Item 1. Business.

Overview

Alcoa is the world’s leading producer of primary aluminum, fabricated aluminum, and alumina, and is active in all major aspects of the industry: technology, mining, refining, smelting, fabricating, and recycling. Aluminum is a commodity that is traded on the London Metal Exchange (LME) and priced daily based on market supply and demand. Aluminum and alumina represent approximately three-quarters of Alcoa’s revenues, and the price of aluminum influences the operating results of Alcoa. Nonaluminum products include precision castings, industrial fasteners, vinyl siding, consumer products, food service and flexible packaging products, plastic

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closures and electrical distribution systems for cars and trucks. Alcoa’s products are used worldwide in aircraft, automobiles, commercial transportation, packaging, consumer products, building and construction, and industrial applications.

Alcoa is a global company operating in 42 countries. North America is the largest market with 61% of Alcoa’s revenues. Europe is also a significant market with 23% of the company’s revenues. Alcoa also has investments and activities in Australia, Brazil, China, Iceland, Jamaica, Russia, and Trinidad, which present opportunities for substantial growth. Governmental policies and other economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, affect the results of operations in these countries.

Alcoa’s operations consist of six worldwide segments: Alumina, Primary Metals, Flat-Rolled Products, Extruded and End Products, Engineered Solutions, and Packaging and Consumer.

The Alumina segment primarily consists of a series of affiliated operating entities referred to as Alcoa World Alumina and Chemicals (AWAC). Generally, Alcoa owns 60% and Alumina Limited owns 40% of these entities. For more information on AWAC, see Exhibit Nos.10(a) through 10(e) to this report.

Bauxite Interests

Aluminum is one of the most plentiful elements in the earth’s crust. Aluminum is produced primarily from bauxite, an ore containing aluminum in the form of aluminum oxide, commonly referred to as alumina. Aluminum is made by extracting alumina from bauxite and then removing oxygen from the alumina. Alcoa processes most of the bauxite that it mines into alumina. The company obtains bauxite from reserves held by AWAC, from the company’s interests in the countries listed in the chart below, and under both long-term and short-term contracts and mining leases. In 2005, Alcoa consumed 31.5 million metric tons (mt) of bauxite from its own reserves, 7.1 million mt from related third parties and 2.5 million mt from unrelated third parties. Alcoa’s present sources of bauxite are sufficient to meet the forecasted requirements of its alumina refining operations for the foreseeable future. The following table provides information regarding the company’s bauxite interests:

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Alumina Refining Facilities and Capacity

Alcoa is the world’s leading producer of alumina. Alcoa’s alumina refining facilities and its worldwide alumina capacity are shown in the following table:

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In November 2005, AWA LLC and Alcan announced the signing of a Basic Agreement with the Government of Guinea that sets forth the framework for development of a 1.5 million mtpy alumina refinery in Guinea with further expansion potential.

In September 2005, Alcoa announced that its Board of Directors approved plans to make further investments totaling $1.6 billion in the company’s Brazilian “upstream” operations, including: a 2.1 million mtpy expansion of the Alumar consortium alumina refinery in São Luís, state of Maranhao; the creation of a bauxite mine in Juruti, in the state of Para, which will initially produce 2.6 million mtpy; and the modernization of the Poços de Caldas aluminum smelter, in the state of Minas Gerais. Pending finalization of definitive documents, which is expected in due course, the Alumar expansion project will increase the refinery’s capacity from 1.4 million mtpy to approximately 3.5 million mtpy. Through AWAC, Alcoa will own a 54% interest in the expanded refinery and its share of the total facility output will more than double to 1.89 million mtpy.

In June 2005, Alcoa’s Board of Directors approved AWAC’s planned expansion of the Jamalco alumina refinery in Clarendon, Jamaica. Pending finalization of definitive documents, which is expected in due course, this project will add 1.5 million mtpy of production to Jamalco, more than doubling the refinery’s capacity to approximately 2.8 million mtpy. The 1.5 million mtpy expansion is expected to cost approximately $1.2 billion. As a result of this expansion project, AWAC’s ownership in Jamalco will increase from 50% to approximately 77%, with the Government of Jamaica continuing to own the remaining minority interest.

In January 2005, Alcoa and the Government of the Republic of Ghana announced the signing of a Memorandum of Understanding (MOU), under which the parties would evaluate the possible development of an integrated aluminum industry in Ghana, including bauxite mining, alumina refining, aluminum production, and rail transportation infrastructure upgrades. Alcoa is working with the Government to conduct feasibility studies that are expected to be completed in 2006, after which the parties will negotiate definitive agreements on the mining, refining, smelting, rail upgrades and ownership structure, as well as total investment costs. The feasibility review will include a study on the creation of an alumina refinery with an initial design capacity of up to 1.5 million mtpy.

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Primary Aluminum Facilities and Capacity

The company’s primary aluminum smelters and their respective capacities are shown in the following table:

Alcoa Worldwide Smelting Capacity

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Alcoa currently has 509,000 mtpy of idle capacity against a base capacity of 4,004,000 mtpy.

In February 2006, Alcoa signed an Agreement in Principle with the Government of the Republic of Trinidad and Tobago to build a 341,000 mtpy aluminum smelter in the Cap-de-Ville area in southwestern Trinidad. This agreement follows the signing of an MOU in May 2004 for participation by Alcoa in the development of an aluminum industry in Trinidad and Tobago. Under the Agreement in Principle, Alcoa will take a lead role in the development and operation of the smelter, with the Government installing necessary infrastructure. Alcoa will also sponsor development of a new power station to support the facility. Negotiations are ongoing for the final commercial arrangements, which will be subject to final approvals by Alcoa’s Board of Directors and by the Government.

During 2005, Aluminio began a 30% expansion of the capacity of its share of the São Luís (Alumar) aluminum smelter, increasing Aluminio’s share of smelting capacity there by 62,000 mtpy to a total of 263,000 mtpy. When complete, Alcoa’s share of output from the smelter will grow from 53.66% to 60%. Completion of the expansion and startup of the additional capacity is expected by the end of the first quarter of 2006.

As noted above, in September 2005, Alcoa announced that its Board of Directors approved plans to make further investments totaling $1.6 billion in the company’s Brazilian upstream operations, including the modernization of the Poços de Caldas aluminum smelter, in the state of Minas Gerais. The modernization is aimed at reducing emissions and costs and improving operational efficiency.

During 2005, Alcoa continued construction on its new 346,000 mtpy Fjarðaál aluminum smelter in east Iceland. Alcoa broke ground on the new smelter in July 2004. The smelter is scheduled to begin production in April 2007.

Alcoa has a Joint Action Plan in place with the Government of Iceland and three communities in northern Iceland to evaluate the construction of an up to 250,000 mtpy smelter. Through the fall of 2005, three sites have been evaluated and a conclusion on whether to proceed further is expected by March 2006. An MOU covering further development of this smelter project based on a selected site is expected.

In 2005, Alcoa continued construction of a new anode plant in Mosjøen, Norway. The facility, being built together with Elkem AS, will produce anodes for Alcoa’s Fjarðaál, Iceland and Elkem Aluminium ANS’ Mosjøen, Norway smelters. Construction of the anode plant is expected to be completed by 2007.

Alcoa is exploring aluminum smelting and associated hydroelectric power opportunities in Suriname. In January 2003, Suralco, one of the AWAC group of companies, signed an MOU with the Government of Suriname providing for an initial 18-month exclusive period of investigation of the feasibility of smelting and associated hydroelectric power investment in western Suriname. In December 2004, the parties agreed, retroactively, to extend the MOU through December 31, 2005. Alcoa is in the process of negotiating a follow on agreement with the Government.

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Alcoa has an exclusive MOU in effect with the Brunei Economic Development Board (BEDB) for building a smelter in Brunei. In November 2005, the BEDB received a McKinsey report evaluating the use of Brunei’s gas reserves for downstream industry. The potential smelter is one of several industrial developments being considered by the BEDB.

Alcoa owns interests in the following primary aluminum facilities that are accounted for on the equity or cost basis method. The capacity associated with these facilities is not included in Alcoa’s consolidated capacity.

As noted above, in January 2005, Alcoa and the Government of the Republic of Ghana signed an MOU, under which the parties would evaluate the development of an integrated aluminum industry in Ghana, including aluminum production. Alcoa is working with the Government to conduct feasibility studies for the project. These studies are expected to be completed in 2006, at which time the parties would negotiate definitive agreements on smelting and other matters.

At the end of 2005, the shareholders of Hamburger Aluminium-Werk closed the 132,000 mtpy Hamburg, Germany smelter due to escalating power costs. The Hamburg smelter is owned 33.33% each by Alcoa, Austria Metall AG and Norsk Hydro.

Energy

Alcoa produces aluminum from alumina by an electrolytic process requiring large amounts of electric power. Electric power accounts for approximately 25% of the company’s primary aluminum costs. Alcoa generates approximately 24% of the power used at its smelters worldwide and generally purchases the remainder under long-term arrangements. The paragraphs below summarize the sources of power and long-term power arrangements for Alcoa’s smelters.

North America - Electricity

The company’s wholly-owned subsidiary, Alcoa Power Generating Inc. (APGI), generates approximately 25% of the power requirements for Alcoa’s North American smelters. The company generally purchases the remainder under long-term contracts. APGI owns and operates two hydroelectric projects, Tapoco and Yadkin, consisting of eight dams under Federal Energy Regulatory Commission (FERC) licenses. APGI hydroelectric facilities provide electric power for the aluminum smelters at Alcoa, Tennessee and Badin, North

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Carolina. APGI received a renewed 40-year FERC license for the Tapoco project in 2005 and the Yadkin hydroelectric project license is up for renewal in 2008. With the Badin smelter idled, power generated from APGI’s Yadkin system is largely being sold to an affiliate, Alcoa Power Marketing, Inc. The Tennessee smelter also purchases power from the Tennessee Valley Authority under a contract that extends to 2010.

In the Pacific Northwest, Alcoa has a contract with Chelan County Public Utility District located in the State of Washington that is sufficient to supply about half of the capacity of the Wenatchee smelter through October 2011. In addition, Alcoa has a contract through September 2006 for a limited amount of power from the Bonneville Power Administration (BPA) that can be used to cover the remainder of the capacity at the Wenatchee smelter or to operate the Intalco smelter. Alcoa is currently returning part of its BPA power through the end of the contract period. BPA has embarked on the contracting process for the period October 2006-September 2011, but it is not yet clear whether the BPA offer will be adequate for Intalco and/or Wenatchee operations.

The company, through APGI, generates substantially all of the power used at its Warrick smelter using nearby coal reserves. A 1996 coal supply contract satisfies up to 70% of the fuel requirements of the Warrick power plant supplying the smelter through June 2006. In May 2005, Alcoa acquired mining rights to the nearby Friendsville, Illinois coal reserves, and it expects coal from this mine to be available for its use by the summer of 2006. When fully operational, the mine will be capable of producing approximately 1 million tons of coal per year, approximately 45% of the Warrick power plant’s requirements. In April 2001, under the terms of an operating agreement, the company assumed operation of the power plant that supplies the Warrick smelter from Vectren (formerly Southern Indiana Gas & Electric Company) until at least 2008. In July 2005, Alcoa announced its plans to invest approximately $330 million at the Warrick power plant to improve environmental performance and operational efficiency and lower costs.

Power for the Rockdale smelter is generated by company-owned generating units and TXU Generation Company LP (TXU)-owned generating units. Historically, both the company-owned and the TXU-owned units used lignite supplied by the company’s Sandow Mine. The company has opened a new lignite mine, the Three Oaks Mine, on adjacent land it owns or controls. The fuel supply for the company-owned and TXU-owned units is transitioning from the Sandow Mine to the Three Oaks Mine, with active mining in Sandow expected to conclude in 2006. Company-owned generating units supply about one-half of the total electricity requirements of the smelter, although this capacity will retire not later than 2007. TXU supplies the balance through a long-term power contract that does not expire until at least the end of 2038, with the parties having the right to terminate the contract after 2013 if there has been an unfavorable change in law or after 2025 if the cost of the electricity exceeds the market price. TXU and Alcoa recently signed a letter of intent in connection with the possible development of a new circulating fluidized bed power plant adjacent to the existing Sandow Unit Four Power Plant. Alcoa would supply lignite for the new unit from the Three Oaks Mine, and have a right to purchase a portion of the plant’s electricity output.

In the Northeast, the purchased power contracts for both the Massena East and Massena West smelters in New York expire not earlier than June 30, 2013, following their extension for 10 years upon New York Power Authority (NYPA) having relicensed its St. Lawrence-FDR Hydro Project. The company is currently in discussions with NYPA to extend the power supply arrangements in order to facilitate potential technical improvements in the plants, but may terminate either of these contracts with one year’s notice.

The Deschambault and Bécancour smelters located in Quebec purchase electricity under long-term contracts with Hydro-Quebec that expire in 2014, subject to extension provisions. The smelter located in Baie Comeau, Quebec purchases approximately 65% of its power needs under the Hydro-Quebec contract and receives the remainder of its power needs from a 40%-owned hydroelectric generating company, Manicouagan Power Company.

The Mt. Holly smelter in South Carolina purchases electricity from Santee Cooper under a contract that expires December 31, 2015, subject to certain extension provisions.

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At the end of 2005, all production was temporarily curtailed at the Eastalco smelter located in Frederick, Maryland. The curtailment coincides with the expiration of the smelter’s power contract on December 31, 2005, as a competitively-priced replacement power supply could not be obtained.

Australia - Electricity

Power is generated from extensive brown coal deposits covered by a long-term mineral lease held by AofA, and that power currently provides approximately 40% of the electricity for the company’s smelter in Point Henry, Victoria. The State Electricity Commission of Victoria provides the remaining power for this smelter and all power for the Portland smelter, under contracts with AofA that extend to 2014 and 2016, respectively.

Brazil - Electricity

The Alumar smelter is supplied by Eletronorte (Centrais Elétricas do Norte do Brasil S.A.) through a long-term power purchase agreement signed in June 2004 and expiring in June 2024. Eletronorte has supplied the Alumar smelter from the beginning of its operations in 1984.

Aluminio participates in a consortium that owns the Machadinho hydroelectric power plant in southern Brazil, which began to generate power at full capacity in 2002. Aluminio receives its share of the plant’s output, which is sufficient to cover 51% of its operating needs at the Poços de Caldas smelter.

Aluminio also has a 42% interest in Energética Barra Grande S.A. – BAESA, which built the Barra Grande hydroelectric power plant in southern Brazil. Barra Grande began operating in November 2005, and is expected to reach full generating capacity in 2006. Aluminio’s share of the project will cover a substantial portion of its currently-purchased needs at the Poços de Caldas smelter.

Aluminio is also participating in a number of Brazilian hydropower projects. In general, the projects have been approved by the Federal Government, and they are in the process of obtaining necessary environmental licenses:

If these projects are completed, the power will be used in Aluminio’s smelters or sold into the Brazilian grid.

Aluminio also owns 42% of ETAU, a Brazilian company that holds and operates an electric transmission line in southern Brazil, optimizing the transportation of the energy generated in the Barra Grande hydroelectric power plant.

Europe - Electricity

The company purchases electricity for its Italian smelters in the deregulated market, under contracts expiring in December 2009 for both the Portovesme and Fusina smelters. A new law went into effect on May 14, 2005, extending through December 2010 the special conditions applicable to the Italian smelters. This provision has been communicated by the Italian Government to the European Union (EU) as a non-state-aid measure, and EU assent is expected in the first half of 2006.

The company’s smelters at San Ciprián, La Coruña and Avilés, Spain purchase electricity from the power grid at the lowest applicable industrial tariff rate under regulations expiring in January 2010.

Iceland - Electricity

As noted above, Alcoa broke ground in 2004 on construction of its new Fjarðaál smelter in eastern Iceland. Central to those arrangements is a 40-year power contract under which Landsvirkjun, the Icelandic national power company, will build the Karahnjukar dam and power project, and supply competitively priced electricity to the smelter.

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Minority Interests - Electricity

The smelters in Germany, Ghana, Norway and Venezuela, in which Alcoa has only an equity stake and is not the operational manager, have made a variety of electricity purchase arrangements, through their respective managing or majority partners. The power contract for Germany ran through December 2005; at the end of 2005, the shareholders closed the smelter due to escalating power costs. Power for the smelter in Ghana is provided under an interim power rate agreement with the Volta River Authority. The other contracts are up for renewal at various times, the majority of them in the period from 2011 to 2020.

Canada & U.S. - Natural Gas

In order to supply its refineries and smelters in the U.S. and Canada, the company generally procures natural gas on a competitive bid basis from a variety of sources including producers in the gas production areas and independent gas marketers. For Alcoa’s larger consuming locations in Canada and the U.S., the gas commodity as well as interstate pipeline transportation is procured to provide increased flexibility and reliability. Contract pricing for gas is typically based on a published industry index or New York Mercantile Exchange (NYMEX) price. The company may choose to reduce its exposure to NYMEX pricing by hedging a portion of required natural gas consumption.

Australia - Natural Gas

AofA holds a 20% equity interest in a consortium which bought the Dampier-to-Bunbury natural gas pipeline in October 2004. This pipeline transports gas from the North West gas fields to Alcoa’s alumina refineries and other users in the Southwest of Western Australia. AofA uses gas to co-generate steam and electricity for its alumina refining processes at the Kwinana, Pinjarra and Wagerup refineries.

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Other materials generally are purchased from third party suppliers under competitively priced supply contracts or bidding arrangements. The company believes that the raw materials necessary to its business are and will continue to be available.

Joint Ventures and Investments

The company’s principal alliances and joint ventures are included in its “upstream” operating segments (alumina and primary metals) as shown in the tables above relating to those segments.

Alcoa’s other significant joint ventures and investments are as follows:

Alcoa Kobe Transportation Products, Inc. and Kobe Alcoa Transportation Products Ltd. (KATP). These joint ventures, owned 50% by Alcoa and 50% by Kobe Steel, Ltd. (Kobe), continue despite the termination in 2003 of the Alcoa-Kobe joint ventures in rolled aluminum sheet products for aluminum cans. The focus of these ventures, consisting of one company in the U.S. and one in Japan, is to expand the use of aluminum sheet products in passenger cars and light trucks. As a result of a restructuring of the venture in 2000, the U.S. company focuses on research and development efforts, while the Japanese company engages in commercial (manufacturing, marketing and sales) as well as research and development efforts, to serve the transportation industry. In 2003, Alcoa and Kobe further agreed to discuss extending this cooperation into joint research and development products related to other aluminum automotive products such as applied technology of aluminum extrusion and casting. In 2005, Alcoa and Kobe amended the relevant joint venture agreements to permit Alcoa and Kobe to manufacture, sell and distribute aluminum brazing sheet, bare alloy sheet, and fin stock for use in all heat exchanger related applications in all Asian countries except for Japan, where KATP continues to have the primary responsibility for these activities.

Aluminum Corporation of China Limited (Chalco). In November 2001, Alcoa entered into a strategic alliance with Chalco and its parent company, Aluminum Corporation of China (Chinalco). Under this alliance, in 2001 Alcoa became a strategic investor in Chalco’s global offering and listing on the New York Stock Exchange and The Stock Exchange of Hong Kong. Alcoa’s investment is 8% of the issued and outstanding shares. In connection with its investment, Alcoa is entitled to one seat on Chalco’s board of directors. In early 2004, Chalco made an additional public share offering in which Alcoa purchased sufficient shares to maintain its holdings in Chalco at the 8% level. Chinalco remains the largest shareholder in Chalco. As part of the

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strategic alliance, Alcoa and Chalco also agreed that they would enter into a Sino-foreign joint venture at Chalco’s facility in Pingguo. Pingguo is one of the most efficient alumina and aluminum production facilities in China and is located in the Guangxi region. The Pingguo joint venture would be owned 50% by Alcoa and 50% by Chalco. Alcoa would transfer management, operational and technical expertise, and best practices to the Pingguo joint venture. The parties continue to work diligently on terms of their joint venture and to obtain the necessary government approvals.

Elkem Aluminium ANS. This Norwegian partnership is owned 50% by Alcoa and 50% by Elkem AS, one of Norway’s largest industrial companies and a leading supplier of metals and materials, with Elkem as managing partner. The partnership is the second largest aluminum producer in Norway and operates two smelters: Mosjøen and Lista. These facilities supply extrusion billets, rolling ingots and foundry ingots to leading rolling mills, extrusion plants and foundries in Europe. In 2005, Alcoa sold its 46.5% investment in Elkem ASA in response to a tender offer from Orkla ASA. This transaction closed in the second quarter of 2005.

In 2005, Alcoa restructured the following joint ventures and investments:

Alcoa Bohai Aluminum Industries Company Limited. In October 2005, Alcoa inaugurated a restructured joint venture with China International Trust & Investment (CITIC), its equity partner, which will produce aluminum rolled products in Qinghuangdao, China. Alcoa is the managing partner in the new venture, holding a 73% stake, with CITIC holding a 27% stake. The joint venture will operate existing aluminum cold rolling and foil facilities and will undertake a major expansion, which will include a hot rolling mill and related equipment.

Alcoa Closure Systems International (Tianjin) Co., Ltd. Alcoa Closure Systems International (Tianjin) Co., Ltd. was established in 1994 to produce plastic closures for beverages. In December 2005, Alcoa purchased the remaining 30% interest in the Tianjin joint venture previously owned by its partner China Suntrust Investment Group Co., Ltd. CSI Tianjin is now a wholly-owned subsidiary.

Alcoa Fujikura Ltd. Alcoa Fujikura Ltd. (AFL) was a global joint venture headquartered in Franklin, Tennessee, owned 51% by Alcoa and 49% by Fujikura Ltd., which produced and marketed electronic and electrical distribution systems for the automotive industry, as well as fiber optic products and systems for selected electric utilities, telecommunications, cable television and datacom markets. AFL subsidiaries provided EF&I (engineer, furnish and install) services to the telecom and CATV industries. In 2005, Alcoa and Fujikura terminated the joint venture by way of a share exchange in which Fujikura exchanged all of its shares in AFL for all of the shares in a new telecommunications entity, including cash. As a result, Fujikura obtained complete ownership of the AFL telecommunications business and Alcoa obtained complete ownership of AFL, which continues to operate the automotive business described above.

Alcoa (Shanghai) Aluminum Products Co., Ltd. Alcoa (Shanghai) Aluminum Products Co., Ltd. is now owned 100% by Alcoa. In June 2005, Alcoa purchased the remaining 40% interest in this joint venture then owned by its partner, Shanghai Light Industrial Equipment (Group) Company, Ltd. (SLIEC). Alcoa and SLIEC established the joint venture in 1995 to produce foil products primarily for pharmaceutical and other packaging applications in China. It produces aluminum foil products in Shanghai, China.

Patents, Trade Secrets and Trademarks

The company believes that its domestic and international patent, trade secret and trademark assets provide it with a significant competitive advantage. The company’s rights under its patents, as well as the products made and sold under them, are important to the company as a whole and, to varying degrees, important to each business segment. The patents owned by Alcoa generally concern particular products or manufacturing equipment or techniques. Alcoa’s business is not, however, materially dependent on patents, and no individual patent is of material importance to any segment.

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The company has a number of trade secrets, mostly regarding manufacturing processes and material compositions that give many of its businesses important advantages in their markets. The company continues to strive to improve those processes and generate new material compositions that provide additional benefits.

The company also has a number of domestic and international registered trademarks that have significant recognition at the consumer level, and others that have significant recognition within the markets that are served. Examples include Alcoa and the Alcoa Symbol for aluminum products, Howmet metal castings, Huck ^® fasteners, Kawneer building panels, Dura-Bright ^® surface treatments, Presto ^® storage bags, Cut-Rite ^® wax paper, Baco ^® household wraps, Reynolds ^® plastic wrap and Reynolds Wrap ^® aluminum foil. The company’s rights under its trademarks are important to the company as a whole and, to varying degrees, important to each business segment.

Competitive Conditions

Alcoa is the world’s leading producer of alumina, primary aluminum and fabricated aluminum. Alcoa is subject to highly competitive conditions in all aspects of its aluminum and nonaluminum businesses. Competitors include a variety of both U.S. and non-U.S. companies in all major markets. Price, quality and service are the principal competitive factors in Alcoa’s markets. Where aluminum products compete with other materials — such as steel and plastics for automotive and building applications; magnesium, titanium, composites and plastics for aerospace and defense applications; steel, plastics and glass for packaging applications; and wood and vinyl for building and construction applications — aluminum’s diverse characteristics, particularly its light weight, recyclability and flexibility, are also significant factors. For Alcoa’s segments that market products under Alcoa’s brand names, brand recognition and brand loyalty also play a role.

Research and Development

Alcoa, a technology leader in the aluminum industry, engages in research and development programs that include process and product development, and basic and applied research. Alcoa conducts these activities within its businesses and at the Alcoa Technical Center near Pittsburgh, Pennsylvania. Expenditures for R&D activities were $194 million in 2005, $182 million in 2004 and $190 million in 2003.

Most of the major process and product areas within the company have a Technology Management Review Board (TMRB) consisting of members from various worldwide locations. Each TMRB is responsible for formulating and communicating a technology strategy for the corresponding product and process area, developing and managing the technology portfolio and ensuring the global transfer of technology. Certain business units alternatively conduct these activities and research and development programs within the worldwide business unit, supported by the Alcoa Technical Center. Technical personnel from the TMRBs, the Technical Center and such business units also participate in the corresponding Market Sector Lead Teams. In this manner, research and development activities are aligned with corporate and business unit goals.

During 2005, the company continued work on new developments in inert anode technology and the pursuit of patent protection in jurisdictions throughout the world related to these advanced technologies. Progress has been successful in many respects as a result of anode assembly testing, although there remain technical and cost targets to overcome. Technical targets include improvement of anode life, optimization of pot operating conditions and maintenance of metal purity. If the technology proves to be commercially feasible, the company believes that it would be able to convert its existing potlines to this new technology, resulting in significant operating cost savings. The new technology would also generate environmental benefits by reducing and eliminating certain emissions. No timetable has been established for commercial use.

Environmental Matters

Information relating to environmental matters is included in three areas of the Annual Report: under Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Environmental Matters” on pages 34 and 35, in Note A to the financial statements under the caption “Environmental Expenditures” on page 47 and in Note Y to the financial statements on pages 64 and 65.

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Employees

Total worldwide employment at year-end 2005 was 129,000 people.

On May 31, 2006, the master labor agreement between Alcoa and the United Steelworkers (USW) covering 15 locations in the United States and about 9,000 employees is scheduled to expire. The parties will negotiate in May with the intent of reaching a new long-term agreement. To the extent a new long-term agreement is not reached, a work stoppage at some or all of the plants could begin on June 1, 2006.

Cautionary Statements under the Private Securities Litigation Reform Act of 1995

Forward-Looking Statements

This report and the portions of the Annual Report incorporated by reference herein contain (and oral communications made by Alcoa may contain) forward-looking statements that may be identified by their use of words like “anticipates,” “believes,” “estimates,” “expects,” “hopes,” “targets,” “should,” “will,” “will likely result,” “forecast,” “outlook,” “projects” or other words of similar meaning. All statements that address Alcoa’s expectations or projections about the future, including statements about Alcoa’s strategy for growth, cost reduction goals, expenditures and financial results, are forward-looking statements. Forward-looking statements are based on Alcoa’s estimates, assumptions and expectations of future events and are subject to a number of risks and uncertainties. Alcoa cannot guarantee that these estimates, assumptions and expectations are accurate or will be realized. Alcoa disclaims any intention or obligation (other than as required by law) to update or revise any forward-looking statements.

Item 1A. Risk Factors.

In addition to the factors discussed elsewhere in this report and in Management’s Discussion and Analysis in the Annual Report, the following are some of the important factors that could cause Alcoa’s actual results to differ materially from those projected in any forward-looking statements:

Alcoa is subject to cyclical fluctuations in LME prices, economic conditions generally, and aluminum end-use markets.

Alcoa is the world’s leading producer of primary aluminum, fabricated aluminum, and alumina. The aluminum industry is highly cyclical, with prices subject to worldwide market forces of supply and demand and other influences. Prices can be volatile. Although Alcoa uses contractual arrangements with customers, as well as forward, futures and options contracts, to manage its exposure to the volatility of LME-based prices, and is product and segment diversified, Alcoa’s results of operations could be affected by material adverse changes in economic or aluminum industry conditions generally or in the markets served by Alcoa, including the transportation, building and construction, distribution, packaging, industrial gas turbine and other markets.

Alcoa’s operations consume substantial amounts of energy; profitability may decline if energy costs rise or if energy supplies are interrupted.

Alcoa consumes substantial amounts of energy in its operations. Although Alcoa generally expects to meet the energy requirements for its alumina refineries and primary aluminum smelters from internal sources or from long-term contracts, the following could affect Alcoa’s results of operations:

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Alcoa’s profitability could be adversely affected by increases in the cost of raw materials.

Alcoa’s results of operations will be affected by increases in the cost of raw materials, including caustic soda, calcined petroleum coke and resins, in addition to energy. Alcoa may not be able to offset fully the effects of higher raw material costs or energy costs through price increases, productivity improvements or cost reduction programs.

Union disputes and other employee relations issues could adversely affect Alcoa’s financial results.

Some of Alcoa’s employees are represented by labor unions in a number of countries under various collective bargaining agreements with varying durations and expiration dates. At the end of May 2006, the master labor agreement between Alcoa and the USW covering 15 locations in the United States and about 9,000 employees is scheduled to expire. Alcoa may not be able to satisfactorily renegotiate this or other collective bargaining agreements in the United States and other countries when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at Alcoa’s facilities in the future. Any such work stoppages could have a material adverse effect on our financial results.

Alcoa may not be able to successfully implement its growth strategy.

Alcoa has an organic growth strategy focused on its “upstream” businesses. Significant expansion projects are in various stages of development or negotiation in Australia, Brazil, Ghana, Guinea, Iceland, Jamaica, Suriname and Trinidad. These projects may not be completed or may be completed at higher cost than expected due to shortages of labor or materials, inability to obtain energy sources at competitive rates, inability to negotiate favorable contracts, inability to finance the construction of projects at favorable rates of interest, political unrest, regulatory developments and commercial risks, including but not limited to adverse developments in the global supply and demand for alumina and aluminum.

As part of its strategy for growth, Alcoa has made and may continue to make acquisitions and divestitures and form strategic alliances. There can be no assurance that these will be completed or beneficial to Alcoa or that targeted completion dates will be met.

Alcoa’s operations are exposed to business and operational risks, changes in conditions and events beyond its control in the countries in which it operates.

Alcoa has investments, activities and expansion projects in numerous countries outside the U.S. and in emerging markets, including Australia, Brazil, China, Ghana, Guinea, Iceland, India, Jamaica, Korea, Mexico, Russia, Suriname and Trinidad. Changes in the laws or governmental policies in the countries in which Alcoa operates could affect its business in such countries and Alcoa’s results of operations.

Alcoa is exposed to fluctuations in foreign currency exchange rates and interest rates, as well as inflation and other economic factors in the countries in which it operates.

Economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, and competitive factors in the countries in which Alcoa operates, could affect its revenues, expenses and results of operations. In particular, lower valuation of the U.S. dollar against other currencies, particularly the Canadian dollar, Euro, and Australian dollar, may affect profitability as some important raw materials are purchased in other currencies, while products generally are sold in U.S. dollars.

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Alcoa faces significant price competition from other aluminum producers and end-use markets for certain Alcoa products that are highly competitive, such that customers may be willing to accept substitutes for products sold by Alcoa.

The markets for most aluminum products are highly competitive. In addition, aluminum competes with other materials, such as steel, plastics, composites, and glass, among others, for various applications in Alcoa’s key markets. See also “Competitive Conditions” above. The willingness of customers to accept substitutions for the products sold by Alcoa, the ability of large customers to exert leverage in the marketplace to affect the pricing for fabricated aluminum products, or other developments by or affecting Alcoa’s competitors or customers could affect Alcoa’s results of operations.

Alcoa could be adversely affected by changes in the business or financial condition of a significant customer or customers.

A significant downturn in the business or financial condition of a key customer or customers supplied by Alcoa could affect Alcoa’s results of operations in a particular period. If Alcoa is not successful in replacing business lost from such customers, profitability may be adversely affected.

Alcoa may not be able to successfully implement its productivity and cost-reduction initiatives.

Alcoa has undertaken and may continue to undertake productivity and cost-reduction initiatives to improve performance, including deployment of company-wide business process models, such as the Alcoa Business System and the Alcoa Enterprise Business Solution, an initiative designed to build a common global infrastructure across Alcoa for data, processes and supporting software. There can be no assurance that these initiatives will be completed or beneficial to Alcoa or that any estimated cost savings from such activities will be realized.

Alcoa may not be able to successfully develop and implement new technology initiatives.

Alcoa is working on new developments in advanced smelting process technologies, including inert anode technology. There can be no assurance that such technologies will be commercially feasible or beneficial to Alcoa.

Alcoa is subject to a broad range of environmental laws and regulations in the jurisdictions in which it operates and may be exposed to substantial costs and liabilities associated with such laws.

Alcoa’s operations worldwide are subject to numerous complex and increasingly stringent environmental laws and regulations. The costs of complying with such environmental laws and regulations, including participation in assessments and cleanups of sites, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. Alcoa’s results of operations or liquidity in a particular period could be affected by certain environmental matters, including remediation costs and damages related to several sites. Climate change agreements in several parts of the world may result in emission restrictions on carbon dioxide and other greenhouse gases.

Alcoa may be exposed to significant legal proceedings, investigations or changes in law.

Alcoa’s results of operations or liquidity in a particular period could be affected by new or increasingly stringent laws, regulatory requirements or interpretations or significant legal proceedings or investigations adverse to Alcoa, including product liability, safety and health and other claims.

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Alcoa could be required to make additional contributions to its defined benefit pension plans as a result of adverse changes in interest rates and the capital markets.

Alcoa’s estimates of liabilities and expenses for pensions and other postretirement benefits incorporate significant assumptions including the rate used to discount the future estimated liability, the long-term rate of return on plan assets and several assumptions relating to the employee workforce (salary increases, medical costs, retirement age and mortality). Alcoa’s results of operations, liquidity or shareholders’ equity in a particular period could be affected by a decline in the rate of return on plan assets, the rate used to discount the future estimated liability or changes in employee workforce assumptions.

Unexpected events may increase Alcoa’s cost of doing business or disrupt Alcoa’s operations.

Unexpected events, including fires or explosions at facilities, natural disasters such as the Gulf Coast hurricanes in 2005, war or terrorist activities, unplanned outages, supply disruptions, or failure of equipment or processes to meet specifications, may increase the cost of doing business or otherwise impact Alcoa’s financial performance.

The above list of important factors is not all-inclusive or necessarily in order of importance.

Item 1B. Unresolved Staff Comments.

None.