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

Forward-Looking Statements

This report contains statements that relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those containing such words as "anticipates," "believes," "estimates," "expects," "hopes," "targets," "should," "will," "will likely result," "forecast," "outlook," "projects," or other words of similar meaning. All statements that reflect Alcoa's expectations, assumptions, or projections about the future other than statements of historical fact are forward-looking statements, including, without limitation, forecasts concerning aluminum industry growth or other trend projections, anticipated financial results or operating performance, and statements about Alcoa's strategies, objectives, goals, targets, outlook, and business and financial prospects. Forward-looking statements are subject to a number of known and unknown risks, uncertainties, and other factors and are not guarantees of future performance. Actual results, performance, or outcomes may differ materially from those expressed in or implied by those forward-looking statements. For a discussion of some of the specific factors that may cause Alcoa's actual results to differ materially from those projected in any forward-looking statements, see Alcoa's Form 10-K, Part I, Item 1A, for the year ended December 31, 2008 and the following sections of this report: Note I to the Consolidated Financial Statements and the disclosures included below under Segment Information, Environmental Matters, and Quantitative and Qualitative Disclosures about Market Risk. Alcoa disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise, except as required by applicable law.

Results of Operations

Selected Financial Data:



                                                     Second quarter ended           Six months ended
                                                           June 30,                     June 30,
                                                      2009            2008         2009          2008
Sales                                              $    4,244        $ 7,245      $ 8,391      $ 14,243

Amounts attributable to Alcoa common
shareholders:
(Loss) income from continuing operations           $     (312 )      $   553      $  (792 )    $    852
Loss from discontinued operations                        (142 )           (7 )       (159 )          (3 )

Net (loss) income                                  $     (454 )      $   546      $  (951 )    $    849

Earnings per share attributable to Alcoa common
shareholders:
Diluted - (Loss) income from continuing
operations                                         $    (0.32 )      $  0.67      $ (0.89 )    $   1.03
Diluted - Net (loss) income                             (0.47 )         0.66        (1.06 )        1.03

Shipments of aluminum products (kmt)                    1,288          1,407        2,463         2,764
Shipments of alumina (kmt)                              2,011          1,913        3,748         3,908

Alcoa's average realized price per metric ton of
aluminum                                           $    1,667        $ 3,058      $ 1,620      $  2,937

Loss from continuing operations attributable to Alcoa was $312, or $0.32 per diluted share, in the 2009 second quarter compared with income from continuing operations of $553, or $0.67 per share, in the 2008 second quarter. The change of $865 in continuing operations was primarily the result of the following:
significant declines in realized prices for alumina and aluminum; large decreases in volume in the downstream segments; and restructuring charges; all of which was somewhat offset by productivity improvements and procurement efficiencies across all businesses; net favorable foreign currency movements due to a stronger U.S. dollar; income tax benefits due to a current operating loss position; and favorable inventory adjustments.

Loss from continuing operations attributable to Alcoa was $792, or $0.89 per share, in the 2009 six-month period compared with income from continuing operations of $852, or $1.03 per share, in the 2008 six-month period. The change of $1,644 in continuing operations was primarily the result of the following:
the negative impacts discussed above for the 2009 second quarter and a loss on the sale of an equity investment, all of which was somewhat offset by the positive impacts discussed above for the 2009 second quarter and a gain on the exchange of equity interests.

Late in 2008, management made the decision to reduce Alcoa's aluminum and alumina production in response to the significant economic downturn. As a result of this decision, reductions of 750 kmt, or 18%, of annualized output from Alcoa's global smelting system were implemented (includes previous curtailment at Rockdale, TX). Accordingly, reductions in alumina output were also initiated with a plan to reduce production by 1,500 kmt-per-year across the global refining system. The aluminum and alumina production curtailments were completed by the end of the first quarter of 2009 as planned. Smelters in Rockdale, TX (267 kmt-per-year) and Tennessee (215 kmt-per-year) were fully curtailed while another 268 kmt-per-year was partially curtailed at various other locations, including the smelter in Ferndale, WA (93 kmt-per-year). The refinery in Point Comfort, TX was partially curtailed by approximately 1,500 kmt-per-year between the fourth quarter of 2008 and the first quarter of 2009. In the second quarter of 2009, further action became necessary resulting in the decision to fully curtail the Massena East, NY smelter (125 kmt-per-year) and partially curtail the Suralco (Suriname) refinery (480 kmt-per-year).

In March 2009, Alcoa announced a series of operational and financial actions, which were in addition to those announced at the end of 2008, to significantly improve the Company's cost structure and liquidity. Operational actions include procurement efficiencies and overhead rationalization to reduce costs and working capital initiatives to yield significant cash improvements. Financial actions include a reduction in the quarterly common stock dividend from $0.17 per share to $0.03 per share, which began with the dividend paid on May 25, 2009, and the issuance of 172.5 million shares of common stock and $575 in convertible notes that collectively yielded $1,438 in net proceeds.

Sales for the 2009 second quarter and six-month period decreased $3,001, or 41%, and $5,852, or 41%, respectively, compared with the same periods in 2008. The decline in both periods was mainly driven by a drop in realized prices for alumina and aluminum as a result of significantly lower London Metal Exchange (LME) prices; decreases in volume in the downstream segments due to weak end markets; and unfavorable foreign currency movements mostly the result of a weaker Euro; all of which was slightly offset by sales from the newly acquired smelters in Norway. The absence of sales from the businesses within the former Packaging and Consumer segment ($516 in the 2008 six-month period) also contributed to the decline in the 2009 six-month period.

Cost of goods sold (COGS) as a percentage of Sales was 93.4% in the 2009 second quarter and 96.6% in the 2009 six-month period compared with 79.0% in both the 2008 second quarter and six-month period. The percentage was negatively impacted in both periods by significant declines in realized prices for alumina and aluminum and lower demand in the downstream segments. These items were partially offset by procurement and overhead cost savings across all businesses; favorable foreign currency movements due to a stronger U.S. dollar; and positive inventory adjustments, mainly LIFO (last in, first out), as a result of the considerable drop in LME prices.

Selling, general administrative, and other expenses (SG&A) decreased $58 and $135 in the 2009 second quarter and six-month period, respectively, compared with the corresponding periods in 2008. The decline in both periods was primarily due to reductions in labor costs as a result of implemented severance programs; and decreases in expenses for travel, contractors and consultants, and information technology as part of Alcoa's cost reduction initiatives. The absence of the businesses within the former Packaging and Consumer segment ($36 in the 2008 six-month period) also contributed to the decline in the 2009 six-month period. SG&A as a percentage of Sales increased from 4.1% in the 2008 second quarter to 5.7% in the 2009 second quarter, and from 4.3% in the 2008 six-month period to 5.8% in the 2009 six-month period.

Research and development expenses declined $23, or 38%, in the 2009 second quarter and $45, or 36%, in the 2009 six-month period compared to the same periods in 2008. The decrease in both periods was mainly driven by implementation of Alcoa's cost reduction initiatives. The absence of the businesses within the former Packaging and Consumer segment ($3 in the 2008 six-month period) also contributed to the decrease in the 2009 six-month period.

Restructuring and other charges in the 2009 second quarter and six-month period were $82 ($56 after-tax and noncontrolling interests) and $151 ($102 after-tax and noncontrolling interests), respectively. Restructuring and other charges in the 2009 second quarter include $42 ($30 after-tax and noncontrolling interests) for the layoff of approximately 1,560 employees (1,320 in the Flat-Rolled Products segment; 120 in the Alumina segment; 60 in the Primary Metals segment; and 60 in Corporate) to continue to address the impact of the global economic downturn on Alcoa's businesses; $23 ($15 after-tax) in adjustments to the Global Foil and Transportation Products Europe businesses mainly due to unfavorable foreign currency movements; a $9 ($6 after-tax) curtailment charge due to the remeasurement of pension plans as a result of the workforce reductions; and $8 ($5 after-tax and noncontrolling interests) in net charges associated with previously approved restructuring programs. In the 2009 six-month period, restructuring and other charges include $90 ($62 after-tax and noncontrolling interests) for the layoff of approximately 4,060 employees (2,190 in the Engineered Products and Solutions segment; 1,380 in the Flat-Rolled Products segment; 220 in the Primary Metals segment; 120 in the Alumina segment; and 150 in Corporate) to continue to address the impact of the global economic downturn on Alcoa's businesses; the previously mentioned $23 ($15 after-tax) in adjustments to businesses held for sale and the $9 ($6 after-tax) curtailment charge; $18 ($12 after-tax) for the write-off of previously capitalized third-party costs related to potential business acquisitions due to the adoption of SFAS 141(R) (see Recently Adopted and Recently Issued Accounting Standards); and $11 ($7 after-tax and noncontrolling interests) in net charges associated with previously approved restructuring programs.

In the second quarter and six-month period of 2008, Alcoa recorded restructuring and other charges of less than $1 and $38 ($31 after-tax and noncontrolling 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 businesses within the former Packaging and Consumer segment. The $5 was offset by a net credit of $5 ($3 after-tax and noncontrolling 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.

Alcoa does not include restructuring and other charges in the segment results. The pretax impact of allocating restructuring and other charges to the segment results would have been as follows:

                                                    Second quarter ended           Six months ended
                                                          June 30,                     June 30,
                                                     2009           2008           2009        2008
Alumina                                           $        3     $       -       $       3    $    -
Primary Metals                                             5             (1 )           16         (2 )
Flat-Rolled Products                                      33             (2 )           37         -
Engineered Products and Solutions                          8             (1 )           35         (1 )
Packaging and Consumer                                    -               5             -          41

Segment total                                             49              1             91         38
Corporate                                                 33             (1 )           60         -

Total restructuring and other charges             $       82     $       -       $     151    $    38

As of June 30, 2009, approximately 2,030 of the 4,060 employees associated with 2009 restructuring programs and 5,200 of the 6,300 employees associated with 2008 restructuring programs were terminated. The remaining terminations for 2008 restructuring programs are expected to be completed by the end of 2009. In the 2009 second quarter and six-month period, cash payments made against the severance reserves were $18 and $22, respectively, related to the 2009 restructuring programs and $34 and $76, respectively, related to the 2008 restructuring programs.

Other income, net declined $7, or 7%, in the 2009 second quarter and increased $21, or 55%, in the 2009 six-month period compared with the same periods in 2008. The decrease in the 2009 second quarter was mainly the result of a decline in equity income related to Alcoa's share of the results of Elkem and Sapa AB prior to the exchange of these investments and the absence of a gain on the 2008 sale of a smelter interest in Ghana, both of which were mostly offset by net gains related to the improvement in the cash surrender value of company-owned life insurance. The increase in the 2009 six-month period was principally due to a $188 gain on the Elkem/Sapa AB exchange transaction; mark-to-market gains on derivative contracts; net gains related to the improvement in the cash surrender value of company-owned life insurance; favorable foreign currency movements due to a stronger U.S. dollar; and a $22 gain on the sale of property in Vancouver, WA. These positive impacts were mostly offset by a $182 realized loss on the sale of the Shining Prospect investment; a decrease in equity income related to Alcoa's share of the results of Elkem, Sapa AB, and Shining Prospect prior to the exchange and sale of these investments; and the absence of a gain on the 2008 sale of a smelter interest in Ghana.

The effective tax rate for the second quarter of 2009 and 2008 was 25.4% (benefit on a loss) and 27.1% (provision on income), respectively. The rate for the 2009 second quarter differs from the U.S. federal statutory rate of 35% primarily due to lower tax rates in foreign jurisdictions, a $21 tax charge for unbenefitted operational losses that are excluded from the estimated annual effective tax rate calculation, and a $5 discrete income tax charge related to the Elkem/Sapa AB exchange transaction. 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 $9 discrete income tax benefit associated with the sale of the businesses within the former Packaging and Consumer segment, mainly as a result of changes in tax assumptions surrounding transaction costs and the finalization of the divestiture of certain foreign locations.

The effective tax rate for the 2009 and 2008 six-month periods was 34.5% (benefit on a loss) and 31.0% (provision on income), respectively. The rate for the 2009 six-month period differs from the U.S. federal statutory rate of 35% primarily due to lower tax rates in foreign jurisdictions and a $6 tax charge for unbenefitted operational losses that are excluded from the estimated annual effective tax rate calculation, both of which were mostly offset by a $28 discrete income tax benefit related to a Canadian tax law change allowing a tax return to be filed in U.S. dollars and a $6 discrete income tax benefit related to the Elkem/Sapa AB exchange transaction. 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 $28 discrete income tax charge related to the allocation of the sale proceeds of the businesses within the former Packaging and Consumer segment to higher tax rate jurisdictions as opposed to the allocation previously contemplated.

Alcoa has recorded deferred tax assets associated with tax loss carryforwards and tax credit carryforwards. As of December 31, 2008, deferred tax assets related to tax loss carryforwards and tax credit carryforwards were $1,017 and $320, respectively. These deferred tax asset amounts increased during the 2009 six-month period as a result of Alcoa's current operating loss position. Alcoa has recorded a valuation allowance against a portion of the tax loss carryforwards but has not recorded a valuation allowance against the tax credit carryforwards. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets for which no valuation allowance is recorded may not be realized if sufficient income is not generated in the future in certain jurisdictions.

Segment Information

In May 2009, management approved the movement of Alcoa's hard alloy extrusions business from the Flat-Rolled Products segment to the Engineered Products and Solutions segment. This move was made to capture market, customer, and manufacturer synergies through the combination of the hard alloy extrusions business with the power and propulsion forgings business. Prior period amounts were reclassified to reflect this change.

I. Alumina



                                           Second quarter ended        Six months ended
                                                 June 30,                  June 30,
                                            2009            2008        2009       2008
   Alumina production (kmt)                   3,309          3,820        6,754     7,690
   Third-party alumina shipments (kmt)        2,011          1,913        3,748     3,908

   Third-party sales                     $      441        $   717   $      871   $ 1,397
   Intersegment sales                           306            766          690     1,433

   Total sales                           $      747        $ 1,483   $    1,561   $ 2,830


   After-tax operating income (ATOI)     $       (7 )      $   190   $       28   $   359

Alumina production decreased 13% and 12% in the 2009 second quarter and six-month period, respectively, compared with the corresponding periods in 2008. The reduction in both periods was mostly the result of the effects of curtailments initiated over the last three quarters, including approximately 1,500 kmt-per-year at the Point Comfort, TX refinery and approximately 480 kmt-per-year at the Suralco (Suriname) refinery. Slightly offsetting the curtailments was increased production at the Pinjarra (Australia) refinery, as this facility continues to set production records due to the continued positive effects of the efficiency upgrade expansion completed in 2006.

Third-party sales for the Alumina segment declined 38% in the 2009 second quarter compared with the same period in 2008. The decrease was primarily due to a 47% drop in realized prices, driven by significantly lower LME prices. In the 2009 six-month period, third-party sales declined 38% compared to the 2008 six-month period. This decrease was principally the result of a 42% drop in realized prices, driven by significantly lower LME prices and a 4% decline in shipments.

Intersegment sales decreased 60% in the 2009 second quarter and 52% in the 2009 six-month period compared to the corresponding periods in 2008 mostly due to a drop in realized prices and a reduction in demand from the Primary Metals segment.

ATOI for this segment declined $197 in the 2009 second quarter and $331 in the 2009 six-month period compared to the same periods in 2008. The decrease in both periods was primarily the result of the significant drop in realized prices, partially offset by favorable foreign currency movements due to a stronger U.S. dollar, procurement and overhead cost savings across all regions, and the absence of the cost impact of the 2008 gas outage in Western Australia ($16).

In the third quarter of 2009, continued positive results are anticipated from cost savings initiatives and caustic costs are expected to decline through decreased pricing and lower consumption via operating practices. Also, start-up costs of approximately $12 related to the São Luís refinery expansion and Juruti bauxite mine development will impact results.

                                                       Second quarter ended        Six months ended
                                                             June 30,                  June 30,
                                                        2009            2008       2009         2008
Aluminum production (kmt)                                   906          1,030      1,786        2,025
Third-party aluminum shipments (kmt)                        779            750      1,462        1,415

Alcoa's average realized price per metric ton of
aluminum                                             $    1,667        $ 3,058   $  1,620      $ 2,937

Third-party sales                                    $    1,146        $ 2,437   $  1,990      $ 4,314
Intersegment sales                                          349          1,108        742        2,213

Total sales                                          $    1,495        $ 3,545   $  2,732      $ 6,527


ATOI                                                 $     (178 )      $   428   $   (390 )    $   735

At June 30, 2009, Alcoa had 1,303 kmt of idle capacity on a base capacity of 4,813 kmt. In the 2009 second quarter, idle capacity increased by 101 kmt compared to March 31, 2009 primarily due to the temporary shutdown of the Massena East, NY smelter (125 kmt), as a result of continued curtailments to address the significant decline in LME prices and aluminum demand. All previously announced production curtailments were completed.

Aluminum production decreased 12% in both the 2009 second quarter and six-month period compared with the corresponding periods in 2008. The reduction was mainly the result of the effects of smelter curtailments that began at the end of the second quarter of 2008, including the smelters in Rockdale, TX (267 kmt-per-year), Tennessee (215 kmt-per-year), Massena East, NY (125 kmt-per-year), and Ferndale, WA (93 kmt-per-year), partially offset by an increase in production due to the 2009 first quarter acquisition of the Lista (94 kmt-per-year) and Mosjøen (188 kmt-per-year) smelters in Norway. An increase in production at the Iceland smelter (344 kmt-per-year) also contributed positively to production in the 2009 six-month period, as this smelter was not at full capacity until April 2008.

Third-party sales for the Primary Metals segment declined 53% and 54% in the 2009 second quarter and six-month period, respectively, compared with the same periods in 2008. The decrease in both periods was mostly the result of a 45% drop in realized prices, driven by a 49% (quarter) and 50% (six months) decline in LME prices, slightly offset by sales from the newly acquired smelters in Norway.

Intersegment sales decreased 69% in the 2009 second quarter and 66% in the 2009 six-month period compared to the corresponding periods in 2008, mainly as a result of a drop in realized prices and a decline in volume due to lower demand . . .