) (2)                         172            155            423            480

JOINT VENTURES:
Ferrous recycled metal shipments
(tons in thousands) (2)
   Processing                                   814          1,086          2,794          2,588
   Trading                                      840            621          2,307          1,921
                                       ------------   ------------   ------------   ------------
       Total ferrous recycled metal           1,654          1,707          5,101          4,509
                                       ============   ============   ============   ============
fiscal 2006.


(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).


                                       20

26
SCHNITZER STEEL INDUSTRIES, INC.


THIRD QUARTER FISCAL
First Quarter Fiscal 2006 Compared to First Quarter Fiscal 2005 COMPARED TO THIRD QUARTER FISCAL 2004

RESULTS OF OPERATIONS
- ---------------------

General. The thirdfirst quarter of fiscal 20052006 marked the beginning of the Company’s transformation. The Company completed the separation and termination of its joint ventures with HNC and closed two acquisitions, and as a result nearly doubled its revenues compared to the first quarter of fiscal 2005. The Company began the process of integrating the newly acquired businesses into its existing operations during the first quarter of fiscal 2006. The Company also continued on a major capital spending program to upgrade and replace infrastructure and equipment. The recent acquisitions and capital improvements are expected to provide long-term benefits, although management expects they will result in some short-term disruption to operations.
It was another strong quarter for the Company, but
this quarter's performance did not matchSteel Manufacturing Business and the near record earnings level achieved
in the third quarter of fiscal 2004.Auto Parts Business. Compared to last year'syear’s first quarter, operating results for the Steel Manufacturing Business improved dramatically due to higher selling pricessales volumes primarily on rebar products. The Metals Recycling Business was impacted by a number of short term factors that reduced sales volumes and sales volumes. However, operatingmargins, and as a result, earnings did not reflect what the Company considers a normalized state of operations. Operating income declined for the Metals Recycling Business as margins per ton for ferrous metals were compressed by moderately lower selling prices, and higher purchase costs for unprocessed metal purchase prices.
Marginsand lower export volumes at the Company’s previously owned West Coast operations. The entities acquired as part of the HNC separation and termination,, which were reported for the first time in the Metals and Recycling Business segment, were impacted by low beginning inventories and a planned production shutdown. Additionally, operating income from Joint Ventures decreased by over 90% due to the elimination of the HNC joint ventures were also compressed by higher unprocessed metal
purchase prices. Also, sales volumesresults from this segment. As a result of the HNC joint venture separation and termination, the Joint Venture segment will be eliminated and the results for the processingbusinesses acquired in this transaction, and other smaller joint ventures decreased
by 25%, which had a significant adverse affect on joint venture operating income
forwill be consolidated into the quarter.

Metals Recycling Business in future periods. Finally, average segment margins are expected to decrease due to the Company’s new trading business, has different characteristics and produces lower margins than the processing business.
The Company’s results of operations of the Company depend in large part uponon 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 half of fiscal 2005, strong worldwide demand combined with a tight supply of recycled metals created significant price volatility and drove the Metals Recycling Business'Business’ average selling prices to unprecedented highs. Average selling prices for recycled ferrous metals declined in the third quartersecond half of fiscal 2005 due to the unsettled Asian markets, and have continued to modestly decline in the fourth quarter. Marketfirst fiscal quarter of 2006. In particular, the fluctuations of prices for recycled ferrous metals fluctuate periodically
and have a significant impact on the results of operations for the wholly-owned
operations and Joint Ventures in the metals recycling businessMetals Recycling Business and to a lesser extent on the Auto Parts 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 crushed autobodiesauto bodies to metal recyclers. On September 30, 2005, the Auto Parts Business acquired GreenLeaf, which is a full-service supplier of recycled auto parts primarily to commercial customers. This acquisition expanded Pick-N-Pull's national footprint, providing growth potential in both the self-service and full-service markets. The newly acquired locations are in Arizona, Florida, Georgia, Illinois, Massachusetts, Michigan, Nevada, North Carolina, Ohio, Virginia, and Texas. As the Company integrates these stores with its existing business, some of the sites will be converted to Pick-N-Pull’s self-service model, while others will remain full-service or have combined operations. Two of the initial 22 acquired locations have been closed, and a third is a wholesale sales office. This acquisition is expected to have a modestly dilutive to neutral effect on earnings in fiscal 2006 as the conversion process is executed, but is anticipated to provide earnings growth in future years. 
27
SCHNITZER STEEL INDUSTRIES, INC.
Prior to the GreenLeaf acquisition, Pick-N-Pull had existing operations in nine states and two Canadian provinces that achieved an annual pace of more than four million paid customer admissions per year. As a result of the Greenleaf acquisition and the acquisition of four self-service auto parts stores in January 2005, the Auto Parts Business has acquired
four new stores sinceincreased revenue by 128% for the end of the thirdfirst fiscal quarter of 2006 as compared to the same period last year, which
represents a 15% increase inyear. For both the number of stores. These new stores have led to
increases in both retailfull-service and wholesale revenues. In addition,self-service business, revenues for the wholesale product lines are principally affected by commodity metal prices and
shipping schedules.prices. The Auto Parts Business also benefited from improved pricing for crushed autobodiesauto bodies as compared to the thirdfourth quarter of last year.year, which was partially offset by higher purchase prices for those vehicles. The self-service 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.conditions for customers. As a result, the Company'sCompany’s first and third fiscal quarters tend to generate the greatest retail sales and the second and fourth fiscal quarters are the slowest
in terms of retail sales.

During the first half of fiscal 2005, West Coast steel manufacturers (including
the Company) built inventory levels in anticipation of the spring construction
period. Also during the first half of fiscal 2005, many fabricators and steel
distributors used the traditionally slow sales period to reduce their inventory
levels and purchases of steel products. The third fiscal quarter of 2005
experienced higher sales volume as a result of customers replenishing their
reduced inventory levels to prepareslower for the West Coast construction season.
these operations.

Average net selling prices for the Company'sfinished steel products have remained high,of the Steel Manufacturing Business declined 3% compared to the first quarter of fiscal of 2005. Customer demand for steel products on the West Coast is good, and average prices remain strong by historical standards, increasing by 14% over5% from the prior yearfourth quarter although declining by 4% sinceof fiscal 2005. However, there has been an increase in the amount of imported wire rod which has lower selling prices than the Company’s comparable products being delivered on the West Coast.

Revenues.Consolidated revenues for the quarter ended November 30, 2005 increased $189.7 million, or 95%, to $388.7 million from $199.0 million in the first quarter of fiscal 2005. FluctuationsRevenues in the scrap metals market
pricing have caused buyers of steel to anticipate future price decreases and
some have adjusted their buying patterns. In addition, there has been a rise in
the amount of imported finished steel products, principally wire rod, being
delivered on the West Coast which have a lower selling price than the Company's
comparable products.

                                       21

                        SCHNITZER STEEL INDUSTRIES, INC.


The Company's steel mill successfully completed the installation of a new
electric arc furnace in December 2004. It is anticipated that the new furnace
will improve productivity of the mill as well as reduce operating costs,
including the consumption of electricity. To date, the new furnace is performing
well and exceeding productivity expectations.

REVENUES. Consolidated revenues for the quarter ended May 31, 2005 increased
$33.0 million or 17% to $226.8 million from $193.8 million in the thirdfirst quarter of fiscal 2004. Revenues in the third quarter of fiscal 20052006 increased for all Company business segments. For theThe Metals Recycling Business revenue increased primarily as a result of the revenue
increase resulted from increasesbusinesses acquired in sales volumes dueHNC separation and termination ,and the acquisition of Regional. Although there continues to continuedbe a strong demand in the worldwide metals markets. Significant improvementsmarkets for scrap metals, the fourth fiscal quarter of 2005 was affected by the unsettled Asian market and this condition continued into the first fiscal quarter of 2006. The Auto Parts Business benefited from the acquisition of GreenLeaf in world wideSeptember 2005 and four newly acquired self-service stores in January 2005, increased prices for auto bodies and higher revenues from sales of cores. The Steel Manufacturing Business benefited from the strong West Coast demand, coupled with higher raw material cost,which led to increases inhigher selling prices for finished steel products sold by the Steel Manufacturing Business. Auto Parts
Business revenues benefited from increased prices for sales of autobodies and higher core sale revenues. In addition, the Auto Parts Business acquired four
retail locations in January 2005 that added revenue and operating income to the
segment over the prior year.

sales volumes.

The Metals Recycling Business generated revenues of $150.7$281.4 million for the quarter ended May 31,November 30, 2005, before intercompany eliminations, which was an increase of $12.7$136.9 million, or 9%95%, over the same period of the prior year. Ferrous revenues increased $8.4$107.1 million, or 7%85%, to $129.5 million as a result of$234.0 million. This increase was caused by higher sales volume provided by the newly acquired businesses, which added revenue of approximately $168.2 million, and was partially offset by aan approximately $23.9 million decline in revenues from the Company’s previously owned West Coast recycled metals facilities due to the timing of shipments and lower average selling price net of shipping cost
(average net selling price) and slightly lower freight costs.prices. Total ferrous sales volume increased 50,400498,000 tons, or 11%196%, to 969,000 tons over the prior year first quarter, which was primarily due to increased sales to the Company's Steel Manufacturing Business.
Thenewly acquired businesses in the Southeast and Northeast as well as the addition of Schnitzer Global Exchange trading volume. This increase in sales volume represents a $12.0 million increase in revenue.
This increase iswas offset by a 3%an 11% decrease in the average net sales price to $230$209 per ton which represents a $3.3 million decrease in revenue.ton. The cost of freight that is included in revenue remained consistentincreased $16.4 million compared with the prior year first quarter, primarily due to the increased volumes. The entities acquired as part of the HNC separation and termination, which were reported for the first time in the Metals and Recycling Business segment, were impacted by low beginning inventories and a 5% decrease in freight rate per ton for export shipments was offset by increased
ferrous and non ferrous shipping volumes.planned production shutdown. Sales to the Steel Manufacturing Business increased 31,200decreased 5,400 tons, or 20%3%, to 190,000154,000 tons, while other domestic sales increased from 17,000 tons in the first fiscal quarter of 2005 to 144,000 tons in the same quarter of this year as a result of increased demand for finishedthe Regional acquisition. Regional is situated in a growing recycled metals market in the Southeastern United States, which is home to many automobile and auto parts manufacturers. Regional sells its ferrous metal to domestic steel and the
installationmills in its area, of a new furnace at the Steel Manufacturing Business during
December 2004. With the new furnace installed and operating, the Steel
Manufacturing Business has increased its consumption of scrap metal.

which there are approximately 23.
28
SCHNITZER STEEL INDUSTRIES, INC.
Revenue from nonferrous metal sales increased $4.3$30.1 million, or 192%, over the prior year thirdfirst quarter, which was athe result of a $0.04$0.13, or 7%25%, increase in average net sales price to $0.57$0.65 per pound and a 5.539.2 million poundpounds, or 20%134%, increase in the pounds shipped. Total nonferrous shipped for the first fiscal quarter of 2006 was 68.6 million pounds.  The increase in sales price per pound was a result of the additional value of the nonferrous product mix as a result of the Regional acquisition and increased Asian demand for nonferrous metals.  The increase in pounds shipped overwas primarily due to the prior year
thirdacquired businesses, which accounted for an additional 34.5 million pounds sold in the first quarter was a result of more scrap metals being processed through the
Company's shredders as well as the implementation of a system to improve
recovery offiscal 2006.  Certain nonferrous metals from the shredding process. Nonferrous metals are a byproduct of the shredding process, and quantities available for shipment are affected by the volume of materials processed in the Company'sCompany’s shredders.  

The Auto Parts Business generated revenuerevenues of $31.0$53.4 million, before intercompany eliminations, for the quarter ended May 31,November 30, 2005, which is an increase of $7.7$30.0 million, or 33%128%, over the same period of the prior year. This increase isin revenues was primarily due to the acquisition of GreenLeaf in September 2005 as well as the addition of four self-service stores in January 2005. Revenues also increased as a result of higher wholesale revenues driven by higher average sales prices for scrapped autobodiesauto bodies and higher core sale revenues in both the Company's recently acquired
and existing store locations. In addition, retail revenues increased as a resultfrom sales of the acquisition of four retail store locations in January 2005 and, to a
lesser extent, same store sales improvement.

                                       22

                        SCHNITZER STEEL INDUSTRIES, INC.


cores.

The Steel Manufacturing Business generated revenues of $91.4$89.2 million for the quarter ended May 31,November 30, 2005, which is an increase of $19.3$19.1 million, or 27%, over the prior year quarter. Sales volumes in the first fiscal quarter of 2006 increased 31% to 166,000 tons over the same period last year, increasing revenues by $21.4 million, partially due to strong demand for rebar products. Additionally, during the first quarter of fiscal 2005, customers reduced purchases of steel in an effort to reduce inventories on hand. By contrast, during the first quarter of fiscal 2006, customers were buying steel to replace inventories, and consumption of steel was strong. The average net selling price increased $62decreased $17 per ton, or 14%3%, to $510$517 per ton, which increasedresulted in decreased revenue $10.7 million.of $2.8 million as compared to record high prices in the first fiscal quarter of 2005. However, average selling prices during the first quarter of fiscal 2006 were 5% higher than the fourth quarter of fiscal 2005, reflecting several price increases announced earlier in the quarter. The increasedecrease in average net selling prices was due to a combinationstabilization of factors includingthe market after a number of price increases caused by increased steel consumption and higher raw material costs that manufacturers
passed through to the end users. Sales volumes increased 11% to 172,000 tons,
which increased revenues by $7.6 million. The increased sales volume is a resultconsumption.

Cost of increased demand in the Company's normally busiest quarter. Sales volumes in
the third quarter are traditionally higher due to the spring construction season
on the West Coast.

COST OF GOODS SOLD.Goods Sold. Consolidated cost of goods sold increased $27.5$187 million, or 20%134%, for the third quarter ended May 31,November 30, 2005, compared with the same period last year. Cost of goods sold increased as a percentage of revenues from 72%70.2% to 74%84.0%. Gross profit increased $5.5$3.0 million to $59.1$62.2 million during the latestfirst fiscal quarter 2006 as compared to the prior year quarter, which was driven by gross profit improvements atincreases in the Company'sCompany’s Auto Parts Business that was a result of the GreenLeaf acquisition and the Steel Manufacturing Business segments.

Business.

Cost of goods sold for the Metals Recycling Business increased $17.8$148.1 million, or 18%141%, to $118.7 million. As a percentage of revenues, cost of goods sold increased
compared with the third quarter of fiscal 2004 from 73% to 79%. Gross profit
decreased by $5.2$254.0 million to $31.9 million. The decrease in gross profit was
primarily attributable to the combination of lower average net selling prices
per ferrous ton and higher ferrous purchase prices per ton, partially offset by
higher sales volumes and improved nonferrous margins. Compared to the third
quarter of last year, the average ferrous metals cost of sales per ton increased
8% due primarily to higher purchase costs for unprocessed ferrous metals.

The Auto Parts Business' cost of goods sold increased $6.3 million or 51% during
the third quarter of fiscal 2005 as compared to the costfirst fiscal quarter of goods sold for the
fiscal 2004 third quarter. The higher cost of sales was primarily due to higher
car purchase costs that resulted from higher unprocessed metal prices, but also
due to the addition of four new stores since last year.2005. As a percentage of revenues, cost of goods sold increased compared with the prior year quarter from 53%73% to 60%90%. Gross profit decreased by $11.2 million to $27.4 million. The decrease in gross profit percentage was primarily attributable to the recent HNC separation and termination and the Regional acquisition, as these businesses operate in different markets and are currently experiencing narrower margins than the Company’s historical West Coast business. The margin variations for these businesses are due, in part, to differing markets for materials in the regions in which they operate, higher operating expenses due to increased car purchasethe costs of integration and restructuring, higher freight costs to access certain foreign markets and the addition oflower margins generally inherent in the four new
stores which earned a lower margin this quarter thanGlobal Exchange trading business. Additionally, in the previously owned
stores. Gross profit increased $1.4 million or 13% over the prior year quarter
due to increased wholesale revenue earned from the higher market rates for
crushed autobodies and the acquisition of four new stores since the third
quarter of the prior year.

The Steel Manufacturing Business' cost of goods sold increased $13.1 million or
21% during the thirdfirst quarter of fiscal 20052006, strong domestic demand for unprocessed metals caused purchase prices to rise at a time of declining export sales prices, resulting in narrowing margins. While Schnitzer Global Exchange, the Company’s new trading business, provides increased revenues, the associated trading margins are lower than the historical Metals Recycling Business. Although 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 in the trading business is particularly limited by competitive and other market factors. In addition, East Coast processing volumes were negatively impacted by a two-month shutdown of the Rhode Island shredder to install a new, more efficient, and environmentally friendly shredder motor as comparedwell as
29
SCHNITZER STEEL INDUSTRIES, INC.
low beginning inventories at all the New England yards. The lower processing volumes contributed to higher processing costs, which caused the costEast Coast operations to record a small loss for the quarter.

Cost of goods sold for the Auto Parts Business increased $22.0 million, or 164%, compared to the fiscal 2004 third2005 first quarter. As a percentage of revenues, cost of goods sold decreasedincreased compared with the thirdprior year quarter from 57% to 66%. The higher cost of sales was primarily due to the acquisition of GreenLeaf in September 2005 and four self-service stores in January 2005, but also due to higher car purchase costs that resulted from higher unprocessed metal prices, as GreenLeaf typically purchases newer vehicles resulting in a higher purchase price and lower margins as compared to the older model vehicles that Pick-N-Pull purchases. Gross profit increased $8.1 million, or 81%, over the prior year first quarter due to the acquisition of GreenLeaf in September 2005 and the addition of four new self-serve stores in January 2005. During the quarter, the operations acquired in the GreenLeaf transaction recorded a slight loss as the Company began the process of integrating GreenLeaf’s operations into Pick-N-Pull’s operations.

Cost of goods sold for the Steel Manufacturing Business increased $15.9 million, or 28%, as compared to the fiscal 20042005 first quarter. As a percentage of revenues, cost of goods sold increased slightly compared with the prior year quarter from 89%80% to 84%81%. Average cost of goods sold per ton increased $31decreased $10 per ton, or 8%2%, compared to the prior year quarter, which was primarily caused by higherlower raw material costs for recycled metal and alloys. Thisalloys and improved productivity, which were offset by higher energy costs. The overall increase in cost of sales was primarily caused by a 31% increase in sales volume. The Steel Manufacturing Business continues to see the benefits from the new furnace installed at its mini-mill last year, production incentives recently negotiated with the steelworkers union and other improvements in business practices. As a result, the increased production volumes and lower cost per ton of producing steel more than offset by the $62a $17 per ton increasedecrease in average net selling price,prices, and gross profit improved by $6.2$3.3 million to $14.3$17.1 million for the quarter.

JOINT VENTURES. The Joint Ventures in

Selling, General and Administrative Expense. Compared with the metals recycling business
predominantly sell recycled ferrous and nonferrous metals. Revenues for this
segment in the thirdfirst quarter of fiscal 2005 increased $11.5 million or 2%
compared with the prior year quarter primarily due to higher average net selling
prices per ton offset by a 3% decrease in the volume of ferrous recycled metal
sold from the prior year quarter. The overall 3% decrease in ferrous metal sales
volume of the Joint Ventures resulted from a 25% decrease in tons sold by the
processing Joint Ventures offset by a 35% increase in tons sold by the trading
Joint Venture. The decrease in volume for the processing Joint Ventures is
primarily due to the timing of export shipments and adverse weather conditions
in the Northeastern United States during the Company's second fiscal quarter
that led to a shortage of unprocessed metal available for processing and sale
during the Company's third quarter.

                                       23

                        SCHNITZER STEEL INDUSTRIES, INC.


The Company's share of Joint Venture operating income for the third quarter of
fiscal 2005 decreased to $11.2 million from $28.0 million in the third quarter
of fiscal 2004. The decrease in operating income from these Joint Ventures
resulted from decreases in both sales volume and margin per ton for the
processing Joint Ventures and an operating loss despite increased sales volume
for the trading Joint Venture. Margins for the processing Joint Ventures were
affected by higher purchase costs for unprocessed ferrous metals. These
conditions were more pronounced in the Joint Venture locations the Company will
receive as part of the agreement to separate and terminate the joint ventures
with Hugo Neu Corporation identified in Note 9 of Notes to Consolidated
Financial Statements. The Company's share of the results of the trading Joint
Venture was an operating loss in the Company's third quarter of fiscal 2005 of
$0.8 million as compared with operating income of $2.9 million in the same
quarter of the prior fiscal year. This decrease was due to the decline in sales
prices from second quarter 2005 levels and the related impact of selling
inventories purchased before the selling prices began decreasing and a $0.7
million adjustment to mark quarter-end inventory down to the net realizable
value.

On June 9, 2005, the Company announced the signing of an agreement to separate
and terminate its metals recycling joint ventures with Hugo Neu Corporation,
with closing of the transaction expected near the end of fiscal 2005. See Note 9
of Notes to Consolidated Financial Statements for details of the agreement.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Compared with the third quarter of
fiscal 2004, selling, general and administrative expense for the same quarter this fiscal year increased $0.9$30.1 million, or 6%. The increase is a result of
increased legal and professional fees, including $1.6 million related253%, to the
Audit Committee's investigation of payment practices in the Far East as
discussed in Note 5 to the consolidated financial statements, a $1.2 million
increase in expense for the Auto Parts Business primarily related to changes in
management infrastructure to allow growth of this business segment and expenses
related to the addition of four new stores, and the accelerated vesting of stock
options of $0.6 million, offset by a $2.9 million decrease in bonus expense. The
Company's bonus program considers both operating income and the utilization of
operating assets to determine bonus expense. As a result, the Company's
anticipated bonus expense is less than the prior year.$42.0 million. As a percentage of revenues, selling, general and administrative expense has decreasedincreased by 0.7%5% percentage points, from 7.4%6% to 6.7%11%. A significant portion of the increase, $11 million, was attributed to the acquisitions that took place in the first quarter of fiscal 2006 that nearly doubled the Company’s revenue. The increase in selling, general and administrative expense was also due, in part, to spreading these expensesthe charge associated with the reserve of $11 million related to the penalties that the Company estimates will be imposed by the DOJ and the SEC in connection with the past payment practices in Asia discussed in Note 4 to the condensed consolidated financial statements. Other significant increases included higher legal, accounting and professional fees of $2.2 million, which includes $1.5 million related to the Audit Committee’s investigation of past payment practices in the Asia as discussed in Note 4 to the condensed consolidated financial statements, and the adoption of FAS 123(R) in fiscal 2006, which resulted in stock based compensation expense of $0.5 million.

Other Income (Expense).The Company elected to consolidate the results of the businesses formed from the HNC separation and termination and the GreenLeaf acquisition as though the transactions had occurred at the beginning of the fiscal year. As a result, there was $9.1 million gain related to debt extinguishment associated with the GreenLeaf acquisition. The Company recorded a gain of $54.6 million which arose from the HNC separation and termination. Based on the values determined by the valuations of the assets and liabilities acquired and assumed, the Company recorded a gain for the difference between the excess values of businesses acquired over higher
revenues.

INTEREST EXPENSE. the carrying value of the businesses sold. For a more detailed discussion of the HNC joint venture separation and termination and the Greenleaf acquisition, see Notes 1 and 3 to the condensed consolidated financial statements.
Interest Expense.Interest expense for the thirdfirst quarter of fiscal 2005
decreased 80%2006 increased by $0.7 million (245%) to $0.1$1.0 million compared with the thirdfirst quarter of fiscal 2004.2005. The decrease was a result of lower average debt balances during the fiscal 2005
third quarter compared with the fiscal 2004 quarter.

INCOME TAX PROVISION. The tax rate of 37.4% for this quarter of fiscal 2005 was
higher than the 34.9% rate for the same quarter last year primarily because the
Extraterritorial Income Exclusion (ETI) tax benefit on export sales is projected
to decrease.


FIRST NINE MONTHS OF FISCAL 2005 COMPARED TO FIRST NINE MONTHS OF FISCAL 2004

RESULTS OF OPERATIONS
- ---------------------

REVENUES. Consolidated revenues for the nine months ended May 31, 2005 increased
$157.8 million or 33% to $641.5 million from $483.7 million for the same period
last year. The higher revenues were attributed to higher sales volume for the
Metals Recycling Business and higher average net selling prices for both the
Metals Recycling Business and the Steel Manufacturing Business as well as higher
wholesale and retail revenues for the Auto Parts Business. Revenues in the first
nine months of fiscal 2005 increased for the Metals Recycling Business primarily
as a result of increased sales volume and prices 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. Auto Parts Business revenues benefited from
increased prices for sales of autobodies and higher core sale revenues. In
addition, the Auto Parts Business

                                       24

                        SCHNITZER STEEL INDUSTRIES, INC.


acquired four retail locations in the second quarter of fiscal 2005 that added
both revenue and operating income to the segment over the prior year.

The Metals Recycling Business generated revenues of $447.3 million for the nine
month period ended May 31, 2005, before intercompany eliminations, which was an
increase of $120.4 million or 37% over the same period of the prior year.
Ferrous revenues increased $107.4 million, or 38% to $390.0 million as a result
of higher average selling prices net of shipping cost (average net selling
prices), higher shipping costs and an increase in the volume sold. The average
net sales price for ferrous metals increased 32% to $236 per ton, which
represents $82.2 million of the revenue increase over the prior year nine month
period. The cost of freight that was included in revenues increased by $9.6
million over the prior year period due primarily to higher ocean chartering
costs. Average export shipping costs increased 15% over the same period in the
prior year. Total ferrous sales volumes increased by approximately 87,000 tons
or 6%, which represents $15.6 million of the revenue increase over the prior
year nine month period and was primarily due to normal variation in the timing
of when orders are received and ultimately sold.

Sales to the Steel Manufacturing Business increased by 11,000 tons or 2% to
459,000 tons due to increased production as a result of the new furnace
installed in December 2004. Nonferrous revenue increased $12.4 million or 31% to
$52.0 million due to higher average selling prices and higher volumes. The
average net nonferrous selling price in the nine months ended May 31, 2005 was
$0.55 per pound, an increase of $0.07 per pound or 14%. In addition, sales
volume increased 16% to 93.9 million pounds. The increases in average selling
price and volume are related to strong worldwide demand, especially from Asia,
and improved by-product recoveries of nonferrous metals from the ferrous metals
shredding process.

The Auto Parts Business generated revenue of $78.8 million, before intercompany
eliminations, for the nine months ended May 31, 2005, which is an increase of
$20.6 million or 35% over the same period of the prior year. This increase was a result of higher wholesale revenues driven by higher average sales prices for
scrapped autobodies due to rising ferrous recycled metal pricesdebt balances and higher core
sale revenues in both the Company's recently acquired and existing store
locations. In addition, retail revenues increased as a result of the acquisition
of four retail store locations in January 2005.

The Steel Manufacturing Business generated revenues of $228.2 million for the
nine months ended May 31, 2005, which was an increase of $43.1 million, or 23%
overin the same period of the last fiscal year. The average net selling price
increased $151 per ton, or 41% to $519 per ton, which represents a $63.8 million
increase in revenue. The increase in average net selling prices was due to a
combination of factors including increased worldwide steel consumption and
higher raw material costs that manufacturers passed through. However, sales
volumes decreased 12% to 423,000 tons, which reduced revenues by $21.0 million.
The lower sales volumeloan rate during the fiscal 2006 first nine months of fiscal 2005 was primarily
due to abnormally high inventory levels held by fabricators and distributors of
steel during the first half of fiscal 2005. Many of the Company's customers used
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 $78.7 million or
21% for the nine months ended May 31, 2005,quarter compared with the same period last
year. Cost of goods sold decreased as a percentage of revenues from 79% to 72%.
Gross profit increased $79.0 million to $178.7 million during the latest nine
month period compared to the same period in the prior year, driven by profit
margin improvements at the Company's Metals Recycling, Auto Parts and Steel
Manufacturing Business segments.

                                       25

                        SCHNITZER STEEL INDUSTRIES, INC.


Cost of goods sold for the Metals Recycling Business increased $74.1 million or
29% to $333.1 million. As a percentage of revenues, cost of goods sold decreased
compared with the first nine months of fiscal 2004 from 79% to 75%. Gross profit
increased by $46.2 million to $114.1 million. The increase in gross profit was
primarily attributable to higher average net selling prices per ton, a decrease
in cost of goods sold related to inventory adjustments and higher sales volumes.
During the second quarter of fiscal 2005 several piles of ferrous metal
inventory were fully utilized revealing higher inventory volumes than the
Company had previously estimated, resulting in a decrease in cost of goods sold
of $5.4 million for the inventory adjustments. Compared with the first nine
months of last year, the average ferrous metals cost of sales per ton increased
25% 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
the first nine months of last year, so did the cost of unprocessed ferrous
metal.

The Auto Parts Business' cost of goods sold increased $13.7 million or 42% for
the nine months ended May 31, 2005 as compared to the cost of goods sold for the
same period of last fiscal year. The higher cost of sales was primarily due to
higher car purchase costs that resulted from higher scrap metal prices and the
addition of seven new stores since the beginning of last year. As a percentage
of revenues, cost of goods sold increased from 57% to 59% as compared to the
prior year period due to higher car purchase costs and the addition of the seven
new stores since the beginning of last year which earn a lower margin than the
previously owned stores. Gross profit increased $6.9 million or 27% related to
increased wholesale revenue earned from the higher market rates for scrap metals
and the addition of seven new stores since the beginning of last year.

The Steel Manufacturing Business' cost of goods sold increased $21.1 million or
12% to $193.8 million. As a percentage of revenues, cost of goods sold decreased
compared with the first nine months of fiscal 2004 from 93% to 85%. The average
cost of goods sold per ton increased $95 per ton or 28% compared to the prior
year nine month period, which was primarily caused by higher raw material costs
for recycled metal and alloys and the effects of the melt shop shut down in
December 2004. The increase in cost of sales wasquarter. For more than offset by the $151
per ton increase in average net selling price, and gross profit improved by
$22.0 million, to $34.4 million for the nine month period ended May 31, 2005.
The Steel Mill incurred approximately $5.0 million in costs during the second
quarter of fiscal 2005 related to the melt shop shut down and furnace
replacement project in December 2004.

JOINT VENTURES. The Joint Ventures in the metals recycling business
predominantly sell recycled ferrous and nonferrous metals. Revenues for this
segment in the first nine months of fiscal 2005 increased $503.7 million or 43%
compared with the same period last year primarily due to 30% and 39% increases
in average net selling prices per ton for the processing and trading businesses,
respectively, and a 13% increase in the volume of ferrous recycled metal sold,
over the prior year period. The increase in the 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 nine months
of fiscal 2005 increased to $47.8 million from $42.6 million in the first nine
months 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 trading joint venture decreased from $8.0 million in
the first nine months of fiscal 2004 to $6.2 million in the first nine months of
fiscal 2005, a 22% decrease. The Company's share of joint venture operating
income in the first nine months of fiscal 2005 included a charge of $2.6 million
for its share of environmental costs. During the second quarter of fiscal 2005,
in connection with the negotiation of the separation and termination of the
Company's metals recycling Joint Ventures with Hugo Neu Corporation, the Company
conducted an environmental due diligence investigation of certain joint venture
businesses it has now agreed to directly acquire, and identified certain
environmental risks for which estimated remediation costs were accrued.

                                       26

                        SCHNITZER STEEL INDUSTRIES, INC.


On June 9, 2005, the Company announced the signing of an agreement to separate
and terminate its metals recycling joint ventures with Hugo Neu Corporation,
with closing of the transaction expected near the end of fiscal 2005. See Note 9
of Notes to Consolidated Financial Statements for details of the agreement.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Compared with the first nine months
of fiscal 2004, selling, general and administrative expense for the same period
this fiscal year increased $6.6 million or 20%. The increase is a result of
increased headcount of $2.6 million, increased legal and professional fees of
$3.5 million, the vesting of stock options for $1.0 million, and increased
administrative costs of $1.8 million related to new stores in the Auto Parts
Business segment, offset by a $3.2 million decrease in expense for the Company's
bonus program. Approximately $1.4 million of the increased headcount costs are
related to the development of the Auto Parts Business' management infrastructure
to allow growth of this business segment. The increase in legal and professional
fees is the result of approximately $2.5 million incurred related to the
investigation of payment practices in the Far East, as discussed ininformation, see Note 5 to the condensed consolidated financial statements, with an additional $1.0 million
spent on compliance with Sarbanes-Oxley and the use of outside experts to advise
or assist the Company in various projects.statements.
30
SCHNITZER STEEL INDUSTRIES, INC.
Income Tax Provision. The Company's bonus program considers
both operating income and the utilization of operating assets to determine bonus
expense. As a result, the Company's anticipated bonus expense is less than the
prior year. As a percentage of revenues, selling, general and administrative
expense has decreased by 0.7% percentage points, from 6.8% to 6.1% due to
spreading these expenses over higher revenues.

ENVIRONMENTAL MATTERS. During the first nine months of fiscal 2005, the Company
recorded environmental charges of $8.2 million for additional estimated costs
related to the ongoing remediation of the head of the Hylebos Waterway adjacent
to the Company's Tacoma, Washington metals processing facility. An estimate of
this liability was initially recognized as part of the 1995 acquisition of the
Tacoma facility. The cost estimate was based on the assumption that dredge
removal of contaminated sediments would be accomplished within one dredge season
during July 2004 - February 2005. However, due to a variety of factors,
including equipment failures, dredge contractor operational issues and other
dredge related delays, the dredging was not completed during the first dredge
season. As a result, the Company increased its environmental accrual by $8.2
million related to this project primarily to account for additional estimated
costs to complete this work during a second dredging season. The Company has
filed a lawsuit against the dredge contractor to recover a significant portion
of the increased costs. However, generally accepted accounting principles do not
allow the Company to recognize the benefits of any such recovery until receipt
is highly probable.

INTEREST EXPENSE. Interest expensetax rate for the first nine monthsquarter of fiscal 2005
decreased 50%2006 was 41.6%, compared to $0.7 million compared with the first nine months of fiscal
2004. The decrease was a result of lower average debt balances during the first
nine months of fiscal 2005 compared with the same period in fiscal 2004.

INCOME TAX PROVISION. The tax rate of 35.6% for the first nine months of fiscal
2005 was higher than the 30.5%34.8% rate for the same periodquarter last year for two main
reasons. First,year. The rate was higher as a direct result of the Extraterritorial Income Exclusion (ETI)$11.0 million charge associated with the investigation reserve recorded as a result of the DOJ and SEC investigation. At the end of the investigation, the Company will be able to determine the extent of the tax benefit on
export salesdeductible portion if any, of the reserve, which currently is projectedanticipated to decrease. Secondly, last year's tax rate benefitedbe nondeductible. During the first quarter of fiscal 2006, the Company recorded a gain of $54.6 million which arose from the final release of a valuation allowance that had once offset net
operating losses. The 35.6% rate approximatesHNC separation and termination. Based on the 35% Federal statutory rate
because the projected ETI benefits are largely offsetvalues determined by the projected state
income taxes.


LIQUIDITY AND CAPITAL RESOURCES

valuations of the assets and liabilities acquired and assumed, the Company recorded a gain for the difference between the excess values of businesses acquired over the carrying value of the businesses sold. The tax on the gain was recorded using a 38% effective tax rate.

Liquidity and Capital Resources
Cash provided by operations for the ninethree months ended May 31,November 30, 2005 was $67.0$23.2 million, compared with $15.5$17.3 million for the same period in the prior fiscal year. The increase primarily resulted fromwas due to the correspondingreduction in accounts receivable and prepaid expense and other assets, an increase in net
incomeaccrued liabilities and the change in equity accounting for the joint ventures association with the HNC separation and termination agreement, which is offset by a $19.8 million increase in inventory at the Steel
Manufacturing Business. The increase in inventory is a result of higher
inventory prices due to increases in raw material costs and maintaining a higher
quantity on hand to better meet customer demand, balance productiongain on the rolling mills and prepare fordisposition of the expected fourth quarter shut down to replace
the transformer.

                                       27

                        SCHNITZER STEEL INDUSTRIES, INC.


joint ventures.

Capital expenditures for the ninethree months ended May 31,November 30, 2005 were $40.8$15.8 million compared with $17.0$7.5 million during the first ninethree months of fiscal 2004. On May
11, 2005, the Company purchased its Portland metals recycling facility for $20.0
million; the facility was formerly leased by the Company for $1.8 million per
year (see additional discussion in Note 6 of Notes to Consolidated Financial
Statements).2005. The increase in capital expenditures was also due to capital improvement projects at the Company'sCompany’s Portland, Oregon recycling facility related to dock repairs and preparation for the installation of a mega-shredder, as well as other operational improvements at the Oakland and Sacramento, California recycling facilityfacilities and the furnace installationa number of store remodels and equipment upgrades at the Company's steel mill.Auto Parts Business locations. The Company expects to spend up to $20approximately $75 million on capital improvement projects during the remainder of fiscal 2005.

2006. Additionally, the Company continues to explore other capital projects that will provide productivity improvements and add shareholder value.

As a result of the Regional and GreenLeaf acquisitions the Company entered into during the first fiscal quarter of 2006, the Company had higher borrowings under the credit facility of $78.2 million. In addition, these transactions resulted in investments in acquisitions, net of cash acquired of $85.6 million.

Accrued environmental liabilities as of MayNovember 30, 2005 were $45.4 million, which increased since August 31, 2005 by $21.9 million due to the acquisitions discussed in Note 3 and were $21.8 million. Overpartially offset by spending charged against the environmental reserve. During the next 12 months, the Company expects to pay approximately $6.2$6.9 million relating to previously accrued remediation projects, including the remediation on the Hylebos Waterway located in the State of Washington as discussed in Note 4 to the condensed consolidated condensed financial statements. 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 May 31,

On November 8, 2005, the Company had aentered into an amended and restated unsecured committed unsecured bank credit facility
totalingagreement with Bank of America, N.A., as administrative agent, and the other lenders party thereto. The new agreement provides for a five-year, $400 million revolving loan maturing in November 2010. The agreement prior to restatement provided for a $150 million that maturesrevolving loan maturing in May 2006. TheInterest on outstanding indebtedness under the restated agreement is based, at the Company’s option, on either LIBOR plus a spread of between 0.625% and 1.25%, with the amount of the spread based on a pricing grid tied to the Company’s leverage ratio, or the greater of the prime rate or the federal funds rate plus 0.50%. In addition, annual commitment fees are payable on the unused portion of the credit facility containsat rates between 0.15% and 0.25% based on 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 agreedpricing grid tied to the request.Company’s leverage ratio. The extension is subject to the Company providing
standardrestated agreement contains various representations and warranties, asevents of the May 2006 original maturity
date. The Company currently anticipates it will be able to provide the required
representationsdefault and warrantiesfinancial and the agreement will be extended.other covenants, including covenants requiring maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. The Company also has an additional unsecured credit linesline totaling $20$10 million, which areis uncommitted. The Company'sThis additional debt agreements haveagreement also has certain restrictive covenants. As of May 31,November 30, 2005, the Company had aggregate bank borrowings outstanding under theseits credit facilities of $7.7$86 million and was in compliance with such covenants.

covenants, representations and warranties.
31
SCHNITZER STEEL INDUSTRIES, INC.

In July 2002, the Company'sCompany’s metals recycling joint ventures with Hugo Neu
CorporationHNC 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 July 31, 2005 and is secured by the inventory and
receivables of the joint venture businesses. The joint venture has requested an
extension of the maturity date of the facility until December 31, 2005, but at
this time the extension has not been granted. 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 May 31, 2005. As of May 31, 2005, $47.9 million was outstanding under the JV
Credit Facility, compared to no borrowings at August 31, 2004. The increase in
borrowings outstanding since August 31, 2004 was primarily the result of
increases in inventory and accounts receivable related to the timing of
purchases and sales of inventory.



Upon the closing of the agreement for the separation and termination of the Company'sCompany’s joint ventures with Hugo Neu Corporation (HNC)HNC on September 30, 2005, as described in Note 93 of Notes to Consolidated Financial Statements,the condensed consolidated financial statements, HNC will paypaid the Company approximately $52$52.3 million in cash. In addition, the agreement provides that each
joint venture will make a final cash distribution equally to the two partners in
an amount equal to the net incomeThe Company also received approximately $1.4 million for previously undistributed earnings of the joint venture forventures net of the period from
September 1, 2004 through the closing date, less any distributionsCompany’s share of such
income made prior to the closing (of which the Company had received $23.3
million as of May 31, 2005). If necessary, cash to fund these distributions may
be borrowedoutstanding borrowings under the JV Credit Facility.Facility as of that date. Following such earnings distributions, the Company and HNC shall each bewere obligated to repay the portion of the JV Credit Facility borrowed on behalf of the joint venture businesses it acquired in the transaction. 28

                        SCHNITZER STEEL INDUSTRIES, INC.


The outstanding balance was paid off and the JV Credit Facility was terminated and repaid upon closing of the separation and termination agreement on September 30, 2005.

On September 30, 2005, the Company acquired GreenLeaf, five store properties leased by GreenLeaf and certain GreenLeaf debt obligations. Total consideration for the acquisition was $44.7 million, subject to post-closing adjustments.

On October 31, 2005, the Company acquired substantially all of the assets of Regional, a metal recycling business with ten facilities located in Georgia and Alabama. The purchase price was $65.5 million in cash and the assumption of certain liabilities.

The increase in borrowings outstanding since August 31, 2005 was primarily the result of the acquisitions that occurred in the first quarter of fiscal 2006.

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, actuarial valuations and negotiated labor agreements. The Company anticipates making contributions of approximately $6.0$5.0 million to the various pensionbenefit plans in fiscal 2005.2006.

Management evaluates long and short range forecasts as well as anticipated sources and uses of cash before determining the course of action that would best enhance shareholder value. During fiscal 2004 and 2005, the Company made significant investments in capital equipment and completed several acquisitions to both grow the business and enhance shareholder value. The Company is currently engaged in a growth strategy to enhance shareholder value. Pursuant to a stock repurchase program approved in 1996, the Company is authorized to repurchase up to 3.0 million shares of its stock when the market price of the Company'sCompany’s stock is not reflective of management'smanagement’s opinion of an appropriate valuation of the stock. Management evaluates long and short range
forecasts as well as anticipated sources and uses of cash before determining the
course of action that would best enhance shareholder value. As a result, during
fiscal 2004 and 2005, the Company has made significant investments in capital
equipment and has completed several acquisitions to both grow the business and
enhance shareholder value. The Company is currently engaged in a growth strategy
to enhance shareholder value. During the first ninethree months of fiscal 2005,2006, the Company made no share repurchases. As of May 31,November 30, 2005, 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.

Recycled metal markets continue to experience significant price volatility;
however, consumption remains strong. Over
32
SCHNITZER STEEL INDUSTRIES, INC.
Outlook

The company said the last 60 days, market selling
prices for ferrous metal declined, but recent export market activity has shown
evidencefactors that prices may have firmed and even risen modestly on some individual
sales. The Company's wholly-owned will affect its results in the second quarter of 2006 include:

Metals Recycling Business traditionally takes
ferrous

Pricing: The uncertainty in the Asian export markets that was experienced beginning in the second half of last year and into the first quarter of 2006 is expected to continue through the second quarter. Domestic markets are expected to remain stronger than export markets. Sales orders 60 to 90 days aheadcompleted in the early part of shipment,the second quarter would indicate an average price per ton of between $185 and $195.

The Company has seen recent evidence of declines in scrap acquisition costs which may provide
management withare greater than the ability to adjust its buyingdeclines in export sales prices, to minimizeproviding the potential for improved margins.

The Russian and Baltic region trading business generally purchases inventory in advance of making sales, has a lower overall margin impact ofon sales than the domestic metals processing business and thus can be impacted by small changes in selling prices. Ocean freight rates have declined sharply
in recent weeks, which partially mitigatesprice between the reduction in ferrous selling
prices. Based upontime of purchase and sale. During the wholly-owned Metals Recycling Businesses'second quarter, the trading business is expected to sell inventory that is valued higher than the current order
backlog, contracted average net selling prices thatmarket price. As a result, margins related to these sales are anticipatedexpected to be shippednegative, absent strengthening of the market.

Sales volumes: Ferrous scrap volumes in the fourth fiscal quarter of 2005 will be lower than the $230 per ton
average reporteddomestic processing business are expected to rebound in the thirdsecond quarter, of fiscal 2005, but should remain above
the $199 per ton reported in last year's fourth fiscal quarter. Fourth quarter
2005 sales volumes are anticipated to be below the fiscal 2005 quarterly run
rate, but total fiscal 2005 sales volume should approximate last year's level.
The lower fourth quarter sales volumes areprimarily due in part to the timing of export shipping dates and lower fourthorders. For the second quarter, inventory levels. The cost of
unprocessed ferrous metal also remains very competitive and volatile.

Joint venturesvolumes shipped from the Company’s domestic yards should increase from approximately 660,000 tons in the metals recyclingfirst quarter to between 800,000 and 850,000 tons.

Sales volumes in the Russian and Baltic region trading business are expected to experience
similardecline approximately 40% from the first quarter to 175,000 tons. In addition to the impact of normal seasonable winter shipping conditions, lower market trends asprices for scrap metal has significantly reduced the Company's wholly-owned Metals Recycling Business;
however, their financial results will vary depending on a numberavailability of factors
including geographic locations, competitionprocessed metal available for purchase from Russia and available inventory.


                                       29

                        SCHNITZER STEEL INDUSTRIES, INC.


Thethe Baltic region.

For the year, the Company expects sales volumes to be approximately 3.5 million tons in the domestic processing business and 1.0 million tons in the Russian and Baltic region trading business.

Auto Parts Business

Retail demand in the self-service Auto Parts Business generally experiences modestis affected by seasonal declines in retail
demandchanges, with inclement winter weather in the summer months duesecond quarter expected to hot weather conditions reducingdepress customer admissions. Wholesaletraffic and result in lower revenues are anticipated to have mixed results duringwhen compared with the fiscal 2005 fourth quarter; core sales volumes and pricing should remain strong,
but prices for crushed auto bodiesfirst quarter. For the second quarter, margins are expected to be affected by lower thanselling prices for scrapped cars and a high cost basis of cars sold from existing inventory compared to the prices
realizedsecond quarter of 2005.

The integration of GreenLeaf’s operations is expected to result in the conversion of one full-service location to a self-service store toward the end of the second quarter. The GreenLeaf operation is expected to post a modest loss during the third quarter of fiscal 2005 due to the recent decline in
ferrous metal selling prices. Over the last few quarters the business has
incurred increasing costs to procure automobile inventories due to rising
ferrous metal prices. In recent weeks, the business has reduced its prices paid
to procure inventory and is anticipated to continue to do so through the balance
of the fourth quarter. However, fourth quarter margins are anticipated to be
affected as the higher priced inventory is sold and replaced by lower cost
automobiles.


33
SCHNITZER STEEL INDUSTRIES, INC.
Steel Manufacturing Business

Pricing: West Coast consumption of finished steel long products remains strong. The Steel
Manufacturing Business continues to experience good overall demand. In May 2005remain strong, and the Company announced a $30 per ton price decreaseis seeing good demand for rebar and merchant bar
products, which was in reaction to declines by other domestic competitors. Also,
in early July,bar. Based on current market conditions, the Company announced a similar decreaseexpects average prices for wire rod products.
The announced price decreases are anticipatedthe second quarter to be slightly higher than both the first quarter of this year and the second quarter of last year. Higher prices on the West Coast relative to other markets could, however, result in an increase of foreign imports, putting downward pressure on pricing.

Volumes: The Company typically sees a modest declinereduction in fourthsecond quarter average selling prices as comparedsales volumes due to the third quarterimpact of fiscal
2005winter weather on construction projects. However, this year customer inventories remain low and the fourthCompany expects demand to remain good through the quarter. As a result, second quarter of fiscal 2004. The reduction in average selling
prices is anticipated to be partially mitigated by declines in ferrous metal
purchase prices. Fourth quarter 2005 sales volumes should approximate 155,000
tons, which should approximate the estimated volume of steel producedbe significantly higher than during the period.

The Company's effective fourthsecond quarter tax rate should approximate 36%.

FACTORS THAT COULD AFFECT FUTURE RESULTS. Management'sof 2005, but lower than the volumes in the first quarter of this year.

Factors That Could Affect Future Results

This Form 10-Q, including Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,Operations”, and including, particularly, the "Outlook" above,section, contains forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, thatwhich are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. OneThese forward-looking statements include, without limitation, statements regarding the Company's outlook for the business, and can be identified generally identify these forward-looking statements because they contain "expect", "believe" "anticipate","expect," "believe," "anticipate," "estimate" and other words whichthat convey a similar meaning. One can also identify these statements as theystatements that do not relate strictly to historical or current facts. Examples of factors affecting Schnitzer Steel Industries, Inc.'s consolidated operationsthe Company that could cause actual results to differ materially from current expectations are the following: volatile supply and itsdemand conditions affecting prices and volumes in the markets for both the Company's products and raw materials it purchases; world economic conditions; world political conditions; changes in federal and state income tax laws; impact of pending or new laws and regulations regarding imports and exports into the United States and other foreign countries; foreign currency fluctuations; competition; seasonality, including weather; energy supplies; freight rates; loss of key personnel; the inability to complete expected large scrap export shipments in the current quarter; consequences of the pending investigation by the Company's audit committee into past payment practices in Asia; business integration issues relating to acquisitions of businesses and the separation of the joint ventures (the Company)venture business described above; and business disruptions resulting from installation or replacement of major capital assets, as discussed in more detail under the heading "Factors That Could Affect Future Results" in the Company's most recent annual report on Form 10-K or quarterly report on Form 10-Q. One should understand that 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. The Company does not assume any obligation to update any forward-looking statement.

Examples of factors affecting 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'sCompany’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'sCompany’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'sCompany’s accounts receivable balances. Moreover, increases in recycled metals selling prices can adversely affect the operating results of the Company'sCompany’s Steel Manufacturing Business because increases in steel prices generally lag increases in ferrous recycled metals prices.
34
SCHNITZER STEEL INDUSTRIES, INC.
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.

                                       30

                        SCHNITZER STEEL INDUSTRIES, INC.




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'sCompany’s finished steel products. In addition,
weatherWeather and economic conditions nin the United States and abroad can also cause fluctuations in revenue and net income.

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'sCompany’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'sCompany’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.).

As a percentage of revenue, the Auto Parts Business’ wholesale sales, including sales of auto bodies as well as cores, such as engines, transmissions, alternators and other nonferrous metals, have continued to grow in the past few years. Due to the nature of the wholesale business, which is more closely tied to the prices for recycled metals, the Auto Parts Business’ results are increasingly subject to the volatility in the global recycled metals market more than they had been historically.

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; increasing competition; changes in automotive technology; the ultimate success of the Company'sCompany’s growth and acquisition plans; ability to build the infrastructure to support the Company'sCompany’s growth plans; and integration issues of the full-service business integrationmodel.

Backlog:  Historically, the Company has generally entered into export ferrous sales contract by selling forward 60 to 90 days. The backlog of sales contracts, coupled with knowledge of the price at which the processed material will be sold and management
transition issues.

the costs involved in processing the metals, allows the Company to take advantage of this differential in timing between purchases and sales and negotiate prices with suppliers that secure profitable sales transactions. As the difference in timing between the date the sales contracts are executed and the date of shipment grows shorter, it reduces the ability to manage the purchase price of raw material against the future sales price. The timing of forward contracts may impact the Company’s revenue on a quarter-to-quarter basis as well as profitability on export shipments of ferrous metals.
35
SCHNITZER STEEL INDUSTRIES, INC.
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 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'sCompany’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'sCompany’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 the second quarter of fiscal 2005, the Company received a certificate from China that allows the Company to continue shipping recycled metals into China. The certificate is part of a process designed 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'sCompany’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'sCompany’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.

                                       31

                        SCHNITZER STEEL INDUSTRIES, INC.




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 mills 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 more traditional 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 one or 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.multiple locations. As this segment expands, the Company may experience new competition from others attempting to replicate the Company'sCompany’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. However, there are other countries that import wire rod products where the imports are not subject to duties. 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. The Company has experienced increased competition for certain products by foreign importers during fiscal 2005.2005 and 2006. The Company believes that the rise in import levels is attributable to the increase in selling prices in the West Coast market, which potentially allow the import sales to be more profitable to the foreign companies.
36
SCHNITZER STEEL INDUSTRIES, INC.
The steel manufacturing industry has been consolidating over the last several years and as a result several west coastone West Coast manufacturing facilities havefacility has been closed and remainremains idle. Any future start-up of operations of the currently idle facilities could negatively impact the Company'sCompany’s recycled metal and finished steel markets, prices, margins and potentially, cash flow.

In general, given the unprecedented profitability levels of the Company and other recycled metals and steel companies over the last two years, competitors may be attracted to the Company’s markets, which may adversely affect the Company’s ability to protect its profit margins.

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.Business.  Over the last few years, a significant portion of the revenues and operating profits earned in these segments haveby this business has been generated from sales to Asian countries, principally China and South Korea.  In addition, the Company'sCompany’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 ofThe Company’s sales in these countries andhave expanded to a relatively small
customer base,broader geographic area with recent business acquisitions. As always, 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: 
Pending Investigation: As discussed in Part II, Item 1 "Legal Proceedings"
in this Form 10-Q,“Legal Proceedings” and Note 4 to the Company recently terminated itsconsolidated financial statements, the Board of Directors authorized the Audit Committee to engage independent counsel and conduct a thorough, independent investigation of the Company’s past practice of paying
commissionsmaking improper payments to the purchasing managers of customers in Asia in connection with export sales of recycled ferrous metalsmetals. The Board of Directors also authorized and directed that the existence and the results of the investigation be voluntarily reported to the Far East. TerminationU.S. Department of this practice
could putJustice (DOJ) and the Securities and Exchange Commission (SEC), and that the Company atcooperate fully with those agencies. The Audit Committee notified the DOJ and the SEC of the independent investigation, engaged outside counsel to assist in the independent investigation and instructed outside counsel to fully cooperate with the DOJ and the SEC and to provide those agencies with the information obtained as a competitive disadvantageresult of the independent investigation. On August 23, 2005, the Company received from the SEC a formal order of investigation related to the independent investigation. The Audit Committee is continuing its independent investigation. The Company, including the Audit Committee, continues to cooperate fully with the DOJ and could have a negative
impact onthe SEC. The investigations of the Audit Committee, the DOJ and the SEC of the Company’s past practice of making improper payments are not expected to affect the Company's ferrous metal sales volumespreviously reported financial results. However, the Company expects to enter into agreements with the DOJ and prices. In addition,
terminationthe SEC to resolve the above-referenced matters and believes that it is probable that DOJ and the SEC will impose penalties on, and require disgorgement of this practice could havecertain profits by, the Company as a greater impact under weaker ferrous
metal market conditions.result of their investigations.  The Company isestimates that the total amount of these penalties and disgorgement will be within a range of $11 million to $15 million. In the first fiscal quarter of 2006, the Company established a reserve totaling $11 million in connection with this estimate. The precise terms of any agreements to be enterd into with the DOJ and the SEC, however, remain under discussion with these two agencies. The Company, therefore, unable to determinecannot predict with certainty the final outcome of the aforementioned investigations or whether the terminationCompany or any of this practiceits employees will have an adverse effect on its customer
relationships or business.

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                        SCHNITZER STEEL INDUSTRIES, INC.


be subject to any additional remedial actions following completion of these investigations. It is also possible that these investigations could lead to criminal charges, civil enforcement proceedings and civil lawsuits.
Union Contracts: The Company has a number of union contracts, that expire in
fiscal year 2005. Laborseveral of which were recently re-negotiated, including the contract negotiations opened duringcovering the second quarter
of fiscal 2005 with the union at theCompany’s Steel Manufacturing Business. If the Company is unable to reach agreement on the terms of a new contractcontracts with any of theseits unions during future negotiations, the Company could be subject to work slowdowns or work stoppages.
37
SCHNITZER STEEL INDUSTRIES, INC.
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'sCompany’s contributions to the defined benefit and SERBP plans are based upondetermined by 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'sCompany’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'sCompany’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 fiscal 2004 that one of the multiemployer plans of the Steel Manufacturing Business would not meet ERISAEmployee Retirement Income Security Act of 1974 minimum funding standards for the plan year ending September 30, 2004. The trustees of that plan have applied to the Internal Revenue Service (IRS) for certain relief from this minimum funding standard. The IRS has tentatively responded, indicating a willingness to consider granting the relief, will be granted, provided the plan'splan’s contributing employers, including the Company, agree to increased contributions. The increased contributions are estimated to average 6% per year, compounded annually, until the plan reaches the fundedfunding status required by the IRS. These increases would be based on the Company'sCompany’s current contribution level to the plan of approximately $2.2$1.7 million per year. TheBased on commitments from the majority of employers participating in the Plan to make the increased contributions, the Plan Trustees have provided
information toproceeded with the plan's contributing employers regarding the IRS proposed
contribution rate increasesrelief request, and are awaiting a commitmentformal approval from the employers
before proceeding with the relief request.

IRS.

Absent relief by the IRS, the plan'splan’s contributing employers will be required to make additional contributions or pay excise tax that may equal or exceed the full amount of thatthe funding deficiency. The Company estimated its share of the required additional contribution for the 2004 plan year to be approximately $1.1 million and accrued for such amount in fiscal 2004. Future funding deficiency assessments against the Company are possible until the multiemployer plan obtains a waiver from the IRS or the plan reaches the minimum funded status level required by the IRS.

Joint Ventures

Recently Acquired Businesses and Separation of HNC: The Company has significant investmentsFuture Business Acquisitions: As discussed 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,Note 3 - Business Combinations, the Company does not have
the same ability to control or predict the operations, cash 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. The Company has disputed
HNC's recent unilateral assertion of a right to be paid certain commissions on
sales by the joint venture engaged in global trading of recycled metals, as
described in more detail in Note 5 of Notes to Consolidated Financial
Statements.

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                        SCHNITZER STEEL INDUSTRIES, INC.


On June 9, 2005, the Company announced the signing of an agreementrecently completed transactions to separate and terminate its metals recycling joint venturesventure relationships with HNC with closing of the transaction
expected near the end of fiscal 2005. See Note 9 of Notes to Condensed
Consolidated Financial Statements for details of the agreement. Closing of the
transaction is subject to a number of conditions, including obtaining certain
third party consents, permit amendments or transfers, and HNC obtaining required
financing. There can be no assurance that all conditions will be satisfied or
waived and the transaction closed.

The Company and HNC principally used historical earnings before interest and
taxes (EBIT) trends to arrive at an equitable separation of the various joint
venture assets. Since the second quarter of fiscal 2005, the businesses which
the Company is receiving have experienced challenging conditions that adversely
affected the financial results compared to historical EBIT trends and to the
businesses to be received by HNC. Management believes historical EBIT trends
used to separate the assets are good indicators of relative value, but
management is unable to predict the future performance of these businesses.

The Company depends on the effortspurchase Regional and abilities of its senior management and
other key employees.GreenLeaf. With the anticipated separation of the joint ventures, with
HNC, the Company will be acquiringacquired direct ownership of metals recycling businesses in New England and Hawaii and a metals trading business in parts Russia and the Baltic Sea region, theregion. The day-to-day operations of which are currentlythese businesses were overseen by HNC.HNC prior to the separation. The Company will depend on key employees of those businesses, particularly those involved in the metals trading operations, becoming employed
by the Company and providing for the continuity of those businesses. As well, the Company will be hiring additional key employees to help manage those businesses. Loss of or failure to hire key personnel or other transition issues could adversely affect the Company.

The joint venture

Additionally, given the significance of these recently acquired businesses are affected by manyrelative to the size of the same risk factors
mentioned in this document. Additionally, twoCompany, integration of these joint venturesbusinesses will be challenging. Any failure to adequately integrate these businesses may result in adverse impacts on the Company’s profitability.

Throughout the Company’s history, it has made a number of acquisitions as management attempts to improve the value of the Company for its shareholders. It is anticipated that the Company will continue to use LIFO inventory accounting, which tends to defer income taxes.
Historically,pursue additional expansion of the effects of LIFO adjustments, which are recorded during the
fourth quarter of each fiscal year, have beenMetals Recycling Business and Auto Parts Business. Each acquisition comes with its own inherent risks that make it difficult to predict.

predict the ultimate success of the transaction. An acquisition may have a negative and/or unexpected impact on the Company’s cash flow, operating income, net income, earnings per share and financial position.
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SCHNITZER STEEL INDUSTRIES, INC.
Trading Business Risks: Schnitzer Global Exchange (SGE), the Company’s trading entity acquired in September 2005, has various risks associated with its business operations. SGE operates in foreign countries with varying degrees of political risk. It advances and occasionally loans money to suppliers for the delivery of materials at a later date. Credit is also periodically extended to foreign steel mills. Due to the nature of the business, profit margins are thinner than for the Company’s processing business; thus, unsold inventory may be more susceptible to losses. In addition, inventory is generally purchased in advance of sale, and the Company has a lesser ability to manage the risk against adverse movements than in its domestic processing business. Also, the trading business has lower barriers to entry, making the Company potentially more susceptible to competition than in its processing business.

Replacement or Installation of Capital Equipment: The Company and its joint
venture partners installinstalls new equipment and constructconstructs facilities or overhauloverhauls 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 higherhigh 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. Additionally, it may also result in the building of inventory levels. If market conditions then occur which result in lower selling prices, the Company’s profit margins may be adversely impacted. In either case, the Company'sCompany’s ability to reasonably predict financial results may be hampered.

Reliance on Key Pieces of Equipment: The Company and its joint venture partners
relyrelies on key pieces of equipment in the various manufacturing processes. Key items include the shredders and ship loading facilities at the metals recycling locations and the transformer, furnace, melt shop and rolling mills at the Company'sCompany’s steel manufacturing business, including the electrical power and natural gas supply into all of ourthe Company’s locations. If one of these key pieces of equipment were to have a mechanical failure and the Company were unable to correct the failure, revenues and operating income may be adversely impacted. Where practical, the Company has taken steps to reduce these risks such as maintaining a supply of spare parts, performing a regular preventative maintenance program and maintaining a well trained maintenance team that is capable of making most of the Company'sCompany’s repairs.


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                        SCHNITZER STEEL INDUSTRIES, INC.




Energy Supply: The Company and its joint ventures utilizeutilizes various energy sources to operate theirits facilities. In particular, electricity and natural gas currently represent approximately 8%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'sCompany’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 contractthat expires on May 31, 2009 and obligates the business to purchase minimum amounts of gas at a fixed rate.rates, which adjust periodically. Effective November 1, 2004,2005, the natural gas rate was reducedincreased to $4.39$6.90 per MMBTU. This is a take or pay contract with a 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.

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SCHNITZER STEEL INDUSTRIES, INC.
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.

Environmental Matters: The Company records accruals for estimated environmental remediation claims. A loss contingency is accrued when the Company'sCompany’s assessment indicates that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. The Company'sCompany’s estimates are based upon currently available facts and presently enacted laws and regulations. These estimated liabilities are subject to revision in future periods based on actual costs, new information or changes in laws and regulations.

Tax Laws: The Company'sCompany’s tax rate the last three years has benefited from state income tax credits, from the federal Extraterritorial Income Exclusion (ETI) on export sales, and from the final releases of a valuation allowance oncepreviously offsetting the net operating losses and minimum tax credit carryforwards that had accompanied a 1996 business acquisition. The Company's present andCompany’s future tax rates will likely benefit only from the first of these three factors becauseETI, although the recently-enacted American Jobs Creation Act of 2004 (the Act) eliminatedwill gradually eliminate the ETI benefit and because there is
no further valuation allowance to release.benefit. Compensating for the Company'sCompany’s loss of ETI benefit will be the new deduction under the Act for Qualified Production Activities Income, but the effect of this new deduction on the Company'sCompany’s effective tax rate will not be determinable until the newly issued final regulations explaining it are issued. Currently, aexamined by the Company. The Company will also likely continue to benefit from trade tax rate between 34% and 37% is projected for fiscal
2005.

credits.

Currency Fluctuations: Demand from the Company'sCompany’s foreign customers is partially driven by foreign currency fluctuations relative to the U.S. dollar. Strengthening of the U.S. dollar could adversely affect the competitiveness of the Company'sCompany’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'sCompany’s revenues and earnings. The Company conducts most transactions in U.S. dollars.

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 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.


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                        SCHNITZER STEEL INDUSTRIES, INC.




The Steel Manufacturing Business relies on the availability of rail cars to transport finished goods to customers and raw materials to the mill for use in the production process. Market demand for rail cars along the west coast has been very high which has reduced the number of rail cars available to the Steel Manufacturing Business to transport finished goods. In addition, the Steel Manufacturing Business utilizes rail cars to provide an inexpensive form of transportation for delivering scrap metal to the mill for production. Although the Company expects to be able to maintain an adequate supply of scrap metal, a larger portion of those materials are anticipated to be delivered using trucks. The Company anticipates this change in delivery may lead to increased raw material costs.

The Metals Recycling Business relies on the availability of cargo ships to transport their ferrous and non ferrous bulk exports to Asian and other overseas markets. Demand for ocean going vessels has been strong, which has reduced the number of ships available to the Metals Recycling Business to transport product to markets. Although the Company anticipates that it will continue to find available vessels in a timely manner, the tight supply of ships could cause delays in meeting delivery schedules if vessels are not available.
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SCHNITZER STEEL INDUSTRIES, INC.
The Company’s Providence, Rhode Island facility, acquired in conjunction with the separation and termination of its metals recycling joint ventures with HNC, as discussed in Part I, Item II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Acquisitions and Transactions” and Note 3 to the condensed consolidated financial statements, is leased from the Port of Providence. A long-term lease of this facility expired several years ago. The parties are finalizing the terms for a long-term lease of the facility. If the new lease is not finalized and the Company fails to secure another similar facility, the Company’s ability to ship recycled metals cost-effectively from this region would be significantly impacted.

Insurance: The cost of the Company'sCompany’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 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'sCompany’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.



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                        SCHNITZER STEEL INDUSTRIES, INC.





ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company periodically uses derivative financial instruments to limit exposure to changes in interest and foreign currency 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"“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.



2005.


ITEM 4.    CONTROLS AND PROCEDURES

Schnitzer Steel Industries, Inc.

Disclosure Controls and Procedures
During the fiscal period covered by this report, the Company’s management, under supervisionwith the participation 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 May 31, 2005, with the
participation of the Chief Executive Officer and the Chief Financial Officer,
management completed an evaluation of the Company'seffectiveness of the design and operation of the Company’s disclosure controls and procedures.procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, the Company'sCompany’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the fiscal period covered by this report, the disclosure controls and procedures as of May 31, 2005 arewere effective to ensure that all material
information relatingrequired to Schnitzer Steel Industries, Inc.be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and its subsidiaries is
made known to them by othersreported within the organizationtime periods specified by the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
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SCHNITZER STEEL INDUSTRIES, INC.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company'sCompany’s internal control over financial reporting during the third fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company's Audit Committee may, as a result of its investigationthe investigations into Far
East payment practicesthe past practice of making improper payments to customers in Asia discussed in Part II, Item 1, immediately below,“Legal Proceedings” and Note 4 to the consolidated financial statements, recommend improvements to certain aspects of the Company's internal control over financial reporting and/or disclosure controls and procedures related to Far East
transactions.











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                        SCHNITZER STEEL INDUSTRIES, INC.


                                     transactions in Asia.




PART II

ITEM 1.    LEGAL PROCEEDINGS

The Company was advised in 2004 that itshad a past practice of paying commissionsmaking improper payments to the purchasing managers of customers in Asia in connection with export sales of recycled ferrous metals to the Far East may raisemetals. The Company stopped this practice after it was advised in 2004 that it raised questions of possible violations of U.S. and foreign laws, and the practice was stopped.laws. 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 investigationinvestigation. The Board of Directors also authorized and directed that the existence and the results of the investigation be voluntarily reported to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), and that the Company cooperate fully with those agencies. The Board, through its Audit Committee is continuing its independent investigation, which is being conducted
by an outside law firm. The Company has notified the DOJ and the SEC of the investigation; hasindependent investigation, engaged outside counsel to assist in the independent investigation and instructed outside counsel to fully cooperate with the outside law firmDOJ and the SEC and to provide those agencies with the information obtained as a result of the investigation; andindependent investigation. On August 23, 2005, the Company received from the SEC a formal order of investigation related to the independent investigation. The Audit Committee is cooperatingcontinuing its independent investigation. The Company, including the Audit Committee, continues to cooperate fully with those agencies.the DOJ and the SEC. The investigation isinvestigations of the Audit Committee, the DOJ and the SEC are not expected to affect the Company's previously reported financial results, including those
reported in this 10-Q.results. However, the Company expects to enter into agreements with the DOJ and the SEC to resolve the above-referenced matters and believes that it is probable that the SEC and DOJ will impose penalties on, and require disgorgement of certain profits by, the Company as a result of their investigations.  The Company estimates that the total amount of these penalties and disgorgement will be within a range of $11 million to $15 million. In the first fiscal quarter of 2006, the Company established a reserve totaling $11 million in connection with the penalties this estimate. The precise terms of any agreements to be entered into with the DOJ and the SEC, however, remain under discussion with these two agencies. The Company, therefore, cannot predict with certainty the resultsfinal outcome of the investigationaforementioned investigations or whether the Company or any of its employees will be subject to any penalties or otheradditional remedial actions following completion of the
investigation.



ITEM 6.    EXHIBITS

           3.2    Restated Bylaws of the Company.

           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.




                                       38
these investigations.
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SCHNITZER STEEL INDUSTRIES, INC.
ITEM 6.    EXHIBITS

3.11993 Restated Articles of Incorporation f the Registrant. Incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1. Registration No. 33.69352 (the Form S-1).

3.2Restated Bylaws of the Registrant. Filed as Exhibit 3.2 to Registrant’s Form 10-Q for the quarter ended May 31, 2005, and incorporated herein by reference.

10.1Amendment No. 1 to Lease, 3200 Yeon

10.2Amendment No. 2 to Yeon Business Center Lease Agreement, 3200 Yeon

10.3Amendment No. 1 to Lease, 3330 Yeon

10.4Amendment to Yeon Business Center Lease Agreement, 3330 Yeon

10.5Non-Employee Director Compensation Summary

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

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

32.1Certification 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.

32.2Certification 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.
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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:  July 6, 2005                    By: /s/ Kelly E. Lang
      --------------                       ------------------------------
                                           Kelly E. Lang
                                           Acting Chief Financial Officer





















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SCHNITZER STEEL INDUSTRIES, INC.
(Registrant)



Date: January 9, 2006By:  /s/ John D. Carter
John D. Carter
Chief Executive Officer 



Date: January 9, 2006By:  /s/ Gregory J. Witherspoon
Gregory J. Witherspoon
Chief Financial Officer 

44