The following discussion of the company's financial condition and results of operations should be read together with its consolidated financial statements and notes to the consolidated financial statements included in Item 8 of this 10-K.

Page Business Overview 17 Executive Summary - Financial Results & Outlook 18 Consolidated Results and Other Information 19 Segment Discussion 26 Liquidity, Capital Resources and Other Financial Data 31 Off-Balance Sheet Arrangements and Contractual Obligations 35 Critical Accounting Policies 36 New Accounting Standards 40 Non-GAAP Financial Measures 40 Forward-Looking Statements 43

BUSINESS OVERVIEW

Praxair is the largest industrial gases supplier in North and South America, is rapidly growing in Asia, and has strong, well-established businesses in Europe. The company's primary products are oxygen, hydrogen, nitrogen, argon, carbon dioxide, helium, electronic gases and a wide range of specialty gases. Praxair Surface Technologies supplies high-performance coatings that protect metal parts from wear, corrosion and high heat. Praxair's industrial gas operations are managed on a geographical basis and in 2008, 95% of sales were generated in four geographic segments (North America, Europe, South America, and Asia). The surface technologies segment generated the remaining 5% of sales.

Praxair serves approximately 25 industries as diverse as healthcare and petroleum refining; computer-chip manufacturing and beverage carbonation; fiber-optics and steel making; and aerospace, chemicals and water treatment. The diversity of end markets creates financial stability for Praxair in varied business cycles.

Praxair focuses its operational and growth strategies on the following 11 core geographies where the company has its strongest market positions and where distribution and production operations allow the company to deliver the highest level of service to its customers at the lowest cost.

              North America   South America       Europe          Asia
              United States      Brazil            Spain         China
                 Canada                            Italy         India
                 Mexico                       Germany/Benelux   Thailand
                                                                 Korea

Praxair manufactures and distributes its products through a network of hundreds of production plants, pipeline complexes, distribution centers and delivery vehicles. Major pipeline complexes are located in the United States, Brazil, Spain and Germany. These networks are a competitive advantage, providing the foundation of reliable product supply to the company's customer base. The majority of Praxair's business is conducted through long-term contracts which provide stability in cash flow and the ability to pass through changes in energy costs to customers. The company has significant growth opportunities in diverse markets including: hydrogen for refining; oxygen for healthcare; and nitrogen and carbon dioxide for oil and gas production.

EXECUTIVE SUMMARY - FINANCIAL RESULTS & OUTLOOK

Praxair delivered strong financial results in 2008, reporting record sales and operating cash flow. Sales growth was driven primarily by new business, plant start-ups and higher pricing. These results reflect strong sales growth in the first three quarters and a sequential decline in the fourth quarter due to sharply lower volumes in November and December and negative impact from currency translation. In response to rapidly declining demand and falling commodity prices resulting from the global economic and credit crisis, customers around the world curtailed production, particularly in the electronics, chemicals and metals end-markets. Praxair moved quickly to reduce costs resulting in a charge to earnings in the fourth quarter. The fourth quarter actions are expected to significantly offset the impact of volume declines in earnings in 2009.

2008 Year in review

• Sales up 15% to $10,796 million versus $9,402 million in 2007, reflecting growth from new business, new plant start-ups and higher pricing. Acquisitions and currency also contributed favorably to sales growth.

• Results reflect strong sales growth in the first three quarters and a sequential decline in the fourth quarter due to sharply lower volumes in November and December and negative impact from currency translation resulting from the global economic crisis.

• In the fourth quarter 2008, Praxair recorded pre-tax charges totaling $177 million ($114 million after-tax and minority interests), relating to the cost reduction program and other charges. In addition, the 2008 first quarter included a pension settlement charge of $17 million ($11 million after-tax).

• Operating profit of $1,883 million, a 5% increase over $1,786 million in 2007, including the impact of the charges above. Underlying operating profit growth was driven by higher pricing, volume growth and cost savings from productivity initiatives.

• Net income of $1,211 million and diluted earnings per share of $3.80, including the impact of the charges above.

• Cash flow from operations of $2,038 million, a 4% increase over $1,958 million in 2007.

• Capital expenditures of $1,611 million to support strong project backlog and core business acquisitions of $130 million.

2009 Outlook

Praxair's outlook is cautious for 2009 as the company expects the global economy to remain weak.

• Sales in the range of $9.5 billion to $10 billion, or about 10% below 2008 sales. The negative impact of currency, lower natural gas prices and lower volumes will be partially offset by growth from new projects and new applications technologies.

• Diluted earnings per share in the range of $3.80 to $4.20.

• Effective tax rate of about 28%.

• Capital expenditures in the range of $1.4 to $1.5 billion.

The above guidance should be read in conjunction with the section entitled "Forward-Looking Statements".

Praxair provides quarterly updates on operating results, material trends that may affect financial performance, and financial earnings guidance via earnings releases and investor teleconferences. These materials are available on the company's website, www.praxair.com, but are not incorporated herein.

CONSOLIDATED RESULTS AND OTHER INFORMATION

The following table provides selected data for 2008, 2007, and 2006:



                                                                                              Variance
(Dollar amounts in millions)                                                          2008 vs.        2007 vs.
Year Ended December 31,                 2008            2007            2006            2007            2006
Sales                                 $  10,796       $   9,402       $   8,324             15 %            13 %
Gross margin (a)                      $   4,301       $   3,845       $   3,356             12 %            15 %
As a percent of sales                      39.8 %          40.9 %          40.3 %
Selling, general and
administrative                        $   1,312       $   1,190       $   1,086             10 %            10 %
As a percent of sales                      12.2 %          12.7 %          13.0 %
Depreciation and amortization         $     850       $     774       $     696             10 %            11 %
Cost reduction program and other
charges                               $     177       $      -        $      -
Pension settlement charge             $      17       $      -        $      -
Other income (expenses) - net         $      35       $       3       $      32
Operating profit                      $   1,883       $   1,786       $   1,519              5 %            18 %
Interest expense - net                $     198       $     173       $     155             14 %            12 %
Effective tax rate                         27.6 %          26.0 %          26.0 %
Net income                            $   1,211       $   1,177       $     988              3 %            19 %
Diluted earnings per share            $    3.80       $    3.62       $    3.00              5 %            21 %
Diluted shares outstanding              318,302         324,842         329,293             (2 )%           (1 )%
Number of employees                      26,936          27,992          27,042             (4 )%            4 %

(a) Gross margin excludes depreciation and amortization expense.

Special Charges in 2008

Cost Reduction Program and Other Charges - Fourth Quarter 2008

In the fourth quarter 2008, Praxair recorded pre-tax charges totaling $177 million ($114 million after-tax and minority interests), including $118 million relating to severance and other exit costs associated with a previously announced global cost reduction program which was initiated in response to the continuing economic downturn. Other charges totaling $59 million reflect recent developments related primarily to social tax matters in Brazil. Amounts were determined based on formal plans approved by management using the best information available; any differences with actual amounts incurred will be adjusted when determined.

Following is a summary of the charges by reportable segment. Corporate costs of $4 million have been allocated to segments based on sales.

 (Millions of Dollars)                Cost Reduction Program
                                        Costs Associated
                                          with Exit or        Total Cost
                         Severance          Disposal          Reduction       Other
                           Costs           Activities          Program       Charges    Total
 North America           $       25    $               39    $         64   $      -    $   64
 Europe                          14                     2              16          -        16
 South America                    9                    10              19          59       78
 Asia                             1                     4               5          -         5
 Surface technologies             6                     8              14          -        14

                         $       55    $               63    $        118   $      59   $  177

Severance costs of $55 million are for the termination of approximately 1,675 employees; 1,260 related to cost reduction initiatives spread across all segments, and 415 related to exit or disposal activities. At December 31, 2008, 1,090 of these positions have been eliminated, including about 74% of the cost reduction initiatives. The remaining actions are planned to be completed in 2009 primarily as businesses are sold or shut down.

Non-severance costs of $63 million associated with exit or disposal activities include asset write-downs and other costs associated with non-strategic activities, net of expected sale proceeds which are not significant.

The other charges of $59 million reflect the impacts of recent developments related to ongoing social tax claims in Brazil.

See Note 2 to the consolidated financial statements for a more detailed description of these charges, including cash flow requirements and a summary of the activity during 2008.

Pre-tax cost savings from the cost reduction program are estimated to be about $80 million in 2009 and $100 million annually thereafter.

Pension Settlement Charge - First Quarter 2008

In the first quarter 2008, Praxair recorded a pension settlement charge of $17 million ($11 million after-tax) related to lump sum benefit payments made from the U.S. supplemental pension plan to a number of recently retired senior managers, including Praxair's former chairman and chief executive officer.

2008 Compared With 2007



                                                   % Change
                                                from Prior Year
                                               2008         2007
                  Sales
                  Volume                           3 %          4 %
                  Price                            6 %          3 %
                  Acquisitions/divestitures        2 %          2 %
                  Currency                         3 %          4 %
                  Natural gas                      1 %         -

                  Total sales change              15 %         13 %

Sales in 2008 increased $1,394 million, or 15%, versus 2007. Sales grew in all geographies driven by new business, plant start-ups and continued strong pricing trends. Volume growth of 3% reflects strong sales to the manufacturing, energy and metals end-markets, mitigated by shut-downs in the third quarter due to Hurricanes Ike and Gustav and significantly lower volumes in November and December due to production cut-backs and shut-downs related to the global economic crisis. Higher pricing contributed 6% to sales growth, due to continued pricing actions and the pass-through of higher power costs and surcharges. The favorable impact of currency, primarily in Brazil, Europe and Canada, increased sales by 3%. The net effect of acquisitions and divestitures contributed 2% to sales. The contractual pass-through of higher natural gas costs to on-site hydrogen customers increased sales by $136 million, or 1%, with a minimal impact on operating profit.

Gross margin in 2008 increased $456 million, or 12%, versus 2007. The decrease in the gross margin percentage to 39.8% was due primarily to the contractual pass-through of higher natural gas and power costs to customers.

Selling, general and administrative (SG&A) expenses in 2008 were $1,312 million, or 12.2% of sales, versus $1,190 million, or 12.7% of sales, for 2007. The decrease in SG&A as a percentage of sales was due to realized benefits from productivity initiatives and the increase in sales due to the pass-through of higher natural gas costs to customers.

Depreciation and amortization expense in 2008 increased $76 million, or 10%, versus 2007. The increase was principally due to new plant start-ups.

Other income (expenses) - net in 2008 was a $35-million benefit versus a $3-million benefit in 2007. 2008 included currency related net gains of $23 million, which primarily consisted of net income hedge gains (see Note 12 to the consolidated financial statements). See Note 7 to the consolidated financial statements for a summary of the major components of Other income (expense) - net.

Operating profit in 2008 increased $97 million, or 5%, versus 2007. Excluding the $177 million cost reduction program and other charges in the fourth quarter and the $17 million pension settlement charge in the first quarter, operating profit increased $291 million, or 16%. The underlying increase in operating profit was principally due to higher pricing, new business and the continued impact of productivity initiatives.

Interest expense - net in 2008 increased $25 million, or 14%, versus 2007 due to higher debt levels during 2008 partially offset by capitalized interest relating to higher capital expenditures and lower interest rates in the fourth quarter.

The effective income tax rate for 2008 was 27.6% versus 26.0% in 2007. Excluding the impact of the cost reduction program and other charges and the pension settlement charge, the underlying effective tax rate for 2008 was 28.2%. This increase in 2008 was primarily due to earnings growth.

At December 31, 2008, minority interests consisted principally of minority shareholders' investments in Asia (primarily in China and India), Europe (primarily in Italy), and North America (primarily within Praxair Distribution). The increase in minority interests of $2 million in 2008 was primarily due to increased minority interest income in Italy partially offset by a $4 million impact in minority interests related to the cost reduction program and other charges in the fourth quarter.

Praxair's significant equity investments are in Italy, Norway, the United States and China. The company's share of net income from equity investments increased $10 million in 2008 primarily related to the acquisition of a 50% interest in an industrial gas business in Norway in November of 2007 (see Note 3 to the consolidated financial statements) and higher earnings in its investments in Italy and China.

Net income in 2008 increased $34 million, or 3%, versus 2007. Excluding the cost reduction program and other charges of $114 million after-tax and the pension settlement charge of $11 million after-tax, net income increased $159 million, or 14%. Operating profit growth was the primary driver of the net income growth partially offset by higher interest expense due to higher debt levels in 2008 and the increase in the effective tax rate.

Diluted earnings per share (EPS) increased $0.18 per diluted share, or 5% versus 2007. In 2008, EPS included the cost reduction program and other charges and a pension settlement charge totaling $0.40 per diluted share. Excluding these special charges, EPS increased 16% in 2008. The underlying growth in EPS is in line with net income growth and the lower number of diluted shares outstanding due to the impact of the company's net repurchases of common stock in connection with two publicly announced stock repurchase programs (see Liquidity, Capital Resources and Other Financial Data section of Management's Discussion and Analysis). See Note 6 to the consolidated financial statements for a calculation of diluted earnings per share.

The number of employees at December 31, 2008 was 26,936, a decrease of 1,056 employees from December 31, 2007, primarily due to the cost reduction program in the fourth quarter of 2008, partially offset by acquisitions made during the year.

2007 Compared With 2006



                                                   % Change
                                                from Prior Year
                                               2007         2006
                  Sales
                  Volume                           4 %          4 %
                  Price                            3 %          4 %
                  Acquisitions/divestitures        2 %         -
                  Currency                         4 %          2 %
                  Natural gas                     -            (1 )%

                  Total sales change              13 %          9 %

Sales in 2007 increased $1,078 million, or 13%, versus 2006. Sales grew in all geographies, led by growth in Asia and South America from new business and project start-ups, and continued volume growth in North America. Volume growth of 4% reflects strong volumes to the manufacturing, energy, and metals end-markets. Higher pricing contributed 3% to sales growth. Currency appreciation, primarily in Europe and South America, increased sales by 4%. Acquisitions and divestitures contributed 2%. The pass-through of natural gas costs to on-site hydrogen customers was neutral for the year.

Gross margin in 2007 improved $489 million, or 15%, versus 2006. The increases in the gross margin percentage to 40.9% was due primarily to higher pricing and cost efficiency and productivity programs which outpaced underlying inflationary cost pressures.

Selling, general and administrative (SG&A) expenses in 2007 were $1,190 million, or 12.7% of sales, versus $1,086 million, or 13.0% of sales, for 2006. The decrease in SG&A as a percentage of sales was due to realized benefits from productivity initiatives.

Depreciation and amortization expense in 2007 increased $78 million, or 11%, versus 2006. The increase was principally due to new plant start-ups and currency effects.

Other income (expenses) - net in 2007 was a $3-million benefit versus a $32-million benefit in 2006. See Note 7 to the consolidated financial statements for a summary of the major components of Other income (expense) - net.

Operating profit in 2007 increased $267 million, or 18%, versus 2006. The increase was principally driven by new business, higher pricing, and the continued impact of focused productivity initiatives.

Interest expense - net in 2007 increased $18 million, or 12%, versus 2006 as a result of higher debt balances primarily used to finance acquisitions and common stock repurchases. The increase in interest incurred on outstanding debt was partially reduced by interest capitalized relating to higher capital expenditures.

The effective income tax rate for 2007 and 2006 was 26%.

At December 31, 2007, minority interests consisted principally of minority shareholders' investments in Asia (primarily in China and India), Europe (primarily in Italy), and North America (primarily within Praxair Distribution). The increase in minority interests of $12 million in 2007 was primarily due to increased minority interest income in Italy and the formation of a new majority-owned packaged gas distribution subsidiary with GT&S, Inc. (see Note 3 to the consolidated financial statements).

Praxair's significant equity investments are in Italy, Norway, the United States and China. The company's share of net income from equity investments increased $16 million in 2007 primarily related to higher earnings in its investments in Italy and China.

Income in 2007 increased $189 million, or 19%, versus 2006. Operating profit growth was the primary driver of the net income improvement.

Diluted earnings per share (EPS) increased $0.62 per diluted share, or 21% versus 2006. The underlying growth in EPS is in line with net income growth and the lower number of diluted shares outstanding due to the impact of the company's net repurchases of common stock in connection with a publicly announced stock repurchase program. See Note 6 to the consolidated financial statements for a calculation of diluted earnings per share.

The number of employees at December 31, 2007 was 27,992, an increase of 950 employees from December 31, 2006, primarily due to acquisitions completed in 2007.

Related Party Transactions

The company's related parties are primarily unconsolidated equity affiliates. The company did not engage in any material transactions involving related parties that included terms or other aspects that differ from those which would be negotiated with independent parties.

Environmental Matters

Praxair's principal operations relate to the production and distribution of atmospheric and other industrial gases, which historically have not had a significant impact on the environment. However, worldwide costs relating to environmental protection may continue to grow due to increasingly stringent laws and regulations, and Praxair's ongoing commitment to rigorous internal standards.

Climate Change

There is increasing political attention being paid to greenhouse gas (GHG) emissions. Internationally, the United Nations meeting in December 2009 in Copenhagen is widely expected to define a post-Kyoto international regime to address climate change. In the United States, laws regulating GHG emissions have been enacted in California and New Jersey, among other states, and bills are being considered by still more states. Regional state initiatives have been implemented that will regulate greenhouse gas emissions from fossil-fuel-driven power plants and some federal legislative proposals also focus on such power plants. As a large user of electricity, Praxair is aware of potential cost implications that may arise from such regulatory controls. However, Praxair's customer contracts routinely provide rights to recover increased electricity costs incurred by Praxair.

Hydrogen production plants have been identified under California law as a source of carbon dioxide emissions and these plants may become subject to proposed federal climate-change legislation. Hydrogen is essential to refineries which use it to remove sulfur from transportation fuels in order to meet ambient air quality standards. It is possible that limits or offset requirements may be applied to such plants' carbon dioxide emissions at some future time, but it is premature to judge the impact of prospective legislative or regulatory proposals or to try to quantify potential costs to the company.

Regulation of greenhouse gas emissions may also provide Praxair with business opportunities. Praxair continues to develop new applications technologies that help its customers lower energy consumption and lower emissions in their own processes.

Costs Relating to the Protection of the Environment

Environmental protection costs in 2008 included approximately $21 million in capital expenditures and $29 million of expenses. Environmental protection expenditures were approximately $12 million higher in 2008 versus 2007 primarily due to increases in capital projects and increased compliance costs. Praxair anticipates that future annual environmental protection expenditures will be similar to 2008, subject to any significant changes in existing laws and regulations. Based on historical results and current estimates, management does not believe that environmental expenditures will have a material adverse effect on the consolidated financial position or on the consolidated results of operations or cash flows in any given year.

Legal Proceedings

See Note 18 to the consolidated financial statements for information concerning legal proceedings.

Retirement Benefits

The non-cash pension and OPEB funded status liability increased $341 million to $696 million at December 31, 2008 ($457 million after-tax) from $355 million at December 31, 2007 ($235 million after-tax). The increase was due primarily to the significant reduction in the fair value of the U.S. pension plans' assets during 2008.

Pension contributions were $20 million in 2008 and $22 million in 2007. Estimates of 2009 contributions are in the range $70 million to $100 million, all of which are required by funding regulations or laws.

Praxair assumes an expected return on plan assets for 2009 in the U.S. of 8.25%. In 2009, consolidated pension expense is expected to be approximately $42 million versus $54 million in 2008 and $50 million in 2007. Consolidated pension expense in 2008 included a settlement charge of $17 million.

See the Critical Accounting Policies section and Note 17 to the consolidated financial statements for a more detailed discussion of the company's retirement benefits.

Insurance

Praxair purchases insurance to limit a variety of risks, including those related to workers' compensation, third-party liability and property. Currently, the company self-retains the first $5 million per occurrence for workers' . . .