TO OUR SHAREHOLDERS

The business environment in 2001 truly tested our mettle, and the Praxair team delivered. In spite of a U.S. recession, a strong U.S. dollar, a global slump in semiconductor markets, and the impact of the September 11 terrorist attacks, Praxair people kept their eye on our customers' needs, delivering world-class reliability, outstanding service and innovative products and technologies.

And because we moved quickly to realign our cost structure with new realities in the marketplace, Praxair was able to weather a very tough year better than most. As a result, by year-end Praxair's stock price rose 25%, significantly outperforming the Standard & Poor's 500 Index, which declined by 13%.

Although sales and operating earnings in 2001 were up just slightly over 2000 levels, excluding special charges, we were able to maintain after-tax return on capital at 12% and increased operating cash flow by 13%, demonstrating the resilience of our business.

It was not easy. Despite the outstanding efforts of Praxair employees around the world, the global economic slowdown severely hampered our ability to meet our near-term financial targets. Lower demand from industrial customers in the Americas was only partly offset by growth in businesses such as healthcare, and by good performance in our European and Asian businesses. Results in South America were adversely affected by weak currency and an economic downturn caused by energy shortages. Depressed aviation markets were reflected in Praxair Surface Technologies' results.

An operating highlight of the year was substantially improved safety performance. Worldwide, Praxair employees reduced injury rates by 16% and lost work-day case rates by 27%. In addition, product vehicle accidents were down 9%. We strengthened our safety programs with the implementation of a safety observation system that encourages employees to coach each other on good safety practices.