SCHNITZER STEEL INDUSTRIES, INC.

Changes in Shareholders’ Equity

During the first nine monthsquarter of fiscal 2008,2009, the Company’s shareholders’ equity increased $106decreased $34 million. The increasedecrease was primarily comprised of a net incomeloss of $122 million and share-based compensation of $10 million, which was partially offset by the Company repurchasing 445,500 shares of its Class A common stock in open-market transactions at a cost of $26$34 million.

Net Income and Dividends per Share

The following table sets forth the reconciliation from basic net income (loss) per share to diluted net income (loss) per share (in thousands, except per share amounts):

The Company accounts for earnings per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share.” Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding andduring the periods presented, including vested deferred stock unitunits (“DSU”DSUs”) awards during the periods presented.and restricted stock units (“RSU”). Diluted earnings per share is computed usingby dividing net income and(loss) by the weighted average number of common shares outstanding, assuming dilution. Potentially dilutive common shares include the assumed exercise of stock options and assumed vesting of Long-Term Incentive Plan (“LTIP”) performance share,shares and DSU and restricted stock unit (“RSU”)RSU awards using the treasury stock method. For the three and nine months ended May 31,November 30, 2008, 1,340,913 common stock equivalent shares were considered antidilutive and were excluded from the calculation of diluted earnings per share. For the three months ended November 30, 2007, all stockof the options, LTIP performance share, DSUshares, DSUs and RSU awardsRSUs issued through and outstanding as of November 30, 2007 were considered to be dilutive. Stock options

Fair Value Measurements

On September 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” which defines fair value. In accordance with SFAS No. 157, fair value is measured using inputs from the three levels of the fair value hierarchy. Classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are described as follows:

The Company uses quoted market prices whenever available, or seeks to maximize the use of observable inputs and RSU awards totaling approximately 37,000minimize the use of unobservable inputs when quoted market prices are not available, when developing fair value measurements. The Company’s only financial instruments subject to fair value measurement are its outstanding derivative contracts, which are measured at fair value using models or other market accepted valuation methodologies derived from observable market data. These models consider various inputs including:

SCHNITZER STEEL INDUSTRIES, INC.

(a) quoted futures prices for commodities, (b) time value, and 249,000 shares(c) the Company’s credit risk, as well as other relevant economic measures. The impact of this statement is reflected in the Company’s condensed consolidated financial statements for the three and nine months ended May 31, 2007, respectively, were considered antidilutive.first quarter of fiscal 2009 (refer to Note 10 – Fair Value Measurements for further detail).

Recent Accounting Pronouncements

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS 162 is effective 60 days following the SEC’s approval by the Public Company Accounting Oversight Board of amendments to AU Section 411, “The Meaning of ‘Present fairly in conformity with generally accepted accounting principles’.” The Company is currently in compliance with this standard.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their risks and impact on an entity’s financial position, financial performance and cash flows. The provisions of SFAS 161 are effective for the Company for the quarter ending February 28, 2009. Management is currently evaluating the impactas of the provisionssecond quarter of fiscal 2009. The adoption of SFAS No. 161 on its disclosures.

SCHNITZER STEEL INDUSTRIES, INC.

will enhance and provide more visibility over the Company’s footnote disclosure surrounding derivative instruments and hedging activities.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which replaces SFAS 141, and issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), an amendment of ARB No. 51. These two new standards will change the accounting and reporting for business combination transactions and noncontrolling (minority) interests in the consolidated financial statements, respectively. SFAS 141(R) will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. These two standards will be effective for the Company in the first quarter of fiscal year 2010. SFAS 141(R) will be applied prospectively. SFAS 160 requires retrospective application of most of the classification and presentation provisions. All other requirements of SFAS 160 shall be applied prospectively. Early adoption is prohibited for both standards. Management is currently evaluating the requirements of SFAS 141(R) and SFAS 160 and has not yet determined the impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 establishes a fair value option under which entities can elect to report certain financial assets and liabilities at fair value, with changes in fair value recognized in earnings. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Earlier application is encouraged, provided that the reporting entity also elects to apply the provisions of SFAS 157. SFAS 159 becomes effective for the Company in the first quarter of fiscal year 2009. Management is currently evaluating the requirements of SFAS 159 and has not yet concluded if the fair value option will be adopted.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands fair value measurement disclosure. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company will be required to adopt SFAS 157 in the first quarter of fiscal year 2009. In February 2008, the FASB issued FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157” (“FSP”) 157-1 and FSP 157-2. FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope.157-2”). FSP 157-2 delays the effective date of SFAS 157 for non-recurring non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until the beginning of the Company’s first quarter of fiscal 2010. ManagementThe Company’s significant non-financial assets and liabilities that could be impacted by this deferral include assets and liabilities initially measured at fair value in a business combination and goodwill tested annually for impairment. The Company is currently evaluating the requirements of SFAS 157 as it relates to FSP 157-2 for non-recurring non-financial assets and liabilities and has not yet determined the impact, if any, on the Company’s consolidated financial statements.position, results of operations or cash flows.

Reclassifications

Certain prior year cash flow amounts have been reclassifiedIn April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to conformdetermine the useful life of a recognized intangible asset under SFAS No. 142,“Goodwill and Other Intangible Assets.” FSP 142-3 must be applied prospectively to all intangible assets acquired as of and subsequent to fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. This standard will be effective for the current year presentation. These changes didCompany on September 1, 2009. Early adoption is prohibited. FSP 142-3 will not have ana material impact on previously reportedthe Company’s consolidated financial position, results of operations or cash flows from operating activities.flows.

SCHNITZER STEEL INDUSTRIES, INC.

Note 2 –- Inventories, net

The Company’s inventories consist primarily consist of ferrous and nonferrous processed and unprocessed scrap metal, used and salvaged vehicles and finished steel products, consisting primarily of rebar, merchant bar and wire rod. Inventories are stated at the lower of cost or market for all periods presented.

SCHNITZER STEEL INDUSTRIES, INC.

Inventories, net consisted of (in thousands):

The Company makes certain assumptions regarding future demand and net realizable value in order to assess that inventory is properly recorded at the lower of cost or market. The assumptions are based on both historical experience and current information. Due to declines in the anticipated future selling prices of scrap metal and finished steel products, the Company recorded non-cash net realizable value (“NRV”) inventory adjustments of $52 million at November 30 to reduce the value of its inventory (and increase cost of goods sold) to the lower of cost or market. In addition, the Company recognized $10 million of expense during the first quarter of fiscal 2009 for production costs that could not be capitalized in inventory.

Note 3 - Property, Plant and Equipment, net

Property, plant and equipment, net consisted of (in thousands):

Note 4 - Business Combinations

Metals Recycling Business

In the first nine monthsquarter of fiscal 2008,2009, the Company continued its growth strategy by completingsigned a purchase and sale agreement for the following acquisitions:

These acquisitions wereare not expected to be material, individually or in the aggregate, to the Company’s financial position or results of operations.

SCHNITZER STEEL INDUSTRIES, INC.

Note 5 –- Goodwill and Acquired Intangibles

The Company performs its annualAs discussed in more detail in Note 2 to the Company’s consolidated financial statements in the Company’s 2008 Annual Report on Form 10-K, goodwill assessment testand other intangible assets are tested annually for impairment during the second quarter and upon the occurrence of each fiscal year and whenevercertain triggering events and circumstances indicate that the value of goodwill may be impaired. Based on the operating results of eachor substantive changes in circumstances. During part of the reportable segments and the Company’s impairment testing completed in the secondfirst quarter of fiscal 2008,2009, the market value of the Company’s Class A common stock traded below its book value. Given the current economic conditions, deterioration in the financial markets and stock market volatility, the Company determined thatevaluated whether a triggering event had occurred in the goodwill balances below were not impaired. There were no triggering events during the current quarter requiring a goodwillended November 30, 2008, which would have required it to perform an interim impairment test of its goodwill and indefinite-lived intangible assets in accordance with SFAS No. 142, “Goodwill142. The Company determined that no triggering event had occurred, as the long-term fundamentals of the Company’s business have not changed. The market value of the Company’s Class A common stock was below book value for only a portion of the quarter, and Other Intangible Assets.”

SCHNITZER STEEL INDUSTRIES, INC.

subsequent to period end the Company’s stock traded above book value.

The changes in the carrying amount of goodwill by reportable segments resulting primarily from business combinations (see “Note 4 - Business Combinations”) during the first ninethree months of fiscal 2008,2009 were (in thousands):

The gross carrying amount and accumulated amortization offollowing table presents the Company’s identifiable intangible assets wereand their related lives (in thousands):

Intangible assets with finite useful lives are amortized over their useful lives using methods that reflect the pattern over which the economic benefits are expected to be consumed or on a straight-line basis based on estimated lives. Amortization expense for identifiable intangible assets for the three and nine months ended May 31,November 30, 2008 was $1 million and $3 million, respectively. Amortization expense related to intangible assets for the three and nine months ended May 31,November 30, 2007 was $1 million and $2 million, respectively. Amortization expense projected for the next five fiscal years is (in thousands):million.

Note 6 - Environmental Liabilities and Other Contingencies

The Company evaluates the adequacy of its environmental liabilitiesreserves on a quarterly basis in accordance with Company policy. Adjustments to the liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or expenditures are made for which reserves were established.

SCHNITZER STEEL INDUSTRIES, INC.

Changes in the Company’s environmental liabilities for the first ninethree months of fiscal 20082009 were (in thousands):

Metals Recycling Business (“MRB”)

At May 31,November 30, 2008, MRB’s environmental liabilitiesreserves of $24 million consisted primarily of the reserves established in connection with the Hylebos Waterway, the Portland Harbor and various acquisitions completed in fiscal 2008, 2007 and 2006.

Hylebos Waterway

In fiscal 1982, the Company was notified by the U.S. Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that it was one of 60 potentially responsible parties (“PRPs”) for the investigation andpotential future clean-up of contaminated sediment along the Hylebos Waterway. On March 25, 2002, the EPA issued Unilateral Administrative Orders to the Company and another party (the “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 Unilateral Administrative Order for the head of the Hylebos Waterway was converted to a voluntary consent decree in 2004, pursuant toMRB locations at which the Company or its subsidiaries have conducted business or allegedly disposed of certain materials and the Other Party agreed to remediate the head of the Hylebos Waterway.

There were two phases to the remediation of the head of Hylebos Waterway. The first phase was intertidal and bank remediation, which was conducted in 2003 and early 2004. The second phase involved dredging in the head of the Hylebos Waterway, which began in July 2004. During the second phase, the Company incurred remediation costs of $16 million in fiscal 2005. The Company’s cost estimates were based on the assumption that dredge removal of contaminated sediments would be accomplished within one dredge season, from July 2004 to February 2005. However, due to a variety of factors, including dredge contractor operational issues and other dredge related delays, the dredging was not completed during the first dredge season. As a result, the Company recorded additional environmental charges of $14 million in fiscal 2005, primarily to account for the additional estimated costs to complete this work during a second dredging season. The Company and the Other Party also incurred additional remediation costs of $7 million during fiscal 2006. The Company and the Other Party filed a complaint in the U.S. District Court for the Western District of Washington at Tacoma against the dredge contractor to recover damages and a significant portion of cost overruns incurred in the second dredging season to complete the project. Following a trial that concluded in February 2007, a jury awarded the Company and the Other Party damages in the amount of $6 million. The judgment has been appealed by the dredge contractor, and enforcement of the judgment is stayed pending the appeal. No accrual or reduction of liabilities will be recorded until all legal options have been resolved and the award is certain and deemed collectible. The Company and the Other Party also pursued settlement negotiations with and a legal action against other PRPs and recovered additional amounts. As of May 31, 2008, environmental liabilities for the Hylebos Waterway aggregated $4 million.various sites acquired through acquisitions.

Portland Harbor

In fiscal 2006, the Company was notified by the EPA under CERCLA that it was one of at least 69 PRPs that own or operate or formerly owned or operated sites adjacent to the Portland Harbor Superfund site. The precise nature and extent of any clean-up of the Portland Harbor, the parties to be involved, the process to be followed for any clean-up and the allocation of any costs for the clean-up among responsible parties have not yet been determined. It is unclear whether or to what extent if any, the Company will be liable for environmental costs or damages associated with the Portland Harbor Superfund site. It is also unclear to what extent natural resource damage

SCHNITZER STEEL INDUSTRIES, INC.

claims or third party contribution or damage claims will be asserted against the Company. While the Company participated in certain preliminary Portland Harbor study efforts, it is not party to the consent order entered into by the EPA with other certain PRPs, referred to as the “Lower Willamette Group” (“LWG”), 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.

During fiscal 2006, the Company received letters from the LWG and one of its members with respect to participating in the LWG Remedial Investigation/Feasibility Study (“RI/FS”) and demands from various parties in connection with environmental response costs allegedly incurred in investigating contamination at the Portland Harbor Superfund site. In an effort to develop a coordinated strategy and response to these demands, the Company joined with more than twenty other newly-noticed parties to form the Blue Water Group (“BWG”). All members of the BWG declined to join the LWG. As a result of discussions between the BWG, LWG, EPA and Oregon Department of Environmental Quality (“DEQ”) regarding a potential cash contribution to the RI/FS, certain members of the BWG, including the Company, have agreed to an interim settlement with the LWG under which the Company contributedwould contribute toward the BWG’s total settlement amount.

The DEQ is performing investigations involving the Company sites which are focused on controlling any current releases of contaminants into the Willamette River. In January 2008, the Natural Resource Damages Trustee Council (“Trustees”) for Portland Harbor invited the Company and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the site. Following meetings among the Trustees and the PRPs, a funding and participation agreement was negotiated under which the participating PRPs agreed to fund the first phase of natural resource damage assessment. The Company joined in that agreement and agreed to pay $100,000 of those costs. The cost of the investigations and remediation associated with these properties and the cost of employment of source control Best Management Practices is not reasonably estimable until the completion of the data review and further investigations now being conducted by the LWG.LWG and the Natural Resource Damage trustees. In fiscal 2006, the Company recorded a liability for its estimated share of the costs of the investigation incurred by the LWG to date. The Company’s estimated share of these costs is not considered to be material. As of November 30, 2008, the Company has reserved $1 million for investigation costs of the Portland Harbor.

SCHNITZER STEEL INDUSTRIES, INC.

Hylebos Waterway

In fiscal 1982, the Company was notified by the U.S. Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that it was one of 60 potentially responsible parties (“PRPs”) for the investigation and clean-up of contaminated sediment along the Hylebos Waterway. On March 25, 2002, the EPA issued Unilateral Administrative Orders to the Company and another party (the “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 Unilateral Administrative Order for the head of the Hylebos Waterway was converted to a voluntary consent decree in 2004, pursuant to which the Company and the Other Party agreed to remediate the head of the Hylebos Waterway.

During the second phase of the dredging in the head of the Hylebos Waterway, which began in July 2004, the Company incurred remediation costs of $16 million during fiscal 2005. The Company’s cost estimates were based on the assumption that dredge removal of contaminated sediments would be accomplished within one dredge season, from July 2004 to February 2005. However, due to a variety of factors, including dredge contractor operational issues and other dredge related delays, the dredging was not completed during the first dredge season. As a result, the Company recorded environmental charges of $14 million in fiscal 2005, primarily to account for additional estimated costs to complete this work during a second dredging season. The Company and the Other Party then incurred additional remediation costs of $7 million during fiscal 2006. The Company and the Other Party filed a complaint in the U.S. District Court for the Western District of Washington at Tacoma against the dredge contractor to recover damages and a significant portion of cost overruns incurred in the second dredging season to complete the project. Following a trial that concluded in February 2007, a jury awarded the Company and the Other Party damages in the amount of $6 million. In the first quarter of 2009, the judgment was affirmed on appeal, and the Company relieved a liability in the amount of $2 million related to the dredge contractor’s claim for unpaid invoices and recorded a gain in the amount of $4 million with respect to the damages award. As of November 30, 2008, environmental liabilities for the Hylebos Waterway aggregated less than $1 million.

Other Metals Recycling Business Sites

The Company performs environmental due diligence investigations in connection with its acquisitions. As a result of these investigations, the Company has identified certain environmental risks at various sites and accrued for its share of the estimated costs to remediate these risks. These liabilities were recorded as part of purchase accounting for the acquisitions and are evaluated quarterly according to Company policy. No environmental compliance proceedings are pending with respect to any of these sites. As of May 31, 2008 and August 31, 2007, environmental liabilities for these sites aggregated $22 million and $20 million, respectively. The Company’s environmental liabilities alsoreserves include amountsapproximately $22 million for potential future clean-up of other sitesMRB locations at which the Company or its subsidiaries have conducted business or allegedly disposed of other materials. No environmental compliance enforcement proceedings are currently pending related to these sites.

Auto Parts Business (“APB”)

The Company has completed various acquisitionsCompany’s environmental reserves include $17 million for potential future clean-up of businesses within the APB segment. At the time of each acquisition,locations at which the Company or its subsidiaries have conducted environmental due diligence investigations related to locations involved in the acquisitions and recorded a liability for the estimated cost to address any environmental matters identified as a resultbusiness or allegedly disposed of these investigations. The liability is evaluated quarterly according to Company policy. At May 31, 2008 and August 31, 2007, environmental liabilities for APB aggregated $18 million.other materials. No environmental compliance enforcement proceedings are currently pending with respectrelated to any of these locations.sites.

Steel Manufacturing Business (“SMB”)

SMB’s electric arc furnace generates dust (“EAF dust”) that is classified as hazardous waste by the EPA because of its zinc and lead content. As a result, the Company captures the EAF dust and ships it via specialized rail cars to a domestic firm that applies a treatment that allows the EAF dust to be delisted as hazardous waste so it can be disposed of as a non-hazardous solid waste.

SCHNITZER STEEL INDUSTRIES, INC.

SMB has an operating permit issued under Title V of the Clean Air Act Amendments of 1990, which governs certain air quality standards. The permit was first issued in fiscal 1998 and has since been renewed through fiscal 2012. The permit allows SMB to produce up to 950,000 tons of billets per year and allows varying rolling mill production levels based on levels of emissions.

SCHNITZER STEEL INDUSTRIES, INC.

Contingencies - Other

On October 16, 2006, the Company finalized settlements with the DOJ and the SEC resolving an investigation related to a past practice of making improper payments to the purchasing managers of the Company’s customers in Asia in connection with export sales of recycled ferrous metal. Under the settlement, the Company agreed to a deferred prosecution agreement with the DOJ (the “Deferred Prosecution Agreement”) and agreed to an order issued by the SEC, instituting cease-and-desist proceedings, making findings and imposing a cease-and-desist order pursuant to Section 21C of the Securities Exchange Act of 1934 (the “Order”). Under the Deferred Prosecution Agreement, the DOJ will not prosecute the Company if the Company meets the conditions of the agreement for a period of three years including, among other things, that the Company engage a compliance consultant to advise its compliance officer and its Board of Directors on the Company’s compliance program. A compliance consultant has been engaged by the Company since April 2007. Under the Order, the Company agreed to cease-and-desist from the past practices that were the subject of the investigation and to disgorge $8 million of profits and prejudgment interest. The Order also contains provisions comparable to those in the Deferred Prosecution Agreement regarding the engagement of the compliance consultant. In addition, under the settlement, the Company’s Korean subsidiary, SSI International Far East, Ltd., pled guilty to Foreign Corrupt Practices Act anti-bribery and books and records provisions, conspiracy and wire fraud charges and paid a fine of $7 million. These amounts were accrued during fiscal 2006 and paid in the first quarter of fiscal 2007. Under the settlement, the Company has agreed to cooperate fully with any ongoing, related DOJ and SEC investigations.

The Company has incurred expenses, and may incur further expenses, in connection with the advancement of funds to, or indemnification of, individuals involved in such investigations. Under the terms of its corporate bylaws, the Company is obligated to indemnify all current and former officers or directors involved in civil, criminal or investigative matters in connection with their service. The Company is also obligated to advance fees and expenses to such persons in advance of a final disposition of such matters, but only if the involved officer or director affirms a good faith belief of entitlement to indemnification and undertakes to repay such advance if it is ultimately determined by a court that such person is not entitled to be indemnified. The Company also has the option to indemnify employees and to advance fees and expenses, but only if the involved employees furnish the Company with the same written affirmation and undertaking. There is no limit on the indemnification payments the Company could be required to make under these provisions. The Company did not record a liability for these indemnification obligations based on the fact that they are employment-related costs. At this time, the Company does not believe thatexpect to pay any indemnity payments the Company may be required to make will be material.future material amounts associated with this settlement.

Note 7 - Short-Term Borrowings

The Company’s short-term borrowings consist primarily of ana one year unsecured uncommitted credit line which was increased by $5 million, to $25 million, onwith Wells Fargo Bank, N.A. The credit line expires March 1, 2008. The term of this credit facility was also extended2009; however, the Company believes it will be able to March 1, 2009.renew the facility. Interest rates on outstanding indebtedness under the unsecured line of credit are set by the bank at the time of borrowing. The credit available underweighted average interest rate on this agreement is uncommitted, and asline was 2.57% at November 30, 2008. As of May 31,November 30, 2008 and August 31, 20072008 the Company had $24$25 million and $20 million, respectively, outstanding under this agreement. The credit agreement contains various representations and warranties, events of default and financial and other covenants, including covenants regarding maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of MayNovember 30, 2008 and August 31, 2008, the Company was in compliance with all such covenants.

SCHNITZER STEEL INDUSTRIES, INC.

Note 8 - Long-Term Debt

In July 2007, the Company amended its unsecured committed bank credit agreement with Bank of America, N.A., as administrative agent, and the other lenders party thereto. The revised agreement provides for a five-year, $450 million revolving credit facility maturing in July 2012. Interest rates on outstanding indebtedness under the amended agreement are based, at the Company’s option, on either the London Interbank Offered Rate (“LIBOR”) plus a spread of between 0.50% and 1.00%, with the amount of the spread based on a pricing grid tied to the Company’s leverage ratio, or the greater of the prime rate or the federal funds rate plus 0.50%. In addition, annual commitment fees are payable on the unused portion of the credit facility at rates between 0.10% and 0.25% based on a pricing grid tied to the Company’s leverage ratio. As of May 31,November 30, 2008 and August 31, 20072008, the Company had borrowings outstanding under the credit facility of $206$97 million and $115$150 million, respectively.

The bank credit agreement contains various representations and warranties, events of default and financial and other covenants, including covenants regarding maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of May 31,November 30, 2008, the Company was in compliance with all such covenants.

As of May 31,November 30, 2008 the Company leased equipment underhad capital lease agreementsobligations for the use of equipment that expire at various dates through November 2014. Additionally, asAs of May 31,November 30, 2008, and August 31, 2007,2008 the Company had $2 million and $1 million, respectively, of assets that were accounted for as capital leases which were included in property, plant and equipment on the condensed consolidated balance sheets. Additionally, as of November 30, 2008 and August 31, 2008, the Company had $8 million of long-term bonded indebtedness that matures in January 2021.

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Note 9 - Related Party Transactions

The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled $16$5 million and $6 million in the thirdfirst quarter of fiscal 2009 and 2008, respectively. Advances to (payments from) these joint ventures were $1 million and ($3) million as of November 30, 2008 and 2007, respectively,August 31, 2008, respectively.

Thomas D. Klauer, Jr., President of the Company’s Auto Parts Business, is the sole shareholder of a corporation that is the 25% minority partner in a partnership with the Company. This partnership operates four self-service stores in Northern California. Mr. Klauer’s 25% share of the profits (loss) of this partnership totaled ($155,000) and $29 million and $13 million for$377,000 in the first nine monthsquarter of fiscal 2009 and 2008, respectively. Mr. Klauer also owns the property at one of these stores which is leased to the partnership under a lease providing for annual rent of $235,000, subject to annual adjustments based on the Consumer Price Index, and 2007, respectively.has a term that expires in December 2010. The partnership has the option to renew the lease upon its expiration for a five-year period. In addition, during fiscal 2008, the Company loaned this partnership $5 million to fund the exercise of an option to purchase property occupied by the partnership. The loan bears interest at a market rate, and the partnership is prohibited from making distributions to its partners until the loan is repaid. At November 30, 2008 the loan balance was $3 million.

Members of the Schnitzer family own significant interests in the Company and may exercise voting control by virtue of their ownership of Class B common stock. As such, Schnitzer family employees are considered related parties for financial reporting purposes. Gary Schnitzer, Gregory Schnitzer and Joshua Philip, each a member of the Schnitzer family, are employed by the Company. For the three and nine months ended May 31, 2008,first quarter of fiscal 2009, these members of the Schnitzer family collectively earned total compensation of $571,000 and $1 million, respectively,$292,000 compared to $596,000, and $1 million$247,000 for the threefirst quarter of fiscal 2008.

Note 10 - Fair Value Measurements

The Company’s natural gas contract to supply the SMB mini-mill is classified as a derivative instrument and nine months ended Maycarried at fair value. Fair value for the Company’s natural gas derivative instrument, the only instrument impacted by the adoption of SFAS No. 157, is determined using a forward price curve based on observable market price quotations at a major natural gas trading hub. In accordance with SFAS No. 157, the Company considers nonperformance risk in calculating fair value adjustments. This includes a credit risk adjustment based on the credit spreads of the counterparty when the Company is in an unrealized gain position, or on the Company’s own credit spread when the Company is in an unrealized loss position. This assessment of nonperformance risk is generally derived from the credit default swap market or from bond market credit spreads. The impact of the credit risk adjustments for the Company’s outstanding derivative was not material to the fair value calculation at November 30, 2008. Mark-to-market adjustments on this instrument resulted in a derivative liability of $6 million at November 30, 2008, an increase of $2 million from August 31, 2007.2008. This amount is classified as a Level 2 fair value measurement under the SFAS 157 fair value hierarchy described in Note 1 above.

Note 1011 - Share-based Compensation

The Company recognized $12$4 million and $18$3 million in the aggregate for share-based compensation expense for the three and nine months ended May 31,November 30, 2008 respectively, compared to $2 million and $5 million for the three and nine months ended May 31, 2007, respectively. A detailed description of the awards under the Company’s 1993 Stock Incentive Plan and the respective accounting treatment is included in the “Notes to the Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2007.2008.

SCHNITZER STEEL INDUSTRIES, INC.

Fiscal 2008-20102009-2011 Long-Term Incentive Awards

On October 31, 2007,November 24, 2008, the Company’s Compensation Committee approved performance-based awards under the Company’s 1993 Stock Incentive Plan (“the Plan”) and the entry by the Company into Long-Term Incentive Award Agreements evidencing the award of these performance shares. The Compensation Committee established performance targets based on the Company’s average growth in earnings per share (weighted at 50%) and the Company’s average return on capital employed (weighted at 50%) for the three years of the performance period, with award payouts ranging from a threshold of 50% to a maximum of 200% for each portion of the target awards. A participant generally must be employed by the Company on the October 31 following the end of the performance period to receive an award payout, although adjusted awards will be paid if employment terminates earlier on account of death, disability, retirement, termination without cause after the first year of the performance period or on a sale of the Company. Awards will be paid in Class A common stock as soon as practicable after October 31 following the end of the performance period. The grant date for the fiscal 2008 – 20102009–2011 performance-based awards was December 14, 2007, the date on which the awards were communicated to the participants. The Company recognized $600,000 and $1 million in compensationNovember 24, 2008. Compensation expense for the fiscal 2008 – 20102009–2011 performance-based awards during the three and nine monthsquarter ended May 31, 2008.

SCHNITZER STEEL INDUSTRIES, INC.

Deferred Stock Units

On January 30, 2008, each of the Company’s non-employee directors received a DSU award equal to $87,500 ($131,250 for the Chairman of the Board) divided by the closing market price of the Class A common stock on January 30, 2008. The total number of DSUs granted on JanuaryNovember 30, 2008 was 16,406 shares. The DSUs will become fully vested on the day before the 2009 annual meeting, subject to continued Board service. On April 29, 2008, the Compensation Committee revised the compensation structure for its non-employee directors, including the amount of the annual DSU awards to be granted to each director. In connection with the adoption of the revised compensation structure, the Company granted a one time DSU award to each non-employee director equal to $32,500 ($48,750 for the Chairman of the Board) divided by the closing market price of the Class A common stock on April 29, 2008. The total number of DSU awards granted on April 29, 2008 was 3,950 shares. These shares will become fully vested on the day before the 2009 annual meeting, subject to continued Board service. For the three and nine months ended May 31, 2008, the Company recognized $304,000 and $825,000, respectively, for compensation expense related to all outstanding DSU awards, compared to $283,000 and $850,000, for the same periods in the prior year.immaterial.

Annual Incentive Plan Shares

The Company has established an annual incentive plan for certain executives that provides for incentive compensation to be paid based on achievement of their fiscal year 2008 performance goals and the Company’s financial results. If the executive’s aggregate incentive compensation exceeds a specified threshold, the portion above the threshold is to be paid in Class A common stock, which is treated as a liability-classified award during the performance period in accordance with SFAS No. 123(R), “Share-Based Payment.” The Company’s financial and operating results during the third quarter of fiscal 2008 were such that the Company expects to exceed the specified threshold, and as a result, for the three and nine month period ended May 31, 2008, the Company recognized $8 million of liabilities and compensation expense in connection with the annual incentive plan. As of May 31, 2008, this liability was equivalent to 80,000 shares of the Company’s Class A common stock based on the closing stock price on that date.

Note 1112 - Employee Benefits

The Company and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees.employees of these companies. These plans include a defined benefit plan, a supplemental executive retirement benefit plan (“SERBP”), defined contribution plans and multi-employermultiemployer pension plans. These plans are more fully described in the “Notes to the Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2007. 2008.

The components of the defined benefit plannet periodic pension costs for the three and nine months ended May 31, 2008 and 2007, were (in thousands):

SCHNITZER STEEL INDUSTRIES, INC.

The components of the SERBP costs for the three and nine months ended May 31, 2008 and 2007 were (in thousands):

Defined Benefit Plans

DueBenefits under the Company’s defined benefit plan were frozen effective June 30, 2006. In general, additional contributions to the Company’s decision to freeze benefits as of June 30, 2006,plan are not required; however, changes in the discount rate or actual investment returns that are lower than the long-term expected return on plan assets could result in the need for the Company did notto make additional contributions. Recently, most defined benefit plans have experienced deterioration in their funded status due to the general decline in equity values over the last fiscal quarter. As a result, the Company may be required to make additional contributions to the defined benefit plan in fiscal 2009. The Company made no contributions to the defined benefit plan during the three and nine monthsquarters ended May 31,November 30, 2008 and 2007 and does not expector 2007. Company contributions to make contributions during the remainderSERBP were $37,000 for the first quarter of each of fiscal 2008. The need for future contributions will be evaluated periodically2009 and will be determined by a number of factors, including market investment returns and interest rates.2008.

Multiemployer Pension Plans

In accordance with collective bargaining agreements, theThe Company contributes to multi-employervarious multiemployer pension plans. Company contributions to the multi-employer plans were $1 million and $3 million for the three and nine months ended May 31, 2008, respectively, which was consistentin accordance with the same periods in the prior year.

its collective bargaining agreements. The Company is not the sponsor or administrator of these multi-employer plans. Contributions wereplans, and contributions are determined in accordance with the provisions of negotiated labor contracts. The Company has contingent liabilities for its share of the unfunded liabilities of each plan to which it contributes. Due to the general decline in equity values, the

SCHNITZER STEEL INDUSTRIES, INC.

Company believes these plans have experienced deterioration in their funded status. Should the funding status of these plans fall below certain specified levels, the Company may be required to participate in a rehabilitation plan, which could involve contribution increases, benefit reductions or a combination of the two. Company contributions to the multiemployer plans were $1 million for the first quarter of each of fiscal 2009 and 2008.

The Company’sCompany also has a contingent liability for athe funding of the multiemployer plan benefiting employees of SMB that would be triggered if itthe Company were to withdraw or partially withdraw from that plan. Theplan, and such liability could be material to the Company’s results of operations and cash flows. Because the Company has no current intention of withdrawing from any of the plans.multiemployer plans in which it participates, it has not recognized a liability for this contingency. The Company is unable to determine its relative portion of any existing withdrawal liability, or estimate its future liability, under these plans.plans as of November 30, 2008.

Defined Contribution Plans

The Company has several defined contribution plans covering non-union employees. Company contributions to the defined contribution plans were $2 million and $1 million for the first quarter of fiscal 2009 and 2008, respectively. The Company expects to make contributions to its various defined contribution plans of approximately $5 million for the three and nine months ended May 31, 2008, respectively, and $2 million and $4 million for the three and nine months ended May 31, 2007, respectively.remainder of fiscal 2009.

Note 1213 - Segment Information

The Company operates in three reportable segments: metalsmetal purchasing, processing, recycling and selling and trading (MRB), mini-mill steel manufacturing (SMB), and self-service and full-service used auto parts (APB) and mini-mill steel manufacturing (SMB). Corporate expense consists primarilyAdditionally, the Company is a non-controlling partner in joint ventures, which are either in the metals recycling business or are suppliers of unallocatedunprocessed metal.

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 expense for management and administrative services that benefit all three business segments.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. 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.

SCHNITZER STEEL INDUSTRIES, INC.

The following is a summary of the Company’s total assets (in thousands):

SCHNITZER STEEL INDUSTRIES, INC.

The tabletables below illustratesillustrate the Company’s operating results by segment for the three and nine months ended May 31,November 30, 2008 and 2007 respectively (in thousands):

Note 1314 - Income Taxes Expense (Benefit)

The effective tax rates for the three and nine months ended May 31,November 30, 2008 and November 30, 2007 were 38.1%33.6% and 36.9%35.9%, respectively, compared to 34.6% and 35.3%respectively. Since there was a pre-tax loss for the same periods inperiod ended November 30, 2008, income taxes represented a benefit for the prior year.period. The increasedecrease in the effective tax ratesrate was principallyprimarily due to a projected increase instate taxes and to the benefit of $5 million of nondeductible executive incentive compensation that was awarded and included as nondeductible officers’ compensation as a result of the Company’s improved financialfor fiscal 2008 but was voluntarily and operating performance.

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertaintyirrevocably declined in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”) as of September 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 applies a more-likely-than-not recognition threshold to all tax uncertainties, and only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities.

The adoption of FIN 48 resulted in a $3 million increase in unrecognized tax benefits, partially offset by a $2 million increase in deferred tax assets. The cumulative effect was a $1 million decrease in retained earnings as of September 1, 2007. Upon adoption, the balance in the reserve for unrecognized tax benefits totaled $5

SCHNITZER STEEL INDUSTRIES, INC.

million, including interest and penalties, representing the aggregate tax effect of differences between tax return positions and the benefits recognized in the financial statements. Recognition of those benefits would reduce income tax expense by $3 million. As of May 31, 2008, the Company had $7 million of unrecognized tax benefits. The Company does not anticipate any material changes to the reserve within the next 12 months.November 2008.

The Company files Federalfederal and state income tax returns in the United States and a foreign tax returnsreturn in Korea and Canada. The Federalfederal statute of limitations has expired for fiscal years 20032004 and prior. With limited and insignificant exceptions, theThe Company is no longer subject to state orand foreign tax examinations for years before fiscal 2003.2004. Certain state tax authorities are currently examining the Company’s returns for fiscal 2004 and 2005. In addition, the Company has been notified of the U.S. Internal Revenue Service’s intent to examine the Company’s federal returns for fiscal 2007.

Deferred taxes include benefits expected to be realized from the use of the net operating loss carryforwards (“NOLs”) acquired in the Proler International Corp. (“PIC”) acquisition in fiscal 1996 and the GreenLeaf acquisition in fiscal 2006. As of November 30, 2008 and August 31, 2008, the balances for these two NOLs were $3 million for PIC and $10 million for GreenLeaf. The annual use of these NOLs is limited by Section 382 of the Internal Revenue Code. If unused, the NOLs for PIC expire in fiscal 2012 and the NOLs for GreenLeaf

SCHNITZER STEEL INDUSTRIES, INC.

expire in fiscal 2024. As of November 30, 2008, the Company also recorded a current deferred tax asset for the federal tax benefit of the first quarter 2008 net operating losses which is expected to reverse in subsequent quarters of the current fiscal year. The Company is not currently under examination in anyalso has state tax credits that expire between 2010 and 2020. A valuation allowance of its major tax jurisdictions. The reserves for tax-related interest and penalties were $1 million ashas been recorded at November 30, 2008 for state tax credits that are expected to expire unused in the future. Realization of the September 1, 2007 implementation date of FIN 48 and $1 million as of May 31, 2008. It is the Company’s policy to record tax-related penalties and interest in income tax expense.

Deferred income taxes reflect the differences between the financial reporting and tax basis of assets and liabilities, 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. The Company periodically reviews itsremaining deferred tax assets is dependent upon generating sufficient taxable income prior to assess whether a valuation allowance is necessary. A valuation allowance is established to reduce deferred tax assets, includingexpiration of the remaining state tax credits and net operating loss carryforwards, whencarryforwards. Although realization is not assured, management believes it is more likely than not that they will not be realized. Nothe recorded deferred tax asset, net of the valuation allowance was required as of May 31, 2008 or August 31, 2007.provided, will be realized.

SCHNITZER STEEL INDUSTRIES, INC.

This section includes a discussion of the Company’s operations for the third quarter and first nine months of fiscal quarters ended November 30, 2008 and 2007. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the results of operations and financial condition of Schnitzer Steel Industries, Inc. (the “Company”) and should be read in conjunction with the Company’s 20072008 Form 10-K and the Unaudited Condensed Consolidated Financial Statements and the related notes thereto included elsewhere in this Form 10-Q.

Forward-looking StatementsFORWARD-LOOKING STATEMENTS

ThisStatements and information included in this Quarterly Report on Form 10-Q including Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”by Schnitzer Steel Industries, Inc. (the “Company”) that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, whichand are made pursuant to the safe harbor“safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-lookingForward-looking statements in this Quarterly Report on Form 10-Q include without limitation, statements regarding the Company’s outlook forexpectations, intentions, beliefs and strategies regarding the businessfuture, including statements regarding trends, cyclicality and statements asgrowth in the markets the Company sells into, strategic direction, changes to manufacturing processes, the cost of compliance with environmental and other laws, liquidity positions, ability to generate cash from continuing operations, expected growth, the potential impact of adopting new accounting pronouncements, expected results including pricing, sales volume, operating marginsvolumes, profitability, obligations under the Company’s retirement plans, savings or additional costs from business realignment programs and operating income. Suchthe adequacy of accruals.

When used in this report, the words “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “may,” “could,” “opinions,” “forecasts,” “future,” “forward,” “potential,” “probable” and similar expressions are intended to identify forward-looking statements.

The Company may make other forward-looking statements can generallyfrom time to time, including in press releases and public conference calls. All forward-looking statements made by the Company are based on information available to the Company at the time the statements are made, and the Company assumes no obligation to update any forward-looking statements, except as may be identified because they contain “expect,” “believe,” “anticipate,” “estimate”required by law. Actual results are subject to a number of risks and other words that convey a similar meaning. One can also identify these statements as statements that do not relate strictly to historical or current facts. Examples of factors affecting the Companyuncertainties that could cause actual results to differ materially from current expectationsthose included in, or implied by, such forward-looking statements. Some of these risks and uncertainties are discussed in Item 1A. Risk Factors of Part I in the following:Company’s most recent Annual Report on Form 10-K. Other examples include volatile supply and demand conditions affecting prices and volumes in the markets for both the Company’s products and the raw materials it purchases; world economic conditions; world political conditions; unsettled credit markets; the Company’s ability to match output with demand; changes in federal and state income tax laws; government regulations and environmental matters; the impact of pending or new laws and regulations regarding imports and exports into the United States and other foreign countries; foreign currency fluctuations; competition; seasonality, including weather; energy supplies; freight rates and availability of transportation; loss of key personnel; expectations regarding the Company’s compliance program; the inability to obtain sufficient quantities of scrap metal to support current orders; purchase price estimates made during acquisitions; business integration issues relating to acquisitions of businesses; new accounting pronouncements; availability of capital resources; credit-worthiness of and availability of credit to suppliers and customers; andnew accounting pronouncements; availability of capital resources; business disruptions resulting from installation or replacement of major capital assets, as discussed in more detail in “Management’s Discussionassets; and Analysisthe adverse impact of Financial Condition and Results of Operations” in the Company’s most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q. One should understand that it is not possible to predict or identify all factors that could cause actual results to differ from the Company’s forward-looking statements. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties. The Company does not assume any obligation to update any forward-looking statement.climate changes.

SCHNITZER STEEL INDUSTRIES, INC.

General

Founded in 1906, Schnitzer Steel Industries, Inc. (“the Company”), an Oregon corporation, is currently one of the nation’s largest recyclers of ferrous and nonferrous metals in the United States,metal, a leading recycler of used and salvaged vehicles and a manufacturer of finished steel products.

The Company operates in three reportable segments: the Metals Recycling Business (“MRB”), the Auto Parts Business (“APB”) and the Steel Manufacturing Business (“SMB”). MRB purchases, collects, processesCorporate expense consists primarily of unallocated corporate expense for management and recycles steel and other metals through its facilities and trades, brokers and sells scrap metals. APB purchases used and salvaged vehicles and sells serviceable used auto parts and autobodies through its self-service and full-service auto parts stores. APB is alsoadministrative services that benefit all three business segments. As a supplierresult of autobodiesthis unallocated expense, the operating income (loss) of each segment does not reflect the operating income (loss) the segment would have as a stand-alone business. For further information regarding the Company’s segments refer to MRB, which processesNote 13 – Segment Information, in the autobodies into saleable recycled metal. SMB purchases recycled metals from MRB and uses its mini-mill near Portland, Oregon,notes to melt recycled metal to produce finished steel products. SMB also maintains mill depotsthe consolidated financial statements, in Central and Southern California.

SCHNITZER STEEL INDUSTRIES, INC.

Part I, Item 1 of this report.

The Company’s results of operations largely depend in large part on the demand and prices for recycled metal in global markets and for steel products in the westernWestern United States, as well as freight rates and the availability of transportation. The Company’s deep water port facilities on both the WestEast and EastWest coasts of the United States and in Hawaii allow the Companyit to take advantage of the increasing demand for recycled metal by steel manufacturers located in Europe, Asia, Mexico and the Mediterranean. The Company’s processing facilities in the southeastern United StatesSoutheastern U.S. also provide access to the automobile and steel manufacturing industries in that region. Market prices for recycled ferrous and nonferrous metal fluctuate periodically butand have generally increased over the past three years. These higher prices have had a significant impact on the results of operations for all three operating segments.

Executive Overview of Quarterly Results

During the quarter ended May 31, 2008, the Company continued to benefit from the high sales prices for all of its steel and scrap metal products as it achieved record quarterly revenues, operating income and net income in each of its operating segments. These increases were driven by continued strong worldwide demand for steel and recycled scrap metal products, which resulted in prices for steel and scrap metal reaching unprecedented levels. The increases were also driven by the Company’s ongoing focus on increasing throughput in all three of its operating divisions.

The Company generated consolidated revenues of $972$499 million for the thirdfirst quarter of fiscal 2009, a decrease of $105 million, or 17%, from $604 million in the first quarter of fiscal 2008. Consolidated operating income (loss) for the first quarter of fiscal 2009 decreased $92 million, or 222%, from $41 million for the first quarter of fiscal 2008 an increase of $263to a ($50) million or 37%, from $709 million inoperating loss for the thirdfirst quarter of fiscal 2007. Consolidated operating income for2009. For the thirdfirst quarter of fiscal 2008 increased $332009, the Company incurred a net loss of ($34) million, a decrease of $59 million, or 46.6%, to $102 million. Net income for the quarter ended May 31, 2008 was $62 million, an increase of $18 million, or 41%238%, compared to net income of $44$25 million forin the quarter ended May 31 2007.prior year period. The net loss included a pre-tax, non-cash net realizable value (“NRV”) inventory adjustment of $52 million. Diluted net incomeloss per share for the quarter was $2.14,($1.21), a 46% increase242% decrease over the thirdfirst quarter of fiscal 2007.2008. The decrease in revenues and operating income (loss) was generated from all segments.

MRB revenues increasedNet cash provided by $223operating activities for the three months ended November 30, 2008, was $70 million, or 38%,an increase of $101 million, compared to net cash used in operating activities of $31 million for the thirdsame period in fiscal 2008. As of November 30, 2008, debt, net of cash, was approximately $121 million, compared to $169 million at August 31, 2008.

For the first quarter of fiscal 20082009, MRB revenues decreased by $80 million, or 17%, to $401 million from $481 million for the same period in fiscal 2008. This included a $76 million, or 19%, decrease in ferrous revenues to $313 million and a $3 million, or 3%, decrease in nonferrous revenues to $87 million. The decrease in ferrous revenues was driven by a 31% decrease in sales volumes, which was partially offset by a 26% increase in the average net sales price. Ferrous volumes in the first quarter of fiscal 2009 decreased by 357,000 tons compared to the same period in the prior year. This included a $198 million, or 42%, increase in ferrous revenues and a $25 million, or 22%, increase in nonferrous revenues. The increase in ferrous revenues was driven by a 57% increase in the average net selling price for processed ferrous and a 43% increase in the average net selling price for ferrous trading, which was partially offset by a 58% decrease in ferrous trading volumes, primarilyyear due to the Company’s focus on higher margin processed ferrous operations.lower demand arising from weaker economic conditions. The increasedecrease in nonferrous revenues was driven by a 19% increase in pounds sold and a 2% increase22% decrease in the average net sellingsales price, which were primarily the result of the incremental impact of capacity growth during fiscal 2007 and the first nine months of fiscal 2008.was partially offset by a 21% increase in pounds sold. Operating income (loss) for MRB was $94($19) million, or 11.5%4.8% of revenues, for the thirdfirst quarter of fiscal 2008,2009, compared to $55$30 million, or 9.4%6.2% of revenues, for the same period in fiscal 2007.2008. The $39 million increasedecrease in operating income reflectsof $49 million, or 165%, was primarily due to reduced demand for scrap and recycled metal arising from weaker economic conditions, which led to a reduction in ferrous sales volumes and average nonferrous selling prices. The lower sales volumes were largely attributable to renegotiations, deferrals and cancellations of customer contracts. In addition, continued weak demand and the impact of higher ferrous and nonferrousdeclines in anticipated future selling prices and higher processed ferrous and nonferrous volumes that were partially offset by higher raw materialwhich outpaced the decline in inventory costs, and lower ferrous trading volumes. In addition,resulted in MRB recording a non-cash NRV inventory write-down of $29 million.

SCHNITZER STEEL INDUSTRIES, INC.

For the increase in operating income was partially offset by an $8 million increase in selling, general and administrative (“SG&A”) expenses, consisting primarily of a $5 million increase in compensation related expenses, including annual incentive expense, resulting from the Company’s improved financial and operating performance and increased headcount resulting from the incremental capacity growth experienced during fiscal 2007 and the first nine months of fiscal 2008, a $1 million increase in share-based compensation expense and a $1 million increase in professional service costs.

APB revenues increased by $29 million, or 41%, in the third quarter of fiscal 20082009, APB revenues decreased by $5 million, or 7%, to $67 million from $72 million for the same period in fiscal 2008. The decrease in revenues compared to the same period in the prior year. The increaseyear was driven by a $15$2 million, or 98%16%, increasedecrease in scrap vehicle revenue due to higherlower sales volumes and prices, a $10$2 million, or 81%19%, increasedecrease in core revenue due to higherlower sales volumes and prices, and a $5less than $1 million, or 11%1%, increasedecrease in parts revenue, primarily as a result of higher parts sales for both the self-service and full-service businesses.revenue. Operating income (loss) for APB was $17($9) million, or 16.6%13.3% of revenues, for the first quarter of fiscal 2009 compared to $10$7 million, or 14.3%10.0% of revenues, for the same period in fiscal 2007.2008. The increasedecrease in operating income of $7$16 million, or 63.6%224%, reflected the impact of higherlower sales volumes and prices which outpacedand the increase inadverse impact of inventory costs not falling as rapidly as selling prices.

For the cost of purchased vehicles.

SMB revenues increased by $55 million, or 49%, in the thirdfirst quarter of fiscal 2008 compared2009, SMB revenues decreased by $11 million, or 10%, to $99 million from $110 million for the same period in fiscal 2008. The decrease over the prior year. The increaseyear was the result of highera reduction in finished steel sales volumes, partially offset by an increase in average net selling prices for finished steel productsproducts. Sales volumes decreased 76,000 tons, or 44%, to 98,000 tons for the first quarter of fiscal 2009 compared to same period in the prior year, primarily due to significantly reduced demand as a result of weaker economic and higher

SCHNITZER STEEL INDUSTRIES, INC.

sales volumes.market conditions. The average net selling price per ton for finished goods increased $148,$263, or 25%44%, to $744$864 for the thirdfirst quarter of fiscal 2008. Sales volumes for finished goods increased 36 thousand tons, or 20%,2009 compared to the same period in the priorlast year. Operating income (loss) for SMB was $23($31) million, or 13.6%31.7% of revenues, for the first quarter of fiscal 2009, compared to $18$14 million, or 15.6%13.1% of revenues, for the same period in fiscal 2007.2008. The increasedecrease in operating income of $46 million, or 318%, was primarily due to higherreduced demand for finished steel products that led to lower sales volumes and higher average netthe impact of inventory costs not falling as rapidly as selling prices coupled with a decline in anticipated future selling prices which resulted in SMB recording a non-cash NRV inventory write-down of $32 million. In addition, the decrease in operating income reflected lower production volumes that were partially offset by increasedresulted in $6 million of production costs for scrap metal and other raw materials.that could not be capitalized in inventory.

Business Combinations

Metals Recycling Business

In the first nine monthsquarter of fiscal 2008,2009, the Company continued its growth strategy by completingsigned a purchase and sale agreement for the following acquisitions:

These acquisitions wereare not expected to be material, individually or in the aggregate, to the Company’s financial position or results of operations.

Share Repurchases

Pursuant to a share repurchase program as amended in 2001 and in October 2006, the Company was authorized to repurchase up to 6.0 million shares of its Class A Commoncommon stock when management deems such repurchases to be appropriate. DuringPrior to fiscal 2009, the first six months of fiscalCompany had repurchased approximately 4.5 million shares under the program. In November 2008, the Company repurchasedCompany’s Board of Directors approved an additional 445,500increase in the shares under this program.authorized for repurchase by 3.0 million, to 9.0 million. No share repurchases were made during the quarter ended May 31,November 30, 2008. As of May 31,a result, at November 30, 2008 there were 1.7approximately 4.5 million shares available for repurchase under existing authorizations.

SCHNITZER STEEL INDUSTRIES, INC.

Results of Operations