(dollars in millions, except per share amounts and ingot prices; production and shipments in thousands of metric tons [kmt])

Forward-Looking Statements

Certain statements in this report under this caption and elsewhere relate to future events and expectations and, as such, constitute forward-looking statements. Forward-looking statements include those containing such words as "anticipates," "believes," "estimates," "expects," "hopes," "targets," "should," "will," "will likely result," "forecast," "outlook," "projects," or similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of Alcoa Inc. and its subsidiaries ("Alcoa" or the "company") to be different from those expressed or implied in the forward-looking statements. For a discussion of some of the specific factors that may cause such a difference, see Note J to the Consolidated Financial Statements; the disclosures included below under Segment Information, Environmental Matters, and Quantitative and Qualitative Disclosures about Market Risks; and Alcoa's Form 10-K, Part I, Item 1A, for the year ended December 31, 2007. Alcoa disclaims any intention or obligation (other than as required by law) to update or revise any forward-looking statements.

Results of Operations

Selected Financial Data:



                                                     Second quarter ended          Six months ended
                                                           June 30,                    June 30,
                                                     2008           2007           2008        2007
Sales                                             $     7,620    $     8,066     $  14,995   $ 15,974


Income from continuing operations                 $       546    $       716     $     849   $  1,389
Loss from discontinued operations                          -              (1 )          -         (12 )

Net income                                        $       546    $       715     $     849   $  1,377

Earnings per common share:
Diluted - Income from continuing operations       $      0.66    $      0.81     $    1.03   $   1.58
Diluted - Net income                                     0.66           0.81          1.03       1.56


Shipments of aluminum products (kmt)                    1,407          1,364         2,764      2,729
Shipments of alumina (kmt)                              1,913          1,990         3,908      3,867


Alcoa's average realized price per metric ton
of aluminum                                       $     3,058    $     2,879     $   2,937   $  2,890

Income from continuing operations was $546, or $0.66 per diluted share, in the 2008 second quarter compared with $716, or $0.81 per share, in the 2007 second quarter. Income from continuing operations in the 2008 second quarter declined $170, or 24%, compared to the corresponding period in 2007 primarily due to the following: significantly higher costs for raw materials, energy and freight; increased net unfavorable foreign currency movements; the absence of the soft alloy extrusion business and virtually all of the businesses within the Packaging and Consumer segment; costs associated with a gas outage in Western Australia and a smelter curtailment in Rockdale, TX; the absence of a favorable adjustment in 2007 to the original impairment charge related to the soft alloy extrusion business; and the absence of a 2007 non-recurring foreign currency gain in Russia. These negative impacts were partially offset by higher realized prices across all segments; productivity improvements in the downstream segments; the absence of certain costs incurred in 2007 associated with the Rockdale, Tennessee, and Iceland smelters; and the absence of transaction costs incurred in 2007 related to a potential business acquisition.

Income from continuing operations was $849, or $1.03 per share, in the 2008 six-month period compared with $1,389, or $1.58 per share, in the 2007 six-month period. Income from continuing operations in the 2008 six-month period declined $540, or 39%, compared to the same period in 2007 primarily due to the following: the negative impacts discussed above for the 2008 second quarter; a loss on the sale of the packaging and consumer businesses and a related net discrete income tax charge; and the absence of costs incurred in 2007 associated with the national labor strike in Guinea and the restart of a potline at the Intalco smelter. All of these items were partially offset by productivity improvements in the downstream segments and the absence of the costs incurred in 2007 associated with a potential business acquisition, Rockdale, Tennessee, and Iceland.

On June 3, 2008, a major gas supplier to Alcoa's Western Australia refining operations (part of Alcoa of Australia) suffered a pipeline rupture and fire, which resulted in a complete shutdown of the supplier's gas production operations at a certain hub and a declaration of force majeure by the supplier to all customers. The disruption in gas supply caused an immediate reduction in production capacity and required the purchase of alternative fuel at a much higher cost than the natural gas displaced resulting in a significant negative impact on operations. As a result, Alcoa of Australia, in turn on June 10, 2008, notified its own customers that it was declaring force majeure under its alumina supply contacts. The earnings impact of the disruption in gas supply was $17 after-tax and minority interest ($35 before tax and minority interest) in the 2008 second quarter. The Alumina segment was impacted by $16 after-tax ($23 before tax) and the remaining impact of $8 after-tax ($12 before tax) was reflected in Corporate due to Alcoa's captive insurance program. In the third quarter of 2008, a negative impact of approximately $45 after-tax and minority interest ($107 before tax and minority interest - see Alumina segment below) is anticipated. This estimate is dependent upon the partial restoration of the gas supply midway through the 2008 third quarter. Alcoa of Australia is part of Alcoa World Alumina and Chemicals (AWAC), which is 60-percent owned by Alcoa and 40% owned by Alumina Limited. Alcoa anticipates insurance recoveries for the loss, subject to a claim deductible of $40 and to customary claim adjustment procedures.

On June 19, 2008, Alcoa temporarily idled half of the aluminum production (three of six operating potlines or 120 kmt) at its Rockdale smelter due to ongoing power supply issues with Rockdale's onsite supplier and the uneconomical power that Alcoa was forced to purchase in the open market as a result of such issues. In the 2008 second quarter, the earnings impact of the idled potlines was $22 ($36 pretax). In the third quarter of 2008, the curtailment at Rockdale is expected to have a negative impact of approximately $22 ($36 pretax). Output at Rockdale's other three operating potlines was continued through the utilization of contracted long-term power.

Sales for the 2008 second quarter and six-month period decreased $446, or 6%, and $979, or 6%, respectively, compared with the same periods in 2007. The decline in both periods was driven mainly by the absence of sales from most of the businesses within the Packaging and Consumer segment in the 2008 second quarter and four months in the 2008 six-month period ($818 in the 2007 second quarter and $1,066 in the 2007 six-month period) and the absence of sales from the soft alloy extrusion business in the respective 2008 periods ($431 in the 2007 second quarter and $1,090 in the 2007 six-month period), partially offset by an increase in primary aluminum volumes and favorable foreign currency movements due to a stronger Euro. Higher realized prices across all segments were also a positive contribution in the 2008 second quarter.

Cost of goods sold (COGS) as a percentage of sales was 79.9% in the 2008 second quarter and six-month period compared with 76.6% in the 2007 second quarter and 76.3% in the 2007 six-month period. The percentage in both periods was negatively impacted by continued cost increases in raw materials, energy, freight, and other inputs; unfavorable foreign currency movements due to a significantly weaker U.S. dollar; and the impacts of the gas outage in Western Australia and the 2008 smelter curtailment at Rockdale. These items were partially offset by the absence of the soft alloy extrusion business in the respective 2008 periods (95.2% in the 2007 second quarter and 96.3% in the 2007 six-month period); the absence of most of the businesses within the Packaging and Consumer segment in the 2008 second quarter and four months in the 2008 six-month period (83.9% in the 2007 second quarter and 83.7% in the 2007 six-month period); productivity improvements in most of the businesses within the Flat-Rolled Products and Engineered Products and Solutions segments; and the absence of certain costs incurred in the respective 2007 periods as a result of production curtailments associated with the Tennessee and Rockdale smelters and startup costs at the Iceland smelter. The absence of costs incurred in the 2007 six-month period related to the national labor strike in Guinea and the restart of one of Intalco's smelter lines also provided a benefit in the 2008 six-month period.

Selling, general administrative, and other expenses (SG&A) decreased $61 in the 2008 second quarter and $90 in the 2008 six-month period compared with the corresponding periods in 2007. The

The Provision for depreciation, depletion, and amortization increased $4, or 1%, in the 2008 second quarter and $19, or 3%, in the 2008 six-month period compared with the same periods in 2007. The increase in both periods was principally the result of depreciation expense related to the Iceland smelter and Norway anode facility that were not in-service in the respective 2007 periods (collectively, $25 in the 2008 second quarter and $43 in the 2008 six-month period), partially offset by a reduction in depreciation expense due to the extension of depreciable lives for a majority of refining and smelting locations based upon a review of estimated useful lives completed in the 2008 first quarter ($17 in the 2008 second quarter and $19 in the 2008 six-month period).

Restructuring and other charges in the 2008 second quarter and six-month period were $2 ($2 after-tax and minority interests) and $40 ($32 after-tax and minority interests), respectively. Restructuring and other charges include $5 ($3 after-tax) and $41 ($31 after-tax) in the 2008 second quarter and six-month period, respectively, as a result of the loss recognized on the sale of the packaging and consumer businesses. The $5 was partially offset by a net credit of $3 ($1 after-tax and minority interests) in the 2008 second quarter, primarily as a result of adjustments to severance reserves associated with previously approved restructuring programs due to changes in facts and circumstances. The $41 was slightly offset by a net credit in the 2008 six-month period, primarily as a result of the previously mentioned adjustments partially offset by severance and other exit costs associated with previously approved restructuring programs.

Restructuring and other charges in the 2007 second quarter and six-month period were $57 ($21 after-tax and minority interests) and $31 ($3 after-tax and minority interests), respectively. The net credit in both periods included a $65 ($27 after-tax) adjustment to the original impairment charge recorded in the fourth quarter of 2006 related to the estimated fair value of the soft alloy extrusion business, which was contributed to a joint venture effective June 1, 2007. This adjustment was offset by net charges, primarily for accelerated depreciation associated with the shutdown of certain facilities in 2007, of $8 ($6 after-tax and minority interests) in the second quarter of 2007 and $34 ($24 after-tax and minority interests) in the 2007 six-month period related to the restructuring program initiated in the fourth quarter of 2006.

As of June 30, 2008, approximately 2,200 of the 6,300 employees associated with the 2007 restructuring program have been terminated. The remaining terminations are expected to be completed by the end of 2008. Also, the terminations associated with the 2006 restructuring program are essentially complete.

In the 2008 six-month period, cash payments of $33 and $7 were made against total reserves related to the 2007 and 2006 restructuring programs, respectively. The remaining reserves are expected to be paid in cash during 2008, with the exception of approximately $35 to $40, which is expected to be paid over the next several years for ongoing site remediation work and special termination benefit payments.

                                           Second quarter ended           Six months ended
                                                 June 30,                     June 30,
                                          2008              2007          2008          2007
Alumina                                 $      -          $       1     $     -        $    1
Primary Metals                                  1                (2 )          2           -
Flat-Rolled Products                            2                -            -           (19 )
Engineered Products and Solutions              -                 (6 )         -           (10 )
Packaging and Consumer                         (5 )               1          (41 )         (5 )

Segment total                                  (2 )              (6 )        (39 )        (33 )
Corporate                                      -                 63           (1 )         64

Total restructuring and other charges   $      (2 )       $      57     $    (40 )     $   31

Interest expense rose $1, or 1%, and $17, or 10%, in the 2008 second quarter and six-month period, respectively, compared with the corresponding periods in 2007. The increase in both periods was primarily due to a higher average debt level in the 2008 periods over the comparable periods in 2007 and a decrease ($14 and $23) in the amount of interest capitalized on construction projects in the 2008 second quarter and six-month period, respectively, mainly as a result of placing growth projects, such as the Iceland smelter and the Norway anode facility, into service during 2007. Both of these items were mostly offset by a lower weighted-average effective interest rate.

Other income, net increased $37, or 62%, in the 2008 second quarter and declined $65, or 63%, in the 2008 six-month period compared with the same periods in 2007. The increase in the 2008 second quarter was principally due to favorable foreign currency impacts, partially offset by losses related to the deterioration of the cash surrender value of life insurance due to the decline in the investment markets and the absence of a 2007 non-recurring foreign currency gain in Russia. The decrease in the 2008 six-month period was primarily the result of increased mark-to-market losses on energy and other derivative contracts, losses related to the deterioration of the cash surrender value of life insurance due to the decline in the investment markets, and the absence of a 2007 non-recurring foreign currency gain in Russia.

The effective tax rate for the second quarter of 2008 and 2007 was 27.3% and 30.0%, respectively. The rate for the 2008 second quarter differs from the U.S. federal statutory rate of 35% primarily due to foreign income being taxed in lower rate jurisdictions and a discrete income tax benefit of $9 associated with the sale of the packaging and consumer businesses, mainly as a result of changes in tax assumptions surrounding transaction costs and the divestiture of certain foreign locations that were finalized in the second quarter. The rate for the 2007 second quarter differs from the U.S. federal statutory rate of 35% primarily due to foreign income being taxed in lower rate jurisdictions.

The effective tax rate for the 2008 and 2007 six-month periods was 30.7% and 29.9%, respectively. The rate for the 2008 six-month period differs from the U.S. federal statutory rate of 35% primarily due to foreign income being taxed in lower rate jurisdictions and the $9 discrete income tax benefit mentioned above, partially offset by a discrete income tax charge of $28 recognized as a result of the allocation of the proceeds from the sale of the packaging and consumer businesses to higher tax rate jurisdictions as opposed to the allocation previously contemplated. The rate for the 2007 six-month period differs from the U.S. federal statutory rate of 35% primarily due to foreign income being taxed in lower rate jurisdictions.

Minority interests' share of income from continuing operations for the 2008 second quarter and six-month period decreased $40, or 36%, and $88, or 39%, respectively, compared with the corresponding periods in 2007. The decline in both periods was principally due to lower earnings at AWAC driven mainly by unfavorable foreign currency movements due to a weaker U.S. dollar, continued increases in raw materials and energy costs, and the impact of the gas outage in Western Australia.

In the first quarter of 2008, management approved a realignment of Alcoa's reportable segments to better reflect the core businesses in which Alcoa operates and how it is managed. This realignment consisted of eliminating the Extruded and End Products segment, and realigning its component businesses as follows: the building and construction systems business is reported in the Engineered Products and Solutions segment; the hard alloy extrusions business and the Russian extrusions business are reported in the Flat-Rolled Products segment; and the remaining segment components, consisting primarily of the equity investment/income of Alcoa's interest in the Sapa AB joint venture, and the Latin American extrusions business, are reported in Corporate. Additionally, the Russian forgings business was moved from the Engineered Products and Solutions segment to the Flat-Rolled Products segment, where all Russian operations are now reported. Prior period amounts were reclassified to reflect the new segment structure. Also, the Engineered Solutions segment was renamed the Engineered Products and Solutions segment.

I. Alumina



                                           Second quarter ended        Six months ended
                                                 June 30,                  June 30,
                                           2008           2007          2008       2007
  Alumina production (kmt)                    3,820          3,799        7,690     7,454
  Third-party alumina shipments (kmt)         1,913          1,990        3,908     3,867

  Third-party sales                     $       717    $       712   $    1,397   $ 1,357
  Intersegment sales                            766            587        1,433     1,166

  Total sales                           $     1,483    $     1,299   $    2,830   $ 2,523


  After-tax operating income (ATOI)     $       190    $       276   $      359   $   536

Third-party sales for the Alumina segment rose 1% in the second quarter of 2008 compared with the corresponding period in 2007. The slight improvement was primarily due to an 8% increase in realized prices driven by higher LME prices, mostly offset by a 4% decline in volume. Third-party sales increased 3% in the 2008 six-month period compared with the 2007 six-month period. The improvement was principally due to a 1% rise in volume.

Intersegment sales increased 30% and 23% in the 2008 second quarter and six-month period compared with the same periods in 2007 mostly due to an increase in realized prices and higher volumes.

ATOI for this segment declined 31% in the second quarter of 2008 and 33% in the 2008 six-month period compared to the same periods in 2007. The decrease in both periods was primarily the result of unfavorable foreign currency movements due to a weaker U.S. dollar; continued higher energy costs; significant increases in raw materials and other costs, including freight; and the impact of the gas outage in Western Australia ($16). These negative impacts were somewhat offset by an increase in realized prices.

In the third quarter of 2008, a negative after-tax impact of approximately $75 ($45 after-tax and minority interest - see Results of Operations above) is anticipated as a result of the disruption to the gas supply in Western Australia. This estimate is dependent upon the partial restoration of the gas supply midway through the 2008 third quarter. Raw materials and energy costs are also expected to increase.

                                                        Second quarter ended        Six months ended
                                                              June 30,                  June 30,
                                                        2008           2007          2008       2007
Aluminum production (kmt)                                  1,030            901        2,025     1,800
Third-party aluminum shipments (kmt)                         750            565        1,415     1,083

Alcoa's average realized price per metric ton of
aluminum                                             $     3,058    $     2,879   $    2,937   $ 2,890

Third-party sales                                    $     2,437    $     1,746   $    4,314   $ 3,379
Intersegment sales                                         1,108          1,283        2,213     2,760

Total sales                                          $     3,545    $     3,029   $    6,527   $ 6,139


ATOI                                                 $       428    $       462   $      735   $   966

Third-party sales for the Primary Metals segment climbed 40% and 28% in the 2008 second quarter and six-month period, respectively, compared with the corresponding periods in 2007. The improvement in both periods was primarily due to an increase in volumes, mainly due to the shipments made in the 2008 periods to the Sapa AB joint venture (shipments to Alcoa's soft alloy extrusion business were included in intersegment sales in the 2007 periods) and the sales related to the production of the Iceland smelter that did not occur in the respective 2007 periods. An increase in realized prices of 6% in the 2008 second quarter and 2% in the 2008 six-month period also contributed to the increase in third-party sales.

Intersegment sales decreased 14% in the second quarter of 2008 and 20% in the 2008 six-month period compared with the same periods in 2007 mostly as a result of the absence of shipments to Alcoa's soft alloy extrusion business that occurred in the respective 2007 periods. In the 2008 second quarter, the absence of such shipments was partially offset by an increase in realized prices.

ATOI for this segment declined 7% and 24% in the 2008 second quarter and six-month period, respectively, compared to the corresponding periods in 2007. The decrease in both periods was principally due to unfavorable foreign currency impacts related to a weaker U.S. dollar; higher raw materials costs, including carbon; a continued rise in energy costs; and the impact of the 2008 curtailment at Rockdale ($22). These negative impacts were partially offset by the absence of certain costs incurred in the respective 2007 periods associated with the all of the following: the start-up of the Iceland smelter, the smelter production curtailment of one of the potlines in Rockdale, and the smelter curtailment associated with the power outage in Tennessee.

Alcoa had 566,000 metric tons per year (mtpy) of idle capacity on a base capacity of 4,573,000 mtpy. In the second quarter of 2008, idle capacity increased by 120,000 mtpy as compared to the first quarter of 2008 due to the shutdown of three potlines at the Rockdale smelter.

In the third quarter of 2008, the curtailment at Rockdale is expected to have a negative impact of approximately $22. Also, higher energy and material costs are anticipated while additional efficiency gains are expected at Iceland.

                                            Second quarter ended        Six months ended
                                                  June 30,                  June 30,
                                            2008           2007          2008       2007
  Third-party aluminum shipments (kmt)           591            612        1,201     1,209

  Third-party sales                      $     2,525    $     2,535   $    5,017   $ 5,002
  Intersegment sales                              77             77          154       142

  Total sales                            $     2,602    $     2,612   $    5,171   $ 5,144


  ATOI                                   $        55    $        97   $       96   $   157

Third-party sales for the Flat-Rolled Products segment were flat in the 2008 second quarter and six-month period compared with the corresponding periods in 2007 primarily as a result of a slight decline in volumes due to weak market conditions in Europe and North America offset by favorable foreign currency movements due to a stronger Euro and a positive product mix.

ATOI for this segment declined 43% and 39% in the 2008 second quarter and six-month period, respectively, compared to the same periods in 2007. The decrease in both periods was primarily due to higher direct materials, energy, and other cost increases; and lower volumes in the automotive and commercial transportation markets; partially offset by productivity improvements in most businesses as a result of prior restructuring programs, and favorable pricing in the aerospace market.

In the third quarter of 2008, typical seasonal slowdowns are expected as a result of the European industrial holidays and the North American automotive . . .