This section includes a discussion of the Company's operations for the second quarter and first six months of fiscal 2009 and 2008. 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 2008 Form 10-K and the Unaudited Condensed Consolidated Financial Statements and the related notes thereto included elsewhere in this Form 10-Q/A.

Statements and information included in this Quarterly Report on Form 10-Q/A 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 and are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements in this Quarterly Report on Form 10-Q/A include statements regarding the Company's expectations, intentions, beliefs and strategies regarding the future, including statements regarding trends, cyclicality and changes in the markets the Company sells into, strategic direction, changes to manufacturing processes, the cost of compliance with environmental and other laws, expected tax rates and deductions, the realization of deferred tax assets, planned capital expenditures, liquidity positions, ability to generate cash from continuing operations, the potential impact of adopting new accounting pronouncements, expected results including pricing, sales volumes, profitability, obligations under the Company's retirement plans, savings or additional costs from business realignment and cost containment programs and the 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 from 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 required by law. Actual results are subject to a number of risks and uncertainties that could cause actual results to differ materially from those 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 Company's most recent Annual Report on Form 10-K and "Risk Factors" in Item 1A below. Other examples include volatile supply and demand conditions affecting prices and volumes in the markets for both the Company's products and raw materials it purchases; world economic conditions; world political conditions; 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; credit-worthiness of and availability of credit to suppliers and customers; new accounting pronouncements; availability of capital resources; business disruptions resulting from installation or replacement of major capital assets; and the adverse impact of climate changes.

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 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"). Corporate expense consists primarily of unallocated corporate expense for management and administrative services that benefit all three business segments. As a result of this 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 Note 13 - Segment Information, in the notes to the consolidated financial statements, in Part I, Item 1 of this report.

The Company's deep water port facilities on both the East and West coasts of the United States and access to port facilities in Rhode Island, Hawaii and Puerto Rico, allow it to meet the demand for recycled metal by steel manufacturers located in Europe, Asia, Mexico and the Mediterranean. The Company's processing facilities in the southeastern United States also provide access to the automobile and steel manufacturing industries in that region. Periodically fluctuating or volatile supply and demand conditions affect market prices for and volumes of recycled ferrous and nonferrous metal in global markets and for steel products in the Western United States and can have a significant impact on the results of operations for all three operating segments, as have freight rates and the availability of transportation.

Executive Overview of Quarterly Results

The Company generated consolidated revenues of $434 million for the second quarter of fiscal 2009, a decrease of $317 million, or 42%, from $751 million in the second quarter of fiscal 2008. Consolidated operating income (loss) for the second quarter of fiscal 2009 decreased $77 million, from $59 million for the second quarter of fiscal 2008 to an ($18) million operating loss for the second quarter of fiscal 2009. The decrease in operating income (loss) was attributable to reduced demand for scrap, recycled metal and finished steel products resulting from weaker economic conditions. Included in the operating loss was a $4 million reduction in selling, general and administrative expenses ("SG&A") for the three months ended February 28, 2009 when compared to the same period in fiscal 2008. This decrease was primarily due to cost containment measures which reduced headcount and other costs and decreased compensation related expenses, which were partly offset by increased bad debt expense. For the second quarter of fiscal 2009, the Company incurred a net loss of ($7) million, a decrease of $43 million, compared to net income of $36 million in the prior year period. Diluted net loss per share for the quarter was ($0.25) compared to diluted net income per share of $1.25 for the second quarter of fiscal 2008. The decrease in revenues and operating income were generated from all segments.

For the second quarter of fiscal 2009, MRB revenues decreased by $260 million, or 44%, to $337 million compared to the same period in fiscal 2008. This included a $199 million, or 40%, decrease in ferrous revenues to $298 million and a $59 million, or 62%, decrease in nonferrous revenues to $37 million. The decrease in ferrous revenues was driven by a 23% decrease in the average net sales price and by a 15% decrease in sales volumes. Ferrous volumes in the second quarter of fiscal 2009 decreased by 194,000 tons compared to the same period in the prior year due to lower demand and reduced availability of raw materials arising from weaker economic conditions. When sales prices fall due to weaker demand, MRB seeks to reduce raw material purchase costs to maintain acceptable margins. The lower purchase costs generally lead to lower availability of raw materials available for sale. The decrease in nonferrous revenues was driven by a 54% decrease in the average net sales price and a 20% decrease in pounds sold. Operating income for MRB was $5 million, or 1.6% of revenues, for the second quarter of fiscal 2009, compared to $52 million, or 8.7% of revenues, for the same period in fiscal 2008. The decrease in operating income of $47 million, or 90%, reflected the impact of lower sales volumes and prices, the adverse impact of lower margin shipments early in the second quarter and inventory costs not falling as rapidly as selling prices due to reduced demand for scrap and recycled metal arising from weaker economic conditions. SG&A expense remained consistent with the same period in the prior year, as cost containment measures and decreased compensation related expenses were offset by a $7 million increase in bad debt expense.

For the second quarter of fiscal 2009, APB revenues decreased by $19 million, or 25%, to $58 million compared to same period in fiscal 2008. The decrease over the prior year period was driven by a $9 million, or 46%, decrease in scrap vehicle revenue due to lower sales volumes and prices, an $8 million, or 54%, decrease in core revenue due to lower sales volumes and prices, and a $2 million, or 6%, decrease in parts revenue. Operating income (loss) for APB was ($5) million for the second quarter of fiscal 2009 compared to $7 million for the same period in fiscal 2008. The decrease in operating income of $12 million reflected the impact of lower sales volumes and prices as a result of lower demand due to weaker economic and market conditions. Included in the operating loss were SG&A expenses that decreased by $1 million, or 7%, compared to the same period in the prior year due to cost containment measures and decreased compensation related expenses.

For the second quarter of fiscal 2009, SMB revenues decreased by $91 million, or 64%, to $52 million compared to the same period in fiscal 2008. The decrease over the prior year period reflected lower demand, due to weaker economic and market conditions, which caused a reduction in finished steel sales volumes and a decrease in average net selling prices for finished steel products. Sales volumes decreased 120,000 tons, or 59%, to 82,000 tons for the second quarter of fiscal 2009 compared to the same period in the prior year, primarily due to significantly reduced demand as a result of weaker worldwide economic and scrap and steel market conditions. The average net selling price per ton decreased $46, or 7%, to $570 per ton for the second quarter of fiscal 2009 compared to the same period last year. Operating income (loss) for SMB was ($6) million, for the second quarter of fiscal 2009, compared to $13 million for the same period in fiscal 2008. The $19 million decrease in operating income was primarily due to reduced demand for finished steel products resulting from weaker economic and market conditions. This reduced demand led to lower sales volumes and selling prices. In addition, the decrease in operating income reflected lower production volumes that resulted in $6 million of production costs that could not be capitalized in inventory. Included in the operating loss were SG&A expenses that decreased by $1 million, or 38%, compared to the same period in the prior year due to cost containment measures and reduced compensation related expenses.

Income taxes represented a benefit for fiscal 2009 since there was a pre-tax loss for the three and six month periods ended February 28, 2009. The effective tax rates for those periods were 60.5% and 40.3%, respectively, compared to 35.3% and 35.6% for the same periods in fiscal 2008. The higher effective tax rates for fiscal 2009 were mainly attributable to tax benefits arising from the reversal of $5 million of executive incentive compensation and the impact on the Company's tax rate of undistributed foreign earnings.

The Company performed its goodwill impairment testing during the second quarter of fiscal 2009 and determined that the fair values of the MRB and APB reporting segments were greater than their carrying values, thus the respective goodwill balances were not impaired as of February 28, 2009. The SMB reporting unit had no goodwill as of February 28, 2009. See further discussion surrounding goodwill impairment testing, under the Critical Accounting Policies and Estimates section below.

Net cash provided by operating activities for the six months ended February 28, 2009 was $161 million, an increase of $85 million, compared to net cash provided by operating activities of $76 million for the same period in fiscal 2008, primarily due to decreases in accounts receivable and inventory, partially offset by decreases in accounts payable and other accrued liabilities. As of February 28, 2009, debt, net of cash, was approximately $141 million, compared to $169 million at August 31, 2008 (refer to Non-GAAP Financial Measures below).

Business Combinations

During the six month period ended February 28, 2009, the Company completed the acquisition of three entities and an additional 16.67% equity interest in an entity that the Company maintains operating control over, for a total consideration of $90 million. These acquisitions are as follows:

• In December 2008, the Company completed the acquisition of a metals recycler near the Company's Tacoma, Washington export facility.

• In February 2009, the Company completed the acquisition of the leading metals recycler in Puerto Rico. This acquisition expanded the Company's presence into a new region, increased the Company's processing capability and provided new sources of scrap metal and access to international export facilities.

• In February 2009, the Company acquired an additional 16.67% equity interest in an auto parts business located in California, thus increasing the equity ownership in this business to 91.67%. The acquired equity was previously consolidated into the Company's financial statements because the Company maintained operating control over the entity.

• In February 2009, the Company completed the acquisition of a self-service used auto parts business with two locations in California.

These acquisitions were accounted for under the purchase method of accounting in accordance with SFAS No. 141 "Business Combinations" and are included in the Company's financial statements from the date of acquisition. The purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the date of acquisition. The excess of the aggregate purchase price over the fair value of the identifiable net assets acquired of $55 million was recorded as goodwill. The purchase price allocation has been prepared on a preliminary basis, and reasonable changes may occur as additional information, such as final valuation reports, becomes available.

                        SCHNITZER STEEL INDUSTRIES, INC.



Results of Operations



                                          For the Three Months Ended                For the Six Months Ended
                                                                     %                                         %
($ in thousands)                     2/28/2009      2/29/2008      Change     2/28/2009       2/29/2008      Change
Revenues:
Metals Recycling Business            $  336,832     $  596,557       (44% )   $  738,015     $ 1,078,029       (32% )
Auto Parts Business                      58,277         77,333       (25% )      125,581         149,496       (16% )
Steel Manufacturing Business             51,925        143,498       (64% )      150,557         253,187       (41% )
Intercompany revenue eliminations       (13,432 )      (65,916 )     (80% )      (81,986 )      (125,342 )     (35% )

Total revenues                          433,602        751,472       (42% )      932,167       1,355,370       (31% )


Cost of Goods Sold:
Metals Recycling Business               309,827        524,186       (41% )      717,122         958,970       (25% )
Auto Parts Business                      48,971         55,169       (11% )      110,099         105,375         4%
Steel Manufacturing Business             57,039        128,258       (56% )      185,018         221,757       (17% )
Intercompany cost of goods
eliminations                            (12,120 )      (65,061 )     (81% )      (94,762 )      (124,173 )     (24% )

Total Cost of Goods Sold                403,717        642,552       (37% )      917,477       1,161,929       (21% )


Selling, General and
Administrative Expense:
Metals Recycling Business                22,264         22,068         1%         42,701          40,860         5%
Auto Parts Business                      14,749         15,781        (7% )       29,873          30,524        (2% )
Steel Manufacturing Business              1,281          2,075       (38% )        3,219           3,921       (18% )
Corporate                                 9,670         11,993       (19% )       15,253          21,505       (29% )

Total SG&A Expense                       47,964         51,917        (8% )       91,046          96,810        (6% )


Environmental Matters:
Metals Recycling Business                  (467 )           -          NA         (6,080 )            -          NA
Auto Parts Business                          -            (157 )       NM             -             (157 )       NM

Total environmental matters                (467 )         (157 )                  (6,080 )          (157 )

(Income) from joint ventures
Metals Recycling Business                   (56 )       (1,637 )     (97% )       (1,740 )        (3,377 )     (48% )
Intercompany profit eliminations             -              -          NA           (572 )            -          NA

Total joint venture income                  (56 )       (1,637 )                  (2,312 )        (3,377 )

Operating Income (loss):
Metals Recycling Business                 5,264         51,940       (90% )      (13,988 )        81,576         NM
Auto Parts Business                      (5,443 )        6,540         NM        (14,391 )        13,754         NM
Steel Manufacturing Business             (6,395 )       13,165         NM        (37,680 )        27,509         NM

Total segment operating income
(loss)                                   (6,574 )       71,645         NM        (66,059 )       122,839         NM
Corporate expense                        (9,670 )      (11,993 )     (19% )      (15,253 )       (21,505 )     (29% )
Change in intercompany profit
(loss) elimination                       (1,312 )         (855 )      53%         13,348          (1,169 )       NM

Total operating income (loss)        $  (17,556 )   $   58,797         NM     $  (67,964 )   $   100,165         NM

NM = Not Meaningful

NA = Not Applicable

Revenues

Consolidated revenues for the second quarter of fiscal 2009 decreased $317 million, or 42%, to $434 million and decreased $423 million, or 31%, to $932 million for the first six months of fiscal 2009 compared to the same periods in fiscal 2008. Revenues in the second quarter and first six months of fiscal 2009 decreased for all business segments, primarily due to reduced demand for scrap, recycled metal and finished steel products resulting from weaker economic conditions throughout the period, combined with the impact of renegotiations, deferrals and cancellations of customer contracts that occurred in the first quarter of fiscal 2009. This reduced demand resulted in lower scrap, recycled metal and finished steel sales volumes and lower average selling prices.

Operating Income (Loss)

Consolidated operating income (loss) decreased $77 million to an operating loss of ($18) million for the second quarter of fiscal 2009 and decreased $168 million to an operating loss of ($68) million for the first six months of fiscal 2009 compared to the same periods in fiscal 2008. As a percentage of revenues, operating income (loss) decreased by 11.9 percentage points for the second quarter of fiscal 2009 and decreased by 14.7 percentage points for the first six months of fiscal 2009 compared to the same periods in fiscal 2008. Weak demand and the impact of declines in anticipated future selling prices, which outpaced the declines in inventory costs, resulted in non-cash NRV inventory write-downs during the first quarter of fiscal 2009 of $52 million (comprised of $29 million at MRB, $32 million at SMB and ($9) million that was eliminated in consolidation). In addition, lower production volumes resulted in the recognition of $6 million and $16 million in charges for production costs that could not be capitalized in inventory during the second quarter and first six months of fiscal 2009, respectively.

These decreases in operating income were partially offset by a $3 million release of environmental reserves and a $4 million gain recognized in the first six months of fiscal 2009, primarily related to resolution of the Hylebos Waterway litigation. Additionally, decreases in cost of goods sold and SG&A were due to the Company's implementation of cost containment measures that included a decrease in headcount of 5% and 13% and other non-labor cost reductions for the second quarter and first six months of fiscal 2009, respectively. SG&A decreased by $4 million and $6 million for the three and six months ended February 28, 2009 compared to the same periods in fiscal 2008 due to the aforementioned cost containment measures, decreased compensation related expenses of $10 million and $15 million, and decreased professional services expense of $2 million for the three months and six months ended February 28, 2009, respectively, compared to the same periods in the prior year. The reduction in compensation related expenses was due to a decrease in annual incentive expense and share-based compensation expense resulting from operating losses incurred by the Company and a $5 million benefit arising from nondeductible executive incentive compensation that was awarded and included as nondeductible officers' compensation for fiscal 2008 but was voluntarily and irrevocably declined in November 2008. The decline in professional services expense was due to reduced production. These reductions were partially offset by an $8 million increase in bad debt expense for the three and six months ended February 28, 2009, compared to the same periods in the prior year, resulting from bankruptcies and adverse financial conditions experienced by certain of the Company's customers affecting their ability to pay timely. The Company continues to implement additional cost containment measures, including the suspension of employer contributions to its defined contribution plans effective in March 2009.

Interest Expense

Interest expense decreased by $2 million, or 68%, to $1 million for the second quarter of fiscal 2009 and $3 million, or 56%, to $2 million for the first six months of fiscal 2009, compared to the same periods in the prior year as a result of lower average interest rates and the Company carrying lower average debt balances during the period. For more information about the Company's outstanding debt balances, see Item 1 - Financial Statements (unaudited) - Notes to Condensed Consolidated Financial Statements, Note 8 - Long-Term Debt.

Income Tax Expense (Benefit)

Income taxes represented a benefit for fiscal 2009 since there was a pre-tax loss for the three and six month periods ended February 28, 2009. The effective tax rates for those periods were 60.5% and 40.3%, respectively, compared to 35.3% and 35.6% for the same periods in fiscal 2008. The higher effective tax rates for fiscal 2009 were mainly attributable to tax benefits arising from the reversal of $5 million of executive incentive compensation and the impact on the Company's tax rate of undistributed foreign earnings. The incentive compensation of $5 million for certain executives that was treated as nondeductible in fiscal 2008 was voluntarily and irrevocably declined in fiscal 2009, thereby providing a tax benefit. The undistributed foreign earnings from the Puerto Rico metals recycling operation acquired in February 2009 provided a tax benefit because the earnings are presumed to be indefinitely reinvested in Puerto Rico and therefore taxed at less than the statutory US Federal tax rate. Going forward, the Company's effective tax rate will fluctuate with the level of tax credits and foreign earnings relative to pretax income (loss).

Financial results by segment

The Company operates its business across three reportable segments: MRB, APB and SMB. Additional financial information relating to these business segments is contained in Item 1 - Financial Statements (unaudited) - Notes to Condensed Consolidated Financial Statements, Note 13 - Segment Information.

Metals Recycling Business



                                                    For the Three Months Ended                For the Six Months Ended
                                                                               %                                         %
(in thousands, except for prices)              2/29/2009      2/29/2008      change     2/29/2009       2/29/2008      change
Ferrous Revenues:                              $  297,757     $  497,088       (40% )   $  610,512     $   885,369       (31% )
Nonferrous revenues                                36,999         96,158       (62% )      123,515         185,764       (34% )
Other                                               2,076          3,311       (37% )        3,988           6,896       (42% )

Total segment revenues                            336,832        596,557       (44% )      738,015       1,078,029       (32% )

Cost of goods sold                                309,827        524,186       (41% )      717,122         958,970       (25% )
Selling, general and administrative expense        22,264         22,068         1%         42,701          40,860         5%
Environmental matters                                (467 )           -          NA         (6,080 )            -          NA
(Income) from joint ventures                          (56 )       (1,637 )     (97% )       (1,740 )        (3,377 )     (48% )

Segment operating income (loss)                $    5,264     $   51,940       (90% )   $  (13,988 )   $    81,576         NM



Average Ferrous Recycled Metal Sales Prices
($/LT) (1)
Domestic                                       $      209     $      323       (35% )   $      319     $       302         6%
Export                                         $      259     $      331       (22% )   $      291     $       308        (6% )
Average                                        $      253     $      328       (23% )   $      297     $       306        (3% )
. . .