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


                                    FORM 10-K


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the fiscal year ended August 31, 2004

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934.

     For the transition period from _____________ to _____________


                         Commission File Number 0-22496


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

    OREGON                                                        93-0341923
- --------------                                               -------------------
  (State of                                                   (I.R.S. Employer
Incorporation)                                               Identification No.)


  3200 N.W. YEON AVE., P.O. BOX 10047
            PORTLAND, OR                                         97296-0047
- ----------------------------------------                     -------------------
(Address of principal executive offices)                          (Zip Code)


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

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                       Class A Common Stock, $1 par value
                       ----------------------------------
                                (Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

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

The aggregate market value of the registrant's voting common stock outstanding
held by non-affiliates on February 29, 2004 was $606,285,000.

The Registrant had 22,073,373 shares of Class A Common Stock, par value of $1.00
per share, and 8,272,866 shares of Class B Common Stock, par value of $1.00 per
share, outstanding at November 1, 2004.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the 2005 Annual
Meeting of Shareholders are incorporated herein by reference in Part III.

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                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

                                TABLE OF CONTENTS
PART  ITEM                                                                  PAGE

  I   1.    BUSINESS...........................................................3
              Overview.........................................................3
              Business Strategy................................................4
              Metals Recycling Business........................................6
              Auto Parts Business.............................................10
              Steel Manufacturing Business....................................11
              Environmental Matters...........................................14
              Employees.......................................................17
              Available Information...........................................17
      2.    PROPERTIES........................................................18
      3.    LEGAL PROCEEDINGS.................................................19
      4.    SUBMISSION OF MATTERS TO A VOTE
              OF SECURITY HOLDERS.............................................19
      4(a). EXECUTIVE OFFICERS OF THE REGISTRANT..............................19

 II   5.    MARKET FOR REGISTRANT'S COMMON EQUITY,
              RELATED STOCKHOLDER MATTERS AND ISSUER
              PURCHASES OF EQUITY SECURITIES..................................21
      6.    SELECTED FINANCIAL DATA...........................................22
      7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS.............................23
      7A    QUANTITATIVE AND QUALITATIVE DISCLOSURES
              ABOUT MARKET RISK...............................................39
      8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................40
      9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
              ON ACCOUNTING AND FINANCIAL DISCLOSURE..........................72
      9A    CONTROLS AND PROCEDURES...........................................72
      9B    OTHER INFORMATION.................................................72

III   10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE
              REGISTRANT......................................................73
      11.   EXECUTIVE COMPENSATION............................................73
      12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT AND RELATED STOCKHOLDER MATTERS......................73
      13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................73
      14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES............................73

 IV   15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES........................74

                                       2


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

                                     PART I
ITEM 1.     BUSINESS

OVERVIEW
- --------

Schnitzer Steel Industries, Inc. (the Company) operates in three vertically
integrated business segments that include the wholly-owned and joint venture
metals recycling businesses, the Auto Parts Business and the Steel Manufacturing
Business. The wholly-owned Metals Recycling Business and certain joint venture
businesses collect, process and recycle metals by operating one of the largest
metals recycling businesses in the United States. The Auto Parts Business
operates as Pick-N-Pull in the United States and as Pick-Your-Part in Canada,
and the Company believes it is one of the country's leading self-service used
auto parts networks. Additionally, Pick-N-Pull is a supplier of autobodies to
the Metals Recycling Business which processes the autobodies into sellable
recycled metal. The Steel Manufacturing Business purchases recycled metals from
the Metals Recycling Business and use its mini-mill to process the recycled
metals into finished steel products. As a result of the Company's vertically
integrated business, it is able to transform autobodies and other unprocessed
metals into finished steel products. The Company believes that its Metals
Recycling, Steel Manufacturing, and Auto Parts Businesses are cost competitive
in their markets.

The Company's wholly-owned metals recycling business (the Metals Recycling
Business) and its joint ventures have major collection and processing facilities
in the following locations:

            Metals Recycling Business         Joint Venture Operations
            -------------------------         ------------------------
            Tacoma, WA                        Portland, ME
            Portland, OR                      Madbury, NH
            Eugene, OR                        Everett, MA
            Sacramento, CA                    Providence, RI
            Oakland, CA                       Long Island, NY
            Fresno, CA                        Jersey City, NJ
                                              Los Angeles, CA

The Company's wholly-owned Metals Recycling Business' eleven yards, including
the major facilities shown above, sold 1.8 million ferrous tons, of which 0.2
million tons were brokered, in fiscal 2004. Approximately 63% of our recycled
ferrous metal volume was sold to Asian steel producers. As a result of the
strategic geographic locations at many of the major deep-water ports in the
United States, the Metals Recycling Business and its joint venture partners
benefit.

Through its joint ventures, the Company participates in the ownership of an
additional 28 metals recycling collection and processing facilities including
the major facilities shown above. These processing joint ventures sold 3.6
million ferrous tons in fiscal 2004. Additionally, one joint venture provides
international and domestic services, which broker metal processed by third
parties. In fiscal 2004, this brokerage business approximated 2.7 million tons.

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. With a network of 23
retail locations in the United States and 3 retail locations in Canada, our
business model has created a competitive position in our markets due to the
consistent approach of offering customers a large selection of cars to obtain
parts and our efficient processing of autobodies. We believe our model can be
efficiently duplicated in other geographic locations and we continue to evaluate
strategic relationships in markets that we believe would provide an economic
benefit to the business.

                                       3


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

The Company's Steel Manufacturing Business consists of its wholly-owned
subsidiary, Cascade Steel Rolling Mills, Inc. The Steel Manufacturing Business
produces steel reinforcing bar (rebar), wire rod, merchant bar, coiled rebar and
other specialty products. The Company believes that the Steel Manufacturing
Business has a competitive position in its market due to its readily available
source of recycled metals, efficient production processes, well-located shipping
and transportation facilities, access to competitively priced electric power and
proximity to California and other major western markets.

On May 5, 2004, the Company announced its intention to explore various strategic
alternatives, including the possible sale or merger of its Steel Manufacturing
Business. To date, there has not been any decision made to change the direction
of the Steel Manufacturing Business and it continues to be managed as an ongoing
business segment of the Company.

BUSINESS STRATEGY
- -----------------

The Company's business strategy emphasizes continued growth of the ferrous
recycled metals business and auto parts business through accretive acquisitions,
new store developments and joint ventures, and maintaining its status as an
efficient and competitive producer of both recycled metal and finished steel
products, as well as a low-cost provider of retail and wholesale used auto
parts, through investments in state-of-the-art manufacturing equipment and
increased production efficiencies.

The Company considers itself, first and foremost, a ferrous metals recycling
company with historically over 60% of its operating income, before corporate
expenses and eliminations and impairment and other nonrecurring charges, derived
from the Metals Recycling Business and its Joint Ventures in the metals
recycling business. The Metals Recycling Business is one of the leading
processors in each of the markets in which it operates. The combined operations
of the wholly-owned Metals Recycling Business and joint venture partners make us
the largest United States exporter of scrap metals. The Company intends to
continue its focus on increasing the Company's position as one of the premier
recycled metals processors in the country.

The Company's Metals Recycling Business enters into export sales contracts by
selling forward 45 to 90 days and purchases metals on a daily basis. By knowing
the price for which the processed material will be sold and the costs involved
in processing the metals, the Company is generally able to take advantage of
this differential in timing between purchases and sales and negotiate prices
with suppliers that secure profitable transactions.

GROWTH STRATEGY. The Company has developed a multi-part growth strategy, which
includes the following elements:
     o    EXPAND METALS RECYCLING OPERATIONS. The Company will continue to seek
          expansion opportunities within both its existing markets and elsewhere
          by working to increase its sources of ferrous metals and through
          selective acquisitions or through joint ventures with other metals
          processors and suppliers of metal.
     o    EXPAND AUTO PARTS BUSINESS. In fiscal 2003, the Company acquired our
          partners' interest in the joint venture and formed the Auto Parts
          Business segment. The Auto Parts Business provides the Company with
          strong vertical integration in Northern California. Pick-N-Pull is one
          of the country's leading self-service used auto parts networks. Over
          the last 15 years it has developed a strong management team and
          internal systems that are believed to provide it with the ability to
          efficiently replicate the business model in other locations. In fiscal
          2004, the Auto Parts Business acquired the assets and leased the sites
          for three self-service used auto parts stores in Canada. We intend to
          seek additional expansion opportunities for the Auto Parts Business
          throughout North America.
     o    COMPLETE VALUE CREATING ACQUISITIONS. The Company intends to complete
          acquisitions it believes will create shareholder value and over the
          long-term will earn after tax income in excess of its cost of capital.
          With a strong balance sheet, cash flows and available borrowing
          capacity, the Company believes it is in an attractive position to
          complete an acquisition should one fitting the Company's long-term
          strategic plans become available and if a reasonable price can be
          attained.

                                       4

                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

INVEST IN STATE-OF-THE-ART PROCESSING AND MANUFACTURING. The Company's objective
is to be an efficient and competitive producer of both recycled metals and
finished steel products in order to maximize the operating margin for both
operations. To meet this objective, the Company has focused on and will continue
to emphasize the cost-effective purchasing and efficient processing of metals.
The Company has made significant investments in state-of-the art equipment to
ensure that its operations have cost effective technology to produce high
quality products and to maximize economies of scale. The Company will continue
to invest in equipment to improve the efficiency and capabilities of its
businesses. During the last five years, the Company spent $65.8 million on
capital improvements in the wholly-owned Metals Recycling Business and Steel
Manufacturing Business. The Joint Ventures in the metals recycling business
continue to invest in state-of-the-art processing equipment and environmental
technology to retain their competitive advantage and grow the business. Capital
spending by these joint ventures in fiscal 2001 through 2004 totaled over $80
million.

The wholly-owned and the Joint Ventures in the metals recycling business
continually review the state of processing equipment and evaluate whether the
current equipment is capable of efficiently processing the required quantities
and grades. Some of our significant planned additions during fiscal 2005
include:
     o    Install a state-of-the-art mega shredder in the Oakland, CA facility,
          which will reduce operating costs and improve product quality as well
          as allow us to shred materials that were not previously shredded;
     o    Replace key pieces of loading equipment, including adding a ship
          loading conveyor system in its Tacoma facility to reduce operating
          costs and increase efficiency;
     o    The Company is developing a reconfiguration and modernization plan for
          the Portland, Oregon facility that will encompass the consideration of
          a new state-of-the-art mega shredder, more efficient nonferrous
          processing and ship loading facilities. Spending will likely take
          place over a period of several years to complete the reconfiguration
          and modernization plan.
     o    The joint ventures will install three state-of-the-art mega shredders,
          a nonferrous sorting system and will complete significant work on
          docks, and storm water processing and collection systems, all aimed at
          improving production efficiency.

In addition, all three of the Metals Recycling Business' export facilities
continue to invest in sorting technologies to recover increased volumes of
high-valued nonferrous metal from the shredding process.

The Steel Manufacturing Business operates an electric arc furnace and two
rolling mills. Management continually reviews operations to identify bottlenecks
in the process and areas where efficiencies can be obtained with an appropriate
cost benefit. Some of our significant planned additions during fiscal 2005
include:
     o    Replace the electric arc furnace in the melt shop to reduce energy
          consumption, reduce conversion costs and improve production capacity
          in addition to increasing the product quality;
     o    Replace the billet craneway to allow for more efficient handling of
          billets into the rolling mills and reheat furnaces.
     o    Repairs to the hotbed on rolling mill #1 will improve product quality.

USE OF INFORMATION TECHNOLOGY. One of Pick-N-Pull's primary business strategies
is to utilize information systems technology to collect data regarding
production, processing costs and customer sales. To this end, Pick-N-Pull
continues to invest in its core information systems to leverage its competitive
advantage.

CAPTURE BENEFITS OF INTEGRATION. The Company has historically sought to capture
the potential benefits of business integration whenever possible. The Company
believes it enjoys a competitive advantage over non-vertically integrated
mini-mill steel producers as a result of its extensive metals recycling
operation. Beginning with the source of raw materials, the Auto Parts Business
has the capability to supply the Metals Recycling Business with a portion of its
autobodies for use in its metals recycling process. The Metals Recycling
Business then has the capability to provide the Steel Manufacturing Business
with a predictable, high quality supply of recycled metals in an optimal mix of
grades for efficient melting. Likewise, the Steel Manufacturing Business ensures
a steady market for a portion of the Metals Recycling Business' production.

                                       5


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

METALS RECYCLING BUSINESS
- -------------------------

The Company is one of the largest metals processors and exporters in the United
States, with eleven wholly-owned metals collection and processing facilities.
The Company purchases, processes and sells ferrous metals to foreign and
domestic steel producers and to the Steel Manufacturing Business. The Metals
Recycling Business also engages in the brokerage business by purchasing
processed metal from other recycled metals processors for shipment to either the
Steel Manufacturing Business or third party customers without further
processing. To a lesser extent, the Company also buys, processes and sells
nonferrous metals to both the domestic and export markets.

Due to the large capital investment required for metals recycling equipment and
the scarcity of potential yard sites that are properly zoned and have access to
waterways, highways and railroads, the recycled metals industry is characterized
by a relatively small number of large dominant metals processors, such as the
Company's Metals Recycling Business and its joint venture operations and many
smaller regional metals processors. The large processors collect raw metals from
a variety of sources, including smaller metal recyclers and dealers, and then
sort, clean and cut it into sizes and grades suitable for use by steel
manufacturers.

The Company's Portland, Oakland and Tacoma metals recycling facilities are
located at deep water terminals operated by the Company and also have rail and
highway access. As a result, the Company believes it is strategically located,
both for collection of unprocessed metals from suppliers and for efficient
distribution of processed recycled metals to western United States and foreign
steel producers.

In addition, we have invested in joint ventures that are engaged in the metals
recycling business. We are a 50% partner in six joint ventures and a 30% partner
in another smaller joint venture. The joint ventures in the metal recycling
business includes 28 metals collection and processing facilities, including
deep-water export terminals located in:

     o    Los Angeles, California;
     o    Everett, Massachusetts;
     o    Portland, Maine;
     o    Providence, Rhode Island;
     o    Jersey City, New Jersey, and
     o    Albany, New York.

In fiscal 2004 and 2003, these joint ventures processed and sold approximately
3.6 million and 3.3 million long tons of ferrous metals, respectively. In fiscal
2004 and 2003, these joint ventures brokered approximately 2.7 million and 1.7
million long tons of ferrous metals, respectively. In addition, these joint
ventures added operating income of $61.6 million and $24.4 million during fiscal
2004 and 2003, respectively.

                                       6


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

CUSTOMERS AND MARKETING. The following table sets forth information about the
amount of ferrous recycled metals sold by the Company's wholly-owned Metals
Recycling Business to certain groups of customers during the last five fiscal
years:


                                                               Year Ended August 31,
                         ------------------------------------------------------------------------------------------------
                               2004               2003                 2002                2001               2000
                         ----------------    ----------------    ----------------    ----------------    ----------------

                         Sales     Vol.1     Sales     Vol.1     Sales     Vol.1     Sales     Vol.1     Sales     Vol.1
                         ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
                                                           (dollar amounts in millions)
                                                                                        
FERROUS RECYCLED METALS

Asian Steel Producers
  and Representatives    $270.0     1,170    $178.7     1,157    $126.8     1,068    $ 91.8       777    $ 91.7       761

Steel Manufacturing
  Business:

    Processed              76.3       402      34.8       303      29.7       313      42.6       471      39.2       411
    Brokered 2             35.8       216      26.0       232       7.9        94       7.1        95       7.1        87
                         ------    ------    ------    ------    ------    ------    ------    ------    ------    ------

                          112.1       618      60.8       535      37.6       407      49.7       566      46.3       498

Other US Steel
  Producers                10.8        57      15.8       120       9.1        82      14.1       139      26.0       247
                         ------    ------    ------    ------    ------    ------    ------    ------    ------    ------

   Total ferrous
     recycled metals     $392.9     1,845    $255.3     1,812    $173.5     1,557    $155.6     1,482    $164.0     1,506
                         ======    ======    ======    ======    ======    ======    ======    ======    ======    ======

1       In thousands of long tons (2,240 pounds).
2       Consists of recycled metal that is purchased from other suppliers for direct shipment and is not processed by the Metals
        Recycling Business.


The Company sells recycled metals to foreign and unaffiliated domestic steel
producers or their representatives and to the Steel Manufacturing Business. The
Company has developed long-standing relationships with Asian and United States
steel producers. The Company's primary Asian recycled metals customers are
located in China and South Korea, with additional sales to Thailand, India,
Japan and Taiwan. Over the last five years, in excess of 60% of our export sales
have been to China with South Korean companies purchasing approximately 25% of
our total exports. In fiscal 2004, South Korean companies purchased 53% of our
export sales with China purchasing 34%. In addition, new customers in Thailand
and India purchased 10% of our total export sales. The Company has established
representatives in South Korea, China and Japan to better serve these markets.
The Metals Recycling Business' five largest customers accounted for 69% of
recycled metals sales to unaffiliated customers in fiscal 2004. However, the
Company's recycled metals customers vary from year to year due to demand,
competition, relative currency values and other factors. Substantially all
recycled metals sales are denominated in United States dollars and substantially
all ferrous recycled metals shipments to foreign customers are supported by
letters of credit.

Ferrous recycled metals prices are subject to market cycles which are influenced
by many factors including worldwide demand from steel producers and readily
available supplies of ferrous materials that can be processed into sellable
scrap. Market prices for recycled ferrous metals reached historical highs during
fiscal 2004 with the Company's wholly-owned Metals Recycling Business average
selling price for fiscal 2004 reaching $184 per ton compared to $122 per ton in
fiscal 2003 and $94 per ton in fiscal 2002. Prices for both domestic and foreign
recycled metals are generally established through a competitive bidding process
based on prevailing market rates. Foreign recycled metals sales contracts
typically provide for shipment within 45 to 90 days after the price is agreed
to, which, in most cases, includes freight. The Company attempts to respond to
changing export price levels by adjusting its purchase prices at its metals
recycling yards to maintain its operating margin dollars per ton. However, the
Company's ability to fully maintain its operating margin per ton through periods
of rapidly declining prices can be limited by the impact of lower purchase
prices on the volume of recycled metals flowing to the Company from marginal
unprocessed metal suppliers. Accordingly, the Company believes it generally
benefits from rising recycled metals prices, which provide the Company greater
ability to maintain or expand both margins and unprocessed metals flow into its
yards.

The Company also sells recycled nonferrous metals to foreign customers. Demand
from Asian countries, especially China, continues to increase. The Company's
efficiency in recovering nonferrous metals from its shredding process

                                       7


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

provides increasing supplies to sell to foreign customers. Also, the Company
purchases nonferrous metals, in smaller quantities, directly from other
suppliers for sale overseas. The nonferrous cargoes are loaded into ocean going
containers which are shipped to the customer. The following table sets forth
information about the amount of nonferrous recycled metals sold by the Company's
wholly-owned Metals Recycling Business during the last five fiscal years:


                                                                    Year Ended August 31,
                              ------------------------------------------------------------------------------------------------
                                    2004                2003                2002                2001               2000
                              ----------------    ----------------    ----------------    ----------------    ----------------

                               Sales   Vol.(1)     Sales   Vol.(1)     Sales   Vol.(1)     Sales   Vol.(1)     Sales   Vol.(1)
                              -------  -------    -------  -------    -------  -------    -------  -------    -------  -------
                                                                (dollar amounts in millions)
                                                                                          
NONFERROUS RECYCLED METALS

Nonferrous recycled metals    $  57.0  117,922    $  47.8  113,378    $  41.7  112,622    $  43.0  114,441    $  38.9   96,207
                              =======  =======    =======  =======    =======  =======    =======  =======    =======  =======

(1) In thousands of pounds


SOURCES OF UNPROCESSED METALS. The most common forms of raw metals purchased by
the Company are obsolete machinery and equipment such as automobiles, railroad
cars, railroad tracks, home appliances and demolition metal from buildings and
other obsolete structures. The metals are acquired from suppliers at posted
prices at the Company's eleven metals recycling yards, from Company drop boxes
at a diverse base of suppliers' industrial sites and through negotiated
purchases from railroads and other large suppliers. The Company purchases
unprocessed metals from a large number of suppliers, including railroads,
industrial manufacturers, automobile salvage yards, metals dealers, landfills
and individuals. Metals recycling yards situated nearest to unprocessed metals
sellers and major transportation routes have a competitive advantage because of
the significance of freight charges relative to the value of metals. The
Portland, Tacoma and Oakland yards receive raw metals using major railroad
routes, deep water ports and major highways. Most of our other yards have access
to railways to both receive and then ship metals to our three major yards using
railroad cars, which we believe provides us with a competitive advantage. The
locations of our facilities allow us to competitively purchase raw metals from
the San Francisco Bay area (one of the largest metropolitan regions in the
country) north up the West Coast to British Columbia and to the east including
Idaho, Montana, Utah and Nevada.

The Company is a 50% partner in two joint ventures operating out of Richmond,
California which are industrial plant demolition contractors. These joint
ventures dismantle industrial plants, perform environmental remediation, resell
any machinery or pieces of steel that are salvaged from the plants in a usable
form and sell other recovered metals, primarily to the Company. The Company
purchased substantially all of the ferrous metals generated by these joint
ventures during fiscal 2004 and 2003, which included 63,000 long tons and 53,000
long tons, respectively. Purchase terms are negotiated at arms-length between
the Company and the other partners to the joint ventures.

METALS RECYCLING. The Company processes raw metal by sorting, shearing,
shredding, torching and processing metal into pieces of a size, density and
purity required by customers for use in their melting furnaces. Smaller, more
homogenous pieces of processed metals have more value because they melt more
easily than larger pieces and more completely fill a steel mill's furnace charge
bucket. Over 70% of the ferrous metals collected by the Company's metals
recycling facilities requires processing before sale.

One of the most efficient ways to process and sort metal is by the use of
shredding systems. The Portland and Oakland facilities each operate a large
shredder capable of processing up to 1,500 tons of metal per day and the Tacoma
facility has a mega shredder capable of shredding over 2,500 tons per day. The
Oakland facility is planning to install a mega-shredder in fiscal 2005, which
will give it the ability to shred 2,500 tons per day as well as more efficiently
process larger and thicker pieces of metal than were previously processed using
other more costly techniques. Mega shredders are designed to provide a denser
product and a more pure form of ferrous metal, which is preferred as the metal
can be more efficiently used by steel mills. Having a larger machine gives the
Company the ability to broaden the types of material that can be fed into the
shredder, and thus processed more efficiently than other more traditional
processes. Shredders reduce automobile bodies, home appliances and other light
gauge sheet metal

                                       8


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

into fist-size pieces of shredded recycled metal in seconds. The shredded
material is then carried by conveyor under magnetized drums, which attract the
ferrous recycled metal and separate it from the nonferrous metals and other
residue found in the shredded material, resulting in a relatively pure and clean
shredded steel product. The remaining nonferrous metal and residue then pass
through a process that mechanically separates the nonferrous metals from the
residue. The remaining nonferrous metals are either hand sorted and graded
before being sold or sold unsorted.

DEEP WATER TERMINAL FACILITIES. The Company delivers ferrous and nonferrous
recycled metals to foreign steel producers by ship or container. The Company
achieves cost efficiencies by operating deep water terminal facilities at
Portland, Tacoma and Oakland. The Company owns the Oakland and Tacoma facilities
and leases the Portland location from a related party. Additionally, because the
Company operates the terminal facilities, it is not normally subject to the same
berthing delays often experienced by users of unaffiliated terminals. The
Company's loading costs are believed to be lower than they would be if the
Company was to utilize third party terminal facilities.

During fiscal 2002, the Company's Portland, Oregon metals recycling facility
embarked on a dock and loading facility renovation. The renovation was suspended
in fiscal 2003 when issues with the dock's substructure were detected. Upon
review of new engineering designs focused on operational efficiency and safety
specifications, an impairment charge of $3.5 million was recorded in the fourth
quarter of 2004 to write-off renovation costs incurred prior to the suspension.
The Company is now developing a larger plan to upgrade and modernize its metals
processing facility in Portland which includes the dock and loading facility.
Expenditures related to the modernization would occur over a period of several
years.

Through its Joint Ventures in the metals recycling business, the Company
participates in the ownership of export terminals in Los Angeles, California,
Everett, Massachusetts, Portland, Maine, Providence, Rhode Island, Albany, New
York and Jersey City, New Jersey. The joint ventures deliver by ship recycled
metals to steel producers throughout the world. As a result of owning or leasing
these facilities, the joint ventures are not subject to berthing delays
sometimes experienced by users of unaffiliated terminal facilities.

COMPETITION. The Company competes for both the purchase of metals from suppliers
and the sale of processed recycled metals to finished steel producers.
Competition for metals purchased in the Metals Recycling Business' markets comes
primarily from well financed large recyclers of metal as well as smaller metals
yards and dealers. Many of these recyclers have varying types and sizes of
processing equipment that include fixed and mobile shears and large and small
ferrous metal shredders, all with varying effects on the selling price of
recycled metal. The Company also competes with brokers who buy product on behalf
of domestic and foreign mills. The predominant competitive factors that impact
the Company's recycled metals sales and its ability to obtain unprocessed metals
are price, including shipping costs, availability, and reliability of service
and product quality.

The Company competes with a number of domestic and foreign recycled metals
processors for export sales. Price, including shipping costs, and availability
are the two most important competitive factors, but reliability and quality are
also important.

SEASONALITY. The Company makes a number of large ferrous metals shipments to
foreign steel producers each year. The Company's control over the timing of
shipments is limited by customers' requirements, shipping schedules and other
factors. Variations in the number of shipments from quarter to quarter can
result in significant fluctuations in quarterly revenues, earnings and inventory
levels.

BACKLOG. On August 31, 2004, the Company's Metals Recycling Business had a
backlog of firm orders of $78.7 million, as compared to $44.9 million on August
31, 2003. The backlog on August 31, 2004 was related to export ferrous metal
shipments.

                                       9


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

AUTO PARTS BUSINESS
- -------------------

The Auto Parts Business competes in the auto dismantling and used auto parts
industry. Our stores are self-service stores in which customers remove used auto
parts from a vehicle in our inventory and then pay a standard price for that
part. Unlike more traditional full service stores, we do not remove parts for
customers or perform automotive repairs. The Company believes it has developed
one of the largest networks of self-service used auto parts stores in the United
States with 23 stores in six states and an additional 3 stores in western
Canada. Seventeen of the U.S. stores are located in Northern California, with
the remaining stores located in Nevada, Utah, Illinois, Indiana and Texas. The
Company purchases salvaged vehicles and sells the parts from those vehicles
through its retail store facilities and wholesale operations, and then sells the
remaining portion of the vehicles to metal recyclers, including the Company's
Metals Recycling Business.

The Company is dedicated to supplying low-cost used auto parts to its customers.
In general, management believes that the price of its parts are significantly
lower than full service auto dismantling prices, retail car part store prices
and car dealership prices. Each store offers an extensive selection of vehicles
from which consumers can remove parts. The average store is located on 14 acres
and contains approximately 1,600 cars available to the customer. The Company
carries domestic and foreign cars, vans and light trucks and rotates its
inventory frequently which provides its customers with access to new parts
inventory.

The Company typically seeks to locate its facilities with convenient access to
major streets and major population centers. By operating its stores at locations
that are convenient and visible to the target customer, the stores become the
first stop a customer makes in acquiring their used auto parts. Convenient
locations also make it easier and less expensive for suppliers to deliver
vehicles.

PRODUCTS AND MARKETING. The following table sets forth information about the
significant components of sales made by the Company's Auto Parts Business and
predecessor companies during the last five fiscal years:


                                                               Year Ended August 31,
                   --------------------------------------------------------------------------------------------------------------
                          2004                   2003                  2002(1)                2001(1)                2000(1)
                   ------------------     ------------------     ------------------     ------------------     ------------------

                    Sales        %.        Sales        %.        Sales        %.        Sales        %.        Sales        %.
                   -------    -------     -------    -------     -------    -------     -------    -------     -------    -------
                                                            (dollar amounts in millions)
                                                                                                 
Retail sales       $48,131         59%    $44,463         68%    $42,257         73%    $37,826         74%    $32,965         74%

Wholesale sales     33,387         41%     20,762         32%     16,018         27%     13,505         26%     11,792         26%
                   -------    -------     -------    -------     -------    -------     -------    -------     -------    -------

        Total      $81,518        100%    $65,225        100%    $58,275        100%    $51,331        100%    $44,757        100%
                   =======    =======     =======    =======     =======    =======     =======    =======     =======    =======


(1)     The  sales for  periods  prior to  fiscal  2003 are not  included  in the  Company's  consolidated  revenues.  Please  refer
        to Note 1 and Note 3 in the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


The Company sells used auto parts from each of its retail locations. Upon
arriving at a store, a customer typically pays an admission charge and signs a
liability waiver before entering the facility. When a customer finds a desired
part on a vehicle, the customer removes it and pays a standard retail price for
the part.

Once the vehicle is removed from the customer area, certain remaining parts that
can be sold wholesale (cores) are removed from the vehicle. In California, these
cores, such as engines, transmissions and alternators, are consolidated at a
central facility. From this facility, the parts are sold, via an auction system,
to a variety of different wholesale buyers. Due to larger volumes generated via
this consolidation process, the Company has been able to obtain increasingly
higher prices for these cores.

                                       10


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

After the core removal process is complete, the remaining auto body is crushed
and sold as scrap metal in the wholesale market. The autobodies are sold on a
price per ton basis. This price is subject to fluctuations in the recycled
ferrous metal markets. During fiscal 2004, the Auto Parts Business had sales of
$8.7 million to the Metals Recycling Business, thereby making it the Auto Parts
Business' single largest customer. The Company's wholesale business consists of
its core and scrap sales.

COMPETITION. The Company competes with both full-service and self-service auto
dismantlers as well as larger well-financed retail auto parts businesses for
retail customers. Also, the Company competes for its vehicle inventory with
other dismantlers, used car dealers, auto auctions and metal recyclers. Vehicle
costs can fluctuate significantly depending on market conditions and prices for
recycled metal.

SOURCES OF VEHICLES. The Company obtains vehicles from four primary sources: tow
companies, private parties, auto auctions and charities. The Company employs car
buyers who travel to vendors and bid on vehicles. The Company also has a program
to purchase vehicles from private parties called "Cash for Junk Cars." This
program is advertised in telephone directories and newspapers. Private parties
call a toll free number and receive a quote for their vehicle. The private party
can either deliver the vehicle to one of the retail locations or the Company can
arrange for the vehicle to be picked up.

SEASONALITY. Retail sales and admissions are somewhat seasonal and principally
affected by weather and promotional events. Since the stores are open to the
natural elements, during periods of prolonged wet, cold or extreme heat, the
retail business tends to slow down due to the difficult customer working
conditions. As a result, the Company's first and third fiscal quarters tend to
generate the most retail sales and the second and fourth fiscal quarters are the
slowest in terms of retail sales.

STEEL MANUFACTURING BUSINESS
- ----------------------------

The Steel Manufacturing Business consists of the Company's wholly-owned
subsidiary, Cascade Steel Rolling Mills, Inc., located in McMinnville, Oregon
(approximately 45 miles southwest of Portland) and includes two distribution
centers located in Central and Southern California. The Steel Manufacturing
Business produces steel reinforcing bar (rebar), wire rod, merchant bar, coiled
rebar and other specialty products. We believe the Steel Manufacturing Business
has a competitive position in its market due to its readily available source of
recycled metals, efficient production processes, well-located West Coast
shipping and transportation facilities, access to competitively priced electric
power and proximity to California and other major western markets. In addition,
the steel mill has access to major railroad routes which reduce the Steel
Manufacturing Business' delivery costs to major West Coast markets.

PRODUCTS AND MARKETING. The Steel Manufacturing Business produces rebar,
merchant bar, coiled products and specialty products. Sales of these products
during the last five fiscal years were as follows:


                                                         Year Ended August 31,
                   ------------------------------------------------------------------------------------------------
                         2004                2003                2002               2001                 2000
                   ----------------    ----------------    ----------------    ----------------    ----------------
                   Sales     Vol.1     Sales     Vol.1     Sales     Vol.1     Sales     Vol.1     Sales     Vol.1
                   ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
                                                    (dollar amounts in millions)
                                                                                  
Rebar              $143.7       340    $ 97.4       327    $ 86.7       307    $ 91.8       309    $ 91.1       308

Coiled products      94.5       233      67.9       223      51.6       179      39.2       137      59.5       214

Merchant bar         31.8        66      23.4        65      21.3        67      28.8        83      40.7       117

Other products        1.3         3       3.2         7       7.0        16       7.8        17      12.3        27
                   ------    ------    ------    ------    ------    ------    ------    ------    ------    ------

        Total      $271.3       642    $191.9       622    $166.6       569    $167.6       546    $203.6       666
                   ======    ======    ======    ======    ======    ======    ======    ======    ======    ======

1    In thousands of short tons (2,000 pounds).


                                       11


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

Rebar is steel rod used to increase the tensile strength of poured concrete.
Merchant bar consists of round, flat, angle and square steel bars used by
fabricators or manufacturers to produce a wide variety of products, including
gratings, steel floor and roof joists, safety walkways, ornamental furniture,
stair railings and farm equipment. Coiled products consist of wire rod and
coiled rebar. Wire rod is steel wire, delivered in coiled form, and is used by
fabricators to produce a variety of products such as chain link fencing, nails,
wire and stucco netting. Coiled rebar is rebar delivered in coils rather than in
straight lengths, a method preferred by some fabricators as it reduces the waste
and improves yield generated by cutting individual lengths to meet customer
specifications.

The Steel Manufacturing Business sells directly from its mill in McMinnville,
Oregon and from its Company owned distribution center located in El Monte,
California (Los Angeles area) and one third-party distribution center in
Stockton, California. The distribution centers facilitate sales by maintaining a
ready inventory of products close to major customers for just-in-time delivery.
The Steel Manufacturing Business communicates regularly with major customers to
determine their anticipated needs and plans its rolling mill production schedule
accordingly. The Steel Manufacturing Business also produces and inventories a
mix of products forecasted to meet the needs of other customers. Shipments to
customers are made by common carrier, either truck or rail.

During fiscal 2004, the Steel Manufacturing Business sold its steel products to
approximately 350 customers primarily located in the 10 western states. In that
period, approximately 43% of the Steel Manufacturing Business' sales were made
to customers in California. The Steel Manufacturing Business' customers are
principally steel service centers, construction industry subcontractors, steel
fabricators, wire drawers and major farm and wood product suppliers. The Steel
Manufacturing Business' 10 largest customers accounted for approximately 44% of
its revenues during fiscal 2004.

RECYCLED METALS SUPPLY. The Company believes it operates the only mini-mill in
the Western United States which has the ability to obtain its entire recycled
metals requirement from its own affiliated metals recycling operations. There
have at times been regional shortages of recycled metals with some mills being
forced to pay higher prices for recycled metals shipped from other regions or to
temporarily curtail operations. The Company's Metals Recycling Business has the
ability to supply the Steel Manufacturing Business both with recycled metals
that it has processed and with recycled metals that it has purchased from
third-party processors. The Metals Recycling Business is also able to deliver to
the Steel Manufacturing Business an optimal mix of recycled metal grades to
achieve maximum efficiency in its melting operations. Since the Company's Steel
Mill and major metals recycling yards are located on rail routes, the Company
takes advantage of the cost benefit of shipping recycled metal by rail.

ENERGY SUPPLY. Electricity and natural gas represented approximately 6% and 2%,
respectively, of the Steel Manufacturing Business' cost of goods sold in the
year ended August 31, 2004.

The Steel Manufacturing Business purchases electric power from McMinnville Water
& Light (McMinnville), a municipal utility, and is McMinnville's largest
customer. The Steel Manufacturing Business has a five-year contract with
McMinnville that expires September 30, 2006. McMinnville obtains power from the
Bonneville Power Administration (BPA) and resells it to the Steel Manufacturing
Business at its cost plus a fixed charge per kilowatt hour and a 3% city
surcharge. The rate McMinnville obtains from BPA is for firm power; therefore,
the Steel Manufacturing Business is not forced to sacrifice the reliability of
its power supply for a lower interruptible power rate as is the case with
certain other mini-mills. 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. The CRAC, which can be adjusted
every six months, has varied from a low of 39% to a high of 50%. The current
rate, which became effective on April 1, 2004, is 47%. Since BPA has been
successful in its cost reduction programs, BPA will pass on a 7.5% reduction in
selected electric power rates effective October 1, 2004. The annual savings are
estimated at over $1.0 million.

                                       12


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

The Steel Manufacturing Business purchases natural gas for use in the reheat
furnaces from IGI Resources of Boise, Idaho, pursuant to a contract that
obligates the business to purchase minimum amounts of gas at a fixed rate. This
is a take or pay contract. The current contract expires on October 31, 2005. All
natural gas used by the Steel Manufacturing Business must be transmitted via a
pipeline owned by Northwest Natural Gas Company that also serves local
residential customers of Northwest Natural Gas Company. To protect against
interruptions in gas supply, the Steel Manufacturing Business maintains stand-by
propane gas storage tanks that have the capacity to hold enough gas to operate
one of the rolling mills for at least three days without refilling.

MANUFACTURING OPERATIONS AND EQUIPMENT. The Steel Manufacturing Business'
melt-shop includes a 108-ton capacity electric-arc furnace, ladle refining
furnace and five-strand continuous billet caster. The melt shop has enhanced
steel chemistry refining capabilities, permitting the mill to produce special
alloy grades of steel not currently produced by other mills on the West Coast.
In December 2004, the Steel Manufacturing Business plans to replace the electric
arc furnace with a 108-ton capacity furnace that will be more energy efficient,
reduce melting time and modestly increase production volume. The melt shop
produced 652,000, 636,000 and 483,000 tons of billets during fiscal 2004, 2003
and 2002, respectively. Melt shop production in fiscal 2002 was curtailed due to
sluggish domestic economic conditions.

The Company operates two computerized rolling mills that allow for synchronized
operations of the rolling mills and related equipment. The billets produced in
the melt shop are reheated in two natural gas-fueled furnaces and are then
hot-rolled through one of the two mills to produce finished products. Rolling
mill #1 is a 17-stand mill that was rebuilt in 1986. Rolling mill #2 is an
18-stand mill, which was installed in 1996. In 1997, a rod block and related
equipment for the manufacture of wire and coiled rebar was added to rolling mill
#2. Since then, the Company has completed a wide variety of improvement projects
to both mills designed to increase the operating efficiency of each mill as well
as increase the types of products that can be competitively produced. Management
continues to monitor the market for new products as well as discuss new
requirements our customers have to identify additional opportunities to enhance
the value of our product offerings. In fiscal 2005, the Company plans major
repairs to the hotbed in rolling mill #1. The hotbed cools the hot-rolled steel.
The repairs will improve the yield and quality of products produced.

COMPETITION. The principal competitive factors in the Steel Manufacturing
Business' market are price, product availability, quality and service. The
mill's primary domestic competitors are Nucor, with manufacturing facilities in
Utah and Washington, and Tamco with a facility in California.

In addition to domestic competition, the Steel Manufacturing Business has
historically competed intensely with foreign steel producers principally located
in Asia, Canada, Mexico, and Central and South America in certain of its product
lines, principally in shorter length rebar and in certain wire rod grades. As a
result, in the spring of 2002, the U.S. Government imposed anti-dumping and
countervailing duties against wire rod products from eight foreign countries.
These duties remain in effect today, are periodically reviewed, and do not have
a set expiration date. Recently, imports of steel were also affected by foreign
currency fluctuations. Relevant foreign currencies generally strengthened
relative to the U.S. dollar in fiscal 2004 and 2003, making imports into the
U.S. more expensive. Imports were also adversely impacted by rising ocean
freight rates in fiscal 2004. As a result of the duties, changes in foreign
exchange rates and freight rates and generally good market conditions in the
foreign countries, the Company has recently experienced less competition from
foreign steel producers.

SEASONALITY. The Steel Manufacturing Business' revenues can fluctuate
significantly between quarters due to factors such as the seasonal slowdown in
the construction industry, which occurs from the late fall through early spring,
and in other industries it serves. In the past, the Steel Manufacturing Business
has generally experienced its lowest sales during the second quarter of the
fiscal year. The Company expects this pattern to continue in the future.

BACKLOG. The Steel Manufacturing Business generally ships products within days
after the receipt of purchase orders. Backlogs are seasonal and would be larger
in fiscal quarters three and four.

                                       13


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

ENVIRONMENTAL MATTERS
- ---------------------

Compliance with environmental laws and regulations is a significant factor in
the Company's business. Some of the Company's businesses are subject to local,
state, federal and supranational environmental laws and regulations concerning,
among other matters, solid waste disposal, hazardous waste disposal, air
emissions, water quality and discharge, dredging and employee health.
Environmental legislation and regulations have changed rapidly in recent years
and it is likely that the Company will be subject to even more stringent
environmental standards in the future.

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

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

While the cost of the investigations associated with these properties and the
cost of employment of source control BMPs are not expected to be material at
August 31, 2004, however $0.3 million has been accrued for studies related to
the pending six mile Portland Working Harbor Willamette River sediment 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 was
carried over to the Company's financial statements when MMI was acquired in
1995, and at August 31, 2004 aggregated $15.1 million.

General Metals of Tacoma (GMT), a subsidiary of MMI, owns and operates a metals
recycling facility located in the State of Washington on the Hylebos Waterway, a
part of Commencement Bay, which is the subject of an ongoing remediation project
by the United States Environmental Protection Agency (EPA) under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).
GMT and more than 60 other parties were named potentially responsible parties
(PRPs) for the investigation and clean-up of contaminated sediment along the

                                       14


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

Hylebos Waterway. On March 25, 2002, EPA issued Unilateral Administrative Orders
(UAOs) to GMT and another party (Other Party) to proceed with Remedial Design
and Remedial Action (RD/RA) for the head of the Hylebos and to two other parties
to proceed with the RD/RA for the balance of the waterway. The issuance of the
UAOs did not require the Company to change its previously recorded estimate of
environmental liabilities for this site. The UOA for the head of the Hylebos
Waterway was converted to a voluntary consent decree in May 2004, pursuant to
which GMT and the Other Party agreed to remediate the head of the Hylebos
Waterway. The consent decree was finalized and entered by the court in September
2004, at which time approximately $7.0 million in settlement funds previously
collected by the EPA from other PRPs became available for reimbursement of
remediation costs incurred by GMT and the Other Party. As of May 31, 2004, the
Company recorded $3.5 million in other current assets representing the Company's
share of the expected EPA reimbursements and, because the expectation of
contributions from other PRPs in this amount had previously been taken into
account as a reduction in the Company's reserve for environmental liabilities,
the Company also recorded a $3.5 million increase in environmental liabilities.

There are two phases to the Clean-up of the Hylebos Waterway. The first phase
was the intertidal and bank remediation, which was conducted in 2003 and early
2004. The second phase is dredging in the Head of Hylebos Waterway, which began
on July 15, 2004. Approximately 117,500 cubic yards of an estimated 310,000
cubic yards total have been removed as of October 30, 2004. Dredging and other
in-water work is scheduled to be completed during fiscal 2005.

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

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

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

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

PROLER
In 1996, prior to the Company's acquisition of Proler International Corp.
(Proler), Proler recorded a liability for the probable costs to remediate its
wholly-owned properties. The Company carried over the aggregate reserve to its
financial statements upon acquiring Proler, and $3.4 million remained
outstanding on August 31, 2004.

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

                                       15


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

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.

METALS RECYCLING BUSINESS
After the shredding of automobile bodies and other obsolete machinery and
appliances and the separation of ferrous and salable nonferrous metals, the
remaining auto shredder residue must be managed. State and federal standards
prescribe sampling protocols requiring representative samples of auto shredder
residue to be analyzed to determine if they are likely to leach heavy metals,
PCBs or other hazardous substances in excess of acceptable levels. Auto shredder
residue from the Company's metals recycling operations in Oakland and Tacoma
undergo an in-line chemical stabilization treatment prior to beneficial use as
an alternative daily landfill cover.

STEEL MANUFACTURING BUSINESS
The Steel Manufacturing Business' electric arc furnace generates dust (EAF
dust), which is classified as a hazardous waste by the EPA because of its zinc
and lead content. The EAF dust is shipped to a firm in the United States that
applies a treatment that allows the EAF dust to be delisted as hazardous so it
can be disposed of as a non-hazardous, solid waste. By maintaining an annual
renewable export license, the Company retains flexibility of having the option
to send the EAF dust to a secondary smelter in Mexico that recycles the EAF dust
into commercial products.

The Steel Manufacturing Business has an operating permit issued under Title V of
the Clean Air Act Amendment of 1990, which governs certain air quality
standards. The permit was first issued in 1998 and has since been renewed
through the year 2007. The permit allows the Steel Manufacturing Business to
melt up to 900,000 tons of recycled metals per year and produce finished steel
products totaling 450,000 tons on Rolling mill #1 and 525,000 tons on Rolling
mill #2. As the mill's production grows beyond current levels, the Steel
Manufacturing Business has anticipated that it would need to enhance its
existing facilities to properly control increased emissions in order to remain
in compliance with the Title V operating permit.

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

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

It is not possible to predict the total size of all capital expenditures or the
amount of any increases in operating costs or other expenses that may be
incurred by the Company or its subsidiaries to comply with environmental
requirements applicable to the Company, its subsidiaries and their operations,
or whether all such cost increases can be passed on to

                                       16


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

customers through product price increases. Moreover, environmental legislation
has been enacted, and may in the future be enacted, to create liability for past
actions that were lawful at the time taken but have been found to affect the
environment and to increase public rights of action for environmental conditions
and activities. As is the case with steel producers and recycled metals
processors in general, if damage to persons or the environment has been caused,
or is in the future caused, by the Company's hazardous materials activities or
by hazardous substances now or hereafter located at the Company's facilities,
the Company may be fined and/or held liable for such damage and, in addition,
may be required to remedy the condition. Thus, there can be no assurance that
potential liabilities, expenditures, fines and penalties associated with
environmental laws and regulations will not be imposed on the Company in the
future or that such liabilities, expenditures, fines or penalties will not have
a material adverse effect on the Company.

The Company has, in the past, been found not to be in compliance with certain
environmental laws and regulations and has incurred liabilities, expenditures,
fines and penalties associated with such violations. The Company's objective is
to maintain compliance. Efforts are ongoing to be responsive to environmental
regulations.

The Company believes that it is in material compliance with currently applicable
environmental regulations as discussed above and, except as discussed above,
does not anticipate any substantial capital expenditures for new environmental
control facilities during fiscal 2005 or 2006.

EMPLOYEES
- ---------

As of August 31, 2004, the Company had 1,624 full-time employees, consisting of
464 employees at the Company's Metals Recycling Business, 458 employees at the
Steel Manufacturing Business, 633 employees at the Auto Parts Business and 69
corporate administrative employees. Of these employees, as of August 31, 2004,
619 are covered by collective bargaining agreements with twelve unions. The
Steel Manufacturing Business' contract with the United Steelworkers of America
covers 336 of these employees and expires on April 1, 2005. The Metals Recycling
Business' contract with the Warehouse, Automotive, Food, Public Employees,
Driver Sales & Special Services covers 43 employees and expires September 1,
2005. The Company believes that its labor relations generally are good.

AVAILABLE INFORMATION
- ---------------------

The Company's website is located at www.schnitzersteel.com. The Company makes
available free of charge on or through its website, its annual, quarterly and
current reports, and any amendments to those reports, as soon as reasonably
practicable after electronically filing such reports with the Securities and
Exchange Commission ("SEC"). Information contained on the Company's website is
not part of this report or any other report filed with the SEC.




                                       17


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

ITEM 2.     PROPERTIES

The Company's Portland metals recycling facility, Portland deep water terminal
facilities, and the related buildings and improvements are located on an
approximately 60-acre industrial site owned by Schnitzer Investment Corp. (SIC),
a related party, and leased to the Company under a long-term lease. See Part
III, Item 13 "Certain Relationships and Related Transactions." Approximately 17
acres are occupied by the Company's deep water terminal facilities, and the
balance is used for recycling metal.

The Pasco, Washington and Anchorage, Alaska operations are located on sites
leased from third parties.

The following metals recycling operations are all located on sites owned by the
Company or subsidiaries:

            LOCATION                           ACREAGE OWNED AT SITE
            --------                           ---------------------
            Oakland, CA                                  33
            Tacoma, WA                                   26
            Fresno, CA                                   17
            Sacramento, CA                               13
            Eugene, OR                                   11
            White City, OR                                4
            Bend, OR                                      3
            Grants Pass, OR                               1

The Steel Manufacturing Business' steel mill and administrative offices are
located on an 83-acre site owned by the Steel Manufacturing Business in
McMinnville, Oregon. The Steel Manufacturing Business also owns its 87,000 sq.
ft. distribution center in El Monte, California. Additionally, in fiscal 2002,
the Company purchased 51 acres near the mill site in McMinnville, Oregon;
however, this site is not currently utilized by the Steel Manufacturing
Business.

The Auto Parts Business has retail facilities in the following locations:

                                       Number of           Total
                                       Locations          Acreage
                                       ---------          -------
            Northern California            17               211
            Nevada                          2                30
            Texas                           1                33
            Utah                            1                12
            Illinois                        1                17
            Indiana                         1                29
            Canada                          3                45
                                        -----             -----
            Total                          26               377
                                        =====             =====

The Company owns the properties located in Indiana and Nevada. Additionally, it
owns approximately 25 acres in California, 6 acres in Illinois and 2.5 acres in
Utah. The remainder of the California, Illinois and Utah facilities are leased.
In addition, all the Canadian and Texas facilities are located on sites leased
by the Company.

The equipment and facilities on each of the foregoing sites are described in
more detail in the descriptions of each of the Company's businesses. The Company
believes its present facilities are adequate for operating needs for the
foreseeable future.

                                       18


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

The Company's principal executive offices are located at 3200 and 3300 NW Yeon
Avenue in Portland, Oregon in 48,000 sq. ft. of space leased from SIC under
long-term leases. See Part III, Item 13 "Certain Relationships and Related
Transactions."



ITEM 3.     LEGAL PROCEEDINGS

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

Except as described above under Part I, Item 1 "Business -- Environmental
Matters", the Company is not a party to any material pending legal proceedings.



ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

            None.


ITEM 4(a).  EXECUTIVE OFFICERS OF THE REGISTRANT

Name                    Age              Office
- ----                    ---              ------

Robert W. Philip        57   Chairman, President and Chief Executive Officer
Gary Schnitzer          62   Executive Vice President
Barry A. Rosen          59   Vice President, Finance and Chief Financial Officer
Ilene Dobrow Davidson   53   Secretary and General Counsel
Kelly E. Lang           43   Vice President, Corporate Controller
Jay Robinovitz          46   Vice President
Kurt C. Zetzsche        65   President, Cascade Steel Rolling Mills, Inc.

ROBERT W. PHILIP joined the Company in 1984 and has been President of the
Company since March 1991, Chief Executive Officer since January 2002 and
Chairman since January 2004.

GARY SCHNITZER has been Executive Vice President in charge of the Company's
California metals recycling operations since 1980. Gary Schnitzer is a first
cousin of Robert Phillip's wife.

BARRY A. ROSEN has been Vice President, Finance and Chief Financial Officer of
the Company since 1982. Mr. Rosen will retire from the Company in June 2005.

ILENE DOBROW DAVIDSON has been Secretary and General Counsel of the Company
since 2001 and became an executive officer in November 2004. Ms. Davidson was
the Executive Vice President and General Counsel of U.S. RealTel from 1998 until
joining the Company. Ms. Davidson previously practiced law as a partner of
Sachnoff & Weaver in Chicago, Illinois.

KELLY E. LANG joined the Company in September 1999 as Vice President-Corporate
Controller. From 1996 to September 1999, he was employed by Tektronix Inc. in
various financial capacities, the last of which was Vice President, Finance for
Tektronix Inc.'s Color Printing and Imaging Division. While with Price
Waterhouse LLP, Mr. Lang was a Certified Public Accountant.

                                       19


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

JAY ROBINOVITZ joined the Company in January 1993 and has held various senior
management positions, including four years serving as General Manager of the
Company's Tacoma yard and most recently, the Company's Vice President of
Northwest metals recycling operations.

KURT C. ZETZSCHE joined the Company in February 1993 as President of the Steel
Manufacturing Business. Mr. Zetzsche has been in the steel production business
since 1966. Mr. Zetzsche retired from the Company on November 5, 2004.



























                                       20


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

                                     PART II

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
            AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company's Class A Common Stock is traded on the Nasdaq National Market tier
of the Nasdaq Stock Market under the symbol SCHN. The approximate number of
shareholders of record on September 30, 2004 was 129. The stock has been trading
since November 16, 1993. The following table sets forth the high and low prices
reported at the close of trading on the Nasdaq Stock Market and the dividends
paid per share for the periods indicated, all as adjusted for the one-for-one
stock dividend effected August 14, 2003 and the one-for-two stock dividend
effected March 25, 2004.

                                             Fiscal Year 2004
                               ---------------------------------------------
                                                                   Dividends
                               High Price        Low Price         Per Share
                               ----------        ---------         ---------
            First Quarter        $ 36.57          $ 16.20            $.017
            Second Quarter       $ 42.52          $ 26.38            $.017
            Third Quarter        $ 37.70          $ 22.60            $.017
            Fourth Quarter       $ 35.79          $ 26.01            $.017

                                             Fiscal Year 2003
                               ---------------------------------------------
                                                                   Dividends
                               High Price        Low Price         Per Share
                               ----------        ---------         ---------
            First Quarter        $  6.39          $  5.56            $.017
            Second Quarter       $  8.00          $  5.91            $.017
            Third Quarter        $ 11.23          $  7.85            $.017
            Fourth Quarter       $ 17.49          $ 11.69            $.017




                                       21


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

ITEM 6.     SELECTED FINANCIAL DATA


                                                                               Year Ended August 31,
                                               ------------------------------------------------------------------------------------
                                                   2004             2003(1)            2002              2001              2000
                                               ------------      ------------      ------------      ------------      ------------
                                                            (In millions, except per share, per ton and shipment data)
                                                                                                        
INCOME STATEMENT DATA:
     Revenues                                  $      688.2      $      496.9      $      350.6      $      322.8      $      367.5

     Operating income                          $      166.9      $       68.8      $        9.8      $       15.1      $       14.8
     Income before cumulative effect of
        change in accounting principle,
        income taxes, minority interests
        and pre-acquisition interests          $      164.3      $       66.4      $        7.7      $       11.3      $       11.0

      Income tax provision                     $      (50.7)     $      (17.9)     $       (1.1)     $       (3.4)     $       (0.6)
     Cumulative effect of change in
        accounting principle                             --              (1.0)               --                --                --

     Net income                                $      111.2      $       43.2      $        6.6      $        7.9      $       10.4
                                               ============      ============      ============      ============      ============

     Basic earnings per share(2)               $       3.71      $       1.55      $       0.24      $       0.28      $       0.35
                                               ============      ============      ============      ============      ============
     Diluted earnings per share(2)             $       3.58      $       1.47      $       0.23      $       0.28      $       0.35
                                               ============      ============      ============      ============      ============

     Dividends per common share(2)             $      0.068      $      0.067      $      0.067      $      0.067      $      0.067
                                               ============      ============      ============      ============      ============

OTHER DATA:
     Shipments (in thousands)(3):
        Ferrous recycled metal (tons)                 1,845             1,812             1,557             1,482             1,506
        Nonferrous (pounds)                         117,992           113,378           112,622           114,441            96,207
        Finished steel products (tons)                  642               622               569               546               666

     Average net selling price(3,4):
        Ferrous recycled metal (per ton)       $        184      $        122      $         94      $         91      $         95
        Nonferrous (per pound)                 $       0.48      $       0.42      $       0.36      $       0.37      $       0.40
        Finished steel products (per ton)      $        404      $        291      $        276      $        292      $        289

     Depreciation and amortization             $       20.4      $       19.4      $       18.6      $       18.8      $       18.4
     Cash provided by operations               $       73.2      $       40.9      $       36.4      $        8.6      $       35.4

     Number of Auto Parts Stores(5)                      26                23                23                23                22

     Joint venture shipments (in thousands):
        Ferrous processed (tons)(6)                   3,582             3,323             3,700             3,400             3,100
        Ferrous brokerage (tons)(6)                   2,676             1,699             1,200             1,000               900


                                       22


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K


                                                    As of August 31,
                              ------------------------------------------------------------
                                2004         2003         2002         2001         2000
                              --------     --------     --------     --------     --------
                                                      (In millions)
                                                                   
BALANCE SHEET DATA:
     Working capital          $   73.1     $   72.4     $   39.4     $   91.4     $   79.9
     Cash and equivalents         11.3          1.7         32.9          1.9          2.4
     Total assets                606.0        487.9        405.0        425.9        426.3
     Short-term debt               0.2          0.2         60.2          0.2          0.2
     Long-term debt               67.8         87.0          8.3         93.8         93.1
     Shareholders' equity     $  418.9     $  303.0     $  252.9     $  248.1     $  248.4

(1)   The 2003 data includes the Auto Parts Business acquisition, which occurred on
      February 14, 2003. Please refer to Note 1 and Note 3 of the NOTES TO THE
      CONSOLIDATED FINANCIAL STATEMENTS. The consolidated results include the results of
      the Auto Parts Business as though the acquisition had occurred at the beginning of
      fiscal 2003. Adjustments have been made for minority interests, which represents the
      ownership interests the Company did not own during the reporting period and
      pre-acquisition interests, which represents the share of income attributable to the
      former joint venture partner for the period from September 1, 2002 through February
      14, 2003. The financial results of the former auto parts joint venture for all
      periods prior to fiscal 2003 continue to be accounted for using the equity method
      and are included in the line "Operating income from joint ventures."
(2)   Basic and diluted earnings per share and dividends per common share have been
      adjusted to reflect the one-for-one stock dividend paid on August 14, 2003, to
      shareholders of record on July 24, 2003 and the one-for-two stock dividend effected
      March 25, 2004.
(3)   Tons for ferrous recycled metals are long tons (2,240 pounds) and for finished steel
      products are short tons (2,000 pounds).
(4)   The Company reports revenues that include shipping costs billed to customers.
      However, average net selling prices are shown net of shipping costs.
(5)   For fiscal years 2002 to 2000, the Auto Parts Business was a component of the
      Company's Joint Ventures in suppliers of metals.
(6)   Joint venture tons shipped represent 100% of the joint venture shipments and not
      just the Company's share.


ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

OVERVIEW
- --------

The Company operates in three industry segments. The Company's Metals Recycling
Business collects, processes and recycles steel and other metals through its
facilities. The Company's Steel Manufacturing Business operates a mini-mill near
Portland, Oregon, which melts recycled metal, produces finished steel products
and maintains one mill depot in Southern California and one in Central
California. The Company's Auto Parts Business purchases used and wrecked
automobiles and allows retail customers the opportunity of extracting parts for
purchase in its self-service auto parts stores, with 17 located in California,
three in Canada, two in Nevada and one store in each of Texas, Utah, Illinois
and Indiana. Additionally, the Company is a non-controlling partner in joint
ventures that are either in the metals recycling business or are suppliers of
unprocessed metals. These joint ventures in the metals recycling business sell
recycled metals that have been processed at their facilities (Processing) and
also buy and sell third parties' processed metals (Brokering).

                                       23


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------

The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with Generally Accepted Accounting Principles. The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, the Company evaluates its estimates. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. These estimates and
assumptions provide a basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions, and these differences may be material.

The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:

INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the average cost method. The production and accounting process utilized by the
Company to record recycled metals inventory quantities relies on significant
estimates. The Company relies upon perpetual inventory records that utilize
estimated recoveries and yields that are based upon historical trends and
periodic tests for certain unprocessed metal commodities. Over time, these
estimates are reasonably good indicators of what is ultimately produced;
however, actual recoveries and yields can vary depending on product quality,
moisture content and source of the unprocessed metal. To assist in validating
the reasonableness of the estimates, the Company not only runs periodic tests,
but also performs monthly physical inventories. Physical inventories may detect
significant variations in volume, but because of variations in product density,
holding period and production processes utilized to manufacture the product,
physical inventories will not generally detect smaller variations. To mitigate
this risk, the Company adjusts it physical inventories when the volume of a
commodity is low and a physical inventory can more accurately predict the
remaining volume. In addition, the Company establishes inventory reserves to
further mitigate the risk of significant adjustments when determined reasonable.

REVENUE RECOGNITION
The Company recognizes revenue when it has a contract or purchase order from a
customer with a fixed price, the title and risk of loss transfer to the buyer
and collectibility is reasonably assured. Title for both metals and finished
steel products transfers upon shipment based on either C.I.F. or F.O.B. terms.
For retail sales by the Company's Auto Parts Business, revenues are recognized
when customers pay for salvaged vehicle parts or when wholesale products are
shipped to the customer location.

ENVIRONMENTAL COSTS
The Company operates in industries that inherently possess environmental risks.
To manage these risks, the Company employs both its own environmental staff and
outside consultants. These consultants and finance personnel meet regularly to
stay updated on environmental risks. The Company estimates future costs for
known environmental remediation requirements and accrues for them on an
undiscounted basis when it is probable that the Company has incurred a liability
and the related costs can be reasonably estimated. The regulatory and government
management of these projects is extremely complex, which is one of the primary
factors that make it difficult to assess the cost of potential and future
remediation of potential sites. When only a wide range of estimated amounts can
be reasonably established, and no other amount within the range is better than
another, the minimum amount of the range is recorded in the financial
statements. Adjustments to the liabilities are made when additional information
becomes available that affects the estimated costs to remediate. In a number of
cases, it is possible the Company may receive reimbursement through prior
insurance or from other potentially responsible parties identified in a claim.
In these situations, recoveries of environmental remediation costs from other
parties are recorded as an asset when realization of the claim for recovery is
deemed probable and reasonably estimable.

                                       24


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

GOODWILL
In assessing the recoverability of goodwill and other intangible assets with
indefinite lives, management must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets. If these estimates and related assumptions change in the future, we may
be required to record impairment charges not previously recorded. We have
adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, and are required to assess goodwill for impairment at a
minimum annually, using a two-step process that begins with an estimation of the
fair value of the reporting unit. The first step is a screen for impairment and
the second step measures the amount of any impairment. These tests utilize fair
value amounts that are determined by estimated future cash flows developed by
management.

LONG-LIVED ASSETS
We are required to assess potential impairments of long-lived assets in
accordance with SFAS 144, Accounting for Impairment of Long-lived Assets, if
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impaired asset is written down to its estimated fair
value based upon the most recent information available. Estimated fair market
value is generally measured by discounting estimated future cash flows developed
by management. The Company's long-lived assets primarily include property, plant
and equipment used in operations.

TAXES
Deferred income taxes reflect the differences between the financial reporting
and tax bases of assets and liabilities at year-end based on enacted tax laws
and statutory tax rates. Tax credits are recognized as a reduction of income tax
expense in the year the credit arises. A valuation allowance is established when
necessary to reduce deferred tax assets, including net operating loss
carryforwards, to the amount more likely than not to be realized. Periodically,
the Company reviews the deferred tax assets to assess whether the valuation
allowances are necessary.

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

During fiscal 2004, the Company's operations improved dramatically, resulting in
a record year for revenue and net income. Both the Company's Metals Recycling
Business and Steel Manufacturing Business recognized marked improvements over
last year. As well, the Company's Joint Ventures in the metals recycling
business benefited from rising selling prices to improve their profitability by
148%. In addition, the Auto Parts Business contributed to earnings growth during
the year.

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

The Steel Manufacturing Business saw significantly higher average selling prices
and slightly higher sales volumes during fiscal 2004 compared with fiscal 2003.
Sales prices and volumes benefited from strong demand for steel products on the
west coast of the United States, improvements in the U.S. economy, and lower
steel imports, which is partially attributed to the weakness of the U.S. dollar
and higher ocean freight rates.

The Auto Parts Business segment was formed in the second quarter of fiscal 2003
as the result of an acquisition. It purchases salvaged vehicles, sells parts
from those vehicles through its retail facilities and wholesale operations and
sells the remaining portion of the vehicles to metal recyclers. The retail
operations are somewhat seasonal and principally affected by weather conditions
and promotional events. Since the stores are open to the natural elements,
during periods of prolonged wet, cold or extreme heat, the retail business tends
to slow down due to the difficult customer working conditions. As a result, the
Company's first and third fiscal quarters tend to generate the most retail sales
and the second and fourth fiscal quarters are the slowest in terms of retail
sales. The Auto Parts Business' other primary source of revenue is the sale of
scrap metal and other parts wholesale. Revenues for the wholesale product lines
are principally affected by commodity prices and shipping schedules. As
mentioned earlier in the discussions regarding the Metal

                                       25


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

Recycling Business, recycled metal prices have increased dramatically over
fiscal 2003 which positively affected the revenues and profits of the Auto Parts
Business. In addition, the Auto Parts Business completed an acquisition during
fiscal 2004 which added three stores in Canada to the original 23 stores
acquired in fiscal 2003.

The following tables set forth information regarding the breakdown of revenues
between the Company's Metals Recycling Business, Steel Manufacturing Business
and Auto Parts Business, and the breakdown of operating income from the Metals
Recycling Business, the Steel Manufacturing Business, the Auto Parts Business,
Joint Ventures, Corporate and eliminations. Additional financial information
relating to business segments is contained in Note 12 of the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.


                                                               Revenues
                                                         Year Ended August 31,
                                                 ------------------------------------
                                                             (In millions)
                                                   2004          2003          2002
                                                 --------      --------      --------
                                                                    
Metals Recycling Business:
     Ferrous                                     $  392.9      $  255.3      $  173.5
     Nonferrous                                      57.0          47.8          41.7
     Other                                            6.4           5.5           6.6
                                                 --------      --------      --------
     Recycled metals total                       $  456.3      $  308.6      $  221.8

Auto Parts Business                                  81.5          65.2            --
Steel Manufacturing Business                        271.3         191.9         166.6
Intercompany sales eliminations(3)                 (120.9)        (68.8)        (37.8)
                                                 --------      --------      --------
     Total                                       $  688.2      $  496.9      $  350.6
                                                 ========      ========      ========

                                                        Operating Income (Loss)
                                                         Year Ended August 31,
                                                 ------------------------------------
                                                             (In millions)
                                                   2004          2003          2002
                                                 --------      --------      --------

Metals Recycling Business                        $   77.3      $   35.8      $   11.5
Auto Parts Business                                  26.8          22.0            --
Steel Manufacturing Business                         24.6          (2.5)         (5.7)
JVs in the metals recycling business(1)              61.7          24.8          13.8
JV suppliers of metals                               (0.1)         (0.4)          5.6
Corporate expense (2)                               (15.6)        (10.0)         (8.1)
Intercompany eliminations(3)                         (4.3)          1.2          (0.2)
Impairment and other nonrecurring charges(4)         (3.5)         (2.1)         (7.1)
                                                 --------      --------      --------
     Operating Income                            $  166.9      $   68.8      $    9.8
                                                 ========      ========      ========

(1)   Includes year-end LIFO adjustments that reduced operating income by $6.1 million,
      $2.2 million and $1.2 million in fiscal 2004, 2003 and 2002, respectively.
(2)   Corporate expense consists primarily of unallocated corporate expense for services
      that benefit all three business segments. Because of this unallocated expense, the
      operating income of each segment does not reflect the operating income the segment
      would have as a stand-alone business.
(3)   Ferrous recycled metal sales from the Metals Recycling Business to the Steel
      Manufacturing Business, and autobody sales from the Auto Parts Business to the
      Metals Recycling Business, are made at negotiated rates per ton that are intended to
      approximate market. Consequently, these intercompany sales produce intercompany
      profits, which are eliminated until the finished products are sold to third parties.
(4)   Impairment and other nonrecurring charges related to the Metals Recycling Business
      in fiscal 2004 and 2002 and to the Auto Parts Business in fiscal 2003. The amounts
      are shown separately to assist in understanding the business' financial results.


                                       26


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

FISCAL 2004 COMPARED TO FISCAL 2003
- -----------------------------------

REVENUES. Consolidated revenues increased $191.4 million (39%) to $688.2 million
for fiscal 2004 compared with fiscal 2003. Revenues in fiscal 2004 increased for
all Company businesses primarily as a result of increased prices and demand in
the worldwide ferrous metals market, including the addition of new export
customers located outside of China. Significant improvements in demand coupled
with lower steel imports led to increases in selling prices for finished steel
products sold by the Steel Manufacturing Business. The Auto Parts Business
benefited from the increased ferrous metals prices in its sales of autobodies.
In addition, the Auto Parts Business acquired three retail locations in Canada
that added revenue and operating income to the segment.


            METALS RECYCLING BUSINESS
The Metals Recycling Business generated revenues of $456.3 million, before
intercompany eliminations, which is an increase of $147.7 million (48%). Ferrous
revenues increased $137.8 million (54%) to $393.0 million as a result of higher
average selling prices net of shipping cost (average net selling prices), higher
shipping costs billed to customers and a slight increase in the volume sold. The
average net selling price of ferrous recycled metal increased $62 per ton, or
51%, to $184 per ton which represents $111.8 million of the revenue increase.
Average export shipping costs increased 57% over the prior year and represent
$19.9 million of the revenue increase. In addition, ferrous sales volumes
increased 1.8% or 33,000 tons which represents $4.1 million of the increase in
ferrous revenue. Export volume is up 1.1% over prior year. Moreover, over 60% of
our total ferrous sales were export shipments to Asia in the last two fiscal
years. In fiscal 2004, ferrous export sales to China decreased to 34% of the
total ferrous exports compared to more than 60% in fiscal 2003. In addition,
ferrous export sales to South Korea increased to approximately 53% of our total
ferrous export sales in fiscal 2004 compared to 28% of ferrous export sales in
fiscal 2003. New customers in Thailand and India purchased 10% of our export
sales volume in fiscal 2004.

Sales volume to the Company's Steel Manufacturing Business increased 15% to
618,000 tons due to increased demand in this finished steel business. Nonferrous
revenues increased $9.2 million (19%) to $57.0 million due primarily to higher
average prices. The average net nonferrous selling price in fiscal 2004 was
$0.48 per pound, an increase of $0.06 per pound from fiscal 2003.

            AUTO PARTS BUSINESS
The Auto Parts Business generated revenue of $81.5 million, before intercompany
eliminations, which is an increase of $16.3 million or 25% from prior year. This
increase is a result of higher wholesale revenues driven by higher average sales
prices for scrapped autobodies due to rising ferrous recycled metal prices and
the March 2004 acquisition of three retail store locations in Canada.

            STEEL MANUFACTURING BUSINESS
The Steel Manufacturing Business' generated revenues of $271.3 million, which is
an increase of $79.4 million or 41% from prior year. Sales prices increased $113
per ton or 39% which represents $70.7 million of the increase and sales volumes
increased 3% which represents $5.9 million of the revenue increase. The increase
in selling prices are a combination of increased demand and passing along
rapidly rising raw materials and energy costs required in the production
process.

COST OF GOODS SOLD. Consolidated cost of goods sold increased $117.2 million or
28% over the prior year. Cost of goods sold decreased as a percentage of revenue
from 83% in fiscal 2003 to 77% in fiscal 2004. The reduction in cost of goods
sold as a percentage of revenue is due to profit margin improvements at all of
the Company's business segments, led by the Steel Manufacturing Business.

            METALS RECYCLING BUSINESS
Cost of goods sold for the Metal Recycling Business increased $102.0 million or
40% to $357.9 million. The cost of goods sold as a percentage of revenues
decreased from 83% in fiscal 2003 to 78% in fiscal 2004. Gross profit increased
by $45.7 million to $98.4 million for the year. The increase in gross profit was
attributable to higher average net selling prices per ton. Compared with fiscal
2003, the average ferrous metals cost of sales per ton

                                       27


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

increased 37% due primarily to higher purchase costs for unprocessed ferrous
metals and higher export sales shipping costs. Generally, the change in the cost
of unprocessed metal has a strong correlation to changes in the average selling
price; however there is generally a delay in the timing between changes in net
selling prices and the change in the cost of unprocessed metal. Thus, as selling
prices rose compared with last year, so did the cost of unprocessed metal. Since
purchase costs did not increase at the same rate as selling prices, we
experienced significant increases in margins.


            AUTO PARTS BUSINESS
The Auto Parts Business' cost of goods sold increased $10.2 million or 28% over
the prior year. As a percentage of revenue, cost of goods sold increased from
55% to 57%. This increase was due to higher car purchase costs and increases in
labor costs. Gross profit increased $6.1 million or 21% over the prior year due
to increased revenue.

            STEEL MANUFACTURING BUSINESS
 Cost of goods sold for the Steel Manufacturing Business increased $51.5 million
or 27% to $242.5 million. Cost of goods sold as a percentage of revenues in
fiscal 2004 decreased to 89% from 100% in fiscal 2003. The decrease in cost of
goods sold as a percentage of revenue is attributable to higher average selling
prices, higher sales volumes and the receipt of the final $1.8 million electrode
price fixing settlement, offset by a $1.1 million pension charge. Average cost
of goods sold per ton increased $69 per ton or 24% compared to the prior fiscal
year. As this increase in cost of sales per ton was more than offset by the $114
per ton increase in average net selling price, gross profit improved by $27.9
million in fiscal 2004 compared to fiscal 2003.

IMPAIRMENT AND OTHER NONRECURRING CHARGES. During fiscal 2002, the Company's
Portland, Oregon metals recycling facility embarked on a dock and loading
facility renovation. The renovation was suspended in fiscal 2003 when issues
with the dock's substructure were detected. Upon review of new engineering
designs focused on operational efficiency and safety specifications, an
impairment charge of $3.5 million was recorded in the fourth quarter of fiscal
2004 to write-off renovation costs incurred prior to the suspension.

In connection with the acquisition of the Auto Parts Business, the Company
conducted an environmental due diligence investigation. Based upon new
information obtained in this investigation, the Joint Venture accrued $2.1
million in environmental liabilities in the second quarter of fiscal 2003 for
remediation costs at the Auto Parts Business's store locations. No environmental
proceedings are pending at any of these sites.

OPERATING INCOME FROM JOINT VENTURES. The Company's joint ventures' revenues and
results of operations were as follows (in thousands):


                                                                         Year Ended August 31,
                                                                    ------------------------------
                                                                        2004              2003
                                                                    ------------      ------------
                                                                                
Total revenues from external customers recognized by:
Joint Ventures in the metals recycling business:
         Processing                                                 $  1,038,373      $    616,958
         Brokering                                                       489,030           251,431
Joint Venture suppliers of metals                                         12,644             8,877
                                                                    ------------      ------------
                                                                    $  1,540,047      $    877,266
                                                                    ============      ============

Operating income from joint ventures recognized by the Company:
Joint Ventures in the metals recycling business                     $     61,672      $     24,827
Joint Venture suppliers of metals                                           (101)             (406)
                                                                    ------------      ------------
                                                                    $     61,571      $     24,421
                                                                    ============      ============


The Joint Ventures in the metals recycling business predominantly sell recycled
ferrous and nonferrous metals. The increase in revenues recognized by these
joint ventures is attributable to higher average net ferrous selling prices and
higher volumes. Shipments of ferrous metal processed by the joint ventures were
3.6 million tons for the year ended

                                       28


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

August 31, 2004 compared with 3.3 million tons in the prior year. The volume of
ferrous metal brokered by the joint ventures increased to 2.7 million tons in
fiscal 2004 compared to 1.7 million tons in the prior year, which came primarily
from increased market share in Mexico and Latin America coupled with product
line expansion into other scrap metal related commodities. The average net
selling price of ferrous recycled metal increased during that period to $187 per
ton from $118 per ton, due to the same worldwide supply and demand factors
affecting the wholly-owned Metals Recycling Business.

In fiscal 2004, the Company's share of income from Joint Ventures in the metals
recycling business increased to $61.7 million due to higher average net selling
prices, increased margins and more efficient operations, benefiting from similar
market factors and pricing as described in the discussion above relating to the
Company's wholly-owned Metals Recycling Business. The Company's joint ventures
with Hugo Neu Corporation earned nearly all of this operating income. The
Company's share of operating income from the global brokering joint venture
increased from $2.3 million in fiscal 2003 to $11.3 million in fiscal 2004. The
Company's share of joint venture operating income in fiscal 2004 also included
an estimated $3.4 million from a joint venture contract with New York City for
the processing and disposal of curbside recycling materials that commenced in
April 2004. The contract with New York City is an interim contract, and the
Company's present intention is not to participate in the anticipated long-tem
contract, so the income stream from this contract could end at any time.
Operating income in fiscal 2004 was reduced by $6.1 million representing the
Company's share of the joint venture LIFO inventory adjustment compared with a
reduction of $2.2 million in fiscal 2003.

SELLING EXPENSES. Selling expenses increased $0.8 million over fiscal 2003
primarily due to increased advertising expenses in the Auto Parts Business.

GENERAL AND ADMINISTRATIVE EXPENSES. General and Administrative expenses
increased $11.0 million over fiscal 2003. The higher general and administrative
expenses were due to higher bonus expense as well as increased spending on
Sarbanes-Oxley compliance and professional fees. The Company's bonus plan is
based upon the principles of Economic Value Added (EVA) and is directly tied to
the financial performance of the Company. Given the Company's recent record
financial performance, bonus expense is significantly higher in fiscal 2004.

INTEREST EXPENSE. In fiscal 2004, interest expense increased $0.3 million
compared to fiscal 2003 due to higher average debt balances during fiscal 2004.

INCOME TAX PROVISION. The 31% tax rate for fiscal 2004 compares with a tax rate
of 27% for fiscal 2003. The increase in tax rate is primarily attributable to a
reduction in estimated Extraterritorial Income Exclusion (ETI) tax benefits on
export sales, an increase partially offset by the reversal of the $6.1 million
deferred tax valuation allowance associated with Net Operating Loss and minimum
tax credit carryforwards. The Company's tax rate is expected to increase in
fiscal 2005 due to a change in the tax law phasing out ETI tax benefits over the
next two years and the deferred tax valuation allowance being fully reversed.

FISCAL 2003 COMPARED TO FISCAL 2002
- -----------------------------------

REVENUES. Consolidated revenues increased $146.2 million (42%) to $496.9 million
for fiscal 2003 compared with fiscal 2002. Revenues for the Metals Recycling
Business increased due to higher selling prices and volumes as worldwide demand
for ferrous metals strengthened through the year. Revenues for the Steel
Manufacturing Business also increased due to higher average net selling prices
and increased sales volumes. Consolidated revenues also increased by $65.2
million due to the addition of the Auto Parts Business as a consolidated
business.

The Metals Recycling Business generated revenues of $308.6 million, before
intercompany eliminations, which is an increase of $86.7 million (39%). Ferrous
revenues increased $81.8 million (47%) to $255.3 million as a result of an
increase in tons sold and higher average selling prices net of shipping cost
(average net selling prices). Ferrous sales volumes increased 255,000 tons (16%)
and the average net selling price of ferrous recycled metal increased $28 (30%)
to $122 per ton. Curtailed supplies of ferrous recycled metals from the
countries of the former Soviet Union, growing worldwide demand and the weakness
of the U.S. dollar drove the volume and price increases. In fiscal 2003, the
Metals Recycling Business made export shipments aggregating 1.2 million tons, an
increase of 89,000 tons (8%) compared with fiscal 2002. Domestic third-party
ferrous tonnage also increased by 38,000 tons (46%) to 120,000 tons. Sales to
the Company's Steel Manufacturing Business increased 31% to 535,000 tons due to
increased demand in this business. Nonferrous revenues increased $6.1 million
(15%) to $47.8 million due primarily to higher average prices. The average net
nonferrous selling price in fiscal 2003 was $0.42 per pound, an increase of
$0.06 per pound from fiscal 2002.

                                       29


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

The Steel Manufacturing Business' revenues increased $25.3 million (15%) from
revenues recognized in the prior year to $191.9 million in fiscal 2003 primarily
due to higher average net selling prices and higher volumes for all major
product lines. The volume of finished steel products sold increased, along with
the average net selling price per ton, compared with fiscal 2002. Sales of
finished steel products were up 9% to 622,000 tons while the average net selling
price per ton increased $15 per ton (5%) to $291 per ton. The increase in the
average sales price per ton was primarily due to a higher valued product sales
mix and lower supplies of competing importing steel, which was partially
attributed to the weakness of the U.S. dollar. Also, towards the end of the
fiscal 2003 second quarter, the Company and other steel producers increased
their selling prices for rebar and coiled rebar. Additionally, merchant bar
selling prices have increased modestly to adjust to the costs of production. The
increase in sales volume was due to a 30% increase in the volume of wire rod and
a 6% increase in sales volume of rebar. The higher wire rod volume was due to
import duties imposed by the U.S. Government in the spring of 2002 on certain
wire rod products. The increase in rebar volumes is primarily due to increased
demand as wholesale customers bought inventory ahead of the effective date of
announced price increases.

As previously mentioned, the Auto Parts Business was acquired on February 14,
2003 and was considered a "step" acquisition allowing the consolidation of its
financial results as of the beginning of fiscal 2003. As such, revenues for
fiscal 2003 included $65.2 million related to the Auto Parts Business with no
comparable revenues being recognized for financial statement purposes in fiscal
2002. In order to aid the reader's understanding of the financial performance of
this segment, the pro forma fiscal 2002 revenues for the Auto Parts Business
were $58.3 million. The $6.9 million (12%) increase was primarily caused by an
increase in wholesale revenues driven by higher average sales prices for
scrapped autobodies due to rising ferrous recycled metal prices. Wholesale
prices also benefited from the implementation of a new "core" distribution
center that aggregated production volumes and provided an improved venue to sell
these products to competing customers. Retail revenues were also up due to
growth in part sales and admissions pricing.

COST OF GOODS SOLD. Consolidated cost of goods sold increased $88.6 million
(27%) to $413.0 million and was 83% percent of revenues compared with 93% in
fiscal 2002. The decrease to 83% was primarily due to improved margins, coming
principally from higher selling prices, for all of the Company's business
segments.

Cost of goods sold for the Metals Recycling Business increased $56.0 million
(28%) to $255.9 million before intercompany eliminations. The cost of goods sold
as a percentage of revenues decreased from 90% for fiscal 2002 to 83% during
fiscal 2003, contributing to a $30.7 million increase in gross profit. This
increase in gross margin in fiscal 2003 was primarily attributable to higher
selling prices and higher sales volume, partially offset by higher prices paid
to suppliers of ferrous recycled metals and higher export freight rates,
resulting in an $18 per ton (18%) increase in the average ferrous metals cost of
sales per ton. Cost of sales per ferrous ton increased as higher selling prices
and higher demand for processed metal pushed up the purchase price the Company
paid for unprocessed metal. Competition from other recyclers for the purchase of
unprocessed metal was also a factor in the cost increases. The average export
freight rate climbed $4 per ton in fiscal 2003 compared with fiscal 2002.

Cost of goods sold for the Steel Manufacturing Business increased $21.8 million
(13%) to $191.0 million and decreased as a percentage of revenues from 102% in
fiscal 2002 to 100% in fiscal 2003. The decrease was due to a higher average
sales price per ton and lowered fixed cost per ton, due to larger production
volumes spreading the fixed costs over more tons produced, partially offset by
higher prices paid for scrap metal. Melt shop production increased 32% and
rolling mill production increased 16% compared with fiscal 2002. Fiscal 2002
production volumes were temporarily curtailed in order to reduce inventory to
better match it with customer demand. Average cost of sales per ton increased
$10 per ton (3%) compared with the prior fiscal year. As this increase in cost
of sales per ton was more than offset by the $15 per ton increase in average net
selling price, gross profit improved by $3.5 million (135%) in fiscal 2003
compared with fiscal 2002.

The Auto Parts Business' cost of sales was $0.5 million (1%) lower during fiscal
2003 as compared to the pro forma cost of sales for fiscal 2002. As a percentage
of revenues, cost of sales decreased from 63% to 55%. This improvement was due
to higher margins realized on wholesale sales partially offset by higher labor
costs.

                                       30


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

IMPAIRMENT AND OTHER NONRECURRING CHARGES. In connection with the acquisition of
the Auto Parts Business, the Company conducted an environmental due diligence
investigation. Based upon new information obtained in this investigation, the
Joint Venture accrued $2.1 million in environmental liabilities in the second
quarter of fiscal 2003 for remediation costs at the Auto Parts Business's store
locations. No environmental proceedings are pending at any of these sites.

The Company recorded impairment and other nonrecurring charges of $7.1 million
in fiscal 2002. The Company recorded nonrecurring charges of $1.9 million for
the early termination of a fixed-price Alaska barge contract of affreightment
that management determined was not cost effective. The Alaska barge contract
charge included a $0.9 million write-off of a note receivable and a $1.0 million
payment to terminate the contract. Also, an impairment charge of $1.8 million
was recorded for the elimination of an unprofitable car-crushing business and an
impairment charge of $1.1 million was recorded for the closure of an
under-performing yard in Reno, Nevada. Nonrecurring charges of $1.5 million were
recorded for the loss on the early termination of two vessel charter contracts
with a related company. The Company terminated the leases in order to take
advantage of market rates which were $7 to $8 per ton lower than the all-in
contracted rates. Shipping cost savings as a result of the contract termination
totaled approximately $2.0 million. Additionally, a loss of $0.8 million was
recorded for the sale of a non-strategic steel forging business.

OPERATING INCOME FROM JOINT VENTURES. The Company's joint ventures' revenues and
results of operations were as follows (in thousands):


                                                                         Year Ended August 31,
                                                                    ------------------------------
                                                                        2003              2002
                                                                    ------------      ------------
                                                                                
Total revenues from external customers recognized by:
Joint Ventures in the metals recycling business:
         Processing                                                 $    616,958      $    480,157
         Brokering                                                       251,431           144,962
Joint Venture suppliers of metals                                          8,877            61,762
                                                                    ------------      ------------
                                                                    $    877,266      $    686,881
                                                                    ============      ============

Operating income from joint ventures recognized by the Company:
Joint Ventures in the metals recycling business                     $     24,827      $     13,766
Joint Venture suppliers of metals                                           (406)            5,624
                                                                    ------------      ------------
                                                                    $     24,421      $     19,390
                                                                    ============      ============


The Joint Ventures in the metals recycling business predominantly sell recycled
ferrous and nonferrous metals. The increase in revenues recognized by these
joint ventures is attributable to higher average net ferrous selling prices.
Shipments of ferrous metal processed by the joint ventures were 3.3 million tons
for the year ended August 31, 2003 compared with 3.5 million tons in the prior
year. The volume of ferrous metal brokered by the joint ventures increased to
1.7 million tons in fiscal 2003 compared to 1.2 million tons in the prior year.
The average net selling price of ferrous recycled metal increased during that
period to $118 per ton from $90 per ton, predominantly due to strong demand from
Asia, especially China and Korea. These joint ventures also increased their
sales margins by improving operational efficiencies.

In fiscal 2003, the Company's share of income from Joint Ventures in the metals
recycling business increased to $24.8 million due to higher average net selling
prices, increased margins and more efficient operations. The Company's joint
ventures with Hugo Neu Corporation, which earned the majority of the income,
instituted EVA concurrently with the Company in fiscal 2001. The use of EVA
coupled with management changes has continued to result in improved operational
efficiencies and increased profitability. Operating income in fiscal 2003 was
reduced by $2.2 million representing the Company's share of the JV LIFO
inventory adjustment compared with a reduction of $1.2 million in fiscal 2002.

                                       31


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

Revenues of the Joint Venture suppliers of metals decreased by $52.9 million
from fiscal 2002 as compared to the fiscal 2003. Most of this decrease was
caused by the reclassification in fiscal 2003 of the Pick-N-Pull Joint Venture,
which is now consolidated and included as a new business segment, the Auto Parts
Business. Excluding the change caused by this reclassification, revenues
decreased $7.0 million during fiscal 2003 compared to last year due to lower
selling prices and lower demolition revenue. The Company's equity in income from
these Joint Ventures, excluding the impact of Pick-N-Pull, decreased $1.1
million primarily due to the slowdown in the U.S. economy.

SELLING EXPENSES. These expenses increased $2.4 million compared with fiscal
2002 primarily due to an increase in export commission expense caused from
higher ferrous recycled metals export sales.

GENERAL AND ADMINISTRATIVE EXPENSES. Compared with fiscal 2002, general and
administrative expenses increased $6.2 million. The consolidation of the Auto
Parts Business represents $5.0 million of this increase. The remainder of this
increase is primarily due to increased bonus accruals directly related to the
improvement in the Company's EVA performance.

INTEREST EXPENSE. In fiscal 2003, interest expense decreased $0.5 million
compared with fiscal 2002 due to lower average interest rates and borrowings.
The Company's borrowings averaged $70.5 million in fiscal 2003 compared to $75.9
million in fiscal 2002. The average interest rate for fiscal 2003 was 2.1%
compared with 2.7% for fiscal 2002.

OTHER INCOME AND EXPENSES. Other income and expenses decreased $0.7 million in
fiscal 2003 compared with fiscal 2002. The difference is principally due to the
addition of the Auto Parts Business and a harbor maintenance tax refund received
in fiscal 2002. In addition, this line item includes market value adjustments
for changes in investment performance for securities held in a trust for the
purpose of funding future non-qualified pension payments. The Company recognized
gains from the trust fund assets in the amount of $0.4 million in fiscal 2003
and losses of $0.4 million in fiscal 2002.

INCOME TAX PROVISION. The Company's effective rate of 27% for fiscal 2003 was
lower than the 35% federal statutory tax rate for three primary reasons: (1) the
implementation of SFAS 142 eliminated the amortization of goodwill, some of
which had been nondeductible; (2) export sales, which under Federal law are
taxed at a lower rate than domestic sales increased; and (3) net operating loss
carryforwards that accompanied an earlier acquisition continued to provide
benefit. The fiscal 2002 tax rate of 14% benefited from the two latter items, as
well as from the one-time recognition of California tax credits that had been
generated over the previous ten years.

As part of the 1996 acquisition of Proler International Corp. (Proler), the
Company acquired $31.4 million of federal net operating loss carryforwards
(NOLs). The Company recognized no immediate tax benefit for the NOLs. Instead,
the Company set up an offsetting $31.4 million valuation allowance because the
ultimate use of the NOLs was uncertain given the then-current federal tax law
proscription against applying the NOLs to any taxable income other than the
post-acquisition income generated by Proler. A change to federal tax law in
1999, however, allowed an annual $2.4 million of NOL to be applied to taxable
income from all sources, not just from Proler. Due to this change in tax law,
the Company released an annual $2.4 million from the valuation allowance, and
recognized the corresponding $0.8 million in tax benefit, in fiscal years 2003
and 2002. This is a major reason why the Company's effective tax rates were
lower than the statutory rates for those years.

The Company also acquired $0.7 million of credits as part of the Proler
acquisition. As with the NOLs, a valuation allowance was set up to offset the
credits. No part of the valuation allowance had been released as of August 31,
2003. The credits are not likely to be used until after the NOLs have been used
or expire. The credits can be carried forward indefinitely.

In fiscal 2002, the Company qualified for $2.1 million of Enterprise Zone tax
credits in the state of California. These credits can be used to offset
California state income taxes to the extent that the Company has a California
franchise (income) tax liability on taxable income apportionable to each zone.
Any credits in excess of the tax liability can be carried forward indefinitely.
These credits, combined with the release of $2.4 million of valuation allowance
pertaining

                                       32


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

to the NOLs, were major reasons why the Company's effective tax rate of 14% for
fiscal 2002 was well below the statutory rate of 35%.

LIQUIDITY AND CAPITAL RESOURCES.
- --------------------------------
For fiscal 2004, cash generated from operations was $73.2 million, compared to
$40.9 million in fiscal 2003. The increase in cash flow from operations was
primary related to an improvement in net income, offset by the reinvestment of
cash flow by the Hugo Neu joint ventures and an increase in inventories, which
is a result of higher inventory quantities on hand at August 31, 2004 and
increased inventory costs for raw materials at all divisions.

Capital expenditures totaled $22.2 million, $21.8 million, and $9.6 million for
fiscal years 2004, 2003 and 2002, respectively. The capital expenditures in
fiscal 2004 included production improvement projects, including partial payments
on the new state-of-the-art mega shredder at the Company's Oakland, California
recycling facility and the major furnace replacement at our Steel Manufacturing
Business.

In March 2004, the Company completed the acquisition of three self-service used
auto parts stores in Canada for a purchase price of $13.7 million. During fiscal
2004, the Company also made additional post-closing payments of $11.8 million
related to the acquisition of Pick and Pull Auto Dismantling, Inc., which closed
in February 2003.

As a result of acquisitions completed in prior years, the Company had $21.5
million of environment liabilities as of August 31, 2004. Over the next 12
months, the Company expects to pay approximately $9.3 million relating to a
previously accrued remediation projects in connection with one of its metals
recycling facilities located in the State of Washington on the Hylebos Waterway.
Additionally, the Company expects to require significant future cash outlays as
it incurs the actual costs relating to the remediation of other such
environmental liabilities.

As of August 31, 2004, the Company had a committed unsecured bank credit
facility totaling $150 million that matures in May 2006. The credit facility
contains a provision whereby the Company may, upon obtaining consent of the bank
group, extend the term of the agreement by one year to May 2007. The Company has
provided notice of its intention to request such an extension and the bank group
has agreed to the request. The extension is subject to the Company providing
standard representations and warranties as of the May 2006 original maturity
date. The Company currently anticipates it will be able to provide the required
representations and warranties and the agreement will be extended. The Company
also has additional unsecured credit lines totaling $20 million, which are
uncommitted. The Company's debt agreements have certain restrictive covenants.
As of August 31, 2004, the Company had aggregate bank borrowings outstanding
under these facilities of $60.0 million and was in compliance with such
covenants.

In July 2002, the Company's metals recycling joint ventures with Hugo Neu
Corporation entered into a revolving credit facility (JV Credit Facility) with a
group of banks for working capital and general corporate purposes. Prior to that
time, the joint ventures' working capital and other cash needs had been met by
advances provided equally by the Company and its partner, Hugo Neu Corporation.
During February 2004, the facility was increased to $110 million. The JV Credit
Facility expires on January 26, 2005 and is secured by the inventory and
receivables of the joint venture businesses. The Company is not a guarantor of
the JV Credit Facility. The JV Credit Facility has a number of covenants and
restrictions, including restrictions on the level of distributions to the joint
venture partners. As of August 31, 2004, there was no debt outstanding under the
credit facility and the joint ventures were in compliance with these covenants.
It is the Company's present intention to not renew the facility upon its
expiration, in which case the Company and its partner will need to revert to
funding the cash needs of the joint ventures on an equal basis.

The joint venture agreements allow for distributions to the joint venture
partners. During the two year period ended August 31, 2004, the Company recorded
$86.0 million in operating income representing its share in the earnings of the
joint ventures. However, during this time the Company received no cash
distributions. Instead, the Hugo-Neu joint ventures have been utilizing all of
their available cash flow to fund expansion of working capital, business growth,
and investment in state-of-the-art equipment to improve the efficiencies and
capabilities of their business and to pay down borrowings from the JV Credit
Facility.

                                       33


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

The joint ventures in the metals recycling business are purchasing and
installing three new mega-shredders in fiscal 2005 for an estimated cost of $36
million. The joint venture partners anticipate using a long-term equipment
financing facility to support the purchase. The joint ventures would make
principal and interest payments on the financing facility from operating income.

The Company has certain contractual obligations to make future payments. The
following table summarizes these future obligations as of August 31, 2004 (in
thousands):


        CONTRACTUAL OBLIGATIONS                              Payments Due By Period
        -----------------------           ------------------------------------------------------------
                                                       Less than      1-3          4-5         After 5
                                            Total       1 Year       Years        Years         Years
                                          --------     --------     --------     --------     --------
                                                                               
         Long-term debt(1)                $ 68,026     $    225     $ 60,101     $     --     $  7,700
         Interest payments on long-
            term debt                        1,488           97          194          194        1,003
         Operating leases                  127,675        7,067       10,375        7,193      103,040

         PURCHASE OBLIGATIONS:
             Gas contract(2)                27,767        5,749       17,246        4,772           --
             Electric contract(3)            2,184        2,016          168           --           --

         OTHER LONG-TERM LIABILITIES
             ON BALANCE SHEET:
         Environmental liabilities          21,499        9,373          450          400       11,276
         Long-term supplemental
            retirement plan liability        2,172           --          127          329        1,716
                                          --------     --------     --------     --------     --------
         Total                            $250,811     $ 24,527     $ 88,661     $ 12,888     $124,735
                                          ========     ========     ========     ========     ========

(1)   The Company has a $150 million credit facility with a group of banks for working capital and
      other general purposes. The facility expires in May 2006, but may be extended one year after the
      Company meets certain administrative requirements.
(2)   The Steel Manufacturing Business has a take-or-pay natural gas contract with IGI Resources that
      requires a minimum purchase of 3,500 MMBTU per day at tiered pricing, whether or not the amount
      is utilized. The natural gas price as of August 31, 2004 was $4.50 MMBTU. Any amount that is not
      utilized may be resold to IGI Resources. The contract expires on May 31, 2009.
(3)   The Steel Manufacturing Business has an electricity contract with McMinnville Power and Light
      that requires a minimum purchase of electricity at a rate subject to variable pricing, whether
      or not the amount is utilized. Any amount that is not utilized may be resold to the Bonneville
      Power Administration. The contract expires in September 2005.


Pursuant to a stock repurchase program which began in 1997, the Company is
authorized to repurchase up to 3.0 million shares of its stock when management
believes such repurchases would enhance shareholder value. During fiscal year
2004, the Company made no share repurchases. As of August 31, 2004, the Company
had repurchased a total of 1.3 million shares under this program.

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. We anticipate making
contributions of approximately $6.0 million to the various pension plans in
fiscal 2005.

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

                                       34


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

twelve months. In the longer term, the Company may seek to finance business
expansion with additional borrowing arrangements or additional equity financing.

FACTORS THAT COULD AFFECT FUTURE RESULTS. This Form 10-K, including Item 1 of
Part l and Item 7 of Part II, contains forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934, that are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. One can generally identify
these forward-looking statements because they contain "expect," "believe,"
"anticipate," "estimate," "plans" and other words which convey a similar
meaning. One can also identify these statements as they do not relate strictly
to historical or current facts. Examples of factors affecting Schnitzer Steel
Industries, Inc.'s wholly-owned operations and its joint ventures (the Company)
that could cause actual results to differ materially are the following:

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

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

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

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

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

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

Additionally, the Auto Parts Business is subject to a number of other risks that
could prevent it from maintaining or exceeding its current levels of
profitability, such as volatile supply and demand conditions affecting prices
and volumes in the markets for its products, services and raw materials;
environmental issues; local and worldwide

                                       35


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

economic conditions; increased competition; the ultimate success of the
Company's growth and acquisition plans; and business integration and management
transition issues.

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

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

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

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

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

In December 2002, Nucor Corporation ("Nucor") assumed ownership of the assets of
Birmingham Steel Corp., and acquired a steel manufacturing business in Seattle,
Washington. Nucor Corporation, the leader in setting finished steel prices in
the Company's finished steel markets, has a significant share of the West Coast
steel market and is considered an aggressive competitor. Nucor has consolidated
much of the West Coast domestic steel production with the 2002 purchase of the
former Birmingham Steel Mill in Seattle, Washington and the former North Star
mill in Kingman,

                                       36


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

Arizona. The Kingman mill has been idle since 2003, any future start-up of its
operations could negatively impact the Company's recycled metal and finished
steel markets, prices, margins and, potentially, cash flow.

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

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

POST RETIREMENT BENEFITS: The Company has a number of post retirement benefit
plans that include defined benefit and multiemployer plans. The Company's
contributions to the defined benefit plans are determined 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's annual contributions into the defined
benefit plans and changes to the expenses recognized in a current fiscal year.
Management and the actuary evaluate these rates annually and adjust if
necessary.

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

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

JOINT VENTURES: The Company has significant investments in joint venture
companies, the most substantial of which are its five metals recycling joint
ventures with Hugo Neu Corporation (HNC). In each case, the day-to-day
activities of the joint venture business are managed by the Company's joint
venture partner, not the Company. As a result, the Company does not have the
same ability to control or predict the operations, cash flow, expenditures,
debt, and related financial results as it does with its consolidated businesses.
Therefore, it is difficult to predict the financial results of the joint
ventures.

In recent years, the Company's relationship with the chief executive officer of
HNC, its most significant joint venture partner, has deteriorated. There have
been disagreements regarding business decisions as well as personality clashes,
but the Company does not believe that these issues have materially affected the
operations or operating results of the joint ventures, which have shown dramatic
financial improvement since fiscal 2000. The Company is currently disputing
HNC's recent unilateral assertion of a right to be paid certain commissions on
sales by the joint venture engaged in global brokering of recycled metals, as
described in more detail in Note 7 of Notes to Consolidated Financial Statements
in Item 8. As described in Liquidity and Capital Resources above, the Company's
present intention is to not renew the $110 million JV Credit Facility when it
matures in January 2005, and for the Company and HNC to revert to funding the
cash needs of the joint ventures on an equal basis. If HNC does not fund its
share of joint venture cash needs, the operations of the global brokering joint
venture, which has relied extensively on the JV Credit Facility for working
capital support, could be adversely affected.

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

                                       37


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

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

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

ENERGY SUPPLY: The Company and its joint ventures utilize various energy sources
to operate their facilities. In particular, electricity and natural gas
currently represent approximately 9% of the cost of steel manufactured for the
Company's Steel Manufacturing Business. The Steel Manufacturing Business
purchases electric power under a long-term contract from McMinnville Water &
Light (McMinnville) which in turn relies on the Bonneville Power Administration
(BPA). Historically, these contracts have had favorable prices and are long-term
in nature. The Company has a five-year contract that expires in September 2006.
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
MMBTU. The current contract expires on May 31, 2009 and obligates the business
to purchase minimum amounts of gas at a fixed rate. Effective November 1, 2004,
the natural gas rate will be reduced to $4.39 per MMBTU. This is a take or pay
contract with a minimum average usage of 3,575 MMBTU per day. Gas not used is
sold on the open market and gains or losses are recorded in cost of sales.

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

TAX LAWS: The Company has been able to reduce its effective tax rate below the
federal statutory tax rate for each of the last three years by using a
combination of Net Operating Loss carryforwards (NOLs), tax credits in State of
California Enterprise Zones, and federal Extraterritorial Income Exclusion (ETI)
tax benefits associated with making foreign sales. In response to recent
determinations by the World Trade Organization that the ETI tax benefit
constituted an illegal export subsidy, Congress passed the American Jobs
Creation Act of 2004 (the Act), which became law on October 22, 2004. A key
provision of the Act eliminates the ETI deduction over the next two years,
offsetting it in part with a deduction for "qualified production activities
income." Until regulations are issued explaining the new deduction, any
projection of its effect on the Company's worldwide tax rate would necessarily
be imprecise, but the current projection is that the tax rate would approximate
36% in fiscal 2005.

The Company's worldwide tax rate is also apt to be higher in fiscal 2005 for two
reasons unrelated to the Act: All net operation losses (NOLs) have been used for
GAAP purposes, and further discovery of significant state tax credits is
unlikely. As noted above, both items have served to reduce the effective tax
rate in recent years.

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

                                       38


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

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

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

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

INTERCOMPANY SALES: The Auto Parts Business sells autobodies to the Metals
Recycling Business, and the Metals Recycling Business sells ferrous recycled
metal to the Steel Manufacturing Business, at prices that are intended to
approximate market. When the Company consolidates its results in accordance with
generally accepted accounting principles, the Company eliminates the
intercompany sales and purchases and also eliminates the estimated profit
remaining in inventory ("Profit Elimination") at the end of each reporting
period. In estimating future operating and financial performance, the Company
makes assumptions regarding the forecasted Profit Elimination computation and
its impact on the quarterly financial results of the Company. Small variations
in price, sales volume, production volume, and purchase prices and volumes from
both within the Company and from third parties can result in significant
differences between forecasted Profit Elimination and actual results.

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



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company periodically uses derivative financial instruments to limit exposure
to changes in interest rates. Because such derivative instruments are used
solely as hedges and not for speculative trading purposes, they do not represent
incremental risk to the Company. For further discussion of derivative financial
instruments, refer to "FAIR VALUE OF FINANCIAL INSTRUMENTS" in the Consolidated
Financial Statements included in Item 8, Note 1 of the "Notes to the
Consolidated Financial Statements".

                                       39


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
                                                                            Page
                                                                            ----
            Report of Independent Registered Public Accounting Firm...........41

            Consolidated Balance Sheets - August 31, 2004 and 2003............42

            Consolidated Statement of Operations - Years ended
                   August 31, 2004, 2003 and 2002.............................43

            Consolidated Statement of Shareholders' Equity - Years ended
                   August 31, 2004, 2003 and 2002.............................44

            Consolidated Statement of Cash Flows - Years ended
                   August 31, 2004, 2003 and 2002.............................45

            Notes to Consolidated Financial Statements........................46

            Schedule II - Valuation and Qualifying Accounts...................70

            Report of Independent Registered Public Accounting Firm
                   on Financial Statement Schedule............................71


            All other schedules and exhibits are omitted, as the information is
not applicable or is not required.









                                       40


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the Board of Directors and Shareholders of Schnitzer Steel Industries, Inc

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of retained earnings
and of cash flows present fairly, in all material respects, the financial
position of Schnitzer Steel Industries and its subsidiaries at August 31, 2004
and 2003, and the results of their operations and their cash flows for each of
the three years in the period ended August 31, 2004 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.



PricewaterhouseCoopers LLP
Portland, Oregon
November 23, 2004

                                       41


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

                                                                                      AUGUST 31,
                                                                            -----------------------------
                                                                                2004             2003
                                                                            ------------     ------------
                                                                                       
                                     Assets
                                     ------
Current assets:
     Cash                                                                   $     11,307     $      1,687
     Accounts receivable, less allowance for doubtful accounts of
        $772 and $712                                                             43,179           38,428
     Accounts receivable from related parties                                        265              555
     Inventories (Note 2)                                                         80,167           61,143
     Deferred income taxes (Note 8)                                                5,383            4,524
     Prepaid expenses and other                                                    6,859            7,400
                                                                            ------------     ------------
            Total current assets                                                 147,160          113,737

Net property, plant and equipment (Note 4)                                       138,438          141,224

Other assets:
     Investment in and advances to joint venture partnerships (Note 12)          182,845          119,066
     Notes receivable less current portion (Note 9)                                1,337            1,565
     Goodwill                                                                    131,178          107,209
     Intangibles and other                                                         5,015            5,093
                                                                            ------------     ------------
Total Assets                                                                $    605,973     $    487,894
                                                                            ============     ============
                      Liabilities and Shareholders' Equity
                      ------------------------------------
Current liabilities:
     Current portion of long-term debt (Note 6)                             $        225     $        220
     Accounts payable                                                             31,881           21,537
     Accrued payroll liabilities                                                  20,183           10,065
     Current portion of environmental liabilities (Note 7)                         9,373            4,639
     Accrued income taxes                                                          4,954              358
     Other accrued liabilities                                                     7,450            4,477
                                                                            ------------     ------------
            Total current liabilities                                             74,066           41,296

Deferred income taxes (Note 8)                                                    24,884           33,093

Long-term debt, less current portion (Note 6)                                     67,801           87,045

Environmental liabilities, net of current portion (Note 7)                        12,126           17,139

Other long-term liabilities (Note 10)                                              2,295            2,704

Minority interests                                                                 5,921            3,620

Commitments and contingencies (Notes 4, 7 and 9)                                                       --

Shareholders' equity:
     Preferred stock--20,000 shares authorized, none issued                                            --
     Class A common stock--75,000 shares $1.00 par value authorized,
         22,022 and 12,445 shares issued and outstanding                          22,022           12,445
     Class B common stock--25,000 shares $1.00 par value authorized,
         8,306 and 7,061 shares issued and outstanding                             8,306            7,061
     Additional paid-in capital                                                  110,177          104,249
     Retained earnings                                                           278,374          179,242
     Accumulated other comprehensive loss:
            Foreign currency translation adjustment                                    1               --
                                                                            ------------     ------------
            Total shareholders' equity                                           418,880          302,997
                                                                            ------------     ------------
Total Liabilities and Shareholders' Equity                                  $    605,973     $    487,894
                                                                            ============     ============

          The accompanying notes are an integral part of this statement

                                       42


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

                                                                         YEAR ENDED AUGUST 31,
                                                             ------------------------------------------------
                                                                 2004              2003              2002
                                                             ------------      ------------      ------------
                                                                                        
Revenues                                                     $    688,220      $    496,866      $    350,648

Cost of goods sold                                                530,279           413,043           324,435
Impairment and non-recurring charges                                3,500             2,100             7,100
Selling                                                             6,102             5,311             2,863
General and administrative                                         43,030            32,048            25,815
                                                             ------------      ------------      ------------

Income (loss) from wholly-owned operations                        105,309            44,364            (9,565)

Operating income from joint ventures (Note 12)                     61,571            24,421            19,390
                                                             ------------      ------------      ------------

Operating income                                                  166,880            68,785             9,825

Other income (expense):
     Interest expense                                              (2,048)           (1,778)           (2,314)
     Other income (expense)                                          (506)             (540)              136
                                                             ------------      ------------      ------------

                                                                   (2,554)           (2,318)           (2,178)
                                                             ------------      ------------      ------------

Income before cumulative effect of change in
   accounting principle, income taxes, minority
   interests and pre-acquisition interests                        164,326            66,467             7,647

Income tax provision (Note 8)                                     (50,669)          (17,946)           (1,094)
                                                             ------------      ------------      ------------

Income before cumulative effect of change in
   accounting principle,  minority interests
   and pre-acquisition interests                                  113,657            48,521             6,553

Minority interests, net of tax                                     (2,476)           (1,824)               --

Pre-acquisition interests, net of tax                                  --            (2,513)               --
                                                             ------------      ------------      ------------

Income before cumulative effect of change in
   accounting principle                                           111,181            44,184             6,553

Cumulative effect of change in accounting principle                    --              (983)               --
                                                             ------------      ------------      ------------

Net income                                                   $    111,181      $     43,201      $      6,553
                                                             ============      ============      ============

Net income per share - basic:
     Income before cumulative effect of change in
        accounting principle                                 $       3.71      $       1.58      $       0.24
     Cumulative effect of change in accounting principle               --             (0.03)               --
                                                             ------------      ------------      ------------
     Net income per share                                    $       3.71      $       1.55      $       0.24
                                                             ============      ============      ============

Net income per share - diluted:
     Income before cumulative effect of change in
        accounting principle                                 $       3.58      $       1.50      $       0.23
     Cumulative effect of change in accounting principle               --             (0.03)               --
                                                             ------------      ------------      ------------
     Net income per share                                    $       3.58      $       1.47      $       0.23
                                                             ============      ============      ============

          The accompanying notes are an integral part of this statement

                                       43


                        SCHNITZER STEEL INDUSTRIES, INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                 (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, 2001                 4,896  $    4,896     4,304  $    4,304  $   95,923  $  142,946  $       --  $  248,069

Class B common stock converted to
   Class A common stock                      124         124      (124)       (124)                                             --
Class A common stock repurchased             (99)        (99)                           (1,157)                             (1,256)
Class A common stock issued                  104         104                             1,308                               1,412
Net income                                                                                           6,553                   6,553
Cash dividends paid - common ($0.067
   per share)                                                                                       (1,830)                 (1,830)
                                        --------  ----------  --------  ----------  ----------  ----------  ----------  ----------

Balance at August 31, 2002                 5,025       5,025     4,180       4,180      96,074     147,669          --     252,948

Class B common stock converted to
   Class A common stock                      635         635      (635)       (635)                                             --
Class A common stock issued                  547         547                             8,175                               8,722
Net income                                                                                          43,201                  43,201
Stock dividend                             6,238       6,238     3,516       3,516                  (9,754)                     --
Cash dividends paid - common ($0.067
   per share)                                                                                       (1,874)                 (1,874)
                                        --------  ----------  --------  ----------  ----------  ----------  ----------  ----------

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 adjustments                                                                             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
                                        ========  ==========  ========  ==========  ==========  ==========  ==========  ==========


          The accompanying notes are an integral part of this statement

                                       44


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



                                                                         YEAR ENDED AUGUST 31,
                                                            ------------------------------------------------
                                                                2004              2003              2002
                                                            ------------      ------------      ------------
                                                                                       
Operations:
Net income                                                  $    111,181      $     43,201      $      6,553
Noncash items included in income:
   Cumulative effect of change in accounting principle                                 983                --
   Depreciation and amortization                                  20,403            19,441            18,631
   Minority and pre-acquisition interests                          3,557             5,942                --
   Deferred income taxes                                          (9,068)            1,791               692
   Equity in earnings of joint ventures                          (61,571)          (24,421)          (19,390)
   Impairment and other non-recurring charges                      3,500             2,100             6,100
   (Gain) loss on disposal of assets                                 310               (93)               85
Cash provided (used) by changes in working capital:
   Accounts receivable                                            (4,461)           (6,169)           (8,675)
   Inventories                                                   (19,024)           (1,240)           31,174
   Prepaid expenses and other                                        541            (4,411)              426
   Accounts payable                                               10,344             2,802             1,166
   Accrued liabilities                                            17,426             1,317            (1,768)
   Environmental liabilities                                        (279)           (1,998)             (966)
   Other assets and liabilities                                      362             1,692             2,357
                                                            ------------      ------------      ------------

Net cash provided by operations                                   73,221            40,937            36,385
                                                            ------------      ------------      ------------

Investing:
Capital expenditures                                             (22,192)          (21,796)           (9,569)
Investments in subsidiaries                                      (23,861)          (64,923)               --
Cash received from joint ventures                                    953               286           145,060
Cash paid to joint ventures                                       (3,009)           (3,272)         (113,703)
Proceeds from sale of assets                                       1,649               585                39
                                                            ------------      ------------      ------------

Net cash (used) provided by investing                            (46,460)          (89,120)           21,827
                                                            ------------      ------------      ------------

Financing:
Repurchase of Class A common stock                                    --                --            (1,256)
Issuance of Class A common stock                                   6,730             8,722             1,412
Distributions to minority and pre-acquisition interests           (2,603)           (4,292)               --
Cash dividends declared and paid                                  (2,029)           (1,874)           (1,830)
Increase (decrease) in long-term debt                            (19,239)           19,000           (23,900)
Decrease in other long-term debt                                      --            (4,660)           (1,541)
                                                            ------------      ------------      ------------

Net cash (used) provided by financing                            (17,141)           16,896           (27,115)
                                                            ------------      ------------      ------------

Net increase (decrease) in cash                                    9,620           (31,287)           31,097

Cash at beginning of year                                          1,687            32,974             1,877
                                                            ------------      ------------      ------------
Cash at end of year                                         $     11,307      $      1,687      $     32,974
                                                            ============      ============      ============


          The accompanying notes are an integral part of this statement

                                       45


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF BUSINESS

Schnitzer Steel Industries, Inc. (the Company) operates a metal recycling
business, a self-service used auto parts business, and, through its Cascade
Steel Rolling Mills, Inc. subsidiary, a mini-mill steel manufacturing business.
The Company's facilities are located primarily in the western United States and
Canada, but our Joint Ventures in the metals recycling business have a strong
presence in the eastern United States.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries. The Company, through
subsidiaries, holds a 50% interest in nine joint ventures and a 30% interest in
one, which are accounted for using the equity method. All intercompany
transactions and balances have been eliminated.

BASIS OF PRESENTATION
Note 3 of the Notes to the Consolidated Financial Statements describe an
acquisition that occurred on February 14, 2003. Under Statement of Financial
Accounting Standards No. 141 (SFAS No. 141), "Business Combinations," the
acquisition is considered a "step" acquisition due to the fact that the Company
had a significant joint venture interest in the acquired business for a number
of years. Additionally, since the acquisition occurred during fiscal 2003, the
Company elected to include it in the consolidated results as though it had
occurred at the beginning of fiscal 2003. Thus, the 2003 statement of
operations, balance sheet, and statement of cash flows have been adjusted to
consolidate the acquisition as of September 1, 2002. Also, the acquired
businesses were consolidated with the Company's previous interest in the
business to form a separate reporting segment called the Auto Parts Business.
Additionally, consolidation accounting requires the Company to adjust its
earnings for the ownership interests it did not own during the reporting period.
For fiscal 2003, net income was reduced by $2.5 million of pre-acquisition
interests, net of income taxes, representing the share of income attributable to
the former joint venture partner prior to the acquisition. The financial results
of the acquired business for periods prior to fiscal 2003 continue to be
accounted for using the equity method and are included in the joint venture
businesses reporting segment.

CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term securities that have an original
maturity date of 90 days or less.

INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the average cost method. The production and accounting process utilized by the
Company to record recycled metals inventory quantities relies on significant
estimates, which can be affected by weight imprecision, moisture, production
yields and other factors.

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Major renewals and
improvements are capitalized. Substantially all expenditures for maintenance and
repairs are charged to operations as incurred.

Depreciation is determined principally using the straight-line method over
estimated useful lives of approximately 20 to 40 years for buildings and
approximately 3 to 15 years for equipment. Leasehold improvements are amortized
over the estimated useful lives of the property or the remaining lease term,
whichever is less. When assets are retired or sold, the related cost and
accumulated depreciation are removed from the accounts and resulting gains or
losses are generally included in operating income.

                                       46


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill
and Other Intangible Assets" requires that intangibles with finite useful lives
be reviewed for impairment in accordance with Statement of Financial Accounting
Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets." In September 2002, the Company adopted SFAS No. 144, which
supersedes Statement of Financial Accounting Standards No. 121 (SFAS No. 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", and Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operation-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 establishes a single accounting model for long-lived
assets to be disposed of by sale, whether they were previously held and used or
newly acquired, and it also broadens the presentation of discontinued operations
to include more disposal transactions. The Company assesses its long-lived
assets for impairment at the lowest level for which there are identifiable cash
flows whenever changes in circumstances indicate that the carrying amount may
not be recoverable. Factors the Company considers important which could trigger
an impairment review include, but are not limited to, significant
underperformance relative to historical or projected future operating results,
significant changes in the manner in which an asset is utilized and substantial
negative industry or economic trends. When such events or changes in
circumstances occur, the Company assesses the recoverability of long-lived
assets by determining whether the carrying value of such assets will be
recovered through the undiscounted expected future cash flows. If the future
undiscounted cash flows are less than the carrying amount of these assets, the
Company recognizes an impairment loss based on the excess of the carrying amount
over the fair value of the assets in accordance with SFAS No. 144.

GOODWILL
Effective September 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142,"Goodwill and Other Intangible Assets" (SFAS No.
142). This statement changed the accounting for goodwill and indefinite-lived
intangible assets from an amortization approach to an impairment-only approach.
As required under the transitional accounting provisions of SFAS No. 142, the
Company completed steps during the second quarter of fiscal 2003 to identify and
measure goodwill impairment at its two reporting units, which existed at the
time of adoption, the Metals Recycling Business and the Steel Manufacturing
Business. The reporting units were measured for impairment by comparing the
implied fair value of the reporting units' goodwill with the carrying amount of
the goodwill. Historical earnings were used as a basis to project future
earnings to determine whether any impairment of goodwill existed at the
reporting units. As a result of this evaluation, the Company determined that
goodwill associated with its Steel Manufacturing Business was impaired. The
Company recorded a non-cash impairment charge for the entire $983,000 of
remaining goodwill, effective September 1, 2002, and reported it as a
"Cumulative effect of change in accounting principle" on the Consolidated
Statement of Operations. The goodwill was not deductible for tax purposes, thus
the amount was not tax affected. The implementation of SFAS No. 142 required the
use of judgments, estimates and assumptions in the determination of fair value
and impairment amounts related to the required testing. Prior to adoption of
SFAS No. 142, the Company had historically evaluated goodwill for impairment by
comparing the entity level unamortized balance of goodwill to projected
undiscounted cash flows, which did not result in an indicated impairment. The
Company performs impairment tests annually and whenever events and circumstances
indicate that the value of goodwill and other indefinite-lived intangible assets
might be impaired. The following table presents the Company's intangible assets
and their related lives:

      ($ in millions)                   August 31, 2004          Life in Years
      ---------------                   ---------------          -------------
      Goodwill                             $  131.2                Indefinite
      Trade name                           $    0.8                Indefinite
      Non-compete agreement                $    2.0                 6 Years



                                       47


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents a reconciliation of reported net income and income
per share, as if SFAS No. 142 had been in effect for all periods presented (in
thousands, except per share amounts):

                                                FOR THE YEAR ENDED AUGUST 31,
                                              --------------------------------
                                                2004        2003        2002
                                              --------    --------    --------
      Reported net income                     $111,181    $ 43,201    $  6,553
      Goodwill amortization, net of tax             --          --       1,269
                                              --------    --------    --------
      Adjusted net income                     $111,181    $ 43,201    $  7,822
                                              ========    ========    ========

      Reported basic net income per share     $   3.71    $   1.55    $   0.24
      Goodwill amortization, net of tax             --          --        0.05
                                              --------    --------    --------
      Adjusted basic net income per share     $   3.71    $   1.55    $   0.29
                                              ========    ========    ========

      Reported diluted net income per share   $   3.58    $   1.47    $   0.23
      Goodwill amortization, net of tax             --          --        0.04
                                              --------    --------    --------
      Adjusted diluted net income per share   $   3.58    $   1.47    $   0.27
                                              ========    ========    ========


The changes in the carrying amount of goodwill for the year ending August 31,
2004 are as follows (in thousands):

                                               METALS
                                              RECYCLING  AUTO PARTS
                                              BUSINESS    BUSINESS      TOTAL
                                              --------    --------    --------
      Beginning of year balance               $ 34,771    $ 72,438    $107,209
      Pick-N-Pull Business                          --      10,812      10,812
      Canadian Acquisition                          --      13,157      13,157
                                              --------    --------    --------
      Balance as of August 31, 2004           $ 34,771    $ 96,407    $131,178
                                              ========    ========    ========


COMMON STOCK
Each share of Class A common stock is entitled to one vote and each share of
Class B common stock is entitled to ten votes. Additionally, each share of Class
B common stock may be converted to one share of Class A common stock.

EARNINGS PER SHARE
Basic and diluted earnings per share and dividends per common share have been
adjusted to reflect the one-for-two stock dividend, that was paid on March 25,
2004 and the one-for-one stock dividend paid on August 14, 2003.



                                       48


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Basic EPS is computed based upon the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential dilution that
would occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The following represents a
reconciliation from basic EPS to diluted EPS giving effect to the share dividend
referred to above (in thousands, except per share amounts):


                                                                   YEAR ENDED AUGUST 31,
                                                          ----------------------------------------
                                                             2004           2003           2002
                                                          ----------     ----------     ----------
                                                                               
Income before cumulative effect of accounting change      $  111,181     $   44,184     $    6,553
Cumulative effect of change in accounting principle               --           (983)            --
                                                          ----------     ----------     ----------
Net income                                                $  111,181     $   43,201     $    6,553
                                                          ==========     ==========     ==========

Computation of shares:
     Average common shares outstanding                        29,976         27,975         27,444
     Stock options                                             1,082          1,505            405
                                                          ----------     ----------     ----------
     Diluted average common shares outstanding                31,058         29,480         27,849
                                                          ==========     ==========     ==========

Basic EPS:
Income before cumulative effect of accounting change      $     3.71     $     1.58     $     0.24
Cumulative effect of change in accounting principle               --          (0.03)            --
                                                          ----------     ----------     ----------
     Net income per share                                 $     3.71     $     1.55     $     0.24
                                                          ==========     ==========     ==========

Diluted EPS:
Income before cumulative effect of accounting change      $     3.58     $     1.50     $     0.24
Cumulative effect of change in accounting principle               --          (0.03)            --
                                                          ----------     ----------     ----------
     Net income per share                                 $     3.58     $     1.47     $     0.24
                                                          ==========     ==========     ==========

Dividend per share                                        $    0.068     $    0.067     $    0.067
                                                          ==========     ==========     ==========



Options with an exercise price greater than the average market price were not
included in the computation of diluted earnings per share because to do so would
be antidilutive. These options totaled 267,000 in 2003 and 1,757,700 in 2002. No
options were antidilutive in fiscal 2004.

The Company records stock-based compensation under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations. Under this method, compensation expense for its
stock incentive plans is determined using the intrinsic value method.
Accordingly, because the exercise price equals the market price on the date of
the grant, no compensation expense is recognized by the Company for stock
options issued to employees and directors. The Company recorded compensation
expense in fiscal 2004 of $0.6 million due to accelerating the vesting period on
stock options for a retired employee.

On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure," which amends Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation."
SFAS No. 148 provides alternative methods of transition for voluntary change to
the fair value method of accounting for stock-based compensation. In addition,
SFAS No. 148 requires more prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. At this
time, the Company has elected to adopt the annual and interim disclosure
requirements of SFAS No. 148.

                                       49


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INTEREST AND INCOME TAXES PAID
The Company paid $2.3 million, $1.5 million and $2.4 million in interest expense
during fiscal years 2004, 2003 and 2002, respectively. In fiscal years 2004 and
2003, the Company paid $50.3 million and $17.2 million in income taxes,
respectively. During fiscal 2002, the Company received tax refunds of $0.5
million.

FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, receivables and current liabilities in the consolidated financial
statements are considered to reflect the fair value because of the short-term
maturity of these instruments. The fair value of long-term debt is deemed to be
the same as that reflected in the consolidated financial statements given the
variable interest rates on the significant credit facilities. There are no
quoted prices for the Company's investments in joint ventures accounted for on
the equity method. A reasonable estimate of fair value could not be made without
incurring excessive costs.

USE OF ESTIMATES IN FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in accordance with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.

REVENUE RECOGNITION
The Company recognizes revenue when it has a contract or purchase order from a
customer with a fixed price, the title and risk of loss transfer to the buyer
and collectibility is reasonably assured. Title for both metals and finished
steel products transfers upon shipment, based on either C.I.F. or F.O.B. terms.
For retail sales by the Auto Parts Business, revenues are recognized when
customers pay for salvaged parts or when wholesale products are shipped to the
customer location. Substantially all of the Company's ferrous export sales of
recycled metal are made with letters of credit, minimizing credit risk. However,
domestic ferrous recycled metal sales, nonferrous sales and sales of finished
steel are generally made on open account. Historically, there have been very few
sales returns and adjustments that impact the ultimate collection of revenues;
therefore no provisions are made when the sale is recognized.

All shipping costs billed to customers are recorded as revenue with the related
costs being included under cost of sales.

ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company evaluates the collectibility of its accounts, notes and advances
receivable based on a combination of factors. In cases where management is aware
of circumstances that may impair a specific customer's ability to meet its
financial obligations to the Company, management records a specific allowance
against amounts due and reduces the net recognized receivable to the amount we
reasonably believe will be collected. For all other customers, the Company
maintains a reserve that considers the total receivables outstanding, historical
collection rates and economic trends.

ENVIRONMENTAL COSTS
The estimated future costs for known environmental remediation requirements are
accrued on an undiscounted basis when it is probable that the Company has
incurred a liability and the related costs can be reasonably estimated. When
only a range of amounts is established, and no amount within the range is better
than another, the minimum amount of the range is recorded. Recoveries of
environmental remediation costs from other parties are recorded as assets when
realization of the claim for recovery is deemed probable and reasonably
estimable.

RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to fiscal year 2004
presentation. These changes had no impact on previously reported results of
operations or shareholder's equity.

NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB revised FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46R). FIN 46R requires a variable interest
entity to be consolidated by a company if that company is subject to a majority

                                       50


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. FIN 46R also
requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46R apply immediately to variable interest
entities created after January 31, 2003 and to existing entities in the first
fiscal year or interim period beginning after June 15, 2003. The Company has
determined that it does not have relationships with any entities which meet the
definition of a variable interest entity.


NOTE 2 - INVENTORIES:

Inventories consist of the following (in thousands):

                                                      AUGUST 31,
                                              -------------------------
                                                 2004           2003
                                              ----------     ----------
      Recycled metals                         $   34,551     $   21,115
      Work in process                             10,045          8,254
      Finished goods                              23,808         19,912
      Supplies                                    11,763         11,862
                                              ----------     ----------
                                              $   80,167     $   61,143
                                              ==========     ==========

The production and accounting process utilized by the Company to record recycled
metals inventory quantities relies on significant estimates, which can be
affected by weight imprecisions, moisture, production yields and other factors.


NOTE 3 - BUSINESS COMBINATIONS:

CANADIAN ACQUISITION
- --------------------
On March 8, 2004, the Company, through its wholly-owned subsidiary, PNP Auto
Parts Canada Co., acquired the assets and leased the sites of three self-service
used auto parts stores in Calgary and Edmonton, Alberta and Kelowna, British
Columbia from Sheppard Holdings Ltd. of Calgary, Alberta, Canada, or its
affiliates. The three stores currently operate under the name of Pick Your Part.
This acquisition expands the geographic scope of our Auto Parts Business into
the Canadian market as part of our strategy to grow the business in North
America. The acquisition was completed in the third quarter of fiscal 2004. The
purchase price ($13.7 million) and the results of operations for these three
stores are reflected in the consolidated results of the Company beginning with
the 2004 third fiscal quarter. Of the total purchase price, $13.2 million was
related to goodwill. For further information related to goodwill, refer to Note
1 of the Consolidated Financial Statements.

PICK-N-PULL BUSINESS COMBINATION
- --------------------------------
On February 14, 2003, the Company's wholly-owned subsidiary, Norprop, Inc.
("Norprop") closed its acquisition (the "Acquisition") of all of the stock of
Pick and Pull Auto Dismantling, Inc., which was the Company's 50% partner in
Pick-N-Pull Auto Dismantlers, a California general partnership (the "Joint
Venture") and all of the membership interests in Pick-N-Pull Auto Dismantlers,
Stockton, LLC ("Stockton"). The cost of the Acquisition consisted of $71.4
million of cash paid to the seller at closing, $3.3 million of debt assumed and
immediately paid off, $0.6 million of acquisition costs and $0.5 million of tax
related expenses. In addition, Norprop assumed approximately $12.5 million of
debt owed by the Joint Venture to the Company. Two additional payments were made
during fiscal 2004. The first payment of $4.7 million was made during the fiscal
quarter ended November 30, 2003, as a result of an amendment to the Purchase
Agreement. The second and final payment of $7.1 million was made during the
fiscal quarter ended February 29, 2004, and related to a purchase price
adjustment one year after closing based upon calendar year 2002 and 2003
earnings before interest, taxes, depreciation and amortization (EBITDA) of the
acquired Auto Parts Business. The total purchase price was $100.1 million (or
$96.5 million net of the seller's $3.6 million share of the Joint Venture's cash
on hand at closing).

                                       51


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the estimated fair values of the assets acquired
and liabilities assumed as of the date of the acquisition (in millions):

      Property, plant and equipment            $     13.3
      Identified intangible assets                    3.7
      Other assets                                    5.4
      Liabilities                                    (3.8)
      Goodwill                                       81.5
                                               ----------
           Total                               $    100.1
                                               ==========

Goodwill of $81.5 million represents the excess of purchase price over the fair
value of the net tangible and identified intangible assets acquired, and, as a
result of a tax election filed jointly by the Company and seller, substantially
all of it will be deductible for tax purposes over a 15-year period. Also,
approximately $1.8 million of goodwill existed on the Joint Venture's balance
sheet prior to the Acquisition but was not shown separately in accordance with
the equity method of accounting. Therefore, the total increase to goodwill
related to the Acquisition was $83.3 million. In accordance with SFAS142,
goodwill is not amortized and will be tested for impairment at least annually.


NOTE 4 - PROPERTY, PLANT AND EQUIPMENT AND OPERATING LEASES:

Property, plant and equipment consist of the following (in thousands):

                                                       AUGUST 31,
                                               --------------------------
                                                  2004            2003
                                               ----------      ----------
      Machinery and equipment                  $  258,028      $  262,698
      Land and improvements                        49,080          50,631
      Buildings and leasehold improvements         30,655          30,485
      Construction in progress                     16,995          10,351
                                               ----------      ----------
                                                  354,758         354,165

      Less: accumulated depreciation             (216,320)       (212,941)
                                               ----------      ----------
      Net property, plant and equipment        $  138,438      $  141,224
                                               ==========      ==========


Depreciation expense from operations was $19.7 million, $19.3 million and $16.7
million in fiscal years 2004, 2003 and 2002, respectively.

The Company leases certain property and equipment. The future minimum rental
payments under the operating leases are (in thousands):

      YEAR                       AMOUNT
      ----                       ------
      2005                       $4,920
      2006                        3,560
      2007                        2,356
      2008                        1,748
      2009                          945
      Thereafter                 $2,207

Rent expense was $6.7 million, $3.6 million and $1.1 million for fiscal years
2004, 2003, and 2002, respectively. See discussion of additional leases with
related parties in Note 9.


                                       52


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - IMPAIRMENT AND OTHER NONRECURRING CHARGES:

During fiscal 2002, the Company's Portland, Oregon metals recycling facility
embarked on a dock and loading facility renovation. The renovation was suspended
in fiscal 2003 when issues with the dock's substructure were detected. Upon
review of new engineering designs focused on operational efficiency and safety
specifications, an impairment charge of $3.5 million was recorded in the fourth
quarter of fiscal 2004 to write-off renovation costs incurred prior to the
suspension.

In connection with the acquisition of the Auto Parts Business, the Company
conducted an environmental due diligence investigation. Based upon new
information obtained in this investigation, the Joint Venture accrued $2.1
million in environmental liabilities in the second quarter of fiscal 2003 for
remediation costs at the Auto Parts Business's store locations. No environmental
proceedings are pending at any of these sites.

The Company recorded impairment and other nonrecurring charges of $7.1 million
in fiscal 2002. The Company recorded nonrecurring charges of $1.9 million for
the early termination of a fixed-price Alaska barge contract of affreightment
that management determined was not cost effective. The Alaska barge contract
charge included a $0.9 million write-off of a note receivable and a $1.0 million
payment to terminate the contract. Also, an impairment charge of $1.8 million
was recorded for the elimination of an unprofitable car-crushing business and an
impairment charge of $1.1 million was recorded for the closure of an
under-performing yard in Reno, Nevada. Nonrecurring charges of $1.5 million were
recorded for the loss on the early termination of two vessel charter contracts
with a related company. The Company terminated the leases in order to take
advantage of market rates which were $7 to $8 per ton lower than the all-in
contracted rates (see Note 9 "Related Party Transactions"). Shipping cost
savings as a result of the contract termination totaled approximately $2.0
million. Additionally, a loss of $0.8 million was recorded for the sale of a
non-strategic steel forging business.


NOTE 6 - LONG-TERM DEBT:

Long-term debt consists of the following (in thousands):

                                                           AUGUST 31,
                                                   --------------------------
                                                      2004            2003
                                                   ----------      ----------
Bank unsecured revolving credit facilities         $   60,000      $   79,000

Tax-exempt economic development revenue bonds
due January 2022, interest payable monthly at
a variable rate (1.26% at August 31, 2004),
secured by a letter of credit                           7,700           7,700

Other                                                     326             565
                                                   ----------      ----------
Total long-term debt                                   68,026          87,265
Less:  portion due within one year                       (225)           (220)
                                                   ----------      ----------
Long-term debt less current portion                $   67,801      $   87,045
                                                   ==========      ==========

In May 2003, the Company entered into an agreement to refinance its revolving
bank credit facility. The facility for $150 million is unsecured, matures in May
2006 and bears interest at varying interest rates. As of August 31, 2004, such
rates on outstanding borrowings averaged 2.7%. Interest is payable at varying
dates not to exceed the maturity of each advance under the line. The credit
facility contains a provision whereby the Company may, upon obtaining consent of
the bank group, extend the terms of the agreement by one year to May 2007. The
Company has provided notice of its intention to request such an extension and
the bank group has agreed to the request. The extension is subject to the
Company providing standard representations and warranties as of the May 2006
original maturity date. The Company currently anticipates it will be able to
provide the required representations and warranties and the agreement will be
extended.

                                       53


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition to the above facility, the Company has an additional unsecured line
of credit totaling $20 million. There were no outstanding borrowings against the
unsecured line of credit at August 31, 2004. The committed bank credit
facilities and other borrowings contain financial covenants, including covenants
related to net worth, interest coverage and leverage. The Company was in
compliance with these covenants at August 31, 2004.

Payments on long-term debt during the next five fiscal years and thereafter are
as follows (in thousands):

      YEAR                        AMOUNT
      ----                       --------
      2005                       $    225
      2006                         60,071
      2007                             30
      2008                             --
      2009                             --
      Thereafter                    7,700
                                 --------
                                 $ 68,026
                                 ========


NOTE 7 - ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES:

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

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

While the cost of the investigations associated with these properties and the
cost of employment of source control BMPs are not expected to be material at
August 31, 2004, however $0.3 million has been accrued for studies related to

                                       54


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the pending six mile Portland Working Harbor Willamette River sediment 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 was
carried over to the Company's financial statements when MMI was acquired in
1995, and at August 31, 2004, aggregated $15.1 million.

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

There are two phases to the Clean-up of the Hylebos Waterway. The first phase
was the intertidal and bank remediation, which was conducted in 2003 and early
2004. The second phase is dredging in the Head of Hylebos Waterway, which began
on July 15, 2004. Approximately 117,500 cubic yards of an estimated 310,000
cubic yards total have been removed as of October 30, 2004. Dredging and other
in-water work is scheduled to be completed during fiscal 2005.

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

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

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

                                       55


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

PROLER
In 1996, prior to the Company's acquisition of Proler International Corp.
(Proler), Proler recorded a liability for the probable costs to remediate its
wholly-owned properties. The Company carried over the aggregate reserve to its
financial statements upon acquiring Proler, and $3.4 million remained
outstanding on August 31, 2004.

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.

In connection with the acquisition of the Auto Parts Business, the Company
conducted an environmental due diligence investigation. Based upon new
information obtained in this investigation, the Joint Venture accrued $2.1
million in environmental liabilities in the second quarter of fiscal 2003 for
remediation costs at the Auto Parts Business's store locations. No environmental
proceedings are pending at any of these sites.

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

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

OTHER CONTINGENCIES
The Company and Hugo Neu Corporation ("HNC") are the 50% members of Hugo Neu
Schnitzer Global Trade, LLC ("HNSGT"), a joint venture engaged in global
brokering of recycled metals. HNC manages the day-to-day activities of HNSGT. In
January 2004, HNC advised the Company that it would charge HNSGT a 1% commission
on HNSGT's recycled metal sales, and began deducting those commissions. While
some reasonable reimbursement of HNC's costs may be appropriate, the Company has
responded that the 1% commission is excessive and that HNC has no authority to
unilaterally impose such commissions on HNSGT. The Company has not yet commenced
litigation in this dispute. For fiscal 2004, the Company estimated that its 50%
share of the disputed commissions totaled $2.5 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.

                                       56


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 - INCOME TAXES:

The provision (benefit) for income taxes is as follows (in thousands):

                                                   YEAR ENDED AUGUST 31,
                                          -------------------------------------
                                             2004          2003         2002
                                          ----------    ----------   ----------
Current:
      Federal                             $   50,231    $   13,363   $      508
      State                                    5,322         3,011          686
      Foreign                                    586            --           --
Deferred:
      Federal                                 (5,865)        1,051        1,436
      State                                      395           521       (1,536)
                                          ----------    ----------   ----------
Income Tax Provision                      $   50,669    $   17,946   $    1,094
                                          ==========    ==========   ==========


Deferred tax assets and liabilities are as follows (in thousands):

                                                                AUGUST 31,
                                                        -----------------------
                                                           2004         2003
                                                        ----------   ----------
Current deferred tax assets (liabilities)
   California Enterprise Zone credit carryforward       $      700   $      200
   AMT carryforward                                             --          374
   Segment held for sale                                        --         (176)
   Inventory valuation methods                               3,359        2,897
   Employee benefit accruals                                 1,052          906
   State income tax and other                                  272          323
                                                        ----------   ----------
       Net current deferred tax assets                  $    5,383   $    4,524
                                                        ==========   ==========

Non-current deferred tax assets (liabilities)
   California Enterprise Zone credit carryforward       $      550   $    1,500
   Accelerated depreciation and basis differences          (40,548)     (44,409)
   AMT carryforward                                            742           --
   Environmental liabilities                                 8,599        8,711
   Net operating loss carryforwards and credits              4,569        6,090
   Other                                                     1,204        1,105
                                                        ----------   ----------
                                                           (24,884)     (27,003)
   Deferred tax asset valuation allowance                       --       (6,090)
                                                        ----------   ----------
       Net non-current deferred tax liabilities         $  (24,884)  $  (33,093)
                                                        ==========   ==========

                                       57


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The reasons for the difference between the effective income tax rate and the
statutory federal income tax rate are as follows:

                                                   YEAR ENDED AUGUST 31,
                                            ----------------------------------
                                              2004         2003         2002
                                            --------     --------     --------
Federal statutory rate                            35%          35%          34%
Extraterritorial Income Exclusion                 (3)         (11)          (7)
State taxes, net of credit                         2            5           11
State taxes, California Enterprise
   Zone Credit                                    --           --          (22)
Proler NOLs                                       (4)          (1)         (10)
Amortization of goodwill                          --           --           11
Other                                              1           (1)          (3)
                                            --------     --------     --------
      Effective tax rate                          31%          27%          14%
                                            ========     ========     ========


The Company's effective tax rate of 31% for fiscal 2004 is lower than the 35%
federal statutory tax rate for two primary reasons. First, the Company continues
to benefit from federal tax law's Extraterritorial Income Exclusion (ETI), which
has the effect of taxing export sales at a lesser rate than comparable domestic
sales. The estimated ETI benefit for the year ended August 31, 2004 was
approximately 3%. Secondly, the reduced tax rate benefited from the release of
NOL valuation reserves. As part of the 1996 acquisition of Proler International,
Inc., the Company succeeded to federal income tax Net Operating Loss ("NOLs")
and minimum tax credit carryforwards. In accordance with generally accepted
accounting principles (GAAP), valuation reserves were then established against
the NOLs and credits because management was uncertain whether the Company's
future taxable income and tax would be sufficient to use them. Part of the
uncertainty regarding use of the NOLs stemmed from two Federal tax law
constraints, one limiting their use to $2.4 million a year and the other
requiring that they be used by 2011. Management would assess the continuing need
for the valuation reserves each fiscal year, and would release them only to the
extent that the uncertainty regarding their use was judged to be mitigated. In
each of fiscal years 2003 and 2002, management released valuation reserves of
$0.8 million.

During fiscal 2004, however, management released the remaining $6.1 million
balance in the reserves because it determined that it was more likely than not
that future taxable income and tax would be sufficient to absorb the remaining
NOLs of $15.3 million and the credits of $0.7 million. This determination was
based upon a number of factors including profitability trends, industry
fundamentals and recent profitable acquisitions. The reversal had no effect on
cash flows, as those are only affected by the present and future use of the NOLs
against taxable income and the credits against tax.

The effective tax rates for fiscal 2004 and 2003 are higher than that for fiscal
2002 because the Company qualified for $2.1 million of California Enterprise
Zone credits in fiscal 2002. These credits can be used to offset California
state income taxes to the extent that each corporation in the consolidated group
has a California franchise (income) tax liability on taxable income
apportionable to each zone. Any credits in excess of the tax liability can be
carried forward indefinitely. The Company has qualified for additional minor
amounts of these credits in fiscal 2004 and 2003.

                                       58


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - RELATED PARTY TRANSACTIONS:

Certain shareholders of the Company own significant interest in, or are related
to owners of, the entities discussed below. As such, these entities are
considered related parties for financial reporting purposes.

TRANSACTIONS AFFECTING COST OF GOODS SOLD
Historically, the Company chartered vessels from related companies at market
rates to transport recycled metal to foreign markets. The number of vessels
chartered varied from year to year depending on the availability of their
vessels. In December 2003, the related party exited the shipping business and
consequently this relationship ended. No charter fees were paid to the related
party in fiscal 2004. However, charter fees paid to the related party were $1.9
million and $9.8 million for fiscal 2003 and 2002, respectively.

A primary reason for entering into a number of the Company's joint ventures was
to secure the supply of recyclable metal for the Metals Recycling Business. The
Company purchased recycled metals from its joint venture operations at prices
that approximate market. Purchases from these joint ventures totaled $9.7
million, $5.0 million and $10.4 million in 2004, 2003 and 2002, respectively.

The Company leases certain land and buildings from Schnitzer Investment Corp.
("Landlord"), a related real estate company, under operating leases. The
following table summarizes the lease terms, annual rents and future minimum
rents (in thousands):

                                                     LEASE            CURRENT
      LOCATION:                                   EXPIRATIONS       ANNUAL RENT
      ---------                                   -----------       -----------
      Metals Recycling Business:
        Portland facility and marine terminal        2063             $ 1,834
      Administrative offices                         2014                 381


                                                    MINIMUM
      YEAR                                           RENTS
      ----                                         --------
      2005                                         $  2,147
      2006                                            2,225
      2007                                            2,235
      2008                                            2,245
      2009                                            2,255
      Thereafter                                   $100,834


Rent expense was $2.2 million, $2.1 million, and $1.9 million, for 2004, 2003
and 2002, respectively.

In accordance with a lease agreement dated September 1988, the rent for the
Metals Recycling Business's Portland facility was adjusted in 2003 and will be
adjusted every 15 years thereafter to market rates, but only if such adjustment
results in an increase in rent. In 2008, and every five years thereafter, except
in the year of a market rate adjustment, the rent will be adjusted based on the
Consumer and Producer Price Indices.

TRANSACTIONS AFFECTING SELLING AND ADMINISTRATIVE EXPENSES
The Company performs some administrative services and provides operation and
maintenance of management information systems for certain related parties. These
services are charged to the related parties based upon cost plus a 15% margin
for overhead and profit. These administrative charges totaled $0.6 million, $0.9
million, and $1.0 million in 2004, 2003 and 2002, respectively.

TRANSACTIONS AFFECTING OTHER INCOME (EXPENSE)
Included in other assets are $1.0 million and $1.1 million of notes receivable
from joint venture businesses at August 31, 2004 and 2003, respectively.

                                       59


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - EMPLOYEE BENEFITS:

Primary actuarial assumptions are determined as follows:

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


DEFINED BENEFIT PENSION PLANS
For certain nonunion employees, the Company maintains a defined benefit pension
plan. The asset value of the plan is based on the market value which represents
its fair value. The following table sets forth the change in benefit obligation,
change in plan assets and funded status at August 31:


($ IN THOUSANDS)                                           2004         2003
                                                        ----------   ----------
Change in benefit obligation:
   Benefit obligation at beginning of year              $    9,580   $    7,662
   Service cost                                                936          792
   Interest cost                                               607          549
   Actuarial loss                                              548        1,053
   Transfers                                                   447           --
   Benefits paid                                              (779)        (475)
                                                        ----------   ----------
   Benefit obligation at end of year                    $   11,339   $    9,581
                                                        ==========   ==========

Change in plan assets:
   Fair value of plan assets at beginning of year       $    8,387   $    6,656
   Actual return on plan assets                                717          514
   Employer contribution                                     1,228        1,690
   Transfers                                                   447            2
   Benefits paid                                              (779)        (475)
                                                        ----------   ----------
   Fair value of plan assets at end of year             $   10,000   $    8,387
                                                        ==========   ==========

Funded status:
   Plan assets less than benefit obligation             $   (1,339)  $   (1,193)
   Unrecognized actuarial loss                               3,893        3,543
   Unrecognized prior service cost                              41           45
                                                        ----------   ----------
   Net amount recognized                                $    2,595   $    2,395
                                                        ==========   ==========

                                       60


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Components of net periodic pension benefit cost at August 31:

   ($ IN THOUSANDS)                                        2004         2003
                                                        ----------   ----------
   Service cost                                         $      936   $      792
   Interest cost                                               607          549
   Expected return on plan assets                             (692)        (541)
   Amortization of past service cost                             5            4
   Recognized actuarial loss                                   172          126
                                                        ----------   ----------
   Net periodic pension benefit cost                    $    1,028   $      930
                                                        ==========   ==========


Weighted-average assumptions used to determine pension benefit obligations at
August 31:

                                                           2004         2003
                                                        ----------   ----------
   Discount rate                                             6.00%        6.25%
   Rate of compensation increase                             3.00%        3.25%


Weighted-average assumptions used to determine net periodic pension benefit cost
for years ended August 31:
                                                           2004         2003
                                                        ----------   ----------
   Discount rate                                             6.25%        6.30%
   Expected long-term return on plan assets                  8.00%        8.00%
   Rate of compensation increase                             3.25%        3.80%


To determine the expected long-term rate of return on pension plan assets, we
consider the current and expected asset allocations, as well as historical and
expected returns on various categories of plan assets. We apply our expected
rate of return to a market related value of the assets which reduces the
underlying variability in assets to which we apply that expected return. We
amortize gains and losses, as well as the effects of changes in actuarial
assumptions and plan provisions over a period no longer than the average future
service of employees.

PLAN ASSET ALLOCATIONS. The Company's asset allocation for its pension plan is
based on the primary goal of maximizing investment returns over the long-term.
At the same time the Company has invested in a diversified portfolio so as to
provide a balance of returns and risk. In an effort to quantify this allocation,
the Company has established a target guideline to be used in determining the
investment mix.

The table below shows the Company's target allocation range along with the
actual allocations at August 31:

                                  TARGET         ACTUAL 2004       ACTUAL 2003
                                 --------        -----------       -----------
      Equity                      75-100%            61%               59%
      Fixed Income                  0-25%            39%               41%
                                                 -----------       -----------
      Total                                         100%              100%


CONTRIBUTIONS. The Company expects to contribute $1.1 million to its defined
benefit pension plan in fiscal 2005.

                                       61


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


ESTIMATED FUTURE BENEFIT PAYMENTS. The following benefit payments, which reflect
expected future service, as appropriate, are expected to be paid:

                                 BENEFITS
                                 --------
      2005                       $    496
      2006                            402
      2007                            284
      2008                          1,245
      2009                          1,059
      2010-2013                  $  7,936


DEFINED CONTRIBUTION PLANS
The Company has several defined contribution plans covering nonunion employees.
The pension cost related to these plans totaled $1.4 million, $1.2 million and
$1.1 million for fiscal 2004, 2003 and 2002, respectively.

MULTIEMPLOYER PENSION PLANS
In accordance with collective bargaining agreements, the Company contributed to
multiemployer pension plans $3.1 million, $2.5 million, and $2.3 million in
fiscal 2004, 2003 and 2002, respectively. 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 the fourth quarter of 2004 that one of the
multiemployer plans would not meet ERISA minimum funding standards for the plan
year ending September 30, 2004. The trustees of that plan have applied to the
Internal Revenue Service for certain relief from this minimum funding standard,
but cannot determine whether this relief will be granted. Absent relief, the
plan's contributing employers will be required to make additional contributions
or pay excise tax that may equal or exceed the full amount of that deficiency.
The Company estimates its share of the required additional contribution for the
2004 plan year is approximately $1.1 million and has accrued for such amount in
fiscal 2004.

OTHER BENEFITS
The Company has adopted a nonqualified supplemental retirement plan for certain
executives. A restricted trust fund has been established and invested in life
insurance policies which can be used for plan benefits, but are subject to
claims of general creditors. The trust fund and deferred compensation expense
are classified as other assets. The status of this plan is summarized as follows
as of August 31, (in thousands):
                                                 2004                 2003
                                              ----------           ----------
   Restricted trust fund                      $    1,663           $    1,540
   Deferred compensation expense                    (278)                 374
   Long-term pension liability                     2,172                2,570
   Pension cost                                      351                  273


The trust fund assets stock market gains and losses are included in other income
(expense). During fiscal 2004 and 2003, the Company recognized gains totaling
$0.2 million and $0.4 million, respectively, and losses of $0.4 million during
fiscal 2002.

                                       62


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - STOCK INCENTIVE PLAN:

The Company has adopted a stock incentive plan for employees, consultants and
directors of the Company. The plan covers 7,200,000 shares of Class A common
stock. All options have a ten-year term and, except for options granted in
fiscal 2001, become exercisable for 20% of the shares covered by the option on
each of the first five anniversaries of the grant. The options granted in fiscal
2001 become exercisable as follows: 33% after one year from the date of grant,
66% after two years from the date of grant, and 100% after two and one-half
years from the date of grant. The vesting periods for these options varied from
the standard because the Company granted them to certain employees in lieu of
annual salary revisions.

Pro forma information for fiscal years 2004, 2003 and 2002 regarding net income
and earnings per share has been determined as if the Company had accounted for
its employee stock options under the fair value method. The per share weighted
average grant date fair value for these awards, as determined by applying the
Black-Scholes option pricing model, was $12.66, $7.82 and $6.36 during the years
ended August 31, 2004, 2003 and 2002, respectively, using the following
assumptions:

                                                       YEAR ENDED AUGUST 31,
                                                 -------------------------------
                                                    2004       2003       2002
                                                 ---------  ---------  ---------

   Risk-free interest rate                          3.8%       3.7%       4.7%
   Dividend yield                                   1.0%       1.0%       1.0%
   Weighted average expected life of options     7.0 Years  7.0 Years  7.0 Years
   Volatility                                       .43        .35        .40


Had compensation expense for the Company's stock options been recognized based
upon the estimated fair value on the grant date under the fair value methodology
allowed by SFAS No. 123, as amended by SFAS No. 148, the Company's net income
and net income per share would have been as follows (in thousands, except
earnings per share):
                                                  YEAR ENDED AUGUST 31,
                                         --------------------------------------
                                            2004          2003          2002
                                         ----------    ----------    ----------
Reported net income                      $  111,181    $   43,201    $    6,553
Stock compensation expense, net of tax         (371)         (830)         (786)
                                         ----------    ----------    ----------
Pro forma net income                     $  110,810    $   42,371    $    5,767
                                         ==========    ==========    ==========

Reported basic net income per share      $     3.71    $     1.55    $     0.24
Pro forma basic net income per share     $     3.70    $     1.51    $     0.21

Reported diluted  net income per share   $     3.58    $     1.47    $     0.23
Pro forma diluted net income per share   $     3.57    $     1.44    $     0.20

                                       63


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the Company's stock option activity and related information is as
follows (in thousands, except per share amounts):

                                                        YEAR ENDED AUGUST 31,
                                --------------------------------------------------------------------
                                        2004                    2003                    2002
                                --------------------    --------------------    --------------------
                                            Weighted                Weighted                Weighted
                                             Average                 Average                 Average
                                            Exercise                Exercise                Exercise
                                 Options      Price      Options      Price      Options      Price
                                --------    --------    --------    --------    --------    --------
                                                                          
Outstanding-beginning of year      2,183    $  15.66       3,216    $  13.28       3,381    $  12.90
Options granted                       68    $  28.03         596    $  19.52         177    $  15.02
Options exercised                 (1,031)   $   6.54      (1,593)   $  12.33        (312)   $  10.23
Options canceled                    (105)   $   5.25         (36)   $  12.92         (30)   $  13.02
                                --------                --------                --------
Outstanding - end of year          1,115    $   8.80       2,183    $  15.66       3,216    $  13.28
                                ========                ========                ========
Exercisable at end of year           393    $   7.23         954    $  16.01       2,196    $  14.07
                                ========                ========                ========



The following table summarizes information about options outstanding as of
August 31, 2004:

                          OPTIONS OUTSTANDING                                        OPTIONS EXERCISABLE
- --------------------------------------------------------------------------    -------------------------------
   NUMBER        RANGE OF       WEIGHTED AVERAGE      WEIGHTED AVERAGE          NUMBER       WEIGHTED AVERAGE
OUTSTANDING   EXERCISE PRICES    EXERCISE PRICE    REMAINING LIFE IN YEARS    EXERCISABLE     EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------
                                                                              
    209,000    $4.50 - 4.67          $ 4.61              6.1 Years               112,000          $ 4.56
    403,000    $5.92 - 6.70          $ 6.14              7.9 Years                54,000          $ 6.30
    198,000    $8.08 - 8.98          $ 8.21              3.1 Years               194,000          $ 8.20
    237,000       $12.00             $12.00              8.8 Years                33,000          $12.00
     68,000   $27.96 - 28.10         $28.03               10 Years                     0          $ 0.00
- -----------   --------------         ------             ----------               -------          ------
  1,115,000   $ 4.50 - 28.10         $ 8.80              7.0 Years               393,000          $ 7.23


NOTE 12 - SEGMENT INFORMATION:

The Company operates in three industry segments: metal processing and recycling
(Metals Recycling Business), mini-mill steel manufacturing (Steel Manufacturing
Business) and self-service used auto parts (Auto Parts Business). Additionally,
the Company is a non-controlling partner in joint ventures, which are either in
the metals recycling business or are suppliers of unprocessed metals. The
Company also considers these to be separate segments because they are managed
separately. These joint ventures are accounted for using the equity method. As
such, the operating information provided below related to the joint ventures is
shown separately from consolidated information, except for the Company's equity
in the net income of, investment in and advances to the joint ventures.

The Metals Recycling Business buys and processes ferrous and nonferrous metals
for sale to foreign and other domestic steel producers or their representatives
and to the Steel Manufacturing Business. The Metals Recycling Business also
purchases ferrous metals from other processors for shipment directly to the
Steel Manufacturing Business.

                                       64


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Steel Manufacturing Business produces rebar, merchant bar, wire rod, coiled
rebar and other specialty products.

The Auto Parts Business purchases salvaged vehicles, sells parts from those
vehicles through its retail facilities and wholesale operations, and sells the
remaining portion of the vehicles to metal recyclers, including the Metals
Recycling Business. Note 3 describes the acquisition that occurred on February
14, 2003.

Intersegment sales from the Metals Recycling Business to the Steel Manufacturing
Business, and from the Auto Parts Business to the Metals Recycling Business, are
transferred at negotiated market rates per ton. These intercompany sales tend to
produce intercompany profits, which are eliminated until the finished products
are ultimately sold to third parties.

The Joint Ventures in the metals recycling business are also engaged in buying,
processing and selling primarily ferrous metal. Recycled metals are sold to
foreign and domestic steel mills.

The Joint Venture suppliers of metals are industrial plant demolition
contractors. These joint ventures dismantle industrial plants, perform
environmental remediation and sell recovered metals and machinery. The Company
purchases substantially all of the ferrous recycled metals generated by these
joint ventures.

The information provided below is obtained from internal information that is
provided to the Company's chief operating decision-maker for the purpose of
corporate management. 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.

                                                   YEAR ENDED AUGUST 31,
                                          -------------------------------------
                                             2004          2003         2002
                                          ----------    ----------   ----------
Revenues from external customers
(in thousands):
   Metals Recycling Business              $  456,302    $  308,553   $  221,811
   Auto Parts Business                        81,518        65,225           --
   Steel Manufacturing Business              271,293       191,861      166,586
   Intersegment revenues                    (120,893)      (68,773)     (37,749)
                                          ----------    ----------   ----------
Consolidated revenues                     $  688,220    $  496,866   $  350,648
                                          ==========    ==========   ==========


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

                                                  YEAR ENDED AUGUST 31,
                                         --------------------------------------
                                            2004          2003          2002
                                         ----------    ----------    ----------
Joint Ventures in the metals
recycling business
   Processing                            $1,038,373    $  616,958    $  480,157
   Brokering                                489,030       251,431       144,962
Joint Venture suppliers of metals            12,644         8,877        61,762
                                         ----------    ----------    ----------
                                         $1,540,047    $  877,266    $  686,881
                                         ==========    ==========    ==========

                                       65


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Revenues by geographic area (in thousands):

                                                   YEAR ENDED AUGUST 31,
                                         --------------------------------------
                                            2004          2003          2002
                                         ----------    ----------    ----------
Metals Recycling Business:
   Asia                                  $  322,574    $  223,490    $  164,512
   North America                            133,728        85,063        57,299
   Sales to Steel Manufacturing Business   (112,198)      (61,052)      (37,730)
                                         ----------    ----------    ----------
   Sales to external customers              344,104       247,501       184,081

Auto Parts Business:
   North America                             81,518        65,225            --
   Sales to Metals Recycling Business        (8,695)       (7,721)           --
                                         ----------    ----------    ----------
   Sales to external customers               72,823        57,504            --

Steel Manufacturing Business:
   North America                            271,293       191,861       166,586
   Interdivision sales                           --            --           (19)
                                         ----------    ----------    ----------
   Sales to external customers              271,293       191,861       166,567
                                         ----------    ----------    ----------
Consolidated revenues                    $  688,220    $  496,866    $  350,648
                                         ==========    ==========    ==========


The Joint Ventures in the metals recycling business do not maintain revenues by
geographic area and it would be impracticable to provide such disclosure. Sales
by the Joint Venture suppliers of metals are all made to customers in the United
States. See Note 9 regarding the Company's purchases from its joint ventures.

                                                    YEAR ENDED AUGUST 31,
                                         --------------------------------------
                                            2004          2003          2002
                                         ----------    ----------    ----------
                                                     (in thousands)
Operating income (loss):
   Metals Recycling Business             $   77,319    $   35,781    $   11,535
   Auto Parts Business                       26,804        21,968            --
   Steel Manufacturing Business              24,636        (2,522)       (5,718)
   Joint Ventures in the metals
     recycling business                      61,672        24,827        13,766
   Joint Venture suppliers of metals           (101)         (406)        5,624
   Corporate expense and eliminations       (19,950)       (8,763)       (8,282)
   Impairment and other nonrecurring
     charges                                 (3,500)       (2,100)       (7,100)
                                         ----------    ----------    ----------
   Consolidated operating income         $  166,880    $   68,785    $    9,825
                                         ==========    ==========    ==========

                                       66


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


See Note 5 regarding additional discussion on impairment and other non-recurring
charges. Operating income from the joint ventures represents the Company's
equity in the net income of these entities.

                                                  YEAR ENDED AUGUST 31,
                                         --------------------------------------
                                            2004          2003          2002
                                         ----------    ----------    ----------
                                                     (in thousands)
Depreciation and amortization expense:
   Metals Recycling Business             $    6,532    $    6,052    $    8,903
   Auto Parts Business                        4,802         4,017            --
   Steel Manufacturing Business               8,582         8,915         9,368
   Corporate expense and eliminations           487           457           360
                                         ----------    ----------    ----------
   Consolidated depreciation and
      amortization expense               $   20,403    $   19,441    $   18,631
                                         ==========    ==========    ==========


The Company's share of depreciation and amortization expense included in the
determination of the joint ventures' net income is as follows:

                                                  YEAR ENDED AUGUST 31,
                                         --------------------------------------
                                            2004          2003          2002
                                         ----------    ----------    ----------
                                                     (in thousands)
Joint Ventures in the metals recycling
  business                               $    6,724    $    6,539    $    6,542
Joint Venture suppliers of metals               260           286         1,132


The following is a summary of the Company's total assets and capital
expenditures:
                                                  YEAR ENDED AUGUST 31,
                                         --------------------------------------
                                            2004          2003          2002
                                         ----------    ----------    ----------
                                                     (in thousands)
Total assets:
   Metals Recycling Business             $  157,386    $  136,137    $  119,088
   Auto Parts Business                      130,585       105,283            --
   Steel Manufacturing Business             119,653       113,384       122,036
   Investment in and advances to:
      Joint Ventures in the metals
        recycling business                  179,081       115,924        90,433
      Joint Venture suppliers of
        recycled metal                        3,764         3,124         6,006
   Corporate                                 15,504        14,042        67,443
                                         ----------    ----------    ----------
                                         $  605,973    $  487,894    $  405,006
                                         ==========    ==========    ==========

Capital expenditures:
   Metals Recycling Business             $   12,598    $   16,176    $    5,962
   Auto Parts Business                        3,822         2,932            --
   Steel Manufacturing Business               4,967         2,496         3,182
   Corporate                                    805           192           425
                                         ----------    ----------    ----------
                                         $   22,192    $   21,796    $    9,569
                                         ==========    ==========    ==========


                                       67


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In fiscal years 2004 and 2003, one customer accounted for 12% and 21% of the
Company's consolidated revenues, respectively. During fiscal 2002, no single
customer accounted for more than 10% of consolidated revenues. Sales to foreign
countries are a significant part of our business. The schedule below identifies
those foreign countries in which our sales exceed 10% of consolidated revenues.

                                                  YEAR ENDED AUGUST 31,
                                         --------------------------------------
                                            2004          2003          2002
                                         ----------    ----------    ----------
Sales to China                               13%           23%           24%
Sales to South Korea                         21%           10%            9%


During fiscal 2002, one customer accounted for 11% of combined revenues for the
joint ventures, while during fiscal 2004 and 2003, no single customer accounted
for more than 10% of combined revenues for the joint ventures.


NOTE 13 - SUMMARIZED FINANCIAL INFORMATION OF JOINT VENTURES:

A summary of combined operations of joint ventures in which the Company is a
partner is as follows:

                                           YEAR ENDED AUGUST 31,
                                         ------------------------
                                            2004          2003
                                         ----------    ----------
                                               (in thousands)

Current assets                           $  266,612    $  150,461
Non-current assets                          136,202       132,390
                                         ----------    ----------
                                         $  402,814    $  282,851
                                         ==========    ==========


Current liabilities                      $   84,385    $   87,418
Non-current liabilities                      10,838         8,917
Partners' equity                            307,591       186,516
                                         ----------    ----------
                                         $  402,814    $  282,851
                                         ==========    ==========


                                                  YEAR ENDED AUGUST 31,
                                         --------------------------------------
                                            2004          2003          2002
                                         ----------    ----------    ----------
                                                     (in thousands)

Revenues                                 $1,540,435    $  877,266    $  686,881
                                         ==========    ==========    ==========

Operating income                         $  147,405    $   52,162    $   39,833
                                         ==========    ==========    ==========

Net income before taxes                  $  131,855    $   50,464    $   39,824
                                         ==========    ==========    ==========


Advances from and to joint venture partnerships from the Company are included in
non-current assets and liabilities above. Certain advances bear interest.


                                       68


                        SCHNITZER STEEL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE
          AMOUNTS):

                                                FISCAL YEAR 2004
                               -------------------------------------------------
                                  FIRST       SECOND        THIRD       FOURTH
                               ----------   ----------   ----------   ----------
Revenues                       $  128,376   $  161,603   $  193,750   $  204,491
Operating income                   18,105       24,217       67,315       57,243
Net income                         12,177       18,549       42,514       37,941
Diluted earnings per share (1) $     0.39   $     0.60   $     1.37   $     1.22



                                                FISCAL YEAR 2003
                               -------------------------------------------------
                                  FIRST       SECOND        THIRD       FOURTH
                               ----------   ----------   ----------   ----------
Revenues                       $   90,667   $  124,659   $  127,944   $  153,596
Operating income                    8,758       13,297       22,027       24,703
Net income                          2,891        8,409       15,028       16,873
Diluted earnings per share (1) $     0.10   $     0.30   $     0.52   $     0.56




(1)  Diluted earnings per share have been adjusted to reflect the one-for-one
     share dividend which occurred on August 14, 2003 and the one-for-two stock
     dividend paid on March 25, 2004.








                                       69


                 Schedule II - Valuation and Qualifying Accounts

               For the Years Ended August 31, 2004, 2003, and 2002
                                 (In thousands)




                COLUMN A                    COLUMN B         COLUMN C - ADDITIONS        COLUMN D       COLUMN E
- --------------------------------------     ----------     -------------------------     ----------     ----------
                                           BALANCE AT     CHARGED TO     CHARGED TO                    BALANCE AT
                                           BEGINNING       COST AND         OTHER                        END OF
              DESCRIPTION                  OF PERIOD       EXPENSES       ACCOUNTS      DEDUCTIONS       PERIOD
- --------------------------------------     ----------     ----------     ----------     ----------     ----------
                                                                                        
              FISCAL 2004
              -----------
Allowance for doubtful accounts            $      712     $      354     $              $     (294)    $      772
Inventories - net realizable value              1,061          2,331                                        3,392
Deferred tax asset valuation allowance          6,090                                       (6,090)            --

              FISCAL 2003
              -----------
Allowance for doubtful accounts                 1,005             21                          (314)           712
Inventories - net realizable value              1,071            (10)                                       1,061
Deferred tax asset valuation allowance          6,928                                         (838)         6,090

              FISCAL 2002
              -----------
Allowance for doubtful accounts                   920             85                                        1,005
Inventories - net realizable value              1,338           (267)                                       1,071
Deferred tax asset valuation allowance          7,766                                         (838)         6,928












                                       70







      REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL
                               STATEMENT SCHEDULE






  To the Board of Directors and Shareholders
  of Schnitzer Steel Industries, Inc.:

  Our audits of the consolidated financial statements referred to in our report
  dated November 23, 2004 appearing in this Form 10-K also included an audit of
  the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In
  our opinion, this financial statement schedule present fairly, in all material
  respects, the information set forth therein when read in conjunction with the
  related consolidated financial statements.



  PricewaterhouseCoopers LLP
  Portland, Oregon
  November 23, 2004





                                       71


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K



ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

NONE.


ITEM 9A.    CONTROLS AND PROCEDURES


Schnitzer Steel Industries, Inc. management, under supervision of the Chief
Executive Officer and Chief Financial Officer, is responsible for establishing
and maintaining disclosure controls and procedures for Schnitzer Steel
Industries, Inc. and its subsidiaries. As of August 31, 2004, with the
participation of the Chief Executive Officer and the Chief Financial Officer,
management completed an evaluation of the Company's disclosure controls and
procedures. Based upon this evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded that the disclosure controls and
procedures are effective to ensure that all material information relating to
Schnitzer Steel Industries, Inc. and its subsidiaries is made known to them by
others within the organization as appropriate to allow timely decisions
regarding required disclosures.

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


ITEM 9B.    OTHER INFORMATION

NONE









                                       72


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by Item 401 of Regulation S-K regarding directors will be
included under "Election of Directors" in the Company's Proxy Statement for its
2005 Annual Meeting of Shareholders and is incorporated herein by reference.
Information with respect to executive officers of the Company will be included
under Item 4(a) of Part I of this Report. Information required by Item 405 of
Regulation S-K will be included under "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for its 2005 Annual
Meeting of Shareholders and is incorporated herein by reference.

The Company has adopted a Code of Business Conduct and Ethics that is applicable
to all of its employees. It includes additional provisions that apply to the
Company's principal executive officer, principal financial officer, principal
accounting officer or controller, and persons performing similar functions (the
"Senior Financial Officers"). It also provides a code of business conduct and
ethics for members of the Company's Board of Directors. This document is posted
on the Company's internet website (www.schnitzersteel.com) and is available free
of charge by calling the Company or submitting a request to ir@schn.com. The
Company intends to disclose any amendments to or waivers from these Codes for
directors, executive officers or Senior Financial Officers on its website.

ITEM 11.    EXECUTIVE COMPENSATION

The information required by this item will be included under "Executive
Compensation" in the Company's Proxy Statement for its 2005 Annual Meeting of
Shareholders and is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
            AND RELATED STOCKHOLDER MATTERS

Information with respect to security ownership of certain beneficial owners and
management will be included under "Voting Securities and Principal Shareholders"
in the Company's Proxy Statement for its 2005 Annual Meeting of Shareholders and
is incorporated herein by reference. Information with respect to securities
authorized for issuance under equity compensation plans will be included under
"Equity Compensation Plan Information" in the Company's Proxy Statement for its
2005 Annual Meeting of Shareholders, and is incorporated herein by reference.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be included under "Certain
Transactions" in the Company's Proxy Statement for its 2005 Annual Meeting of
Shareholders and is incorporated herein by reference.


ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding the Company's principal accountant fees and services will
be included under "Independent Auditors" in the Company's Proxy Statement for
its 2005 Annual Meeting of Shareholders and is incorporated herein by reference.

                                       73


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

                                     PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


(a)    1.   The following financial statements are filed as part of this report:

            See Index to Consolidated Financial Statements and Schedule on page
            40 of this report.

       2.   The following schedule and report of independent accountants are
            filed as part of this report:

                                                                            Page
                                                                            ----
            Schedule II   Valuation and Qualifying Accounts                   70
            Report of Independent Accountants on Financial Statement
              Schedule                                                        71

            All other schedules are omitted as the information is either not
            applicable or is not required.


       3.   Exhibits:

            2.1     Stock and Membership Interest Purchase Agreement dated
                    January 8, 2003 among Bob Spence, Pick and Pull Auto
                    Dismantling, Inc., Pick-N-Pull Auto Dismantlers, Pick-N-Pull
                    Auto Dismantlers, Stockton, LLC and Norprop, Inc. Filed as
                    Exhibit 2.1 to Registrant's Form 10-Q for the quarter ended
                    November 30, 2002, and incorporated herein by reference.

            2.2     Amendment No. 1 dated November 14, 2003, to Stock and
                    Membership Interest Purchase Agreement dated January 8,
                    2003, among Bob Spence, Pick and Pull Auto Dismantling,
                    Inc., Pick-N-Pull Auto Dismantlers, Pick-N-Pull Auto
                    Dismantlers, Stockton, LLC, Norprop, Inc. and the Company.
                    Filed as Exhibit 2.1 to Registrant's Form 10-Q for the
                    quarter ended November 30, 2003, and incorporated herein by
                    reference.

            3.1     1993 Restated Articles of Incorporation of 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).

            3.2     Restated Bylaws of the Registrant. Filed as Exhibit 3.2 to
                    Registrant's Form 10-Q for the quarter ended May 31, 1998,
                    and incorporated herein by reference.

            4.1     Credit Agreement dated May 30, 2003 between the Registrant,
                    Bank of America, NA, and the Other Lenders Party Thereto.
                    Filed as Exhibit 10.1 to Registrant's Form 10-Q for the
                    quarter ended May 31, 2003, and incorporated herein by
                    reference.

            9.1     Schnitzer Steel Industries Inc. 2001 Restated Voting Trust
                    and Buy-Sell Agreement dated March 26, 2001. Filed as
                    Exhibit 9.1 to Registrant's Form 10-K for the fiscal year
                    ended August 31, 2001 and incorporated herein by reference.

            10.1    Lease Agreement dated August 7, 2003 between Schnitzer
                    Investment Corp. and the Registrant, relating to the
                    corporate headquarters. Filed as Exhibit 10.1 to
                    Registrant's Form 10-K for the year ended August 31, 2003,
                    and incorporated herein by reference.

                                       74


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

            10.2    Lease Agreement dated August 7, 2003 between Schnitzer
                    Investment Corp. and the Registrant, relating to the
                    corporate headquarters. Filed as Exhibit 10.2 to
                    Registrant's Form 10-K for the year ended August 31, 2003,
                    and incorporated herein by reference.

            10.3    Lease Agreement dated September 1, 1988 between Schnitzer
                    Investment Corp. and the Registrant, as amended, relating to
                    the Portland metals recycling operation. Incorporated by
                    reference to Exhibit 10.3 to the Form S-1.

            10.4    Second Amendment to Lease dated October 28, 1994 between
                    Schnitzer Investment Corp. and the Registrant, relating to
                    Portland metals recycling operation. Filed as Exhibit 10.1
                    to Registrant's Form 10-Q for the quarterly period ended
                    November 30, 1995, and incorporated herein by reference.

            10.5    Third Amendment to Lease dated February 1998 between
                    Schnitzer Investment Corp. and the Registrant, relating to
                    Portland metals recycling operation. Filed as Exhibit 10.25
                    to Registrant's Form 10-K for the fiscal year ended August
                    31, 2000, and incorporated herein by reference.

            10.6    Fourth Amendment to Lease dated July 1, 1998, between
                    Schnitzer Investment Corp. and the Registrant, relating to
                    Portland metals recycling operation. Filed as Exhibit 10.26
                    to Registrant's Form 10-K for the fiscal year ended August
                    31, 2000, and incorporated herein by reference.

            10.7    Letter dated March 22, 1999 amending the lease between
                    Schnitzer Investment Corp. and the Registrant related to the
                    Portland metals recycling operation. Filed as Exhibit 10.1
                    to Registrant's Form 10-Q for the quarter ended November 30,
                    2001, and incorporated herein by reference.

            10.8    Fifth Amendment to Lease dated July 9, 2001 between
                    Schnitzer Investment Corp. and the Registrant related to the
                    Portland metals recycling operation. Filed as Exhibit 10.8
                    to Registrant's Form 10-K for the year ended August 31,
                    2003, and incorporated herein by reference.

            10.9    Sixth Amendment to Lease dated August 7, 2003 between
                    Schnitzer Investment Corp. and the Registrant related to the
                    Portland metals recycling operation. Filed as Exhibit 10.9
                    to Registrant's Form 10-K for the year ended August 31,
                    2003, and incorporated herein by reference.

            10.10   Purchase and Sale Agreement dated August 7, 2003 between
                    Schnitzer Investment Corp. and the Registrant, relating to
                    the Sacramento metals recycling operation's real estate.
                    Filed as Exhibit 10.10 to Registrant's Form 10-K for the
                    year ended August 31, 2003, and incorporated herein by
                    reference.

            10.11   Second Amended Shared Services Agreement dated September 13,
                    1993 between the Registrant and certain entities controlled
                    by shareholders of the Registrant. Incorporated by reference
                    to Exhibit 10.5 to the Form S-1.

            10.12   Amendment dated September 1, 1994 to Second Amended Shared
                    Services Agreement between the Registrant and certain
                    entities controlled by shareholders of the Registrant. Filed
                    as Exhibit 10.6 to Registrant's Form 10-K for the fiscal
                    year ended August 31, 1995, and incorporated herein by
                    reference.

                                       75


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

            *10.13  1993 Stock Incentive Plan of the Registrant. Filed as
                    Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended
                    February 28, 2002, and incorporated herein by reference.

            *10.14  Form of Stock Option Agreement used for option grants to
                    employees under the 1993 Stock Incentive Plan.

            *10.15  Form of Stock Option Agreement used for option grants to
                    non-employee directors under the 1993 Stock Incentive Plan.

            *10.16  Employment Agreement dated August 20, 2004 between Barry A.
                    Rosen and the Registrant.

            *10.17  Supplemental Executive Retirement Bonus Plan of the
                    Registrant. Filed as Exhibit 10.24 to Registrant's Form 10-K
                    for the fiscal year ended August 31, 2001, and incorporated
                    herein by reference.

            *10.18  Amendment to the Supplemental Executive Retirement Bonus
                    Plan of the Registrant effective January 1, 2002. Filed as
                    Exhibit 10.25 to Registrant's Form 10-K for the fiscal year
                    ended August 31, 2001, and incorporated herein by reference.

            *10.19  Schnitzer Steel Industries, Inc. Amended and Restated
                    Economic Value Added ("EVA") Bonus Plan.

            21.1    Subsidiaries of Registrant.

            23.1    Consent of Independent Accountants.

            24.1    Powers of Attorney

            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.

            *Management contract or compensatory plan or arrangement

                                       76


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                         SCHNITZER STEEL INDUSTRIES, INC.

Dated  November 24, 2004                 By:  /s/BARRY A. ROSEN
       ---------------------             ---------------------------------------
                                         Barry A. Rosen
                                         Vice President, Finance and
                                         Chief Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant:
November 24, 2004 in the capacities indicated.


Signature                                   Title
- ---------                                   -----

Principal Executive Officer:



*ROBERT W. PHILIP                        Chairman, President and
- -------------------------------          Chief Executive Officer
Robert W. Philip


Principal Financial Officer:



 /s/ BARRY A. ROSEN                      Vice President, Finance and
- -------------------------------           Chief Financial Officer
Barry A. Rosen



Principal Accounting Officer:



/s/ KELLY E. LANG                        Vice President, Corporate Controller
- -------------------------------
Kelly E. Lang








                                       77


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

Directors:


*ROBERT S. BALL                          Director
- -------------------------------
Robert S. Ball


*WILLIAM S. FURMAN                       Director
- -------------------------------
William S. Furman


*CAROL S. LEWIS                          Director
- -------------------------------
Carol S. Lewis


*SCOTT LEWIS                             Director
- -------------------------------
Scott Lewis


*KENNETH M. NOVACK                       Director
- -------------------------------
Kenneth M. Novack


*JEAN S. REYNOLDS                        Director
- -------------------------------
Jean S. Reynolds


*DORI SCHNITZER                          Director
- -------------------------------
Dori Schnitzer


*GARY SCHNITZER                          Director
- -------------------------------
Gary Schnitzer


*RALPH R. SHAW                           Director
- -------------------------------
Ralph R. Shaw


*By:  /s/ BARRY A. ROSEN
- -------------------------------
Attorney-in-fact, Barry A. Rosen

                                       78


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

                                INDEX TO EXHIBITS

2.1       Stock and Membership Interest Purchase Agreement dated January 8, 2003
          among Bob Spence, Pick and Pull Auto Dismantling, Inc., Pick-N-Pull
          Auto Dismantlers, Pick-N-Pull Auto Dismantlers, Stockton, LLC and
          Norprop, Inc. Filed as Exhibit 2.1 to Registrant's Form 10-Q for the
          quarter ended November 30, 2002, and incorporated herein by reference.

2.2       Amendment No. 1 dated November 14, 2003, to Stock and Membership
          Interest Purchase Agreement dated January 8, 2003, among Bob Spence,
          Pick and Pull Auto Dismantling, Inc., Pick-N-Pull Auto Dismantlers,
          Pick-N-Pull Auto Dismantlers, Stockton, LLC, Norprop, Inc. and the
          Company. Filed as Exhibit 2.1 to Registrant's Form 10-Q for the
          quarter ended November 30, 2003, and incorporated herein by reference.

3.1       1993 Restated Articles of Incorporation of 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).

3.2       Restated Bylaws of the Registrant. Filed as Exhibit 3.2 to
          Registrant's Form 10-Q for the quarter ended May 31, 1998, and
          incorporated herein by reference.

4.1       Credit Agreement dated May 30, 2003 between the Registrant, Bank of
          America, NA, and the Other Lenders Party Thereto. Filed as Exhibit
          10.1 to Registrant's Form 10-Q for the quarter ended May 31, 2003, and
          incorporated herein by reference.

9.1       Schnitzer Steel Industries, Inc. 2001 Restated Voting Trust and
          Buy-Sell Agreement dated March 26, 2001. Filed as Exhibit 9.1 To
          Registrants Form 10-K for the rascal year ended August 31, 2001, and
          incorporated herein by reference.

10.1      Lease Agreement dated August 7, 2003 between Schnitzer Investment
          Corp. and the Registrant, relating to the corporate headquarters.
          Filed as Exhibit 10.1 to Registrant's Form 10-K for the year ended
          August 31, 2003, and incorporated herein by reference.

10.2      Lease Agreement dated August 7, 2003 between Schnitzer Investment
          Corp. and the Registrant, relating to the corporate headquarters.
          Filed as Exhibit 10.2 to Registrant's Form 10-K for the year ended
          August 31, 2003, and incorporated herein by reference.

10.3      Lease Agreement dated September 1, 1988 between Schnitzer Investment
          Corp. and the Registrant, as amended, relating to the Portland metals
          recycling operation. Incorporated by reference to Exhibit 10.3 to the
          Form S-1.

                                       79


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

10.4      Second Amendment to Lease dated October 28, 1994 between Schnitzer
          Investment Corp. and the Registrant, relating to Portland metals
          recycling operation. Filed as Exhibit 10.1 to Registrant's Form 10-Q
          for the quarterly period ended November 30, 1995, and incorporated
          herein by reference.

10.5      Third Amendment to Lease dated February 1998, between Schnitzer
          Investment Corp. and the Registrant relating to Portland recycled
          metals recycling operation. Filed as Exhibit 10.25 to Registrant's
          Form 10-K for the fiscal year ended August 31, 2000, and incorporated
          herein by reference.

10.6      Fourth Amendment to Lease dated July 1, 1998, between Schnitzer
          Investment Corp. and the Registrant relating to Portland metals
          recycling operation. Filed as Exhibit 10.26 to Registrant's Form 10-K
          for the fiscal year ended August 31, 2000, and incorporated herein by
          reference.

10.7      Letter dated March 22, 1999 amending the lease between Schnitzer
          Investment Corp. and the Registrant relating to the Portland recycled
          metals recycling operation. Filed as Exhibit 10.1 to Registrant's Form
          10-Q for the quarter ended November 30, 2001, and incorporated herein
          by reference.

10.8      Fifth Amendment to Lease dated July 9, 2001 between Schnitzer
          Investment Corp. and the Registrant related to Portland metals
          recycling operation. Filed as Exhibit 10.8 to Registrant's Form 10-K
          for the year ended August 31, 2003, and incorporated herein by
          reference.

10.9      Sixth Amendment to Lease dated August 7, 2003 between Schnitzer
          Investment Corp. and the Registrant related to Portland metals
          recycling operation. Filed as Exhibit 10.9 to Registrant's Form 10-K
          for the year ended August 31, 2003, and incorporated herein by
          reference.

10.10     Purchase and Sale Agreement dated August 7, 2003 between Schnitzer
          Investment Corp. and the Registrant, relating to the Sacramento metals
          recycling operation's real estate. Filed as Exhibit 10.10 to
          Registrant's Form 10-K for the year ended August 31, 2003, and
          incorporated herein by reference.

10.11     Second Amended Shared Services Agreement dated September 13, 1993
          between the Registrant and certain entities controlled by shareholders
          of the Registrant. Incorporated by reference to Exhibit 10.5 to the
          Form S-1.

10.12     Amendment dated September 1, 1994 to Second Amended Shared Services
          Agreement between the Registrant and certain entities controlled by
          shareholders of the Registrant. Filed as Exhibit 10.6 to Registrant's
          Form 10-K for the fiscal year ended August 31, 1995, and incorporated
          herein by reference.

*10.13    1993 Stock Incentive Plan of the Registrant. Filed as Exhibit 10.1 to
          Registrant's Form 10-Q for quarter ended February 28, 2002, and
          incorporated herein by reference.

                                       80


                        SCHNITZER STEEL INDUSTRIES, INC.
                                    FORM 10-K

*10.14    Form of Stock Option Agreement used for option grants to employees
          under the 1993 Stock Incentive Plan.

*10.15    Form of Stock Option Agreement used for option grants to non-employee
          directors under the 1993 Stock Incentive Plan.

*10.16    Employment Agreement dated August 20, 2004 between Barry A. Rosen and
          the Registrant.

*10.17    Supplemental Executive Retirement Bonus Plan of the Registrant. Filed
          as Exhibit 10.24 to Registrant's Form 10-K for fiscal year ended
          August 31, 2001, and incorporated herein by reference.

*10.18    Amendment to the Supplemental Executive Retirement Bonus Plan of the
          Registrant effective January 1, 2002. Filed as Exhibit 10.25 to
          Registrant's Form 10-K for fiscal year ended August 31, 2001, and
          incorporated herein by reference.

*10.19    Schnitzer Steel Industries, Inc. Amended and Restated Economic Value
          Added ("EVA") Bonus Plan.

21.1      Subsidiaries of Registrant.

23.1      Consent of Independent Accountants.

24.1      Powers of Attorney.

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.

                                       81