(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:



                                                     Third quarter ended          Nine months ended
                                                        September 30,               September 30,
                                                      2008           2007         2008          2007
Sales                                              $    7,234       $ 7,387     $  22,229     $ 23,361

Income from continuing operations                  $      269       $   558     $   1,118     $  1,947
Loss from discontinued operations                          (1 )          (3 )          (1 )        (15 )

Net income                                         $      268       $   555     $   1,117     $  1,932

Earnings per common share:
Diluted - Income from continuing operations        $     0.33       $  0.64     $    1.36     $   2.22
Diluted - Net income                                     0.33          0.63          1.36         2.20

Shipments of aluminum products (kmt)                    1,342         1,328         4,106        4,057
Shipments of alumina (kmt)                              2,010         1,937         5,918        5,804

Alcoa's average realized price per metric ton of
aluminum                                           $    2,945       $ 2,734     $   2,940     $  2,835

Income from continuing operations was $269, or $0.33 per diluted share, in the 2008 third quarter compared with $558, or $0.64 per share, in the 2007 third quarter. Income from continuing operations in the 2008 third quarter declined $289, or 52%, compared to the corresponding period in 2007 primarily due to the following: the absence of the gain on the 2007 sale of the investment in Aluminum Corporation of China Limited (Chalco); significantly higher costs for raw materials, energy, and other inputs; the absence of all of the businesses within the Packaging and Consumer segment; and costs associated with a gas outage in Western Australia and a complete smelter curtailment in Rockdale, TX. These negative impacts were partially offset by higher realized prices for alumina and aluminum; the absence of the 2007 asset impairments and restructuring charges associated with the Packaging and Consumer businesses, the Electrical and Electronic Solutions business, and the Automotive Castings business, as well as a discrete income tax charge related to the Packaging and Consumer businesses; the absence of certain costs incurred in 2007 associated with the Rockdale, Tennessee, and Iceland smelters; and the absence of transaction costs and interest charges incurred in 2007 related to a potential business acquisition.

Income from continuing operations was $1,118, or $1.36 per share, in the 2008 nine-month period compared with $1,947, or $2.22 per share, in the 2007 nine-month period. Income from continuing operations in the 2008 nine-month period decreased $829, or 43%, compared to the same period in 2007 principally due to the following: the negative impacts discussed above for the 2008 third quarter; increased net unfavorable foreign currency movements; the absence of a favorable adjustment in 2007 to the original impairment charge related to the soft alloy extrusion business; and a loss on the sale of the Packaging and Consumer businesses along with a related net discrete income tax charge. All of these items were partly offset by the same positive impacts discussed above for the 2008 third quarter.

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, on June 10, 2008, Alcoa of Australia notified its own customers that it was declaring force majeure under its alumina supply contracts. During the 2008 third quarter, the supplier partially restored the gas supply to Alcoa of Australia. In addition, insurance recoveries of $40 were received in the 2008 third quarter. Net of insurance proceeds, Alcoa's earnings impact of the disruption in gas supply was $27 after-tax and minority interest ($53 before tax and minority interest) in the 2008 third quarter and $44 after-tax and minority interest ($88 before tax and minority interest) in the 2008 nine-month period. The Alumina segment was impacted by $25 after-tax ($35 before tax) in the 2008 third quarter and $41 after-tax ($58 before tax) in the 2008 nine-month period. The remaining impact of $12 after-tax ($18 before tax) in the 2008 third quarter and $20 after-tax ($30 before tax) in the 2008 nine-month period was reflected in Corporate due to Alcoa's captive insurance program. In the fourth quarter of 2008, a negative impact of approximately $6 after-tax and minority interest ($14 before tax and minority interest - see Alumina segment below) is anticipated. This estimate is dependent upon the continued restoration of the gas supply throughout the 2008 fourth quarter. It is anticipated that Alcoa will receive additional insurance proceeds in future periods. Alcoa of Australia is part of Alcoa World Alumina and Chemicals (AWAC), which is 60% owned by Alcoa and 40% owned by Alumina Limited.

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 third quarter and nine-month period, the earnings impact of the idled potlines was $16 ($26 pretax) and $38 ($62 pretax), respectively. On September 30, 2008, Alcoa announced it was temporarily idling the remaining three potlines, or 147 kmt, effective immediately as a result of the cumulative effect of operating only half of the smelter, well-known issues regarding the cost and long-term reliability of the power supply, and overall current market conditions. In the fourth quarter of 2008, the curtailment at Rockdale is expected to have a negative impact of approximately $19 ($31 pretax). Alcoa is seeking damages and other relief from its power supplier through ongoing litigation. Additionally, in conjunction with the idling of all six potlines, Alcoa recorded restructuring charges in the 2008 third quarter of $31 ($48 pretax) mostly for the layoff of approximately 870 employees (see Restructuring and other charges below for additional information).

Sales for the 2008 third quarter and nine-month period decreased $153, or 2%, and $1,132, or 5%, respectively, compared with the same periods in 2007. The decline in both periods was driven mainly by the absence of sales from the businesses within the Packaging and Consumer segment in the 2008 third quarter and seven months in the 2008 nine-month period ($828 in the 2007 third quarter and $1,894 in the 2007 nine-month period); a decrease in volumes related to the automotive and commercial transportation markets, mainly due to weaker market conditions in Europe and North America; and the absence of sales from the soft alloy extrusion business in the respective 2008 periods ($23 in the 2007 third quarter and $1,113 in the 2007 nine-month period); all of which was mostly offset by a significant increase in primary aluminum volumes, mainly as a result of sales related to the production at the Iceland smelter that did not occur in 2007; higher realized prices for alumina and aluminum; and favorable foreign currency movements due to a stronger Euro and Australian dollar.

Cost of goods sold (COGS) as a percentage of sales was 82.2% in the 2008 third quarter and 80.6% in the 2008 nine-month period compared with 80.0% in the 2007 third quarter and 77.5% in the 2007 nine-month period. The percentage in both periods was negatively impacted by continued cost increases

Selling, general administrative, and other expenses (SG&A) decreased $82 in the 2008 third quarter and $172 in the 2008 nine-month period compared with the corresponding periods in 2007. The decline in both periods was primarily due to the absence of the businesses within the Packaging and Consumer segment in the 2008 third quarter and seven months in the 2008 nine-month period ($49 in the 2007 third quarter and $116 in the 2007 nine-month period); the absence of the soft alloy extrusion business in the respective 2008 periods ($1 in the 2007 third quarter and $33 in the 2007 nine-month period); the absence of transaction costs (investment banking, legal, audit-related, and other third-party expenses) related to the 2007 offer for Alcan Inc. ($19 and $45 in the 2007 third quarter and nine-month period, respectively); and a decrease in stock-based compensation expense, which was higher in the respective 2007 periods, as a result of reload features of exercised stock options. SG&A as a percentage of sales decreased from 4.9% in the 2007 third quarter to 3.9% in the 2008 third quarter, and from 4.7% in the 2007 nine-month period to 4.1% in the 2008 nine-month period.

The Provision for depreciation, depletion, and amortization decreased $22, or 7%, in the 2008 third quarter and $3, or less than 1%, in the 2008 nine-month period compared with the same periods in 2007. The decline in both periods was principally the result of the absence of depreciation related to the Packaging and Consumer businesses ($29 and $89 in the 2007 third quarter and nine-month period, respectively), and 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 and various rolled products and hard alloy extrusions locations based upon a review completed in the 2008 third quarter (collectively, $22 in the 2008 third quarter and $41 in the 2008 nine-month period), partially offset by depreciation expense related to the Iceland smelter and Norway anode facility that were not in-service in the respective 2007 periods (collectively, $26 in the 2008 third quarter and $69 in the 2008 nine-month period). The decrease in the 2008 nine-month period was also partly offset due to unfavorable foreign currency movements as a result of a weaker U.S. dollar.

Restructuring and other charges in the 2008 third quarter and nine-month period were $43 ($29 after-tax and minority interests) and $83 ($61 after-tax and minority interests), respectively. Restructuring and other charges in both periods include $48 ($31 after-tax) related to the temporary idling of the Rockdale smelter, which consists of $44 ($29 after-tax) for the layoff of approximately 870 employees (terminations are expected to be mostly complete by the end of 2008) and a curtailment of other postretirement benefit plans, and $4 ($2 after-tax) for other exit costs; and a credit of $12 ($8 after-tax) for the reversal of a reserve related to a shutdown facility. Also included in Restructuring and other charges in the 2008 third quarter and nine-month period was $2 ($1 after-tax) and $43 ($32 after-tax), respectively, as a result of the loss recognized on the sale of the Packaging and Consumer businesses, and the remaining amount was for net charges, primarily related to severance costs for the layoff of approximately 1,900 employees at six Electrical and Electronic Solutions locations in Mexico and Honduras through 2009.

Restructuring and other charges in the 2007 third quarter and nine-month period were $444 ($311 after-tax and minority interests) and $413 ($308 after-tax and minority interests), respectively. The net charge in both periods included $357 ($251 after-tax) in asset impairments related to the Packaging and Consumer businesses, the Electrical and Electronic Solutions business, and the Automotive Castings business; $53 ($36 after-tax) in severance charges associated with the Electrical and Electronic Solutions business; and $34 ($24 after-tax and minority interests) in net charges, primarily for severance charges and asset impairments of various other facilities. The 2007 nine-month period also includes net charges, primarily for accelerated depreciation associated with the shutdown of certain facilities in 2007, of $34 ($24 after-tax and minority interests) related to the restructuring program initiated in the fourth quarter of 2006. All of these amounts were slightly offset in the nine-month period of 2007 by 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.

In the 2008 nine-month period, cash payments of $15, $51, and $10 were made against total reserves related to the 2008, 2007, and 2006 restructuring programs, respectively. The remaining reserves are expected to be paid in cash during 2008, with the exception of approximately $50 to $55, which is expected to be paid over the next several years for ongoing site remediation work and special termination benefit payments.

Restructuring and other charges are not included in the segment results. The pre-tax impact of allocating restructuring and other charges to the segment results would have been as follows:

                                           Third quarter ended           Nine months ended
                                              September 30,                September 30,
                                          2008             2007          2008          2007
Alumina                                 $       1       $       -      $      1       $     1
Primary Metals                                (48 )             -           (46 )          -
Flat-Rolled Products                           -               (17 )         -            (36 )
Engineered Products and Solutions              (6 )           (194 )         (6 )        (204 )
Packaging and Consumer                         (4 )           (215 )        (45 )        (220 )

Segment total                                 (57 )           (426 )        (96 )        (459 )
Corporate                                      14              (18 )         13            46

Total restructuring and other charges   $     (43 )     $     (444 )   $    (83 )     $  (413 )

Interest expense decreased $54, or 36%, and $37, or 12%, in the 2008 third quarter and nine-month period, respectively, compared with the corresponding periods in 2007. The decline in both periods was primarily due to the absence of $67 in credit facility commitment fees related to the 2007 offer for Alcan Inc. and a lower weighted-average effective interest rate in the 2008 third quarter and nine-month period, respectively, driven mainly by the decrease in LIBOR. Both of these items were partially offset by a higher average debt level in the 2008 periods over the comparable periods in 2007, mostly due to the issuance of $1,500 in new senior notes in 2008 and higher commercial paper levels, and a decrease of $9 and $31 in capitalized interest for the 2008 third quarter and nine-month period, respectively, principally due to placing growth projects, such as the Iceland smelter and the Norway anode facility, into service during 2007.

Other income, net declined $1,748 in the 2008 third quarter and $1,813 in the 2008 nine-month period compared with the same periods in 2007. The decrease in both periods is mostly due to the absence of a $1,754 gain on the 2007 sale of the Chalco investment.

The effective tax rate for the third quarter of 2008 and 2007 was 24.9% and 63.0%, respectively. The rate for the 2008 third quarter differs from the U.S. federal statutory rate of 35% primarily due to foreign income being taxed in lower rate jurisdictions. Additionally, the 2008 third quarter included a $23 discrete income tax benefit for the filing of the 2007 U.S. income tax return and an income tax benefit for a lower than anticipated tax rate for 2008, both of which were mostly offset by a $28 discrete income tax charge due to a decrease in deferred tax assets related to the Iceland operations as a result of an applicable tax rate change. The rate for the 2007 third quarter differs from the U.S. federal statutory rate of 35% primarily due to a $464 discrete income tax charge related to goodwill associated with the sale of the Packaging and Consumer businesses that would have been non-deductible for tax purposes under the transaction structure contemplated in the 2007 third quarter.

The effective tax rate for the 2008 and 2007 nine-month periods was 29.2% and 44.0%, respectively. The rate for the 2008 nine-month period differs from the U.S. federal statutory rate of 35% primarily due to all of the same items mentioned above for the 2008 third quarter with an additional offset of a net $19 discrete income tax charge associated with the sale of the Packaging and Consumer businesses, mainly as a result of the allocation of the proceeds from the sale to higher tax rate jurisdictions as opposed to the allocation previously contemplated somewhat offset by changes in tax assumptions surrounding transaction costs and the divestiture of certain foreign locations that were finalized in the 2008 second quarter. The rate for the 2007 nine-month period differs from the U.S. federal statutory rate of 35% primarily due to the aforementioned $464 discrete income tax charge, partially offset by foreign income being taxed in lower rate jurisdictions.

Segment Information

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



                                           Third quarter ended       Nine months ended
                                              September 30,            September 30,
                                            2008          2007        2008        2007
   Alumina production (kmt)                    3,790       3,775       11,480     11,229
   Third-party alumina shipments (kmt)         2,010       1,937        5,918      5,804

   Third-party sales                     $       805    $    664   $    2,202   $  2,021
   Intersegment sales                            730         631        2,163      1,797

   Total sales                           $     1,535    $  1,295   $    4,365   $  3,818


   After-tax operating income (ATOI)     $       206    $    215   $      565   $    751

Third-party sales for the Alumina segment rose 21% in the 2008 third quarter and 9% in the 2008 nine-month period compared with the corresponding periods in 2007. The increase in both the 2008 third quarter and nine-month period was primarily due to a 10% and 3% increase, respectively, in realized prices driven by higher LME prices and favorable foreign currency movements due to a stronger Australian dollar.

Intersegment sales increased 16% and 20% in the 2008 third quarter and nine-month period, respectively, compared with the same periods in 2007 mostly due to an increase in realized prices and higher volumes.

ATOI for this segment declined 4% in the 2008 third quarter and 25% in the 2008 nine-month period compared to the same periods in 2007. The decrease in both periods was primarily the result of significant cost increases for bauxite, caustic soda, fuel oil, natural gas, and electricity; and the impact of the gas outage in Western Australia ($25 in the 2008 third quarter and $41 in the 2008 nine-month period). These negative impacts were somewhat offset by an increase in realized prices in both periods. Unfavorable foreign currency movements due to a weaker U.S. dollar also significantly contributed to the reduction in ATOI for the 2008 nine-month period.

In the fourth quarter of 2008, the disruption to the gas supply in Western Australia is expected to have a negative impact of approximately $10 ($14 before tax - see Results of Operations above). The cost for caustic soda is anticipated to significantly increase based upon recent market increases.

                                                       Third quarter ended       Nine months ended
                                                          September 30,            September 30,
                                                        2008          2007        2008        2007
Aluminum production (kmt)                                  1,011         934        3,036      2,734
Third-party aluminum shipments (kmt)                         704         584        2,119      1,667

Alcoa's average realized price per metric ton of
aluminum                                             $     2,945    $  2,734   $    2,940    $ 2,835

Third-party sales                                    $     2,127    $  1,600   $    6,441    $ 4,979
Intersegment sales                                         1,078       1,171        3,291      3,931

Total sales                                          $     3,205    $  2,771   $    9,732    $ 8,910


ATOI                                                 $       297    $    283   $    1,032    $ 1,249

Third-party sales for the Primary Metals segment climbed 33% and 29% in the 2008 third quarter and nine-month period, respectively, compared with the corresponding periods in 2007. The improvement in both periods was primarily due to higher volumes, mainly as a result of increased global demand and the sales related to the production of the Iceland smelter that did not occur in the respective 2007 periods, and a rise in realized prices of 8% in the 2008 third quarter and 4% in the 2008 nine-month period. Higher volumes in the 2008 nine-month period were also due to the shipments made in the first half of 2008 to the Sapa AB joint venture (shipments to Alcoa's soft alloy extrusion business were included in intersegment sales in the 2007 periods).

Intersegment sales decreased 8% in the third quarter of 2008 and 16% in the 2008 nine-month period compared with the same periods in 2007 mostly as a result of a decline in volume, partially offset by an increase in realized prices. Lower . . .