10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

Commission File Number 001-16407

ZIMMER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware	13-4151777
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

345 East Main Street, Warsaw, IN 46580
(Address of principal executive offices)
Telephone: (574) 267-6131

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ]  No [  ]

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ x ]  No [  ]

At October 29, 2004, there were 245,303,528 shares outstanding of the registrant’s $.01 par value Common Stock.

ZIMMER HOLDINGS, INC.

INDEX TO FORM 10-Q

September 30, 2004

	Page
Part I — Financial Information
Item 1.
Financial Statements
Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2004 and 2003		3
Consolidated Balance Sheets — September 30, 2004 and December 31, 2003		4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003		5
Notes to Interim Consolidated Financial Statements		6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.
Quantitative and Qualitative Disclosures About Market Risk		36
Item 4.
Controls and Procedures		36
Part II — Other Information
There is no information required to be reported under any items except those indicated below.
Item 1.
Legal Proceedings		37
Item 5.
Other Information		37
Item 6.
Exhibits		37
Signatures		38
Change in Control Severance Agreement with Jon E. Kramer
Change in Control Severance Agreement with Richard Fritschi
Employment Contract with Richard Fritschi
Confidentiality, Non-Competition and Non-Solicitiation Employment Agreement with Richard Fritschi
Certification of the CEO Pursuant to Section 302
Certification of the CFO Pursuant to Section 302
Certifications Pursuant to Section 906

2

Part I — Financial Information

Item 1. Financial Statements

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except per share amounts, unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Net Sales	$	700.2	$	398.2	$	2,179.8	$	1,199.4
Cost of products sold		169.1		96.8		590.5		292.1
Gross Profit		531.1		301.4		1,589.3		907.3
Research and development		41.4		24.4		119.4		68.5
Selling, general and administrative		286.2		146.8		881.3		450.4
Acquisition and integration		11.5		1.7		67.0		3.2
Operating expenses		339.1		172.9		1,067.7		522.1
Operating Profit		192.0		128.5		521.6		385.2
Interest expense		7.7		0.7		25.8		3.0
Earnings before income taxes, cumulative effect of change in accounting principle and minority interest		184.3		127.8		495.8		382.2
Provision for income taxes		56.4		42.8		154.2		128.0
Minority interest		—		—		0.2		—
Earnings before cumulative effect of change in accounting principle		127.9		85.0		341.8		254.2
Cumulative effect of change in accounting principle, net of tax		—		—		—		55.1
Net Earnings	$	127.9	$	85.0	$	341.8	$	309.3
Earnings Per Common Share - Basic
Earnings before cumulative effect of change in accounting principle	$	0.52	$	0.43	$	1.40	$	1.30
Cumulative effect of change in accounting principle, net of tax		—		—		—		0.28
Earnings Per Common Share - Basic	$	0.52	$	0.43	$	1.40	$	1.58
Earnings Per Common Share - Diluted
Earnings before cumulative effect of change in accounting principle	$	0.52	$	0.43	$	1.38	$	1.28
Cumulative effect of change in accounting principle, net of tax		—		—		—		0.27
Earnings Per Common Share - Diluted	$	0.52	$	0.43	$	1.38	$	1.55
Weighted Average Common Shares Outstanding
Basic		245.0		196.8		244.1		196.3
Diluted		248.2		199.6		247.3		199.1

The accompanying notes are an integral part of these consolidated financial statements.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)

	September 30,			December 31,
	2004			2003
	(unaudited)
ASSETS:
Current Assets:
Cash and equivalents	$	45.3		$	77.5
Restricted cash		17.0			14.5
Accounts receivable, less allowance for doubtful accounts		489.4			486.4
Inventories, net		506.4			527.7
Prepaid expenses		50.1			43.5
Deferred income taxes		194.8			189.1
Total current assets		1,303.0			1,338.7
Property, plant and equipment, net		584.1			525.2
Goodwill		2,398.7			2,291.8
Intangible assets		856.3			760.5
Deferred income taxes		140.7			161.2
Other assets		43.9			78.6
Total Assets	$	5,326.7		$	5,156.0
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	122.9		$	127.6
Income taxes payable (receivable)		(40.5	)		(59.0	)
Other current liabilities		494.7			475.4
Short-term debt		12.5			101.3
Total current liabilities		589.6			645.3
Other long-term liabilities		370.7			352.6
Deferred income taxes		61.0			—
Long-term debt		667.9			1,007.8
Total Liabilities		1,689.2			2,005.7
Commitments and Contingencies (Note 13)
Minority interest		6.8			7.0
Stockholders’ Equity:
Common stock, $.01 par value, one billion shares authorized, 245.3 million in 2004 (242.4 million in 2003) issued and outstanding		2.5			2.4
Paid-in capital		2,473.7			2,342.5
Retained earnings		1,001.5			659.7
Accumulated other comprehensive income		153.0			138.7
Total Stockholders’ Equity		3,630.7			3,143.3
Total Liabilities and Stockholders’ Equity	$	5,326.7		$	5,156.0

The accompanying notes are an integral part of these consolidated financial statements.

4

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)

	For the Nine Months
	Ended September 30,
	2004			2003
Cash flows provided by (used in) operating activities:
Net earnings	$	341.8		$	309.3
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		134.6			62.7
Inventory step-up		56.1			—
Cumulative effect of change in accounting principle		—			(89.1	)
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Income taxes		122.1			68.4
Receivables		(4.2	)		(30.2	)
Inventories		(32.0	)		(29.0	)
Accounts payable and accrued expenses		(26.0	)		47.6
Other assets and liabilities		11.9			(13.9	)
Net cash provided by operating activities		604.3			325.8
Cash flows provided by (used in) investing activities:
Additions to instruments		(106.7	)		(85.2	)
Additions to other property, plant and equipment		(59.6	)		(21.8	)
Centerpulse acquisition costs		(18.2	)		(3.4	)
Implex acquisition, net of acquired cash		(103.7	)		—
Proceeds from note receivable		25.0			—
Investments in other assets		(1.1	)		(15.4	)
Net cash used in investing activities		(264.3	)		(125.8	)
Cash flows provided by (used in) financing activities:
Net payments on lines of credit		(425.1	)		(82.4	)
Proceeds from exercise of stock options		58.7			46.4
Debt issuance costs		(0.6	)		(2.5	)
Equity issuance costs		(5.0	)		(1.2	)
Net cash used in financing activities		(372.0	)		(39.7	)
Effect of exchange rates on cash and equivalents		(0.2	)		1.0
Increase (decrease) in cash and equivalents		(32.2	)		161.3
Cash and equivalents, beginning of period		77.5			15.7
Cash and equivalents, end of period	$	45.3		$	177.0

The accompanying notes are an integral part of these consolidated financial statements.

5

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

     The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the 2003 annual report on Form 10-K filed by Zimmer Holdings, Inc. (together with all its subsidiaries, the “Company”). In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Results for interim periods should not be considered indicative of results for the full year. Certain amounts in the three and nine month periods ended September 30, 2003 have been reclassified to conform to the current year presentation.

2. Stock Compensation

     At September 30, 2004, the Company had three stock-based compensation plans for employees and non-employee directors, which are described more fully in the notes to the consolidated financial statements included in the Company’s 2003 annual report on Form 10-K. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock based compensation cost is reflected in net earnings related to those plans, as all stock options granted had exercise prices equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation,” to the above plans.

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(in millions, except per share amounts)

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
Net earnings, as reported	$	127.9		$	85.0		$	341.8		$	309.3
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax		(8.0	)		(3.8	)		(18.7	)		(10.8	)
Pro forma net earnings	$	119.9		$	81.2		$	323.1		$	298.5
Earnings per share:
Basic - as reported	$	0.52		$	0.43		$	1.40		$	1.58
Basic - pro forma		0.49			0.41			1.32			1.52
Diluted - as reported		0.52			0.43			1.38			1.55
Diluted - pro forma		0.48			0.41			1.31			1.50

3. Acquisitions

Centerpulse AG and InCentive Capital AG

     On October 2, 2003 (the “Closing Date”), the Company closed its exchange offer for Centerpulse AG (“Centerpulse”), a global orthopaedic medical device company headquartered in Switzerland that services the reconstructive joint, spine and dental implant markets. The Company also closed its exchange offer for InCentive Capital AG (“InCentive”), a company that, at the Closing Date, owned only cash and beneficially owned 18.3 percent of the issued Centerpulse shares. The primary reason for making the Centerpulse and InCentive exchange offers (the “Exchange Offers”) was to create a global leader in the design, development, manufacture and marketing of orthopaedic reconstructive implants, including joint and dental, spine implants, and trauma products. The strategic compatibility of the products and technologies of the Company and Centerpulse is expected to provide significant earnings power and a strong platform from which it can actively pursue growth opportunities in the industry. For the Company, Centerpulse provides a unique platform for growth and diversification in Europe as well as in the spine and dental areas of the medical device industry. As a result of the Exchange Offers, the Company beneficially owned 98.7 percent of the issued Centerpulse shares (including the Centerpulse shares owned by InCentive) and 99.9 percent of the issued InCentive shares on the Closing Date.

     Pursuant to Swiss law, the Company initiated the compulsory acquisition process to acquire all of the shares of Centerpulse and InCentive that remained outstanding following the Exchange Offers, and completed this process on April 29, 2004. The aggregate consideration paid by the Company for shares acquired pursuant to the compulsory acquisition process was $42.3 million, consisting of Company common stock valued at $28.1 million (562,870 shares exchanged) and $14.2 million of cash. In accordance with EITF 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination”, the fair value of the Company’s common stock issued pursuant to the compulsory acquisition process

7

was determined to be $49.93 per share based upon the average closing price of the Company’s common stock two days before and after the date when sufficient Centerpulse and InCentive shares had been tendered to make the Exchange Offers binding (August 27, 2003). The aggregate consideration paid by the Company in the Exchange Offers, including amounts paid pursuant to the compulsory acquisition process, was $3,495.7 million, consisting of Company common stock valued at $2,251.9 million (45,101,640 shares exchanged), $1,201.3 million of cash and $42.5 million of direct acquisition costs.

     The acquisitions of Centerpulse and InCentive were accounted for under the purchase method of accounting pursuant to SFAS No. 141, “Business Combinations” (“SFAS No. 141”). Accordingly, Centerpulse results of operations have been included in the Company’s consolidated results of operations subsequent to the Closing Date, and their respective assets and liabilities have been recorded at their estimated fair values in the Company’s consolidated statement of financial position as of the Closing Date, with the excess purchase price being allocated to goodwill.

     The Company finalized the purchase price allocation in the third quarter of 2004 in accordance with U.S. generally accepted accounting principles. During the nine month period ended September 30, 2004, the Company adjusted certain estimates included in the preliminary purchase price allocation, including estimated fair values of certain acquired investments, intangible assets, inventory, fixed assets, income tax liabilities, product liabilities and other legal liabilities. In accordance with SFAS No. 141, all adjustments to the purchase price allocation have been reflected as changes to goodwill. See Note 7 for the changes in the carrying amount of goodwill during the nine month period ended September 30, 2004.

     As of the Closing Date, the Company recorded a $75.7 million integration liability consisting of $49.7 million of employee termination benefits, $22.6 million of sales agent and lease contract termination costs and $3.4 million of employee relocation costs. The Company’s integration plan covers all functional business areas, including sales force, research and development, manufacturing and administrative. Approximately 830 Centerpulse employees will be involuntarily terminated through the Company’s integration plan. The phase-out of production at the Company’s Austin, Texas manufacturing facility began during the three months ended June 30, 2004. The phase-out will result in the involuntary termination of approximately 550 employees, including 390 employees involved in manufacturing. Products previously manufactured at the Austin facility will be sourced from the Company’s other manufacturing facilities. The Company expects to hire additional manufacturing employees at its other manufacturing facilities to handle increased production schedules. The phase-out is expected to be completed by the end of 2005. As of September 30, 2004, approximately 360 Centerpulse employees had been involuntarily terminated. The Company’s integration plan is expected to be completed by the end of 2005. Reconciliation of the integration liability from January 1, 2004 to September 30, 2004 is as follows (in millions):

8

	Employee
	Termination			Contract			Employee
	Benefits			Terminations			Relocation			Total
Balance, January 1, 2004	$	29.0		$	22.4		$	3.4		$	54.8
Cash Payments		(4.3	)		(0.3	)		(0.2	)		(4.8	)
Additions/(Reductions)		(1.8	)		(5.2	)		0.7			(6.3	)
Balance, March 31, 2004		22.9			16.9			3.9			43.7
Cash Payments		(5.2	)		(0.7	)		(0.3	)		(6.2	)
Additions/(Reductions)		(2.0	)		(3.9	)		—			(5.9	)
Balance, June 30, 2004		15.7			12.3			3.6			31.6
Cash Payments		(6.1	)		(0.7	)		(0.4	)		(7.2	)
Additions/(Reductions)		7.2			(2.4	)		1.3			6.1
Balance, September 30, 2004	$	16.8		$	9.2		$	4.5		$	30.5

     In accordance with EITF 95-3, “Recognition of Liabilities Assumed in a Purchase Business Combination”, adjustments to the integration liability were recorded as adjustments to goodwill. The $11.5 million reduction in contract terminations during the nine month period ended September 30, 2004 primarily resulted due to the assignment of $5.2 million of lease obligations related to closed Centerpulse facilities and a $7.9 million reduction in estimated Centerpulse distributor contract termination payments, offset by a $2.7 million addition related to the restructuring or termination of certain Centerpulse contractual obligations. The $3.4 million increase in employee termination benefits during the nine month period ended September 30, 2004 is a result of the finalization of the integration plan, including decisions on management structure and consolidation of facilities.

     Implex Corp.

     On April 23, 2004, the Company acquired Implex Corp. (“Implex”), a privately held orthopaedics company based in New Jersey, pursuant to an Amended and Restated Merger Agreement (“Merger Agreement”). The Company acquired 100 percent of the shares of Implex for an aggregate value of approximately $108.0 million, before adjustments for debt repayment, certain payments previously made by Zimmer to Implex pursuant to their existing alliance agreement and other items. The aggregate cash consideration paid by the Company through September 30, 2004 was $103.7 million, consisting of a $98.6 million payment at closing (including $9.8 million delivered to an escrow agent to be held for eighteen months, subject to possible indemnification claims of the Company), $3.5 million of direct acquisition costs and $1.6 million of earn-out payments made pursuant to the Merger Agreement. The acquisition is a culmination of a distribution and strategic alliance agreement, under which the Company and Implex had been operating since 2000, relating to the development and distribution of reconstructive implant and trauma products incorporating Trabecular Metal^TM Technology.

     The Implex acquisition was accounted for under the purchase method of accounting pursuant to SFAS No. 141. Accordingly, Implex results of operations have been included in the Company’s consolidated results of operations subsequent to April 23, 2004, and their respective assets and liabilities have been recorded at their estimated fair values in the Company’s

9

consolidated statement of financial position as of April 23, 2004, with the excess purchase price being allocated to goodwill. Pro forma financial information has not been included as the acquisition did not have a material impact upon the Company’s financial position or results of operations.

     The Company completed the preliminary purchase price allocation in the second quarter of 2004. The process included interviews with Implex management, review of the economic and competitive environment in which Implex operates and examination of assets including historical performance and future prospects. The preliminary purchase price allocation was based on information currently available to the Company, and expectations and assumptions deemed reasonable by the Company’s management. No assurance can be given, however, that the underlying assumptions used to estimate expected technology based product revenues, development costs or profitability, or the events associated with such technology, will occur as projected. Certain fair value estimates require additional information before being finalized, including, among others, intangible assets. For these reasons, among others, the final purchase price allocation may vary from the preliminary purchase price allocation. The final valuation and associated purchase price allocation is expected to be completed as soon as possible, but no later than one year from the date of acquisition. To the extent that the estimates need to be adjusted, the Company will do so.

     The Merger Agreement contains provisions for additional annual cash earn-out payments that are based on year-over-year sales growth through 2006 of certain products that incorporate Trabecular Metal Technology. The Company estimates the total earn-out payments to be in a range from $120 to $160 million. Other current liabilities at September 30, 2004 include $56.8 million of earn-out payments that have been earned, but not paid. These earn-out payments represent contingent consideration and, in accordance with SFAS No. 141 and EITF 95-8 “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination”, are recorded as an additional cost of the transaction upon resolution of the contingency and therefore increase goodwill.

4. Change in Accounting Principle

     Instruments are hand held devices used by orthopaedic surgeons during total joint replacement and other surgical procedures. Effective January 1, 2003, instruments are recognized as long-lived assets and are included in property, plant and equipment. Undeployed instruments are carried at cost, net of allowances for obsolescence. Instruments in the field are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on average estimated useful lives determined principally in reference to associated product life cycles, primarily five years. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews instruments for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows relating to the asset are less than its carrying amount. Depreciation of instruments is recognized as a selling, general and administrative expense, consistent with classification of instrument cost in prior periods.

     Prior to January 1, 2003, undeployed instruments were carried as a prepaid expense at cost and recognized in selling, general and administrative expense in the year in which the instruments were placed into service. The new method of accounting for instruments was

10

adopted to recognize the cost of these important assets of the Company’s business within the consolidated balance sheet and meaningfully allocate the cost of these assets over the periods benefited, typically five years.

     The effect of the change during the three month period ended September 30, 2003 was to increase earnings before cumulative effect of change in accounting principle by $5.8 million, or $0.03 per diluted share. The effect of the change during the nine month period ended September 30, 2003 was to increase earnings before cumulative effect of change in accounting principle by $12.3 million, or $0.06 per diluted share. The cumulative effect adjustment of $55.1 million (net of income taxes of $34.0 million) to retroactively apply the new capitalization method as if applied in years prior to 2003 is included in earnings during the nine month period ended September 30, 2003.

5. Inventories

	September 30,		December 31,
	2004		2003
	(in millions)
Finished goods	$	387.8	$	384.3
Raw materials and work in progress		112.0		90.8
Inventory step-up (primarily finished goods)		6.6		52.6
Inventories, net	$	506.4	$	527.7

     Inventory step-up includes $1.7 million and $52.6 million from the Centerpulse acquisition at September 30, 2004 and December 31, 2003, respectively, and $4.9 million from the Implex acquisition at September 30, 2004. The Centerpulse inventory step-up value was determined with input provided by an independent valuation firm. Both the Centerpulse step-up and Implex step-up values were based upon estimated sales prices less distribution costs and a profit allowance.

6. Property, Plant and Equipment

	September 30,			December 31,
	2004			2003
	(in millions)
Land	$	19.9		$	22.0
Buildings and equipment		655.4			600.3
Instruments		512.1			431.4
Construction in progress		36.1			20.1
		1,223.5			1,073.8
Accumulated depreciation		(639.4	)		(548.6	)
Property, plant and equipment, net	$	584.1		$	525.2

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7. Goodwill and Other Intangible Assets

     The following table summarizes the changes in the carrying amount of goodwill for the nine months ended September 30, 2004 (in millions):

	Americas			Europe			Asia Pacific			Total
Balance at January 1, 2004	$	1,275.5		$	906.0		$	110.3		$	2,291.8
Change in preliminary fair value estimates of Centerpulse related to:
Intangible assets		(10.0	)		—			—			(10.0	)
Property, plant and equipment		—			(9.6	)		—			(9.6	)
Integration liability		0.8			(7.1	)		—			(6.3	)
Other		(3.2	)		0.3			(0.2	)		(3.1	)
Currency translation		—			(12.3	)		1.7			(10.6	)
Balance at March 31, 2004	$	1,263.1		$	877.3		$	111.8		$	2,252.2
Completion of Centerpulse and InCentive compulsory acquisition process		24.3			16.0			2.0			42.3
Acquisition of Implex		2.6			—			—			2.6
Change in preliminary fair value estimates of Centerpulse related to:
Income taxes		19.6			7.0			—			26.6
Preacquisition contingencies		5.8			—			—			5.8
Integration liability		(2.6	)		(2.8	)		(0.5	)		(5.9	)
Other		0.9			(1.1	)		(0.5	)		(0.7	)
Currency translation		—			0.1			(2.9	)		(2.8	)
Balance at June 30, 2004	$	1,313.7		$	896.5		$	109.9		$	2,320.1
Acquisition of Implex		57.7			—			—			57.7
Change in preliminary fair value estimates of Centerpulse related to:
Intangible assets		18.7			1.0			—			19.7
Income taxes		(62.1	)		6.2			(0.1	)		(56.0	)
Property, tax and equipment		(5.3	)		1.9			—			(3.4	)
Inventories		6.5			1.8			—			8.3
Integration liability		6.8			(1.7	)		1.0			6.1
Other assets		10.3			—			—			10.3
Preacquisition contingencies		32.1			—			—			32.1
Other		(0.7	)		—			0.6			(0.1	)
Currency translation		—			5.6			(1.7	)		3.9
Balance at September 30, 2004	$	1,377.7		$	911.3		$	109.7		$	2,398.7

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     The components of identifiable intangible assets are as follows (in millions):

							Trademarks
	Core			Developed			and Trade			Customer
	Technology			Technology			Names			Relationships			Other			Total
As of September 30, 2004:
Intangible assets subject to amortization:
Gross carrying amount	$	123.3		$	438.2		$	31.7		$	34.5		$	33.6		$	661.3
Accumulated amortization		(6.4	)		(25.4	)		(3.1	)		(1.2	)		(13.1	)		(49.2	)
Intangible assets not subject to amortization:
Gross carrying amount		—			—			244.2			—			—			244.2
Total identifiable intangible assets	$	116.9		$	412.8		$	272.8		$	33.3		$	20.5		$	856.3
As of December 31, 2003:
Intangible assets subject to amortization:
Gross carrying amount	$	118.9		$	318.8		$	33.1		$	34.4		$	23.6		$	528.8
Accumulated amortization		(1.6	)		(5.5	)		(0.8	)		(0.3	)		(11.4	)		(19.6	)
Intangible assets not subject to amortization:
Gross carrying amount		—			—			251.3			—			—			251.3
Total identifiable intangible assets	$	117.3		$	313.3		$	283.6		$	34.1		$	12.2		$	760.5

     The Company completed the Implex acquisition on April 23, 2004, and, as part of the preliminary purchase price allocation, recognized $125.8 million and $7.0 million of developed technology and core technology intangible assets, respectively. The weighted average amortization lives for developed technology and core technology are nineteen years and fifteen years, respectively. The weighted average amortization life of these intangible assets on a combined basis is nineteen years.

     In determining the useful lives of acquired intangible assets, the Company considered the expected use of the asset and the effects of obsolescence, demand, competition, anticipated technological advances, changes in surgical techniques, market influences and other economic factors. Intangible assets with a finite life are evaluated each reporting period to determine whether events or circumstances warrant a revision to the amortization period.

     Amortization expense for the three and nine month periods ended September 30, 2004 was $11.0 million and $29.5 million, respectively, and was recorded as part of selling, general and administrative. Amortization expense for the three and nine month periods ended September 30, 2003 was not significant.

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8. Comprehensive Income

     The reconciliation of net earnings to comprehensive income is as follows:

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004		2003
	(in millions)						(in millions)
Net Earnings	$	127.9		$	85.0		$	341.8	$	309.3
Other Comprehensive Income (Loss):
Minimum pension liability, net of tax		—			—			0.6		—
Foreign currency translation		0.3			3.4			1.3		15.8
Unrealized foreign currency hedge gains (losses), net of tax		(2.2	)		(10.2	)		0.7		(14.0	)
Reclassification adjustments		3.7			2.0			11.7		1.2
Total Other Comprehensive Income (Loss)		1.8			(4.8	)		14.3		3.0
Comprehensive Income	$	129.7		$	80.2		$	356.1	$	312.3

9. Financial Instruments

     The Company is exposed to market risk due to changes in currency exchange rates. As a result, the Company utilizes foreign exchange forward contracts to offset the effect of exchange rate fluctuations on certain anticipated foreign currency transactions, generally intercompany sales and purchases expected to occur within the next twelve to twenty-four months. The Company does not hold financial instruments for trading or speculative purposes. For derivatives which qualify as hedges of future cash flows, the effective portion of changes in fair value is temporarily recorded in other comprehensive income, then recognized in earnings when the hedged item affects earnings. The ineffective portion of a derivative’s change in fair value, if any, is reported in earnings. The net amount recognized in earnings during the three and nine month periods ended September 30, 2004 and 2003, due to ineffectiveness and amounts excluded from the assessment of hedge effectiveness, was not significant. The fair value of outstanding derivative instruments recorded on the balance sheet at September 30, 2004, together with settled derivative instruments where the hedged item has not yet affected earnings, was a net unrealized loss of $44.4 million, or $28.0 million net of taxes, and is deferred in other comprehensive income; $25.3 million, or $15.8 million net of taxes, is expected to be reclassified to earnings over the next twelve months.

10. Retirement and Postretirement Benefit Plans

     The Company has defined benefit pension plans covering certain U.S. and Puerto Rico employees. Plan benefits are primarily based on years of credited service and the participant’s compensation. In addition to the U.S. and Puerto Rico defined benefit pension plans, the Company sponsors various non-U.S. pension arrangements, including retirement and termination benefit plans required by local law or coordinated with government sponsored plans.

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     Effective March 31, 2004, the Company amended its U.S. and Puerto Rico defined benefit plans. Eligible employees hired before September 2, 2002 participating in these plans will not be affected by the amendments and will continue to accrue benefits. Eligible employees hired on or after September 2, 2002 and before March 2, 2004 had their accrued benefits frozen as of March 31, 2004, and do not continue to accrue benefits. As a result of the amendments to the defined benefit plans, the Company amended its U.S. and Puerto Rico defined contribution plans to provide increased Company contributions to eligible employees hired on or after September 2, 2002. Additionally, the defined contribution plan for the former U.S. Centerpulse employees was merged into the existing Zimmer defined contribution plans effective April 1, 2004. The plan amendments did not have a material impact on the Company’s financial position, results of operations or cash flows.

     The Company also provides comprehensive medical and group life insurance benefits to certain U.S. and Puerto Rico retirees who elect to participate in the Company’s comprehensive medical and group life plans. The medical plan is contributory, and the life insurance plan is non-contributory. No similar plans exist for employees outside the U.S. and Puerto Rico.

     The components of net pension expense for the three and nine month periods ended September 30 for the Company’s defined benefit retirement plans are as follows (in millions):

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
Service cost	$	5.5		$	2.8		$	17.0		$	8.3
Interest cost		2.2			1.0			6.6			3.0
Expected return on plan assets		(3.6	)		(1.0	)		(10.7	)		(3.0	)
Amortization of prior service cost		(0.1	)		(0.1	)		(0.1	)		(0.1	)
Amortization of unrecognized actuarial loss		0.2			0.3			1.0			0.7
Net periodic benefit cost	$	4.2		$	3.0		$	13.8		$	8.9

     The components of net periodic benefit expense for the three and nine month periods ended September 30 for the Company’s postretirement benefit plans are as follows (in millions):

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2004		2003		2004		2003
Service cost	$	0.3	$	0.4	$	1.1	$	1.0
Interest cost		0.4		0.4		1.3		1.2
Amortization of unrecognized actuarial loss		0.1		—		0.1		—
Net periodic benefit cost	$	0.8	$	0.8	$	2.5	$	2.2

     The Company contributed $16.2 million during the nine month period ended September 30, 2004 to its U.S. and Puerto Rico defined benefit plans. The Company contributed $6.3 million to

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its foreign based defined benefit plans in the nine month period ended September 30, 2004 and expects to contribute $2.0 million additionally to these foreign based plans during 2004. The Company may make additional discretionary contributions when deemed appropriate to meet the long-term obligations of the plans. Contributions for the U.S. and Puerto Rico postretirement benefit plans are not expected to be significant.

11. Earnings Per Share

     The following table reconciles the diluted shares used in computing diluted earnings per share:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2004		2003		2004		2003
	(in millions)				(in millions)
Basic average common shares outstanding		245.0		196.8		244.1		196.3
Effect of dilutive securities		3.2		2.8		3.2		2.8
Diluted average common shares outstanding		248.2		199.6		247.3		199.1

There were no anti-dilutive securities outstanding at September 30, 2004 or 2003.

12. Segment Information

     The Company designs, develops, manufactures and markets orthopaedic reconstructive implants, including joint and dental, spinal implants, trauma products, and orthopaedic surgical products which include surgical supplies and instruments designed to aid in orthopaedic procedures. Operations are managed through three major geographic segments — the Americas, which is comprised principally of the United States and includes other North, Central and South American markets; Europe, which is comprised principally of the larger countries of Europe as well as the Middle East and Africa; and Asia Pacific, which is comprised primarily of Japan and includes other Asian and Pacific markets. This structure is the basis for the Company’s reportable segment information discussed below. Company management evaluates operating segment performance based upon segment operating profit, exclusive of operating expenses pertaining to global operations and corporate expenses, acquisition and integration expenses, inventory step-up, in-process research and development write-offs and intangible amortization expense. Global operations include research, development engineering, medical education, brand management, corporate legal, finance, human resource functions and the Americas operations and logistics functions.

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     Net sales and segment operating profit are as follows (in millions):

	Net Sales				Operating Profit
	Three Months Ended				Three Months Ended
	September 30,				September 30,
	2004		2003		2004			2003
Americas	$	430.1	$	276.1	$	219.2		$	142.8
Europe		167.3		50.5		51.6			13.4
Asia Pacific		102.8		71.6		41.5			30.1
Total	$	700.2	$	398.2
Inventory step-up						(6.5	)		—
Acquisition and integration						(11.5	)		(1.7	)
Global operations and corporate expenses						(102.3	)		(56.1	)
Operating profit					$	192.0		$	128.5

	Net Sales				Operating Profit
	Nine Months Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004			2003
Americas	$	1,285.0	$	815.9	$	660.3		$	421.3
Europe		580.1		165.9		193.0			47.0
Asia Pacific		314.7		217.6		130.9			96.7
Total	$	2,179.8	$	1,199.4
Inventory step-up						(56.1	)		—
Acquisition and integration						(67.0	)		(3.2	)
Global operations and corporate expenses						(339.5	)		(176.6	)
Operating profit					$	521.6		$	385.2

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Product category net sales are as follows (in millions):

	Net Sales				Net Sales
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Reconstructive implants	$	573.4	$	312.9	$	1,792.5	$	949.4
Trauma		40.5		36.5		128.9		108.0
Spine		32.3		—		99.6		—
Orthopaedic surgical products		54.0		48.8		158.8		142.0
Total	$	700.2	$	398.2	$	2,179.8	$	1,199.4

13. Commitments and Contingencies

     As a result of the Centerpulse transaction, the Company acquired the entity involved in Centerpulse’s hip and knee implant litigation matter. The litigation was a result of a voluntary recall of certain hip and knee implants manufactured and sold by Centerpulse. On March 13, 2002, a U.S. Class Action Settlement Agreement (“Settlement Agreement”) was entered into by Centerpulse that resolved U.S. claims related to the affected products and a settlement trust (“Settlement Trust”) was established and funded for the most part by Centerpulse. The court approved the settlement arrangement on May 8, 2002. Under the terms of the Settlement Agreement, the Company will reimburse the Settlement Trust a specified amount for each revision surgery over 4,000 and revisions on reprocessed shells over 64. As of October 15, 2004, the claims administrator has received 4,130 likely valid claims for hips (cut-off date June 5, 2003) and knees (cut-off date November 17, 2003) and 192 claims for reprocessed shells (cut-off date September 8, 2004). The Company believes the litigation liability recorded as of September 30, 2004 is adequate to provide for any future claims regarding the hip and knee implant litigation.

     The Company is also subject to product liability and other claims and lawsuits arising in the ordinary course of business, for which the Company maintains insurance, subject to self-insured retention limits. The Company establishes accruals for product liability and other claims in conjunction with outside counsel based on current information and historical settlement information for open claims, related fees and for claims incurred but not reported. While it is not possible to predict with certainty the outcome of these cases, it is the opinion of management that, upon ultimate resolution, these cases will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

     On July 25, 2003, the Staff of the Securities and Exchange Commission informed Centerpulse that it was conducting an informal investigation of Centerpulse relating to certain accounting issues. The Company is cooperating with the Securities and Exchange Commission in this matter.

     On February 6, 2004, BTG International Limited (“BTG”) filed an action against the Company and two unrelated parties in the United States District Court for the District of Delaware alleging infringement by the defendants of U.S. Patent No. 6,352,559 (the “‘559

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Patent”). The Company’s Trilogy® Acetabular System is specifically accused of infringement, as well as Centerpulse’s Converge® and Allofit^TM Acetabular Systems. BTG’s complaint seeks unspecified damages and injunctive relief. On March 4, 2004, the Company filed an answer to the complaint denying infringement, and asserting a counterclaim alleging that the ‘559 Patent is invalid. The parties are presently conducting discovery. The Company believes that its defenses are valid and meritorious and the Company intends to defend the BTG lawsuit vigorously.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     Zimmer Holdings, Inc. is a global leader in the design, development, manufacture and marketing of reconstructive orthopaedic implants, including joint and dental, spinal implants, and trauma products and related orthopaedic surgical products. Orthopaedic reconstructive implants restore joint function lost due to disease or trauma in joints such as knees, hips, shoulders and elbows. Dental reconstructive implants restore function and aesthetics in patients that have lost teeth due to trauma or disease. Spinal implants are utilized by orthopaedic surgeons and neurosurgeons in the treatment of degenerative diseases, deformities and trauma in all regions of the spine. Trauma products are devices used primarily to reattach or stabilize damaged bone and tissue to support the body’s natural healing process. The Company’s related orthopaedic surgical products include supplies and instruments designed to aid in orthopaedic surgical procedures. With operations in more than 24 countries and products marketed in more than 80 countries, operations are managed through three reportable geographic segments — the Americas, Europe and Asia Pacific. As used in this discussion, the “Company” means Zimmer Holdings, Inc. and its subsidiaries.

     The Company believes that the following developments or trends are important to understanding the Company’s financial condition and results of operations for the three and nine month periods ended September 30, 2004.

     Acquisition of Centerpulse and Implex

     The Centerpulse acquisition, completed in the fourth quarter of 2003, had a significant impact on financial results for the three and nine month periods ended September 30, 2004. Centerpulse accounted for 56 and 61 percent of the Company’s 76 and 82 percent sales growth for the three and nine month periods ended September 30, 2004, respectively. In addition, for the three and nine month periods ended September 30, 2004, the Company incurred $11.5 million and $67.0 million, respectively, of Centerpulse and Implex acquisition and integration expenses. The Company’s gross profit margin for the three and nine month periods ended September 30, 2004 was also impacted by the Centerpulse and Implex acquisitions, as an inventory step-up charge reduced reported gross profit by $6.5 million (0.9 percent of sales) and $56.1 million (2.6 percent of sales), respectively.

     Net synergies associated with the acquisition and integration of Centerpulse are now expected to be in excess of $100 million for the year ended December 31, 2006, as compared with an original estimate of $70 — $90 million. In the first nine months of 2004, as anticipated, only modest savings are reflected in cost of goods as the acquired inventory must be depleted before changes in manufacturing can be realized in the form of lower costs of goods. Additional cost of goods synergies are expected in 2006 upon completion of the transfer of production from Centerpulse’s U.S. manufacturing facility in Austin, Texas to other Company manufacturing facilities in Warsaw, Indiana, Winterthur, Switzerland and Ponce, Puerto Rico. Operating expense savings have exceeded the Company’s original expectations, reflecting more rapid execution and achievement of operational efficiencies than originally planned. However, cost savings have been partially offset by sales losses, also anticipated, and increases in other costs.

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The Company had anticipated that negative sales synergies (losses) during the first twelve months following the acquisition would amount to approximately $50 million. Actual sales losses incurred through September 30, 2004 are slightly favorable to this original expectation at $38 million. Increases in other costs include higher distributor commissions, professional fees connected with corporate compliance and training programs and relocation and recruiting to fill open positions in the normal course of business. The Company now anticipates net synergies for the year ended December 31, 2004 to approximate $12 million as compared with an original estimate of $1 million. For the year ended December 31, 2005, the Company now expects net synergies to approximate $63 million as compared with an original estimate of $56 million.

     The Company continues to manage the integration of Centerpulse. The Company is managing more than 350 major integration projects for over 80 legal entities in 80 different countries. The Company has made substantial progress in developing global combined product strategies, in integrating the sales and business organizations, and in melding essential activities as diverse as global accounting principles, manufacturing processes and E-mail systems. In the first nine months of 2004, the Company announced its global management structure, completed the closure of Centerpulse’s former headquarters in Zurich, Switzerland, centralized its research and development activities related to orthobiologics in Austin, began the transfer of production from Centerpulse’s U.S. manufacturing facility in Austin, Texas to Warsaw, Indiana, Winterthur, Switzerland and Ponce, Puerto Rico and implemented a more tax efficient global business structure.

     The Company completed the acquisition of Implex on April 23, 2004. The acquisition did not have a material impact on the Company’s results of operations for the three and nine month periods ended September 30, 2004. The acquisition did have a significant impact on the Company’s cash flows as the Company paid approximately $103.7 million in initial Implex acquisition costs. The acquisition reduced diluted EPS by approximately $0.01 and $0.02 for the three month and nine month periods ended September 30, 2004, respectively.

     Demand (Volume and Mix)Trends

     Volume and mix improvements contributed 15 and 14 percent to Zimmer standalone sales growth during the three and nine month periods ended September 30, 2004, respectively. “Zimmer standalone sales” as used herein refers to sales for the period less sales from acquired Centerpulse businesses. Orthopaedic procedure volume on a global basis continues to rise at mid to high single digit rates driven by an aging global population, proven clinical benefits, new material technologies, advances in surgical techniques (such as the Company’s Minimally Invasive Solutions^TM (MIS^TM) Procedures and Technologies) and more active lifestyles, among other factors. In addition, the continued shift in demand to premium products such as Longevity® and Durasul® Highly Crosslinked Polyethylene Liners, Trabecular Metal^TM Technology products, knee and hip revision products and porous hip stems continue to positively impact sales growth. During the nine month period ended September 30, 2004, primary porous hip stems accounted for 58 percent of all primary hip stem units sold, compared to 46 percent, 53 percent and 59 percent of total primary hip stem units sold for Zimmer standalone in 2001, 2002 and 2003, respectively.

     The Company believes innovative surgical approaches will significantly impact the orthopaedics industry. The Company continues to make significant progress in the development

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and introduction of MIS Procedures and Technologies. During the third quarter of 2004, 47 percent of all U.S. hip sales utilized a MIS Procedure and/or Technology. Since its opening in March 2003, The Zimmer Institute in Warsaw, Indiana has seen extensive use for MIS education, new product development meetings and sales training programs. At the Zimmer Institute and its satellite locations, during the third quarter of 2004 the Company completed its 100^th MIS 2-Incision^TM procedure training course since inception and trained its 1,000th surgeon in MIS Techniques this year.

     Pricing Trends

     In the Americas, the Company’s largest operating segment, Zimmer standalone realized average selling price growth of 5 percent in the three month period ended September 30, 2004. In Europe, Zimmer standalone sales reflect an increase in average selling prices of 2 percent in the three month period ended September 30, 2004 as a result of converting certain markets to direct sales from independent distributors. Decreased average selling prices were realized in Germany, principally the result of a revised reimbursement system implemented by the German government. In the Asia Pacific operating segment, Zimmer standalone sales realized an average selling price reduction of 4 percent during the three month period ended September 30, 2004, principally the result of the Japanese government’s bi-annual change in reimbursement rates. Although the global industry has experienced 3-4 percent price growth during the last few years, the Company expects price growth to moderate in the near term and settle in at growth rates of 2-3 percent. Pressure from healthcare cost containment efforts may affect prices in markets where health care spending grows at a rate higher than the local economy.

     Foreign Currency Exchange Rates

     A weakened U.S. dollar during the three and nine month periods ended September 30, 2004 compared to the same periods last year, contributed 2 percent and 4 percent, respectively, to the growth of Zimmer standalone sales. The Company addresses currency risk management through regular operating and financing activities, and under appropriate circumstances and subject to proper authorization, through the use of derivative financial instruments solely for managing risk. The use of derivative financial instruments for trading or speculative purposes is prohibited.

     New Product Sales

     New products, which management defines as products introduced within the prior 36 month period, accounted for 19 and 18 percent of the Company’s sales during the three and nine month periods ended September 30, 2004, respectively. Adoption rates for new technologies are a key indicator of industry performance. Sales have grown with the introduction of new products such as Prolong^TM Crosslinked Polyethylene for the knee, which was introduced in 2002, and represented approximately 50 percent of all cruciate retaining articulating surface product sales and 12 percent of all knee articulating surfaces for the three month period ended September 30, 2004. Adoption rates for the Company’s new products associated with Crosslinked Polyethylene, MIS Procedures and Technologies, Trabecular Metal Technology, knee and hip revision products, and new trauma and dental devices should continue to favorably affect the Company’s operating performance.

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     New product sales are the end result of significant research and development activities performed by the Company. The Company expects over the next few years to invest in research and development at almost 6 percent of sales, as investments in reconstructive, spine, orthobiologics and other new technologies increase.

Third Quarter Results of Operations

The following table presents the components of the percentage changes in net sales by reportable geographic segment for the three month period ended September 30, 2004 versus the three month period ended September 30, 2003:

	Zimmer Standalone
							Foreign						Impact of
							Exchange						Centerpulse
	Volume/Mix			Price			Impact			Subtotal			Acquisition			Net Change
Americas		16	%		5	%		—	%		21	%		35	%		56	%
Europe		8			2			9			19			212			231
Asia Pacific		13			(4	)		7			16			28			44
Consolidated		15			3			2			20			56			76

Net Sales

          Net sales for the three month period ended September 30, 2004 increased 76 percent to $700.2 million from $398.2 million for the comparable 2003 period. Sales growth reflected the additional sales from the October 2, 2003 Centerpulse acquisition and continued strong demand for reconstructive implants. The 76 percent increase was comprised of a 56 percent increase due to the Centerpulse acquisition and a 20 percent increase in Zimmer standalone sales. Favorable demographics, including an aging population and a continued shift to premium products, contributed to the favorable volume and mix growth. Higher average selling prices on Zimmer standalone sales were realized in the Americas and Europe while pricing in Asia Pacific decreased. The weakening of the U.S. dollar versus the Euro and Japanese Yen during the three month period ended September 30, 2004, compared to the three month period ended September 30, 2003, was the main contributor to the favorable impact of foreign currency exchange rates on net sales.

          Net sales in the Americas increased 56 percent to $430.1 million in the three month period ended September 30, 2004 compared to the same period in 2003. Sales growth was driven by additional sales from the Centerpulse acquisition and strong demand for the Company’s reconstructive implants. The 56 percent increase was comprised of a 35 percent increase due to the Centerpulse acquisition plus a 21 percent increase in Zimmer standalone sales. Net sales of reconstructive implants increased 58 percent to $341.7 million, with 32 percent related to the Centerpulse acquisition and 26 percent due to increased Zimmer standalone sales. Knee sales increased 55 percent to $189.5 million, with 30 percent related to increased Zimmer standalone sales and 25 percent due to the Centerpulse acquisition. Knee sales growth was led by the NexGen® Complete Knee Solution product line, including the NexGen Legacy® Posterior Stabilized (LPS) Flex Knee, NexGen Trabecular Metal Tibial Components, NexGen Legacy Constrained Condylar (LCCK) Revision Knee and Prolong Crosslinked Polyethylene. The Natural-Knee® System also made a strong contribution. Hip sales increased 43 percent to $123.6 million, with 23 percent due to the Centerpulse acquisition and 20 percent due to

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increased Zimmer standalone sales. Hip sales growth was driven by the continued conversion to porous stems including significant growth of the VerSys® Fiber Metal and Zimmer® M/L Taper Stems, which are often used in MIS Hip Replacement Procedures, Trabecular Metal Acetabular Cups and Longevity and Durasul Highly Crosslinked Polyethylene Liners.

          Net sales in Europe grew 231 percent to $167.3 million in the three month period ended September 30, 2004 compared to the same period in 2003. Sales growth was driven by additional sales from the Centerpulse acquisition and strong demand for the Company’s reconstructive implants, partially offset by the impact of the changes in the European distribution network and related inventory buy backs (accounted for as sales returns). The 231 percent increase was comprised of a 212 percent increase due to the Centerpulse acquisition and a 19 percent increase in Zimmer standalone sales, including 9 percent due to changes in foreign exchange rates. Net sales of reconstructive implants increased 248 percent to $150.5 million, with 227 percent due to the Centerpulse acquisition and 21 percent due to increased Zimmer standalone sales, including 9 percent due to changes in foreign exchange rates. Knee sales increased 119 percent to $57.0 million, with 106 percent due to the Centerpulse acquisition and 13 percent due to increased Zimmer standalone sales, including 9 percent due to changes in foreign exchange rates, offset by the impact of the changes in the European distribution network and related inventory buy backs of knee products (accounted for as sales returns). Knee sales were driven by strong sales of the NexGen Complete Knee Solution product line. Hip sales increased 426 percent to $84.1 million, with 395 percent due to the Centerpulse acquisition and 31 percent due to increased Zimmer standalone sales, including 10 percent due to changes in foreign exchange rates. Hip sales were driven by strong sales of Longevity and Durasul Highly Crosslinked Polyethylene Liners.

          Net sales in Asia Pacific increased 44 percent to $102.8 million in the three month period ended September 30, 2004 compared to the same period in 2003. Sales growth was driven by additional sales from the Centerpulse acquisition and strong demand for the Company’s reconstructive implants. The 44 percent increase was comprised of a 28 percent increase due to the Centerpulse acquisition and a 16 percent increase in Zimmer standalone sales, including 7 percent due to changes in foreign exchange rates. Asia Pacific sales for the three month period ended September 30, 2004 were negatively impacted by the Japanese government’s bi-annual change in reimbursement rates, which decreased 4.9 percent effective April 1, 2004. The impact of reduced reimbursement rates was less significant on Zimmer due to Zimmer’s product mix. The next Japanese reimbursement rate change is not expected until April 1, 2006. Net sales of reconstructive implants increased 52 percent to $81.2 million, with 34 percent due to the Centerpulse acquisition and 18 percent due to increased Zimmer standalone sales, including 7 percent due to changes in foreign exchange rates. Knee sales increased 30 percent to $34.0 million, with 15 percent due to the Centerpulse acquisition and 15 percent due to increased Zimmer standalone sales, including 7 percent due to changes in foreign exchange rates. Knee sales were driven by strong sales of the NexGen Complete Knee Solution product line, including NexGen Trabecular Metal Tibial Components. The Natural-Knee System also made a strong contribution. Hip sales increased 61 percent to $42.1 million, with 40 percent due to the Centerpulse acquisition and 21 percent due to increased Zimmer standalone sales, including 8 percent due to changes in foreign exchange rates. Hip sales were driven primarily by the continued conversion to porous stems, including VerSys Porous Stems, and sales of Longevity Highly Crosslinked Polyethylene Liners.

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The following table presents the components of the percentage changes in net sales by product category for the three month period ended September 30, 2004 versus the three month period ended September 30, 2003:

	Zimmer Standalone
							Foreign						Impact of
							Exchange						Centerpulse			Net
	Volume/Mix			Price			Impact			Subtotal			Acquisition			Change
Reconstructive implants		18	%		3	%		3	%		24	%		59	%		83	%
Trauma		(1	)		3			2			4			8			12
Spine 1		—			—			—			—			N/A			N/A
Orthopaedic surgical products		5			1			2			8			3			11
Consolidated		15			3			2			20			56			76

          Overall, worldwide reconstructive implant sales increased 83 percent to $573.4 million. The 83 percent increase was comprised of a 59 percent increase due to the Centerpulse acquisition and a 24 percent increase in Zimmer standalone sales, including 3 percent due to changes in foreign exchange rates. Knee sales increased 61 percent to $280.4 million, with 36 percent due to the Centerpulse acquisition and 25 percent due to increased Zimmer standalone sales, including 3 percent due to changes in foreign exchange rates. Knee sales were led by the NexGen Complete Knee Solution product line including the NexGen LPS-Flex Knee, NexGen Trabecular Metal Tibial Components and the NexGen CR-Flex Knee. In addition, the Innex^TM Total Knee System exhibited strong growth. Hip sales increased 94 percent to $249.9 million, with 72 percent due to the Centerpulse acquisition and 22 percent due to increased Zimmer standalone sales, including 3 percent due to changes in foreign exchange rates. Hip sales were driven by continued conversion to porous stems, including VerSys Porous Stems, Trabecular Metal Acetabular Cups, and increased sales of Longevity Highly Crosslinked Polyethylene Liners. The Alloclassic® Hip System also had strong growth. Dental sales were $29.7 million, led by sales of biologicals, implants and surgical products. Trauma sales increased 12 percent to $40.5 million, with 8 percent due to the Centerpulse acquisition and 4 percent due to increased Zimmer standalone sales, including 2 percent due to changes in foreign exchange rates. Trauma sales were led by sales of the ITST™ Intertrochanteric/Subtrochanteric Fixation Nails and Sirus® Femoral Nails. Spine sales were $32.3 million, with the Dynesys® Dynamic Stabilization System exhibiting strong growth. Orthopaedic Surgical Product sales increased 11 percent to $54.0 million, with 8 percent due to increased Zimmer standalone sales, including 2 percent due to changes in foreign exchange rates and 3 percent due to the Centerpulse acquisition. Orthopaedic surgical product sales were primarily driven by the continued growth of the OrthoPAT®² Autotransfusion System.

Gross Profit

          Gross profit as a percentage of net sales was 75.8 percent for the three month period ended September 30, 2004 compared to 75.7 percent in the same 2003 period. Gross profit for the three month period ended September 30, 2004 was reduced by $6.5 million, or 0.9 percent of net sales, as a result of an inventory step-up charge recognized in connection with the

¹ Spine is a new product category as a result of the Centerpulse acquisition.

² Trademark of Haemonetics Corporation

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Centerpulse and Implex acquisitions. Increased Zimmer standalone average selling prices in the Americas and Europe, the shift in mix to premium products and the ongoing efforts to reduce manufacturing costs through automation, in-sourcing and process improvements had positive impacts on gross profit. Sales and gross profit from Centerpulse negatively impacted gross margins as Centerpulse has a greater percentage of sales based in Europe, where gross margins are historically lower than the U.S. and Japan. The Company’s operating plans annually call for reductions in unit manufacturing cost of its products as a direct result of a number of factors, including but not limited to, increased volume, improvements in material technology, replacement of used machinery and equipment with higher speed equipment, changes in the configuration of manufacturing cells designed to increase throughput, labor automation as well as in-sourcing. Focus on annual inventory cost reductions is a strategic imperative. The Company will continue to direct efforts on driving down costs of products sold.

Operating Expenses

          Research and development (“R&D”) as a percentage of net sales was 5.9 percent for the three month period ended September 30, 2004 compared to 6.1 percent for the same 2003 period. R&D increased to $41.4 million from $24.4 million reflecting research and development expenses from Centerpulse and increased spending on active projects focused on areas of strategic significance, including MIS Technologies, spine, innovative materials such as Trabecular Metal Technology and Highly Crosslinked Polyethylene, lifestyle designs, revision implants and biological solutions. The Company has strategically targeted R&D spending to be at the high end of what management believes to be an average of 4-6 percent for the industry. Maintaining a robust product development pipeline has enabled Zimmer to achieve significant contributions in sales from new products. Management expects to continue to invest in R&D at almost 6 percent of sales with a particular emphasis on investments in spine, orthobiologics and new technology.

          Selling, general and administrative expenses (“SG&A”) as a percentage of net sales were 40.9 percent in the three month period ended September 30, 2004 compared to 36.9 percent for the same reported 2003 period. The increase from the prior year is primarily the result of the Centerpulse and Implex acquisitions. Centerpulse operated with higher SG&A expenses as a percentage of sales. In addition, amortization expense related to acquired Centerpulse and Implex intangible assets was $10.5 million, or 1.5% of sales, during the three month period ended September 30, 2004. The Company will continue to pursue opportunities to leverage SG&A expenses and gain synergies from the acquisitions.

          Acquisition and integration expenses related to the acquisitions of Centerpulse and Implex were $11.5 million compared to $1.7 million for the same 2003 period, and included $3.6 million of employee retention expenses, $2.5 million of integration consulting expenses, $2.0 million of costs related to integrating the Company’s information technology systems, $1.6 million of sales agent and lease contract termination expenses, $1.2 million of costs related to relocation of facilities, and $0.6 million of other miscellaneous acquisition and integration expenses.

Operating Profit, Income Taxes and Net Earnings

          Operating profit for the three month period ended September 30, 2004 increased 49 percent to $192.0 million from $128.5 million in the comparable 2003 period. Operating profit

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growth was driven by strong Zimmer standalone sales growth and improved gross profit margins, operating profit contributed by Centerpulse and effectively controlled operating expenses. These favorable items were partially offset by Centerpulse inventory step-up of $6.5 million, Centerpulse and Implex intangible amortization of $10.5 million and Centerpulse and Implex acquisition and integration expenses of $11.5 million.

          The effective tax rate on earnings before taxes decreased to 30.6 percent for the three month period ended September 30, 2004 from 33.5 percent for the same period in 2003. The decrease was primarily due to changes in the statutory mix of earnings. In connection with certain of the Company’s integration initiatives, a greater proportion of earnings are realized in lower tax jurisdictions. In addition, acquisition and integration expenses plus the inventory step-up charges were recognized primarily in higher tax jurisdictions.

          Net earnings increased 50 percent to $127.9 million for the three month period ended September 30, 2004 compared to $85.0 million in the same 2003 period. The increase was due to strong Zimmer standalone sales growth, earnings contributed by Centerpulse and leveraged operating expenses, partially offset by Centerpulse inventory step-up of $4.3 million (net of tax), Centerpulse and Implex intangible amortization of $7.8 million (net of tax) and Centerpulse and Implex acquisition and integration expenses of $7.6 million (net of tax). Basic and diluted earnings per share for the three month period ended September 30, 2004 both increased 21 percent to $0.52 from $0.43 in the comparable 2003 period.

Operating Profit by Segment

          Company management evaluates operating segment performance based upon segment operating profit exclusive of operating expenses pertaining to global operations and corporate expenses, acquisition and integration expenses, inventory step-up, in-process research and development write-offs and intangible amortization expense. Global operations include research, development engineering, medical education, brand management, corporate legal, finance, human resource functions and the Americas operations and logistics functions. For more information regarding the Company’s segments, see Note 12 to the consolidated financial statements included elsewhere in this Form 10-Q.

          The following table sets forth operating profit as a percentage of sales by segment for the three month period ended September 30, 2004 and 2003:

Percent of net sales

	Three Months Ended September 30,
	2004			2003
Americas		51.0	%		51.7	%
Europe		30.8			26.5
Asia Pacific		40.4			42.0

          Operating profit for the Americas as a percentage of net sales decreased to 51.0 percent for the three month period ended September 30, 2004, as compared with 51.7 percent for the same period in 2003. The favorable effects of increased Zimmer standalone sales of higher margin products and increased Zimmer standalone average selling prices, along with leveraged operating expenses, favorably impacted the Americas operating profit margin. These

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improvements were offset primarily by increased distributor commissions associated with the restructuring of certain distributor contracts.

          Operating profit for Europe as a percentage of net sales increased to 30.8 percent for the three month period ended September 30, 2004 as compared with 26.5 percent for the same period in 2003. The Centerpulse acquisition, together with increased Zimmer standalone average selling prices and increased sales of higher margin products, contributed to the increase. In addition, Zimmer standalone experienced favorable product and country mix and leveraged growth in operating expenses.

          Operating profit for Asia Pacific as a percentage of net sales decreased to 40.4 percent for the three month period ended September 30, 2004 as compared with 42.0 percent for the same period in 2003. Asia Pacific operating profit margin decreased primarily due to decreased Zimmer standalone average selling prices and increased SG&A expenses. SG&A expenses increased due to increased incentives in Japan due to a restructuring of certain dealer contracts. The decrease in Zimmer standalone average selling prices for the three month period ended September 30, 2004 was a result of the 4.9 percent decrease in government reimbursement rates in Japan. These decreases were partially offset by favorable effects of the Centerpulse acquisition.

Nine Months Results of Operations

The following table presents the components of the percentage changes in net sales by geographic segment for the nine month period ended September 30, 2004 versus the nine month period ended September 30, 2003:

	Zimmer Standalone
						Foreign						Impact of
						Exchange						Centerpulse
	Volume/Mix		Price			Impact			Subtotal			Acquisition			Net Change
Americas		16		5	%		—	%		21	%		36	%		57	%
Europe		9		2			11			22			228			250
Asia Pacific		11		(3	)		10			18			27			45
Consolidated		14		3			4			21			61			82

Net Sales

          Net sales for the nine month period ended September 30, 2004 increased 82 percent to $2,179.8 million from $1,199.4 million for the comparable 2003 period. Sales growth reflected the additional sales from the Centerpulse acquisition and continued strong demand for reconstructive implants. The 82 percent increase was comprised of a 61 percent increase due to the Centerpulse acquisition and a 21 percent increase in Zimmer standalone sales, including 4 percent due to changes in foreign exchange rates. Favorable demographics, including an aging population and a continued shift to premium products, contributed to the favorable volume and mix growth. Higher average selling prices were realized in the Americas and Europe while pricing in Asia Pacific decreased. The weakening of the U.S. dollar versus the Euro and Japanese Yen during the nine month period ended September 30, 2004, compared to the nine month period ended September 30, 2003, was the main contributor to the favorable impact of foreign currency exchange rates on net sales.

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          Net sales in the Americas increased 57 percent to $1,285.0 million in the nine month period ended September 30, 2004 compared to the same period in 2003. Sales growth was driven by additional sales from the Centerpulse acquisition and strong demand for the Company’s reconstructive implants. The 57 percent increase was comprised of a 36 percent increase due to the Centerpulse acquisition plus a 21 percent increase in Zimmer standalone sales. Net sales of reconstructive implants increased 59 percent to $1,014.2 million, with 34 percent related to the Centerpulse acquisition and 25 percent due to increased Zimmer standalone sales. Knee sales increased 54 percent to $558.4 million, with 27 percent due to the Centerpulse acquisition and 27 percent related to increased Zimmer standalone sales. Knee sales growth was led by the NexGen Complete Knee Solution product line, including the NexGen LPS-Flex Knee, NexGen Trabecular Metal Tibial Components and the NexGen LCCK Revision Knee and Prolong Crosslinked Polyethylene. The Natural-Knee System also made a strong contribution. Hip sales increased 46 percent to $371.6 million, with 23 percent due to increased Zimmer standalone sales and 23 percent due to the Centerpulse acquisition. Hip sales growth was driven by the continued conversion to porous stems including significant growth of the VerSys Fiber Metal and Zimmer M/L Taper Stems, which are often used in MIS Hip Replacement Procedures, Trabecular Metal Acetabular Cups and Longevity and Durasul Highly Crosslinked Polyethylene Liners.

          Net sales in Europe grew 250 percent to $580.1 million in the nine month period ended September 30, 2004 compared to the same period in 2003. Sales growth was driven by additional sales from the Centerpulse acquisition and strong demand for the Company’s reconstructive implants, partially offset by the impact of changes in the European distribution network and related inventory buy backs of knee products (accounted for as sales returns). The 250 percent increase was comprised of a 228 percent increase due to the Centerpulse acquisition and a 22 percent increase in Zimmer standalone sales, including 11 percent due to changes in foreign exchange rates. Net sales of reconstructive implants increased 261 percent to $527.9 million, with 239 percent due to the Centerpulse acquisition and 22 percent due to increased Zimmer standalone sales, including 11 percent due to changes in foreign exchange rates. Knee sales increased 127 percent to $205.6 million, with 111 percent due to the Centerpulse acquisition and 16 percent due to increased Zimmer standalone sales, including 11 percent due to changes in foreign exchange rates, offset by the impact of changes in the European distribution network and related inventory buy backs (accounted for as sales returns). Knee sales were driven by strong sales of the NexGen Complete Knee Solution product line, including the NexGen CR Knee, NexGen Trabecular Metal Tibial Components and the NexGen Rotating Hinge Knee. Hip sales increased 466 percent to $289.1 million, with 432 percent due to the Centerpulse acquisition and 34 percent due to increased Zimmer standalone sales, including 11 percent due to changes in foreign exchange rates. Hip sales were driven by strong sales of Longevity and Durasul Highly Crosslinked Polyethylene Liners, VerSys Porous Stems and Trabecular Metal Acetabular Cups.

          Net sales in Asia Pacific increased 45 percent to $314.7 million in the nine month period ended September 30, 2004 compared to the same period in 2003. Sales growth was driven by additional sales from the Centerpulse acquisition and strong demand for the Company’s reconstructive implants. The 45 percent increase was comprised of a 27 percent increase due to the Centerpulse acquisition and an 18 percent increase in Zimmer standalone sales, including 10 percent due to changes in foreign exchange rates. Asia Pacific sales for the nine month period ended September 30, 2004 were negatively impacted by the Japanese government’s bi-annual

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change in reimbursement rates, which decreased 4.9 percent effective April 1, 2004. The impact of reduced reimbursement rates was less significant on Zimmer due to Zimmer’s product mix. The next Japanese reimbursement rate change is not expected until April 1, 2006. Net sales of reconstructive implants increased 53 percent to $250.4 million, with 34 percent due to the Centerpulse acquisition and 19 percent due to increased Zimmer standalone sales, including 10 percent due to changes in foreign exchange rates. Knee sales increased 32 percent to $103.4 million, with 17 percent due to increased Zimmer standalone sales, including 10 percent due to changes in foreign exchange rates, and 15 percent due to the Centerpulse acquisition. Knee sales were driven by the NexGen LPS-Flex Knee, NexGen Trabecular Metal Tibial Components and the NexGen CR Knee. The Natural-Knee System also made a strong contribution. Hip sales increased 60 percent to $132.4 million, with 41 percent due to the Centerpulse acquisition and 19 percent due to increased Zimmer standalone sales, including 10 percent due to changes in foreign exchange rates. Hip sales were driven primarily by the continued conversion to porous stems, including VerSys Porous Stems, and sales of Longevity Highly Crosslinked Polyethylene Liners.

The following table presents the components of the percentage changes in net sales by product category for the nine month period ended September 30, 2004 versus the nine month period ended September 30, 2003:

	Zimmer Standalone
							Foreign						Impact of`
							Exchange						Centerpulse			Net
	Volume/Mix			Price			Impact			Subtotal			Acquisition			Change
Reconstructive implants		17	%		3	%		4	%		24	%		65	%		89	%
Trauma		4			3			3			10			11			21
Spine 1		—			—			—			—			N/A			N/A
Orthopaedic surgical products		4			2			3			9			3			12
Consolidated		14			3			4			21			61			82

          Overall, worldwide reconstructive implant sales increased 89 percent to $1,792.5 million. The 89 percent increase was comprised of a 65 percent increase due to the Centerpulse acquisition and a 24 percent increase in Zimmer standalone sales, including 4 percent due to changes in foreign exchange rates. Knee sales increased 63 percent to $867.4 million, with 39 percent due to the Centerpulse acquisition and 24 percent due to increased Zimmer standalone sales, including 4 percent due to changes in foreign exchange rates. Knee sales were led by the NexGen Complete Knee Solution product line including the NexGen LPS-Flex Knee, NexGen Trabecular Metal Tibial Components and the NexGen CR-Flex Knee. In addition, the Innex Total Knee System exhibited strong growth. Hip sales increased 104 percent to $793.2 million, with 81 percent due to the Centerpulse acquisition and 23 percent due to increased Zimmer standalone sales, including 4 percent due to changes in foreign exchange rates. Hip sales were driven by continued conversion to porous stems, including VerSys Porous Stems, Trabecular Metal Acetabular Cups, and Longevity Highly Crosslinked Polyethylene Liners. The Alloclassic Hip System also had strong growth. Dental sales were $88.9 million, led by sales of biologicals, implants and surgical products. Trauma sales increased 21 percent to $128.9 million, with 11 percent due to the Centerpulse acquisition and 10 percent due to increased Zimmer standalone sales, including 3 percent due to changes in foreign exchange rates. Trauma sales were led by sales of the Zimmer Plates and Screws System, ITST Nails, TransFx^TM External Fixation System

¹ Spine is a new product category as a result of the Centerpulse acquisition.

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and Sirus Femoral Nails. Spine sales were $99.6 million, with the Dynesys Dynamic Stabilization System exhibiting strong growth. Orthopaedic Surgical Product sales increased 12 percent to $158.8 million, with 9 percent due to increased Zimmer standalone sales, including 3 percent due to changes in foreign exchange rates, and 3 percent due to the Centerpulse acquisition. Orthopaedic surgical product sales were primarily driven by the continued growth of the OrthoPAT Autotransfusion System.

Gross Profit

          Gross profit as a percentage of net sales was 72.9 percent for the nine month period ended September 30, 2004 compared to 75.6 percent in the same 2003 period. Gross profit for the nine month period ended September 30, 2004 was reduced by $56.1 million, or 2.6 percent of net sales, as a result of an inventory step-up charge recognized in connection with the Centerpulse and Implex acquisitions. Sales and gross profit from Centerpulse also reduced reported gross margins as Centerpulse has a greater percentage of sales based in Europe, where gross margins are historically lower than the U.S. and Japan. Increased Zimmer standalone average selling prices in the Americas and Europe, the shift in mix to premium products and the ongoing efforts to reduce manufacturing costs through automation, in-sourcing and process improvements had positive impacts on gross profit.

Operating Expenses

          R&D as a percentage of net sales was 5.5 percent for the nine month period ended September 30, 2004 compared to 5.7 percent for the same 2003 period. R&D increased to $119.4 million from $68.5 million reflecting research and development expenses from Centerpulse and increased spending on active projects focused on areas of strategic significance, including MIS Technologies, spine, innovative materials such as Trabecular Metal Technology and Highly Crosslinked Polyethylene, lifestyle designs, revision implants and biological solutions.

          SG&A as a percentage of net sales were 40.4 percent in the nine month period ended September 30, 2004 compared to 37.6 percent for the same 2003 period. The increase from the comparable 2003 period is a result of the Centerpulse and Implex acquisitions. Centerpulse operated with higher SG&A expenses as a percentage of sales. In addition, amortization expense related to acquired Centerpulse and Implex intangible assets was $28.1 million, or 1.3% of sales, during the nine month period ended September 30, 2004.

          Acquisition and integration expenses related to the acquisitions of Centerpulse and Implex were $67.0 million compared to $3.2 million for the same 2003 period and included $22.3 million of sales agent and lease contract termination expenses, $20.5 million of integration consulting expenses, $7.2 million of employee retention expenses, $5.7 million of professional fees, $4.2 million of personnel expenses and travel for full-time integration team members, $3.6 million of costs related to integrating the Company’s information technology systems, $2.0 million of costs related to relocation of facilities, and $1.5 million of other miscellaneous acquisition and integration expenses.

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Operating Profit, Income Taxes and Net Earnings

          Operating profit for the nine month period ended September 30, 2004 increased 35 percent to $521.6 million from $385.2 million in the comparable 2003 period. Operating profit growth was driven by strong Zimmer standalone sales growth and improved gross profit margins, operating profit contributed by Centerpulse and effectively controlled operating expenses. These favorable items were partially offset by Centerpulse and Implex inventory step-up of $56.1 million, Centerpulse and Implex intangible amortization of $28.1 million and Centerpulse and Implex acquisition and integration expenses of $67.0 million.

          The effective tax rate on earnings before taxes decreased to 31.1 percent for the nine month period ended September 30, 2004 from 33.5 percent for the comparable period in 2003. The decrease was primarily due to changes in the statutory mix of earnings. In connection with certain of the Company’s integration initiatives, a greater proportion of earnings are realized in lower tax jurisdictions. In addition, acquisition and integration expenses plus the inventory step-up charges were recognized primarily in higher tax jurisdictions.

          Net earnings increased 11 percent to $341.8 million for the nine month period ended September 30, 2004 compared to $309.3 million in the same 2003 period. Net earnings for the nine month period ended September 30, 2003 included a one-time, non-cash cumulative effect of a change in accounting principle gain of $55.1 million (net of tax). Net earnings before the cumulative effect of the change in accounting principle increased 34 percent to $341.8 million versus $254.2 million for the comparable 2003 period, due to strong Zimmer standalone sales growth, earnings contributed by Centerpulse and leveraged operating expenses, partially offset by Centerpulse inventory step-up of $36.2 million (net of tax), Centerpulse and Implex intangible amortization of $19.1 million (net of tax) and Centerpulse and Implex acquisition and integration expenses of $43.2 million (net of tax). Basic and diluted earnings per share for the nine month period ended September 30, 2004 both decreased 11 percent to $1.40 and $1.38, respectively, from $1.58 and $1.55, respectively, in the comparable 2003 period. Basic and diluted earnings per share before cumulative effect of change in accounting principle both increased 8 percent to $1.40 and $1.38, respectively, from $1.30 and $1.28 in the comparable 2003 period.

Operating Profit by Segment

          The following table sets forth operating profit as a percentage of sales by segment for the nine month period ended September 30, 2004 and 2003:

Percent of net sales

	Nine Months Ended September 30,
	2004			2003
Americas		51.4	%		51.6	%
Europe		33.3			28.3
Asia Pacific		41.6			44.4

          Operating profit for the Americas as a percentage of net sales decreased to 51.4 percent for the nine month period ended September 30, 2004, as compared with 51.6 percent for the same period in 2003. The favorable effects of increased Zimmer standalone sales of premium

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products and increased Zimmer standalone average selling prices, along with leveraged operating expenses, favorably impacted the Americas operating profit margin. These improvements were offset primarily by increased distributor commissions due to the restructuring of certain distributor contracts.

          Operating profit for Europe as a percentage of net sales increased to 33.3 percent for the nine month period ended September 30, 2004 as compared with 28.3 percent for the same period in 2003. The Centerpulse acquisition, together with increased Zimmer standalone average selling prices and increased sales of premium products, contributed to the increase. In addition, Zimmer standalone experienced favorable product and country mix and leveraged growth in operating expenses.

          Operating profit for Asia Pacific as a percentage of net sales decreased to 41.6 percent for the nine month period ended September 30, 2004 as compared with 44.4 percent for the same period in 2003. Asia Pacific operating profit margin decreased primarily due to decreased Zimmer standalone average selling prices and increased incentives in Japan due to a restructuring of certain dealer contracts. The decrease in Zimmer standalone average selling prices for the three month period ended September 30, 2004 was a result of the 4.9 percent decrease in government reimbursement rates in Japan. The decreases were partially offset by the favorable effects of the Centerpulse acquisition.

Liquidity and Capital Resources

          Cash flows provided by operating activities were $604.3 million for the nine month period ended September 30, 2004 compared to $325.8 million for the nine month period ended September 30, 2003. The principal source of cash was net earnings of $341.8 million. Non-cash expenses for the period included depreciation and amortization expense of $134.6 million and Centerpulse inventory step-up of $56.1 million. Included in operating cash flow is approximately $95 million of payments related to the Centerpulse and Implex integration. In addition, during the third quarter of 2004 the Company initiated factoring of certain Centerpulse Italian receivables resulting in $24.5 million of cash proceeds. Working capital management contributed $71.8 million, net, of operating cash flow.

          Working capital continues to be a key management focus. At September 30, 2004, the Company had 63 days of sales outstanding in accounts receivable, unfavorable to the prior year by 5 days and a decrease of 2 days from June 30, 2004. Acquired Centerpulse businesses negatively impacted days of sales outstanding due to Centerpulse’s business mix which has a greater proportion of European sales with payment terms generally longer that those in the U.S. At September 30, 2004, the Company had 277 days of inventory on hand, unfavorable to the prior year by 4 days. The Company’s days of inventory on hand typically peaks at the end of the third quarter due to seasonally lower sales in the third quarter of each year and the build of inventory to accommodate anticipated fourth quarter sales levels. The Company anticipates days on hand to decrease to a level of 250 – 260 days by year end.

          Cash flows used in investing activities were $264.3 million in the nine month period ended September 30, 2004 compared to $125.8 million in the same period last year. Additions to instruments and other property, plant and equipment during the nine months ended September 30, 2004 were $166.3 million compared to $107.0 million in the same 2003 period. Increases were primarily due to expenditures to support the acquired Centerpulse businesses and to support

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sales growth, new product launches and MIS procedure growth. During the second quarter of 2004, the Company paid $18.2 of Centerpulse acquisition costs, including $14.2 million to complete the compulsory acquisition process of the remaining outstanding shares of Centerpulse and InCentive Capital and $4.0 million of direct acquisition costs. In addition, during the second quarter of 2004 the Company completed the acquisition of Implex for cash consideration of $103.7 and collected a $25.0 million note receivable.

          Cash flows used in financing activities were $372.0 million in the nine month period ended September 30, 2004 compared to $39.7 million in the same period last year. The Company repaid $425.1 million of debt during the nine months ended September 30, 2004 utilizing cash on hand, cash generated from operating activities and $58.7 million in cash proceeds received from the exercise of Company stock options.

          The Company has the following committed financing arrangements: (i) $400 million 364-day revolving credit facility maturing May 2005, (ii) $800 million three-year revolving credit facility maturing June 2006 and (iii) $550 million five-year term loan facility maturing June 2008, (collectively, the “Senior Credit Facility”). Available borrowings under the Senior Credit Facility at September 30, 2004, were approximately $1.1 billion.

          On May 24, 2004, the Company renewed its $400 million 364-day revolving credit facility and amended its five-year term loan facility to $550 million and reduced its pricing by 25 basis points.

          The Company and certain of its wholly owned foreign and domestic subsidiaries are the borrowers and its wholly owned domestic subsidiaries are the guarantors of the Senior Credit Facility. Borrowings may bear interest at the appropriate LIBOR-based rate, or an alternative base rate, plus an applicable margin determined by reference to the Company’s senior unsecured long-term credit rating and the amounts drawn under the Senior Credit Facility. The Senior Credit Facility contains customary affirmative and negative covenants and events of default for an unsecured financing arrangement. Financial covenants include a maximum leverage ratio and a minimum interest coverage ratio. The Company was in compliance with all covenants under the Senior Credit Facility as of September 30, 2004. Commitments under the $400 million 364-day revolving credit facility and the $800 million three-year revolving credit facility are subject to certain fees, including a facility and a utilization fee.

          The Company also has available uncommitted credit facilities totaling $50 million.

          The terms of the Implex acquisition include additional cash earn-out payments that are contingent on the year-over-year growth of Implex product sales through 2006. The Company estimates total earn-out payments to be in a range from $120 to $160 million. Other current liabilities at September 30, 2004 include $56.8 million of earn-out payments that have been earned, but not paid. The Company expects to pay future contingent payments, if any, with cash flows from operations and borrowings available under its Senior Credit Facility.

          The Company had $45.3 million in cash and equivalents, $17.0 million in restricted cash and outstanding borrowings of $680.4 million as of September 30, 2004. The Company expects to pay off the remaining debt balance by June 30, 2006 with cash provided from operations absent any cash requirements for acquisitions. The Company intends to maintain a capital structure that is consistent with an investment grade credit rating.

          Management believes that cash flows from operations, together with available borrowings under the Senior Credit Facility, will be sufficient to meet the Company’s working capital, capital expenditure and debt service needs. Should investment opportunities arise, the Company believes that its earnings, balance sheet and cash flows will allow the Company to obtain additional capital, if necessary.

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Recent Accounting Pronouncements

          In 2003, the FASB issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities”, and subsequent revision FIN No. 46R, “Consolidation of Variable Interest Entities”. FIN 46R defines a variable interest entity (“VIE”) as a corporation, partnership, trust, or any other legal structure that does not have equity investors with a controlling financial interest or has equity investors that do not provide sufficient financial resources for the entity to support its activities. The Company has performed evaluations of Company investments and business relationships that could be considered a VIE as defined by FIN No. 46R. As a result of these evaluations, the Company determined that it has no material investments or business relationships with any VIE that would require consolidation. Therefore, the adoption of FIN 46R did not have a material impact on the Company’s results of operations, financial position or cash flow.

          In May 2004, the FASB issued FSP 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, which is effective for the first interim or annual period beginning after June 15, 2004. The Company does not expect to be eligible for the federal subsidy available pursuant to the Medicare Prescription Drug Improvement and Modernization Act of 2003; therefore, this staff position did not have a material impact on the Company’s results of operations, financial position or cash flow.

          On March 31, 2004, the FASB issued its Exposure Draft, “Share-Based Payment” (the “Exposure Draft”), which is a proposed amendment to SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”). The Exposure Draft would require all share-based payments to employees, including stock options, to be expensed in the income statement based on their fair values. Currently, the Company applies APB Opinion No. 25 “Accounting for Stock Issued to Employees” and related Interpretations to its stock-based compensation plans which results in no compensation expense being recognized for stock option grants with exercise prices equal to the market value of the underlying common stock on the date of grant. The Company disclosed in Note 2 to the interim consolidated financial statements in this Form 10-Q the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123. However, the fair value recognition provisions of the Exposure Draft differ in some regards from the fair value recognition provisions of SFAS 123. The FASB is expected to issue a final standard in late 2004 that would be effective for fiscal periods beginning after June 15, 2005.

Critical Accounting Estimates

          The financial results of the Company are affected by the selection and application of accounting policies and methods. There were no changes in the three or nine month periods ended September 30, 2004 to the application of critical accounting estimates as described in the Company’s 2003 annual report on Form 10-K.

Forward Looking Statements

          This quarterly report contains certain statements that are forward-looking statements within the meaning of federal securities laws. When used in this report, the words “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,” “potential,” “project,”

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“target,” “forecast,” “intend” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, price and product competition, rapid technological development, demographic changes, dependence on new product development, the mix of our products and services, supply and prices of raw materials and products, customer demand for our products and services, the ability to successfully integrate acquired companies including Centerpulse AG and Implex Corp., the outcome of the pending informal Securities and Exchange Commission investigation of Centerpulse AG accounting, control of costs and expenses, the ability to form and implement alliances, changes in reimbursement programs by third-party payors, governmental laws and regulations affecting our U.S. and international businesses, including tax obligations and risks, product liability and intellectual property litigation losses, international growth, general industry and market conditions and growth rates and general domestic and international economic conditions including interest rate and currency exchange rate fluctuations. Readers of this report are cautioned not to place undue reliance on these forward-looking statements, since, while the Company believes the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

          There have been no material changes from the information provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Item 4. Controls and Procedures

          The Company carried out an evaluation under the supervision and participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2004. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II — Other Information

Item 1. Legal Proceedings

          Information pertaining to legal proceedings can be found in Note 13 to the interim consolidated financial statements included in Part I of this report.

Item 5. Other Information

          During the period covered by this Quarterly Report on Form 10-Q, the Audit Committee of our Board of Directors approved the engagement of PricewaterhouseCoopers LLP, our independent auditors, to perform non-audit services related to U.S. and international tax matters. This disclosure is made pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002.

Item 6. Exhibits

          The following documents are filed as exhibits to this report:

10.1	Change in Control Severance Agreement with Jon E. Kramer, executed on September 30, 2004
10.2	Change in Control Severance Agreement with Richard Fritschi, executed on September 30, 2004
10.3	Employment Contract with Richard Fritschi, executed on September 30, 2004
10.4	Confidentiality, Non-Competition and Non-Solicitation Employment Agreement with Richard Fritschi, executed on September 30, 2004
31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ZIMMER HOLDINGS, INC.
	(Registrant)
Date: November 8, 2004	By: /s/ Sam R. Leno
	Sam R. Leno Executive Vice President, Corporate Finance
	and Operations and Chief Financial Officer
Date: November 8, 2004	By: /s/ James T. Crines James T. Crines Senior Vice President, Finance/Controller
	and Information Technology

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EX-10.1

EXHIBIT 10.1

CHANGE IN CONTROL SEVERANCE AGREEMENT

          THIS AGREEMENT, dated as of August 1, 2004, is made by and between ZIMMER HOLDINGS, INC., a Delaware corporation (the “Company”), and Jon E. Kramer (the “Executive”). The capitalized words and terms used throughout this Agreement are defined in Article XIII.

Recitals

          A. The Company considers it essential to the best interests of its shareholders to foster the continuous employment of key management personnel.

          B. The Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such a possibility, and the uncertainty and questions that it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders.

          C. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company’s management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control.

          D. The parties intend that no amount or benefit will be payable under this Agreement unless a termination of the Executive’s employment with the Company occurs following a Change in Control or is deemed to have occurred following a Change in Control as provided in this Agreement.

Agreement

          In consideration of the premises and the mutual covenants and agreements set forth below, the Company and the Executive agree as follows:

ARTICLE I

Term of Agreement

          This Agreement will commence on the date stated above and will continue in effect through December 31, 2004. Beginning on January 1, 2005, and each subsequent January 1, the term of this Agreement will automatically be extended for one additional year, unless either party gives the other party written notice not to extend this Agreement at least 30 days before the extension would otherwise become effective or unless a Change in Control occurs. If a Change in Control occurs during the term of this Agreement, this Agreement will continue in effect for a period of 24 months from the end of the month in which the Change in Control occurs. Notwithstanding the foregoing provisions of this Article, this Agreement will terminate on the Executive’s Retirement Date.

ARTICLE II

Compensation other than Severance Payments

          SECTION 2.01. Disability Benefits. Following a Change in Control and during the term of this Agreement, during any period that the Executive fails to perform the Executive’s full-time duties with the Company as a result of Disability, the Executive will receive short-term and long-term disability benefits no less favorable than those provided under the terms of the Company’s short-term and long-term disability plans as in effect immediately prior to the Change in Control, together with all other compensation and benefits payable to the Executive pursuant to the terms of any compensation or benefit plan, program, or arrangement maintained by the Company during the period of Disability.

          SECTION 2.02. Compensation Previously Earned. If the Executive’s employment is terminated for any reason following a Change in Control and during the term of

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this Agreement, the Company will pay the Executive’s salary accrued through the Date of Termination, at the rate in effect at the time the Notice of Termination is given, together with all other compensation and benefits payable to the Executive through the Date of Termination (including, without limitation, any incentive compensation amounts owed the Executive for a completed calendar year to the extent not yet paid) under the terms of any compensation or benefit plan, program, or arrangement maintained by the Company during that period.

          SECTION 2.03. Normal Post-Termination Compensation and Benefits. Except as provided in Section 3.01, if the Executive’s employment is terminated for any reason following a Change in Control and during the term of this Agreement, the Company will pay the Executive the normal post-termination compensation and benefits payable to the Executive under the terms of the Company’s retirement, insurance, and other compensation or benefit plans, programs, and arrangements, as in effect immediately prior to the Change in Control. This provision does not restrict the Company’s right to amend, modify, or terminate any plan, program, or arrangement prior to a Change in Control.

          SECTION 2.04. No Duplication. Notwithstanding any other provision of this Agreement to the contrary, the Executive will not be entitled to duplicate benefits or compensation under this Agreement and the terms of any other plan, program, or arrangement maintained by the Company or any affiliate.

ARTICLE III

Severance Payments

          SECTION 3.01. Payment Triggers.

          (a) In lieu of any other severance compensation or benefits to which the Executive may otherwise be entitled under any plan, program, policy, or arrangement of the

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Company (and which the Executive hereby expressly waives), the Company will pay the Executive the Severance Payments described in Section 3.02 upon termination of the Executive’s employment following a Change in Control and during the term of this Agreement, in addition to the payments and benefits described in Article II, unless the termination is (1) by the Company for Cause, (2) by reason of the Executive’s death, or (3) by the Executive without Good Reason.

          (b) For purposes of this Section 3.01, the Executive’s employment will be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason if (1) the Executive’s employment is terminated without Cause prior to a Change in Control at the direction of a Person who has entered into an agreement with the Company, the consummation of which will constitute a Change in Control; or (2) the Executive terminates his employment with Good Reason prior to a Change in Control (determined by treating a Potential Change in Control as a Change in Control in applying the definition of Good Reason), if the circumstance or event that constitutes Good Reason occurs at the direction of such a Person.

          (c) The Severance Payments described in this Article III are subject to the conditions stated in Article VI.

          SECTION 3.02. Severance Payments. The following are the Severance Payments referenced in Section 3.01:

          (a) Lump Sum Severance Payment. In lieu of any further salary payments to the Executive for periods after the Date of Termination, and in lieu of any severance benefits otherwise payable to the Executive, the Company will pay to the Executive a lump sum severance payment, in cash, equal to two (or, if less, the number of years, including fractions, from the Date of Termination until the Executive reaches his Retirement Date), times the sum of

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(1) the higher of the Executive’s annual base salary in effect immediately prior to the event or circumstance upon which the Notice of Termination is based or in effect immediately prior to the Change in Control, and (2) the amount of the Executive’s target annual bonus entitlement under the Incentive Plan (or any other bonus plan of the Company then in effect) as in effect immediately prior to the event or circumstance giving rise to the Notice of Termination. If the Board determines that it is not workable to determine the amount that the Executive’s target bonus would have been for the year in which the Notice of Termination was given, then, for purposes of this paragraph (a), the Executive’s target annual bonus entitlement will be the amount of the largest aggregate annual bonus paid to the Executive with respect to the three years immediately prior to the year in which the Notice of Termination was given.

          (b) Incentive Compensation. Notwithstanding any provision of the Incentive Plan or any other compensation or incentive plans of the Company, the Company will pay to the Executive a lump sum amount, in cash, equal to the sum of (1) any incentive compensation that has been allocated or awarded to the Executive for a completed calendar year or other measuring period preceding the Date of Termination ( to the extent not payable pursuant to Section 2.02), and (2) a pro rata portion (based on elapsed time) to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the current calendar year or other measuring period under the Incentive Plan, the Award Plan, or any other compensation or incentive plans of the Company, calculated as to each such plan using the Executive’s annual target percentage under that plan for that year or other measuring period and as if all conditions for receiving that target award had been met.

          (c) Options and Restricted Shares. All outstanding Options will become immediately vested and exercisable (to the extent not yet vested and exercisable as of the Date of

5

Termination). To the extent not otherwise provided under the written agreement evidencing the grant of any restricted Shares to the Executive, all outstanding Shares that have been granted to the Executive subject to restrictions that, as of the Date of Termination, have not yet lapsed will lapse automatically upon the Date of Termination, and the Executive will own those Shares free and clear of all such restrictions.

          (d) Additional Pension Benefit. In addition to the retirement benefits to which the Executive is entitled under the Retirement Plan and BEP, or any successors to those plans, the Company will pay the Executive an additional amount under the BEP (or a successor plan) equal to the excess of (1) over (2), where (1) is the retirement pension (determined as a straight life annuity commencing on the Executive’s Retirement Date) that the Executive would have accrued under the terms of the Retirement Plan and BEP (without regard to any amendment to the Retirement Plan or BEP that is made subsequent to a Change in Control and on or prior to the Date of Termination and that adversely affects in any manner the computation of the Executive’s retirement benefits), determined as if the Executive (a) were fully vested under the Retirement Plan and the BEP, and (b) had accumulated (after the Date of Termination) 24 additional months of age and service credit under the Retirement Plan and the BEP at the higher of (i) the Executive’s highest annual rate of compensation (as compensation is defined for purposes of the BEP) in effect during the three years immediately preceding the Date of Termination, or (ii) the sum of the Executive’s annual salary and target annual bonus in effect immediately prior to the Change in Control (but in no event will the Executive be deemed to have accumulated additional service credit in excess of the maximum permitted pursuant to the Retirement Plan and BEP); and (2) is the retirement pension (determined as a straight life annuity commencing on the Executive’s Retirement Date) that the Executive had then accrued pursuant to the respective

6

provisions of the Retirement Plan and BEP. This additional amount will be paid in the form and at the time or times that the relevant benefits are payable to the Executive under the BEP or any successor plan; provided, however, that if the transaction constituting the Change in Control has not been approved by the Board prior to its consummation, the actuarial equivalent of the additional benefits under this Section 3.02(d) will be paid in a cash lump sum. The Executive understands and acknowledges that the additional retirement benefit described in this Section 3.02(d) is payable entirely under the BEP, a nonqualified plan, and will not be subject to any special tax treatment applicable to benefits under the Retirement Plan and other tax-qualified plans.

          (e) Welfare Benefits. Except as otherwise provided in this Section 3.02(e), for a 24-month period after the Date of Termination, the Company will arrange to provide the Executive with life and health (including medical and dental) insurance benefits and perquisites substantially similar to those that the Executive is receiving immediately prior to the Notice of Termination (without giving effect to any reduction in those benefits subsequent to a Change in Control). Benefits and perquisites otherwise receivable by the Executive pursuant to this Section 3.02(e) will be reduced to the extent comparable benefits are actually received by or made available to the Executive without greater cost to him than as provided by the Company during the 24-month period following the Executive’s termination of employment (and the Executive will report to the Company any such benefits actually received by or made available to the Executive).

          If, as of the Date of Termination, the Company reasonably determines that the continued life insurance coverage required by this Section 3.02(e) is not available from the Company’s group insurance carrier, cannot be procured from another carrier, and cannot be

7

provided on a self-insured basis without adverse tax consequences to the Executive or his death beneficiary, then, in lieu of continued life insurance coverage, the Company will pay the Executive a lump sum payment, in cash, equal to 24 times the full monthly premium payable to the Company’s group insurance carrier for comparable coverage for an executive employee under the Company’s group life insurance plan then in effect. If, as of the Date of Termination, the Company reasonably determines that the continued medical and dental coverage required by this Section 3.02(e) cannot be provided without violating applicable nondiscrimination requirements under the Code, then, in lieu of the continued medical and dental coverage, the Company will pay the Executive a lump sum payment, in cash, equal to 24 times the monthly premium then charged to qualified beneficiaries for full family COBRA continuation coverage under the Company’s medical and dental plans.

          (f) Matching Contributions. In addition to the vested amounts, if any, to which the Executive is entitled under the Savings Plan as of the Date of Termination, the Company will pay the Executive a lump sum amount equal to the value of the unvested portion, if any, of the employer matching contributions (and attributable earnings) credited to the Executive under the Savings Plan.

          (g) Outplacement Services. The Company will provide the Executive with reasonable outplacement services consistent with past practices of the Company prior to the Change in Control or, if no past practice has been established prior to the Change in Control, consistent with the prevailing practice in the medical device manufacturing industry.

          SECTION 3.03. Gross-Up Payment.

          (a) In the event that any Severance Payments paid or payable to the Executive or for his benefit pursuant to the terms of this Agreement or otherwise in connection with a

8

Change in Control (“ Total Payments”) would be subject to any Excise Tax, then the Executive will be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after the Executive’s payment of all taxes (including any interest, penalties, additional tax, or similar items imposed with respect to the Gross-Up Payment and the Excise Tax), including any Excise Tax upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments.

          (b) An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of that Gross-Up Payment will be made at the Company’s expense by an Accounting Firm selected by the Executive and reasonably acceptable to the Company. The Accounting Firm will provide its determination, together with detailed supporting calculations and documentation, to the Company and the Executive within 10 business days after the Date of Termination, or such other time as requested by the Company and the Executive. If the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to the Payments, it will furnish the Executive with an opinion reasonably acceptable to the Executive that no Excise Tax will be imposed with respect to the Payments. Within 10 business days after the Accounting Firm delivers its determination to the Executive, the Executive will have the right to dispute the determination. The Gross-Up Payment, if any, as determined by the Accounting Firm in accordance with the preceding provisions of this Section, will be paid by the Company to the Executive within 5 business days of the receipt of the Accounting Firm’s determination. The existence of a dispute will not in any way affect the Executive’s right to receive the Gross-Up Payment in accordance with the determination. If there is no dispute, the determination will be final, binding, and conclusive upon the Company and the Executive. If there is a dispute, then the Company and the Executive will together select a

9

second Accounting Firm, which will review the determination and the Executive’s basis for the dispute and then render its own determination, which will be final, binding, and conclusive on the Company and the Executive. The Company will bear all costs associated with that determination, unless the determination is not greater than the initial determination, in which case all such costs will be borne by the Executive.

          (c) The value of any non-cash benefits or any deferred payment or benefit paid or payable to the Executive will be determined in accordance with the principles of Code section 280G(d)(3) and (4). For purposes of determining the amount of the Gross-Up Payment, the Executive will be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and applicable state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive’s residence on the Date of Termination, net of the maximum reduction in federal income taxes that would be obtained from deduction of those state and local taxes.

          (d) Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the Accounting Firm’s determination, an Excise Tax will be imposed on the Total Payments, the Company will pay to the applicable government taxing authorities as Excise Tax withholding the amount of the Excise Tax that the Company has actually withheld from the Total Payments in accordance with applicable law.

          (e) Notwithstanding the preceding provisions of this Section 3.03, the Company will not have any obligation to make the Gross-Up Payment unless the value of the Total Payments exceeds 110% of the maximum amount of parachute payments that could be paid to the Executive without any imposition of golden parachute excise taxes under Code sections 280G and 4999 (the “110% Amount”). In that case, the value of the Total Payments

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will be reduced to the extent necessary so that, within the meaning of Code section 280G(b)(2)(A)(ii), the aggregate present value of the payments in the nature of compensation to (or for the benefit of) the Executive that are contingent on a Change in Control (with a Change in Control for this purpose being defined in terms of a “change” described in Code section 280G(b)(2)(A)(i) or (ii)), do not exceed 2.999 multiplied by the Base Amount. For this purpose, cash Severance Payments will be reduced first (if necessary, to zero), and all other, non-cash Severance Payments will be reduced next (if necessary, to zero). For purposes of the limitation described in the preceding sentence, the following will not be taken into account: (1) any portion of the Total Payments the receipt or enjoyment of which the Executive effectively waived in writing prior to the Date of Termination, and (2) any portion of the Total Payments that, in the opinion of the Accounting Firm, does not constitute a “parachute payment” within the meaning of Code section 280G(b)(2).

          (f) For purposes of this Section 3.03, the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments will be determined by the Accounting Firm in accordance with the principles of Code sections 280G(d)(3) and (4).

          SECTION 3.04. Time of Payment. Except as otherwise expressly provided in Section 3.02 or Section 3.03, payments provided for in those Sections will be made as follows:

          (a) No later than the fifth business day following the Date of Termination, the Company will pay to the Executive an estimate, as determined by the Company in good faith, of 90% of the minimum amount of the payments under Sections 3.02 and 3.03 to which the Executive is clearly entitled.

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          (b) The Company will pay to the Executive the remainder of the payments due him under Sections 3.02 and 3.03 (together with interest at the rate provided in Code section 1274(b)(2)(B)) not later than the 30th business day after the Date of Termination.

          (c) At the time that payment is made under Section 3.04(b), the Company will provide the Executive with a written statement setting forth the manner in which all of the payments to him under this Agreement were calculated and the basis for the calculations including, without limitation, any opinions or other advice the Company received from auditors or consultants (other than legal counsel) with respect to the calculations (and any such opinions or advice that are in writing will be attached to the statement).

          SECTION 3.05. Attorneys Fees and Expenses. If the Executive finally prevails with respect to any good faith dispute between the Executive and the Company regarding the interpretation, terms, validity or enforcement of this Agreement (including any dispute as to the amount of any payment due under this Agreement), the Company will pay or reimburse the Executive for all reasonable attorneys fees and expenses incurred by the Executive in connection with that dispute. In addition, the Company will pay the reasonable legal fees and expenses incurred by the Executive in connection with any tax audit or proceeding to the extent attributable to the application of Code section 4999 to any payment or benefit provided under this Agreement and including, but not limited to, auditors’ fees incurred in connection with the audit or proceeding. Payment of fees and expenses due under this Section will be made to the Executive within 15 business days after delivery of the Executive’s written request for payment, accompanied by such evidence of fees and expenses incurred as the Company reasonably may require. With respect to fees and expenses incurred in connection with a good faith dispute, the Executive may not submit a request for payment or reimbursement until the dispute has been

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finally resolved (either by agreement or by an order or judgment that is not subject to appeal or with respect to which all appeals have been exhausted or waived).

ARTICLE IV

Termination of Employment

          SECTION 4.01. Notice of Termination. After a Change in Control and during the term of this Agreement, any purported termination of the Executive’s employment (other than by reason of death) will be communicated by a written Notice of Termination from one party to the other party in accordance with Article VIII. The Notice of Termination will indicate the specific termination provision in this Agreement relied upon and will set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the cited provision.

          SECTION 4.02. Date of Termination. Except as otherwise provided in Section 4.01, with respect to any purported termination of the Executive’s employment after a Change in Control and during the term of this Agreement, the term “Date of Termination” will have the meaning set forth in this Section. If the Executive’s employment is terminated for Disability, Date of Termination means thirty (30) days after Notice of Termination is given, provided that the Executive does not return to the full-time performance of the Executive’s duties during that 30 day period. If the Executive’s employment is terminated for any other reason, Date of Termination means the date specified in the Notice of Termination, which, in the case of a termination by the Company, cannot be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, cannot be less than 15 days nor more than 60 days from the date on which the Notice of Termination is given.

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ARTICLE V

No Mitigation

          The Company agrees that, if the Executive’s employment by the Company is terminated during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Article III. Further, the amount of any payment or benefit provided for in Article III (other than Section 3.02(e)) will not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.

ARTICLE VI

The Executive’s Covenants

          SECTION 6.01. Noncompetition Agreement. In consideration for this Agreement, the Executive will execute, concurrent with the execution of this Agreement, a noncompetition agreement in the form attached to this Agreement as Exhibit A.

          SECTION 6.02. Potential Change in Control. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the term of this Agreement, the Executive will remain employed by the Company until the earliest of (a) a date that is six months from the date of the Potential Change of Control, (b) the date of a Change in Control, (c) the date on which the Executive terminates employment for Good Reason (determined by treating the Potential Change in Control as a Change in Control in applying the definition of Good Reason) or by reason of death, or (d) the date the Company terminates the Executive’s employment for any reason.

          SECTION 6.03. General Release. The Executive agrees that, notwithstanding

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any other provision of this Agreement, the Executive will not be eligible for any Severance Payments under this Agreement unless the Executive timely signs, and does not timely revoke, a General Release in substantially the form attached to this Agreement as Exhibit B. The Executive will be given 21 days to consider the terms of the General Release. The General Release will not become effective until seven days following the date the General Release is executed. If the Executive does not return the executed General Release to the Company by the end of the 21 day period, that failure will be deemed a refusal to sign, and the Executive will not be entitled to receive any Severance Payments under this Agreement. In certain circumstances, the 21 day period to consider the General Release may be extended to a 45 day period. The Executive will be advised in writing if the 45 day period is applicable. In the absence of such notice, the 21 day period applies.

ARTICLE VII

Successors; Binding Agreement

          SECTION 7.01. Obligation of Successors. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no succession had occurred. Failure of the Company to obtain such an assumption and agreement prior to the effectiveness of any such succession will be a breach of this Agreement and will entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to under this Agreement if the Executive were to terminate employment for Good Reason after a Change in Control, except

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that, for purposes of implementing the foregoing, the date on which the succession becomes effective will be deemed the Date of Termination.

          SECTION 7.02. Enforcement Rights of Others. This Agreement will inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If the Executive dies while any amount is still payable to the Executive under this Agreement, (other than amounts that, by their terms, terminate upon the Executive’s death), then, unless otherwise provided in this Agreement, all such amounts will be paid in accordance with the terms of this Agreement to the executors, personal representatives, or administrators of the Executive’s estate.

ARTICLE VIII

Notices

          For the purpose of this Agreement, notices and all other communications provided for in the Agreement will be in writing and will be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may furnish to the other in writing in accordance with this Article VIII, except that notice of change of address will be effective only upon actual receipt:

          To the Company:

Zimmer Holdings, Inc.
345 East Main Street
Post Office Box 708
Warsaw, Indiana 46581-0708

To the Executive:

Jon E. Kramer
168 San Salvador
Naples, FL 34113

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ARTICLE IX

Miscellaneous

          This Agreement will not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive will not have any right to be retained in the employ of the Company. No provision of this Agreement may be modified, waived, or discharged unless the waiver, modification, or discharge is agreed to in writing and signed by the Executive and an officer of the Company specifically designated by the Board. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any other time. Neither party has made any agreements or representations, oral or otherwise, express or implied, with respect to the subject matter of this Agreement that are not expressly set forth in this Agreement. The validity, interpretation, construction, and performance of this Agreement will be governed by the laws of the State of Indiana. All references to sections of the Exchange Act or the Code will be deemed also to refer to any successor provisions to those sections. Any payments provided for under this Agreement will be paid net of any applicable withholding required under federal, state, or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under Articles III, IV, and VI will survive the expiration of the term of this Agreement.

ARTICLE X

Validity

          The invalidity or unenforceability of any provision or this Agreement will not

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affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect.

ARTICLE XI

Counterparts

          This Agreement may be executed in several counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument.

ARTICLE XII

Settlement of Disputes; Arbitration

          All claims by the Executive for benefits under this Agreement must be in writing and will be directed to and determined by the Board. Any denial by the Board of a claim for benefits under this Agreement will be delivered to the Executive in writing and will set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board will afford a reasonable opportunity to the Executive for a review of the decision denying a claim and will further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive’s claim has been denied. Any further dispute or controversy arising under or in connection with this Agreement will be settled exclusively by arbitration in Warsaw, Indiana in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. Each party will bear its own expenses in the arbitration for attorneys’ fees, for its witnesses, and for other expenses of presenting its case. Other arbitration costs, including arbitrators’ fees, administrative fees, and fees for records or transcripts, will be borne equally by the parties. Notwithstanding anything in this Article to the contrary, if the Executive prevails with respect to any dispute submitted to arbitration under this Article, the Company will

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reimburse or pay all reasonable legal fees and expenses that the Executive incurred in connection with that dispute as required by Section 3.05.

ARTICLE XIII
Definitions

          For purposes of this Agreement, the following terms will have the meanings indicated below:

          (a) “Accounting Firm” means an accounting firm that is designated as one of the five largest accounting firms in the United States (which may include the Company’s independent auditors).

          (b) “Award Plan” means the Zimmer Holdings, Inc. Stock Incentive Plan.

          (c) “Base Amount” has the meaning stated in Code section 280G(b)(3).

          (d) “Beneficial Owner” has the meaning stated in Rule 13d-3 under the Exchange Act.

          (e) “BEP” means the Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan.

          (f) “Board” means the Board of Directors of the Company.

          (g) “Cause” for termination by the Company of the Executive’s employment, after any Change in Control, means (1) the willful and continued failure by the Executive to substantially perform the Executive’s duties with the Company (other than any such failure resulting from the Executive’s incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 4.01) for a period of at least 30 consecutive days after a written

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demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive’s duties; (2) the Executive willfully engages in conduct that is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise; or (3) the Executive is convicted of, or has entered a plea of no contest to, a felony. For purposes of clauses (1) and (2) of this definition, no act, or failure to act, on the Executive’s part will be deemed “willful” unless it is done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive’s act, or failure to act, was in the best interest of the Company.

          (h) A “Change in Control” will be deemed to have occurred if any of the following events occur:

          (1) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by that Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company’s then outstanding securities; or

(2) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of the period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (1), (3) or (4) of this paragraph whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously approved), cease for any reason to constitute a majority of the Board; or

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(3) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior to the merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 75% of the combined voting power of the voting securities of the Company or the surviving entity outstanding immediately after the merger or consolidation; or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company’s then outstanding securities; or

(4) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets.

Notwithstanding the foregoing, a Change in Control will not include any event, circumstance, or transaction occurring during the six-month period following a Potential Change in Control that results from the action of any entity or group that includes, is affiliated with, or is wholly or partly controlled by the Executive; provided, further, that such an action will not be taken into account for this purpose if it occurs within a six-month period following a Potential Change in Control resulting from the action of any entity or group that does not include the Executive.

          (i) “COBRA” means the continuation coverage provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

          (j) “Code” means the Internal Revenue Code of 1986, as amended from time to

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time, and interpretative rules and regulations.

          (k) “Company” means Zimmer Holdings, Inc., a Delaware corporation, and any successor to its business and/or assets that assumes and agrees to perform this Agreement by operation of law, or otherwise (except in determining, under Section XIII(h), whether or not any Change in Control of the Company has occurred in connection with the succession).

          (l) “Company Shares” means shares of common stock of the Company or any equity securities into which those shares have been converted.

          (m) “Date of Termination” has the meaning stated in Section 4.02.

          (n) “Disability” has the meaning stated in the Company’s short-term or long-term disability plan, as applicable, as in effect immediately prior to a Change in Control.

          (o) “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, and interpretive rules and regulations.

          (p) “Excise Tax” means any excise tax imposed under Code Section 4999.

          (q) “Executive” means the individual named in the first paragraph of this Agreement.

          (r) “General Release” has the meaning stated in Section 6.03.

          (s) “Good Reason” for termination by the Executive of the Executive’s employment means the occurrence (without the Executive’s express written consent) of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (1), (4), (5), (6), or (7) below, the act or failure to act is corrected prior to the Date of Termination specified in the Executive’s Notice of Termination:

          (1) the assignment to the Executive of any duties inconsistent with the Executive’s

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status as an executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive’s responsibilities from those in effect immediately prior to a Change in Control;

(2) a reduction by the Company in the Executive’s annual base salary as in effect on the date of this Agreement or as the same may be increased from time to time, or the level of the Executive’s entitlement under the Incentive Plan as in effect on the date of this Agreement or as the same may be increased from time to time;

(3) the Company’s requiring the Executive to be based more than 50 miles from the Company’s offices at which the Executive is based immediately prior to a Change in Control (except for required travel on the Company’s business to an extent substantially consistent with the Executive’s business travel obligations immediately prior to the Change in Control), or, in the event the Executive consents to any such relocation of his offices, the Company’s failure to provide the Executive with all of the benefits of the Company’s relocation policy as in operation immediately prior to the Change in Control;

(4) the Company’s failure, without the Executive’s consent, to pay to the Executive any portion of the Executive’s current compensation (which means, for purposes of this paragraph (4), the Executive’s annual base salary as in effect on the date of this Agreement, or as it may be increased from time to time, and the awards earned pursuant to the Incentive Plan) or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date the compensation is due;

     (5) the Company’s failure to continue in effect any compensation plan in which the Executive participates immediately prior to a Change in Control, which plan is

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material to the Executive’s total compensation, including, but not limited to, the Incentive Plan and the Award Plan or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to that plan, or the Company’s failure to continue the Executive’s participation in such a plan (or in a substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive’s participation relative to other participants, as existed at the time of the Change in Control;

(6) the Company’s failure to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company’s pension (including, without limitation, the Company’s Retirement Plan, the BEP, and the Company’s Savings and Investment Program, including the Company’s Benefit Equalization Plan for the Savings and Investment Program), life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control; the taking of any action by the Company that would directly or indirectly materially reduce any of those benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of a Change in Control; or the Company’s failure to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company’s normal vacation policy in effect at the time of the Change in Control; or

(7) any purported termination of the Executive’s employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 4.01; for purposes of

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     this Agreement, no such purported termination will be effective.

          The Executive’s right to terminate the Executive’s employment for Good Reason will not be affected by the Executive’s incapacity due to physical or mental illness. The Executive’s continued employment will not constitute consent to, or a waiver of rights with respect to, any act or failure to act that constitutes Good Reason.

          Notwithstanding the foregoing, the occurrence of an event that would otherwise constitute Good Reason will cease to be an event constituting Good Reason if the Executive does not timely provide a Notice of Termination to the Company within 120 days of the date on which the Executive first becomes aware (or reasonably should have become aware) of the occurrence of that event.

          (t) “Gross-Up Payment” has the meaning stated in Section 3.03.

          (u) “Incentive Plan” means the Company’s Executive Performance Incentive Plan.

          (v) “Notice of Termination” has the meaning stated in Section 4.01.

          (w) “Options” means options for Shares granted to the Executive under the Award Plan.

          (x) “Person” has the meaning stated in section 3(a)(9) of the Exchange Act, as modified and used in sections 13(d) and 14(d) of the Exchange Act; however, a Person will not include (1) the Company or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an underwriter temporarily holding securities pursuant to an offering of those securities, or (4) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

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          (y) “Potential Change in Control” will be deemed to have occurred if any one of the following events occur:

     (1) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control;

     (2) the Company or any Person publicly announces an intention to take or to consider taking actions that, if consummated, would constitute a Change in Control;

     (3) any Person who is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company’s then outstanding securities, increases that Person’s beneficial ownership of those securities by 5% or more over the percentage so owned by that Person on the date of this Agreement; or

     (4) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.

          (z) “Retirement Date” means the later of (1) the Executive’s normal retirement date under the Retirement Plan and (2) another date for retirement by the Executive that has been approved by the Board at any time prior to a Change in Control.

          (aa) “Retirement Plan” means the Zimmer Holdings, Inc. Retirement Income Plan.

          (bb) “Savings Plan” means the Zimmer Holdings, Inc. Savings and Investment Program, which, for purposes of this Agreement, will be deemed to include the Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Savings and Investment Program.

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          (cc) “Severance Payments” means the payments described in Section 3.02.

          (dd) “Shares” means shares of the common stock, $0.10 par value, of the Company.

          (ee) “Total Payments” has the meaning stated in Section 3.03(a).

Date: September 30, 2004

EXECUTIVE	ZIMMER HOLDINGS, INC.
Jon E. Kramer	By:	David C. Dvorak
		EVP, Corporate Services & Chief Counsel & Secretary

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EX-10.2

EXHIBIT 10.2

CHANGE IN CONTROL SEVERANCE AGREEMENT

          THIS AGREEMENT, dated as of September 30, 2004, is made by and between ZIMMER HOLDINGS, INC., a Delaware corporation (the “Company”), and Richard Fritschi (the “Executive”). The capitalized words and terms used throughout this Agreement are defined in Article XIII.

Recitals

          A. The Company considers it essential to the best interests of its shareholders to foster the continuous employment of key management personnel.

          B. The Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such a possibility, and the uncertainty and questions that it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders.

          C. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company’s management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control.

          D. The parties intend that no amount or benefit will be payable under this Agreement unless a termination of the Executive’s employment with the Company occurs following a Change in Control or is deemed to have occurred following a Change in Control as provided in this Agreement.

Agreement

          In consideration of the premises and the mutual covenants and agreements set

forth below, the Company and the Executive agree as follows:

ARTICLE I

Term of Agreement

          This Agreement will commence on the date stated above and will continue in effect through December 31, 2004. Beginning on January 1, 2005, and each subsequent January 1, the term of this Agreement will automatically be extended for one additional year, unless either party gives the other party written notice not to extend this Agreement at least 30 days before the extension would otherwise become effective or unless a Change in Control occurs. If a Change in Control occurs during the term of this Agreement, this Agreement will continue in effect for a period of 24 months from the end of the month in which the Change in Control occurs. Notwithstanding the foregoing provisions of this Article, this Agreement will terminate on the Executive’s Retirement Date.

ARTICLE II

Compensation other than Severance Payments

          SECTION 2.01. Disability Benefits. Following a Change in Control and during the term of this Agreement, during any period that the Executive fails to perform the Executive’s full-time duties with the Company as a result of Disability, the Executive will receive short-term and long-term disability benefits no less favorable than those provided under the terms of the Company’s short-term and long-term disability plans as in effect immediately prior to the Change in Control, together with all other compensation and benefits payable to the Executive pursuant to the terms of any compensation or benefit plan, program, or arrangement maintained by the Company during the period of Disability.

          SECTION 2.02. Compensation Previously Earned. If the Executive’s

2

employment is terminated for any reason following a Change in Control and during the term of this Agreement, the Company will pay the Executive’s salary accrued through the Date of Termination, at the rate in effect at the time the Notice of Termination is given, together with all other compensation and benefits payable to the Executive through the Date of Termination (including, without limitation, any incentive compensation amounts owed the Executive for a completed calendar year to the extent not yet paid) under the terms of any compensation or benefit plan, program, or arrangement maintained by the Company during that period.

          SECTION 2.03. Normal Post-Termination Compensation and Benefits. Except as provided in Section 3.01, if the Executive’s employment is terminated for any reason following a Change in Control and during the term of this Agreement, the Company will pay the Executive the normal post-termination compensation and benefits payable to the Executive under the terms of the Company’s retirement, insurance, and other compensation or benefit plans, programs, and arrangements, as in effect immediately prior to the Change in Control. This provision does not restrict the Company’s right to amend, modify, or terminate any plan, program, or arrangement prior to a Change in Control.

          SECTION 2.04. No Duplication. Notwithstanding any other provision of this Agreement to the contrary, the Executive will not be entitled to duplicate benefits or compensation under this Agreement and the terms of any other plan, program, or arrangement maintained by the Company or any affiliate.

ARTICLE III

Severance Payments

          SECTION 3.01. Payment Triggers.

          (a) In lieu of any other severance compensation or benefits to which the

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Executive may otherwise be entitled under any plan, program, policy, or arrangement of the Company (and which the Executive hereby expressly waives), the Company will pay the Executive the Severance Payments described in Section 3.02 upon termination of the Executive’s employment following a Change in Control and during the term of this Agreement, in addition to the payments and benefits described in Article II, unless the termination is (1) by the Company for Cause, (2) by reason of the Executive’s death, or (3) by the Executive without Good Reason.

          (b) For purposes of this Section 3.01, the Executive’s employment will be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason if (1) the Executive’s employment is terminated without Cause prior to a Change in Control at the direction of a Person who has entered into an agreement with the Company, the consummation of which will constitute a Change in Control; or (2) the Executive terminates his employment with Good Reason prior to a Change in Control (determined by treating a Potential Change in Control as a Change in Control in applying the definition of Good Reason), if the circumstance or event that constitutes Good Reason occurs at the direction of such a Person.

          (c) The Severance Payments described in this Article III are subject to the conditions stated in Article VI.

          SECTION 3.02. Severance Payments. The following are the Severance Payments referenced in Section 3.01:

          (a) Lump Sum Severance Payment. In lieu of any further salary payments to the Executive for periods after the Date of Termination, and in lieu of any severance benefits otherwise payable to the Executive, the Company will pay to the Executive a lump sum severance payment, in cash, equal to two (or, if less, the number of years, including fractions,

4

from the Date of Termination until the Executive reaches his Retirement Date), times the sum of (1) the higher of the Executive’s annual base salary in effect immediately prior to the event or circumstance upon which the Notice of Termination is based or in effect immediately prior to the Change in Control, and (2) the amount of the Executive’s target annual bonus entitlement under the Incentive Plan (or any other bonus plan of the Company then in effect) as in effect immediately prior to the event or circumstance giving rise to the Notice of Termination. If the Board determines that it is not workable to determine the amount that the Executive’s target bonus would have been for the year in which the Notice of Termination was given, then, for purposes of this paragraph (a), the Executive’s target annual bonus entitlement will be the amount of the largest aggregate annual bonus paid to the Executive with respect to the three years immediately prior to the year in which the Notice of Termination was given.

          (b) Incentive Compensation. Notwithstanding any provision of the Incentive Plan or any other compensation or incentive plans of the Company, the Company will pay to the Executive a lump sum amount, in cash, equal to the sum of (1) any incentive compensation that has been allocated or awarded to the Executive for a completed calendar year or other measuring period preceding the Date of Termination ( to the extent not payable pursuant to Section 2.02), and (2) a pro rata portion (based on elapsed time) to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the current calendar year or other measuring period under the Incentive Plan, the Award Plan, or any other compensation or incentive plans of the Company, calculated as to each such plan using the Executive’s annual target percentage under that plan for that year or other measuring period and as if all conditions for receiving that target award had been met.

          (c) Options and Restricted Shares. All outstanding Options will become

5

immediately vested and exercisable (to the extent not yet vested and exercisable as of the Date of Termination). To the extent not otherwise provided under the written agreement evidencing the grant of any restricted Shares to the Executive, all outstanding Shares that have been granted to the Executive subject to restrictions that, as of the Date of Termination, have not yet lapsed will lapse automatically upon the Date of Termination, and the Executive will own those Shares free and clear of all such restrictions.

          (d) Additional Pension Benefit. In addition to the retirement benefits to which the Executive is entitled under the Retirement Plan and BEP, or any successors to those plans, the Company will pay the Executive an additional amount under the BEP (or a successor plan) equal to the excess of (1) over (2), where (1) is the retirement pension (determined as a straight life annuity commencing on the Executive’s Retirement Date) that the Executive would have accrued under the terms of the Retirement Plan and BEP (without regard to any amendment to the Retirement Plan or BEP that is made subsequent to a Change in Control and on or prior to the Date of Termination and that adversely affects in any manner the computation of the Executive’s retirement benefits), determined as if the Executive (a) were fully vested under the Retirement Plan and the BEP, and (b) had accumulated (after the Date of Termination) 24 additional months of age and service credit under the Retirement Plan and the BEP at the higher of (i) the Executive’s highest annual rate of compensation (as compensation is defined for purposes of the BEP) in effect during the three years immediately preceding the Date of Termination, or (ii) the sum of the Executive’s annual salary and target annual bonus in effect immediately prior to the Change in Control (but in no event will the Executive be deemed to have accumulated additional service credit in excess of the maximum permitted pursuant to the Retirement Plan and BEP); and (2) is the retirement pension (determined as a straight life annuity commencing on the

6

Executive’s Retirement Date) that the Executive had then accrued pursuant to the respective provisions of the Retirement Plan and BEP. This additional amount will be paid in the form and at the time or times that the relevant benefits are payable to the Executive under the BEP or any successor plan; provided, however, that if the transaction constituting the Change in Control has not been approved by the Board prior to its consummation, the actuarial equivalent of the additional benefits under this Section 3.02(d) will be paid in a cash lump sum. The Executive understands and acknowledges that the additional retirement benefit described in this Section 3.02(d) is payable entirely under the BEP, a nonqualified plan, and will not be subject to any special tax treatment applicable to benefits under the Retirement Plan and other tax-qualified plans.

          (e) Welfare Benefits. Except as otherwise provided in this Section 3.02(e), for a 24-month period after the Date of Termination, the Company will arrange to provide the Executive with life and health (including medical and dental) insurance benefits and perquisites substantially similar to those that the Executive is receiving immediately prior to the Notice of Termination (without giving effect to any reduction in those benefits subsequent to a Change in Control). Benefits and perquisites otherwise receivable by the Executive pursuant to this Section 3.02(e) will be reduced to the extent comparable benefits are actually received by or made available to the Executive without greater cost to him than as provided by the Company during the 24-month period following the Executive’s termination of employment (and the Executive will report to the Company any such benefits actually received by or made available to the Executive).

          If, as of the Date of Termination, the Company reasonably determines that the continued life insurance coverage required by this Section 3.02(e) is not available from the

7

Company’s group insurance carrier, cannot be procured from another carrier, and cannot be provided on a self-insured basis without adverse tax consequences to the Executive or his death beneficiary, then, in lieu of continued life insurance coverage, the Company will pay the Executive a lump sum payment, in cash, equal to 24 times the full monthly premium payable to the Company’s group insurance carrier for comparable coverage for an executive employee under the Company’s group life insurance plan then in effect. If, as of the Date of Termination, the Company reasonably determines that the continued medical and dental coverage required by this Section 3.02(e) cannot be provided without violating applicable nondiscrimination requirements under the Code, then, in lieu of the continued medical and dental coverage, the Company will pay the Executive a lump sum payment, in cash, equal to 24 times the monthly premium then charged to qualified beneficiaries for full family COBRA continuation coverage under the Company’s medical and dental plans.

          (f) Matching Contributions. In addition to the vested amounts, if any, to which the Executive is entitled under the Savings Plan as of the Date of Termination, the Company will pay the Executive a lump sum amount equal to the value of the unvested portion, if any, of the employer matching contributions (and attributable earnings) credited to the Executive under the Savings Plan.

          (g) Outplacement Services. The Company will provide the Executive with reasonable outplacement services consistent with past practices of the Company prior to the Change in Control or, if no past practice has been established prior to the Change in Control, consistent with the prevailing practice in the medical device manufacturing industry.

          SECTION 3.03. Gross-Up Payment.

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          (a) In the event that any Severance Payments paid or payable to the Executive or for his benefit pursuant to the terms of this Agreement or otherwise in connection with a Change in Control (“ Total Payments”) would be subject to any Excise Tax, then the Executive will be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after the Executive’s payment of all taxes (including any interest, penalties, additional tax, or similar items imposed with respect to the Gross-Up Payment and the Excise Tax), including any Excise Tax upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments.

          (b) An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of that Gross-Up Payment will be made at the Company’s expense by an Accounting Firm selected by the Executive and reasonably acceptable to the Company. The Accounting Firm will provide its determination, together with detailed supporting calculations and documentation, to the Company and the Executive within 10 business days after the Date of Termination, or such other time as requested by the Company and the Executive. If the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to the Payments, it will furnish the Executive with an opinion reasonably acceptable to the Executive that no Excise Tax will be imposed with respect to the Payments. Within 10 business days after the Accounting Firm delivers its determination to the Executive, the Executive will have the right to dispute the determination. The Gross-Up Payment, if any, as determined by the Accounting Firm in accordance with the preceding provisions of this Section, will be paid by the Company to the Executive within 5 business days of the receipt of the Accounting Firm’s determination. The existence of a dispute will not in any way affect the Executive’s right to receive the Gross-Up Payment in accordance with the determination. If there

9

is no dispute, the determination will be final, binding, and conclusive upon the Company and the Executive. If there is a dispute, then the Company and the Executive will together select a second Accounting Firm, which will review the determination and the Executive’s basis for the dispute and then render its own determination, which will be final, binding, and conclusive on the Company and the Executive. The Company will bear all costs associated with that determination, unless the determination is not greater than the initial determination, in which case all such costs will be borne by the Executive ..

          (c) The value of any non-cash benefits or any deferred payment or benefit paid or payable to the Executive will be determined in accordance with the principles of Code section 280G(d)(3) and (4). For purposes of determining the amount of the Gross-Up Payment, the Executive will be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and applicable state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive’s residence on the Date of Termination, net of the maximum reduction in federal income taxes that would be obtained from deduction of those state and local taxes.

          (d) Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the Accounting Firm’s determination, an Excise Tax will be imposed on the Total Payments, the Company will pay to the applicable government taxing authorities as Excise Tax withholding the amount of the Excise Tax that the Company has actually withheld from the Total Payments in accordance with applicable law.

          (e) Notwithstanding the preceding provisions of this Section 3.03, the Company will not have any obligation to make the Gross-Up Payment unless the value of the Total Payments exceeds 110% of the maximum amount of parachute payments that could be

10

paid to the Executive without any imposition of golden parachute excise taxes under Code sections 280G and 4999 (the “110% Amount”). In that case, the value of the Total Payments will be reduced to the extent necessary so that, within the meaning of Code section 280G(b)(2)(A)(ii), the aggregate present value of the payments in the nature of compensation to (or for the benefit of) the Executive that are contingent on a Change in Control (with a Change in Control for this purpose being defined in terms of a “change” described in Code section 280G(b)(2)(A)(i) or (ii)), do not exceed 2.999 multiplied by the Base Amount. For this purpose, cash Severance Payments will be reduced first (if necessary, to zero), and all other, non-cash Severance Payments will be reduced next (if necessary, to zero). For purposes of the limitation described in the preceding sentence, the following will not be taken into account: (1) any portion of the Total Payments the receipt or enjoyment of which the Executive effectively waived in writing prior to the Date of Termination, and (2) any portion of the Total Payments that, in the opinion of the Accounting Firm, does not constitute a “parachute payment” within the meaning of Code section 280G(b)(2).

          (f) For purposes of this Section 3.03, the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments will be determined by the Accounting Firm in accordance with the principles of Code sections 280G(d)(3) and (4).

          SECTION 3.04. Time of Payment. Except as otherwise expressly provided in Section 3.02 or Section 3.03, payments provided for in those Sections will be made as follows:

          (a) No later than the fifth business day following the Date of Termination, the Company will pay to the Executive an estimate, as determined by the Company in good faith, of 90% of the minimum amount of the payments under Sections 3.02 and 3.03 to which the Executive is clearly entitled.

11

          (b) The Company will pay to the Executive the remainder of the payments due him under Sections 3.02 and 3.03 (together with interest at the rate provided in Code section 1274(b)(2)(B)) not later than the 30th business day after the Date of Termination.

          (c) At the time that payment is made under Section 3.04(b), the Company will provide the Executive with a written statement setting forth the manner in which all of the payments to him under this Agreement were calculated and the basis for the calculations including, without limitation, any opinions or other advice the Company received from auditors or consultants (other than legal counsel) with respect to the calculations (and any such opinions or advice that are in writing will be attached to the statement).

          SECTION 3.05. Attorneys Fees and Expenses. If the Executive finally prevails with respect to any good faith dispute between the Executive and the Company regarding the interpretation, terms, validity or enforcement of this Agreement (including any dispute as to the amount of any payment due under this Agreement), the Company will pay or reimburse the Executive for all reasonable attorneys fees and expenses incurred by the Executive in connection with that dispute. In addition, the Company will pay the reasonable legal fees and expenses incurred by the Executive in connection with any tax audit or proceeding to the extent attributable to the application of Code section 4999 to any payment or benefit provided under this Agreement and including, but not limited to, auditors’ fees incurred in connection with the audit or proceeding. Payment of fees and expenses due under this Section will be made to the Executive within 15 business days after delivery of the Executive’s written request for payment, accompanied by such evidence of fees and expenses incurred as the Company reasonably may require. With respect to fees and expenses incurred in connection with a good faith dispute, the Executive may not submit a request for payment or reimbursement until the dispute has been

12

finally resolved (either by agreement or by an order or judgment that is not subject to appeal or with respect to which all appeals have been exhausted or waived).

ARTICLE IV

Termination of Employment

          SECTION 4.01. Notice of Termination. After a Change in Control and during the term of this Agreement, any purported termination of the Executive’s employment (other than by reason of death) will be communicated by a written Notice of Termination from one party to the other party in accordance with Article VIII. The Notice of Termination will indicate the specific termination provision in this Agreement relied upon and will set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the cited provision.

          SECTION 4.02. Date of Termination. Except as otherwise provided in Section 4.01, with respect to any purported termination of the Executive’s employment after a Change in Control and during the term of this Agreement, the term “Date of Termination” will have the meaning set forth in this Section. If the Executive’s employment is terminated for Disability, Date of Termination means thirty (30) days after Notice of Termination is given, provided that the Executive does not return to the full-time performance of the Executive’s duties during that 30 day period. If the Executive’s employment is terminated for any other reason, Date of Termination means the date specified in the Notice of Termination, which, in the case of a termination by the Company, cannot be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, cannot be less than 15 days nor more than 60 days from the date on which the Notice of Termination is given.

13

ARTICLE V

No Mitigation

          The Company agrees that, if the Executive’s employment by the Company is terminated during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Article III. Further, the amount of any payment or benefit provided for in Article III (other than Section 3.02(e)) will not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.

ARTICLE VI

The Executive’s Covenants

          SECTION 6.01. Noncompetition Agreement. In consideration for this Agreement, the Executive will execute, concurrent with the execution of this Agreement, a noncompetition agreement in the form attached to this Agreement as Exhibit A.

          SECTION 6.02. Potential Change in Control. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the term of this Agreement, the Executive will remain employed by the Company until the earliest of (a) a date that is six months from the date of the Potential Change of Control, (b) the date of a Change in Control, (c) the date on which the Executive terminates employment for Good Reason (determined by treating the Potential Change in Control as a Change in Control in applying the definition of Good Reason) or by reason of death, or (d) the date the Company terminates the Executive’s employment for any reason.

          SECTION 6.03. General Release. The Executive agrees that, notwithstanding

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any other provision of this Agreement, the Executive will not be eligible for any Severance Payments under this Agreement unless the Executive timely signs, and does not timely revoke, a General Release in substantially the form attached to this Agreement as Exhibit B. The Executive will be given 21 days to consider the terms of the General Release. The General Release will not become effective until seven days following the date the General Release is executed. If the Executive does not return the executed General Release to the Company by the end of the 21 day period, that failure will be deemed a refusal to sign, and the Executive will not be entitled to receive any Severance Payments under this Agreement. In certain circumstances, the 21 day period to consider the General Release may be extended to a 45 day period. The Executive will be advised in writing if the 45 day period is applicable. In the absence of such notice, the 21 day period applies.

ARTICLE VII

Successors; Binding Agreement

          SECTION 7.01. Obligation of Successors. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no succession had occurred. Failure of the Company to obtain such an assumption and agreement prior to the effectiveness of any such succession will be a breach of this Agreement and will entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to under this Agreement if the Executive were to terminate employment for Good Reason after a Change in Control, except

15

that, for purposes of implementing the foregoing, the date on which the succession becomes effective will be deemed the Date of Termination.

          SECTION 7.02. Enforcement Rights of Others. This Agreement will inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If the Executive dies while any amount is still payable to the Executive under this Agreement, (other than amounts that, by their terms, terminate upon the Executive’s death), then, unless otherwise provided in this Agreement, all such amounts will be paid in accordance with the terms of this Agreement to the executors, personal representatives, or administrators of the Executive’s estate.

ARTICLE VIII

Notices

          For the purpose of this Agreement, notices and all other communications provided for in the Agreement will be in writing and will be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may furnish to the other in writing in accordance with this Article VIII, except that notice of change of address will be effective only upon actual receipt:

          To the Company:

Zimmer Holdings, Inc.
345 East Main Street
Post Office Box 708
Warsaw, Indiana 46581-0708

To the Executive:

Richard Fritschi

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ARTICLE IX

Miscellaneous

          This Agreement will not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive will not have any right to be retained in the employ of the Company. No provision of this Agreement may be modified, waived, or discharged unless the waiver, modification, or discharge is agreed to in writing and signed by the Executive and an officer of the Company specifically designated by the Board. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any other time. Neither party has made any agreements or representations, oral or otherwise, express or implied, with respect to the subject matter of this Agreement that are not expressly set forth in this Agreement. The validity, interpretation, construction, and performance of this Agreement will be governed by the laws of the State of Indiana. All references to sections of the Exchange Act or the Code will be deemed also to refer to any successor provisions to those sections. Any payments provided for under this Agreement will be paid net of any applicable withholding required under federal, state, or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under Articles III, IV, and VI will survive the expiration of the term of this Agreement.

ARTICLE X

Validity

          The invalidity or unenforceability of any provision or this Agreement will not

17

affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect.

ARTICLE XI

Counterparts

          This Agreement may be executed in several counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument.

ARTICLE XII

Settlement of Disputes; Arbitration

          All claims by the Executive for benefits under this Agreement must be in writing and will be directed to and determined by the Board. Any denial by the Board of a claim for benefits under this Agreement will be delivered to the Executive in writing and will set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board will afford a reasonable opportunity to the Executive for a review of the decision denying a claim and will further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive’s claim has been denied. Any further dispute or controversy arising under or in connection with this Agreement will be settled exclusively by arbitration in Warsaw, Indiana in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. Each party will bear its own expenses in the arbitration for attorneys’ fees, for its witnesses, and for other expenses of presenting its case. Other arbitration costs, including arbitrators’ fees, administrative fees, and fees for records or transcripts, will be borne equally by the parties. Notwithstanding anything in this Article to the contrary, if the Executive prevails with respect to any dispute submitted to arbitration under this Article, the Company will

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reimburse or pay all reasonable legal fees and expenses that the Executive incurred in connection with that dispute as required by Section 3.05.

ARTICLE XIII

Definitions

          For purposes of this Agreement, the following terms will have the meanings indicated below:

          (a) “Accounting Firm” means an accounting firm that is designated as one of the five largest accounting firms in the United States (which may include the Company’s independent auditors).

          (b) “Award Plan” means the Zimmer Holdings, Inc. Stock Incentive Plan.

          (c) “Base Amount” has the meaning stated in Code section 280G(b)(3).

          (d) “Beneficial Owner” has the meaning stated in Rule 13d-3 under the Exchange Act.

          (e) “BEP” means the Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan.

          (f) “Board” means the Board of Directors of the Company.

          (g) “Cause” for termination by the Company of the Executive’s employment, after any Change in Control, means (1) the willful and continued failure by the Executive to substantially perform the Executive’s duties with the Company (other than any such failure resulting from the Executive’s incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 4.01) for a period of at least 30 consecutive days after a written

19

demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive’s duties; (2) the Executive willfully engages in conduct that is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise; or (3) the Executive is convicted of, or has entered a plea of no contest to, a felony. For purposes of clauses (1) and (2) of this definition, no act, or failure to act, on the Executive’s part will be deemed “willful” unless it is done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive’s act, or failure to act, was in the best interest of the Company.

          (h) A “Change in Control” will be deemed to have occurred if any of the following events occur:

          (1) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by that Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company’s then outstanding securities; or

(2) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of the period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (1), (3) or (4) of this paragraph whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously approved), cease for any reason to constitute a majority of the Board; or

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(3) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior to the merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 75% of the combined voting power of the voting securities of the Company or the surviving entity outstanding immediately after the merger or consolidation; or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company’s then outstanding securities; or

(4) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets.

Notwithstanding the foregoing, a Change in Control will not include any event, circumstance, or transaction occurring during the six-month period following a Potential Change in Control that results from the action of any entity or group that includes, is affiliated with, or is wholly or partly controlled by the Executive; provided, further, that such an action will not be taken into account for this purpose if it occurs within a six-month period following a Potential Change in Control resulting from the action of any entity or group that does not include the Executive.

          (i) “COBRA” means the continuation coverage provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

          (j) “Code” means the Internal Revenue Code of 1986, as amended from time to

21

time, and interpretative rules and regulations.

          (k) “Company” means Zimmer Holdings, Inc., a Delaware corporation, and any successor to its business and/or assets that assumes and agrees to perform this Agreement by operation of law, or otherwise (except in determining, under Section XIII(h), whether or not any Change in Control of the Company has occurred in connection with the succession).

          (l) “Company Shares” means shares of common stock of the Company or any equity securities into which those shares have been converted.

          (m) “Date of Termination” has the meaning stated in Section 4.02.

          (n) “Disability” has the meaning stated in the Company’s short-term or long-term disability plan, as applicable, as in effect immediately prior to a Change in Control.

          (o) “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, and interpretive rules and regulations.

          (p) “Excise Tax” means any excise tax imposed under Code Section 4999.

          (q) “Executive” means the individual named in the first paragraph of this Agreement.

          (r) “General Release” has the meaning stated in Section 6.03.

          (s) “Good Reason” for termination by the Executive of the Executive’s employment means the occurrence (without the Executive’s express written consent) of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (1), (4), (5), (6), or (7) below, the act or failure to act is corrected prior to the Date of Termination specified in the Executive’s Notice of Termination:

          (1) the assignment to the Executive of any duties inconsistent with the Executive’s

22

status as an executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive’s responsibilities from those in effect immediately prior to a Change in Control;

(2) a reduction by the Company in the Executive’s annual base salary as in effect on the date of this Agreement or as the same may be increased from time to time, or the level of the Executive’s entitlement under the Incentive Plan as in effect on the date of this Agreement or as the same may be increased from time to time;

(3) the Company’s requiring the Executive to be based more than 50 miles from the Company’s offices at which the Executive is based immediately prior to a Change in Control (except for required travel on the Company’s business to an extent substantially consistent with the Executive’s business travel obligations immediately prior to the Change in Control), or, in the event the Executive consents to any such relocation of his offices, the Company’s failure to provide the Executive with all of the benefits of the Company’s relocation policy as in operation immediately prior to the Change in Control;

(4) the Company’s failure, without the Executive’s consent, to pay to the Executive any portion of the Executive’s current compensation (which means, for purposes of this paragraph (4), the Executive’s annual base salary as in effect on the date of this Agreement, or as it may be increased from time to time, and the awards earned pursuant to the Incentive Plan) or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date the compensation is due;

     (5) the Company’s failure to continue in effect any compensation plan in which the Executive participates immediately prior to a Change in Control, which plan is

23

material to the Executive’s total compensation, including, but not limited to, the Incentive Plan and the Award Plan or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to that plan, or the Company’s failure to continue the Executive’s participation in such a plan (or in a substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive’s participation relative to other participants, as existed at the time of the Change in Control;

(6) the Company’s failure to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company’s pension (including, without limitation, the Company’s Retirement Plan, the BEP, and the Company’s Savings and Investment Program, including the Company’s Benefit Equalization Plan for the Savings and Investment Program), life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control; the taking of any action by the Company that would directly or indirectly materially reduce any of those benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of a Change in Control; or the Company’s failure to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company’s normal vacation policy in effect at the time of the Change in Control; or

(7) any purported termination of the Executive’s employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 4.01; for purposes of

24

     this Agreement, no such purported termination will be effective.

          The Executive’s right to terminate the Executive’s employment for Good Reason will not be affected by the Executive’s incapacity due to physical or mental illness. The Executive’s continued employment will not constitute consent to, or a waiver of rights with respect to, any act or failure to act that constitutes Good Reason.

          Notwithstanding the foregoing, the occurrence of an event that would otherwise constitute Good Reason will cease to be an event constituting Good Reason if the Executive does not timely provide a Notice of Termination to the Company within 120 days of the date on which the Executive first becomes aware (or reasonably should have become aware) of the occurrence of that event.

          (t) “Gross-Up Payment” has the meaning stated in Section 3.03.

          (u) “Incentive Plan” means the Company’s Executive Performance Incentive Plan.

          (v) “Notice of Termination” has the meaning stated in Section 4.01.

          (w) “Options” means options for Shares granted to the Executive under the Award Plan.

          (x) “Person” has the meaning stated in section 3(a)(9) of the Exchange Act, as modified and used in sections 13(d) and 14(d) of the Exchange Act; however, a Person will not include (1) the Company or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an underwriter temporarily holding securities pursuant to an offering of those securities, or (4) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

25

          (y) “Potential Change in Control” will be deemed to have occurred if any one of the following events occur:

     (1) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control;

     (2) the Company or any Person publicly announces an intention to take or to consider taking actions that, if consummated, would constitute a Change in Control;

     (3) any Person who is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company’s then outstanding securities, increases that Person’s beneficial ownership of those securities by 5% or more over the percentage so owned by that Person on the date of this Agreement; or

     (4) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.

          (z) “Retirement Date” means the later of (1) the Executive’s normal retirement date under the Retirement Plan and (2) another date for retirement by the Executive that has been approved by the Board at any time prior to a Change in Control.

          (aa) “Retirement Plan” means the Zimmer Holdings, Inc. Retirement Income Plan.

          (bb) “Savings Plan” means the Zimmer Holdings, Inc. Savings and Investment Program, which, for purposes of this Agreement, will be deemed to include the Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Savings and Investment Program.

26

          (cc) “Severance Payments” means the payments described in Section 3.02.

          (dd) “Shares” means shares of the common stock, $0.10 par value, of the Company.

          (ee) “Total Payments” has the meaning stated in Section 3.03(a).

Date: September 30, 2004

EXECUTIVE	ZIMMER HOLDINGS, INC.
	By:
Richard Fritschi		David C. Dvorak
		EVP, Corporate Services & Chief Counsel & Secretary

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EX-10.3

EXHIBIT 10.3

Employment Contract

between

Richard Fritschi

born April 3, 1960

from

Zurich

and

Zimmer GmbH in 8404 Winterthur

1.	This Employment Contract shall be effective as of April 1, 2004. Under this agreement, Richard Fritschi (“Employee”) will continue to provide services as President Zimmer Europe & Australasia, Management Level Z04. In this function, Employee will jointly report to the Chairman & CEO of Zimmer for the Australasian business and to the Chairman International for the European business.
	The position is based in Winterthur, Switzerland.
2.	This Agreement shall be valid for an indefinite period of time. The employment may be terminated in writing by either party with a notice period of six (6) months from the end of the month in which the notice is given; provided, however, that in the event of “Termination for Cause” (as defined below), Zimmer shall not be required to provide six (6) months’ notice. This term of notice deviates from the Contractual Employment Conditions Zimmer. (Arbeitsvertragliche Bestimmungen Zimmer, AVB)
	“Termination for Cause” means if Employee: (a) is convicted of or pleads guilty or nolo contendere to any felony or to any crime or offense causing substantial harm to Zimmer or any of its affiliates (whether or not for personal gain) or involving acts of theft, fraud, embezzlement, moral turpitude or similar conduct; (b) is grossly negligent or exercises willful misconduct in the performance of the duties of Employee; (c) fails or refuses to comply with policies or directives of the President, Chairman, CEO, or Board of Directors which are consistent with the nature of Employee’s duties hereunder and the provisions of this Agreement; (d) materially breaches any obligation of Employee set forth in this Agreement or in any other agreement between Employee and Zimmer; or (e) commits any act or omission which reflects adversely on Zimmer. In the event of Termination for Cause, (i) Zimmer shall not have any further liability or obligation to Employee other than any unpaid base salary, to the extent already earned or accrued as of his termination date, minus any liabilities that Employee may have to Zimmer; (ii) Employee shall not be entitled to receive any incentive compensation or bonus for that year or any portion of that year during which the Termination for Cause occurs; and (iii) all previously granted stock options will terminate and not be exercisable.

Name   Richard Fritschi

Page   2

3.	The attached Zimmer Confidentiality, Non-Competition and Non-Solicitation Employment Agreement (‘Non-compete Agreement’) forms an integral part of this contract.
4.	The annual base salary amounts to CHF 448’896.— gross. It will be paid in twelve monthly installments and is subject to all mandatory deductions. Payment will be made by bank transfer at the end of each month.
5.	Covering a Z04 position, Employee will be enrolled within the Zimmer Management Incentive Plan scheme in effect at the time. For 100% achievement of budgeted targets, a normal bonus payment of 50% of base salary will be payable according to the payout scale in operation at the time. Except as otherwise determined by Zimmer policies in effect from time to time, this payment will be made in two parts, an interim payment of 80% of projected bonus payable in December if company results are on target and with a balancing adjustment in February the following year.
6.	In case of termination of the employment agreement (other than Termination for Cause), the bonus payment is due pro rata temporis. Furthermore, except in the event of Termination for Cause, Employee is entitled to all contractual pension, insurance and benefits contributions for the duration of the termination period.
7.	Employee will be eligible to be considered for participation in the Zimmer Incentive Stock Option Plan in effect at the time. Selection to receive a grant is made year to year by the CEO and Compensation and Management Development Committee of Zimmer.
8.	Employee’s working hours result from the requirements of his function, and he will not be eligible to be paid overtime. To compensate him for overtime he will be entitled to 5 additional vacation days per calendar year.
9.	For pension purposes, Employee will be covered under the terms and conditions of the following two schemes: “Sulzer Vorsorgeeinrichtung (SVE)” and “Johann Jakob Sulzer Stiftung (JJS)”.
10.	Employee is covered under the Zimmer Directors and Officers Insurance (D&O).
11.	The following documents build an integral part of this employment contract, if not otherwise specified in this contract:

• Contractual Employment Conditions Zimmer (Arbeitsvertragliche Bestimmungen Zimmer, AVB)

• Zimmer Confidentiality, Non-Competition and Non-Solicitation Employment Agreement

Name   Richard Fritschi

Page   3

• Terms and conditions of the “Sulzer Vorsorgeeinrichtung (SVE)”

• Terms and conditions of the “Johann Jakob Sulzer Stiftung (JJS)”

Employee confirms receipt of the before mentioned documents and his agreement with the contents.

Any existing employment agreement in place will be replaced by this new employment contract and the documents referenced above.

This agreement and its annexes shall be governed by and are construed in accordance with the laws of Switzerland. All disputes arising out of or in connection with this agreement and its annexes shall be submitted to the exclusive jurisdiction of the courts of Winterthur.

Winterthur, September 30, 2004

Zimmer GmbH

J. Raymond Elliott	Heidi K. Jauch
Chairman, President & CEO of Zimmer, Inc.	Legal Counsel

Date:
Employee:
	Richard Fritschi

EX-10.4

EXHIBIT 10.4

CONFIDENTIALITY, NON-COMPETITION AND NON-SOLICITATION
EMPLOYMENT AGREEMENT

     This Confidentiality, Non-Competition and Non Solicitation Employment Agreement (this “Agreement”) is made by and between Centerpulse Orthopedics Ltd (“Company”) and Richard Fritschi (“Employee”).

Recitals

     A. For purposes of this Agreement, “Parent” means an entity which is a holding company of or holds a controlling interest in Company; “Affiliates” means a subsidiary of Company or the Parent of Company or a company over which Company or any holding company of Company has control; and the definition of each of Company, Parent and Affiliates, includes any of their successors-in-interest, including, but not limited to, Zimmer, Inc. (“ZINC”).

     B. Company, Parent and the Affiliates are part of the global holdings of Zimmer Holdings, Inc., a publicly traded corporation incorporated under the laws of the state of Delaware, U.S.A., the primary purpose of which is to serve as the umbrella entity for ZINC. Company, Parent and the rest of the Affiliates located throughout the world are engaged in the development, manufacture, distribution, and sale of orthopaedic medical and/or oral rehabilitation devices, products, and services.

Agreement

     NOW, THEREFORE, in consideration of the foregoing recitals, the promises contained herein, those certain benefits contained in each Zimmer Holdings, Inc. 2001 Stock Incentive Plan Nonqualified Stock Option Grant Agreement to which Employee is a party, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Company and Employee agree as follows:

     1. Acknowledgements. Employee acknowledges that Company is engaged in the highly competitive business of the development, manufacture, distribution, and sale of orthopaedic medical, oral rehabilitation and/or spine or trauma devices, products, and services, and that Employee serves in an executive, managerial capacity, and/or other designated position

for Company. Further, Employee acknowledges that in the course of Employee’s employment with Company, Employee i) has been given and will continue to be given access to Confidential Information (as hereinafter defined); ii) has participated and will continue to participate in the development of and/or usage of inventions, products, concepts, methods, or technologies which are related to Company’s business; iii) has been given and will continue to be given specialized training relating to Company’s products and/or processes; and/or iv) has been given and will continue to be given access to Company’s customers and other business relationships.

     2. Termination of Employment. Company and Employee acknowledge and agree that Employee’s employment is on an at-will basis, and, accordingly, either Company or Employee may terminate the employment relationship at any time for any reason, or no reason whatsoever, with or without cause, and without advance notice.

     3. Non-Disclosure of Confidential Information. Employee acknowledges that Confidential Information is a valuable, special, and unique asset of Company, Parent and the Affiliates and agrees to the following:

(A) Confidential Information Defined. The term “Confidential Information” includes, but is not limited to, any and all of Company’s, Parent’s or Affiliates’ trade secrets, confidential and proprietary information and all other information and data of Company that is not generally known to the public or other third parties who could derive economic value from its use or disclosure. Confidential Information includes, without limitation, the following: i) marketing, sales, and advertising information such as lists of actual or potential customers; customer preference data; marketing and sales techniques, strategies, efforts, and data; merchandising systems and plans; confidential customer information including identification of purchasing personnel, account status, needs and ability to pay; business plans; product development and delivery schedules; market research and forecasts; marketing and advertising plans, techniques, and budgets; overall pricing strategies; the specific advertising programs and strategies utilized, and the success or lack of success of those programs and strategies; ii) organizational information such as personnel and salary data; merger, acquisition and expansion information; information concerning methods of operation; divestiture information; and competitive information pertaining to Company’s distributors; iii) financial information such as product costs; supplier information; overhead costs; profit margins; banking and financing information; and pricing policy practices; iv) technical information such as product specifications, compounds, formulas, improvements, discoveries, developments, designs, inventions, techniques, new products and surgical training methods; v) information disclosed to Employee as part of a training process; and vi) information of third parties provided to Employee subject to non-disclosure restrictions for use in Employee’s business for Company. Confidential Information also includes any work product created by Employee in rendering services for Company.

(B) Non-Disclosure of Confidential Information. Employee agrees that Employee will not disclose, transfer, or use (or seek to induce others to disclose,

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transfer, or use) any Confidential Information for any purpose other than i) disclosure to authorized employees and agents of Company who are bound to maintain the confidentiality of the Confidential Information; and/or ii) for authorized purposes during the course of Employee’s employment in furtherance of Company’s business.

(C) Protection of Confidential Information. Employee will notify Company in writing of any circumstances which may constitute unauthorized disclosure, transfer, or use of Confidential Information. Employee will use best efforts to protect Confidential Information from unauthorized disclosure, transfer, or use. Employee will implement and abide by all procedures adopted by Company to prevent unauthorized disclosure, transfer, or use of Confidential Information.

4. Ownership of Confidential Information and Inventions.

(A) Invention Defined. The term “Invention” includes, but is not limited to ideas, programs, processes, systems, intellectual property, copyrightable materials, discoveries, and/or improvements of which Employee conceives alone or in conjunction with others during Employee’s employment with Company and/or within six (6) months after Employee’s employment ends which relate to Company’s present or future business. An Invention is covered by this Agreement regardless of whether i) Employee conceived of the Invention in the scope of Employee’s employment; or ii) the Invention is patentable.

(B) Ownership of Confidential Information and Inventions. Confidential Information and Inventions are solely the property of Company. Employee agrees that Employee does not have any rights, title, or interest in any of the Confidential Information or Inventions.

(C) Disclosure and Assignment of Inventions. Employee will, without royalty or other consideration: i) inform Company promptly and fully of each Invention in writing with a detailed description of each Invention; ii) assign, and hereby does assign, to Company all of Employee’s right, title and interest in and to each Invention; and iii) execute at Company’s request and expense, any and all applications, assignments, or other documents relating to any Invention and the process of obtaining any patents or other protection for any Invention.

     5. Return of Confidential Information and Company Property. Immediately upon termination of Employee’s employment with Company, Employee shall return to Company all of Company’s property relating to Company’s business, including without limitation all of Company’s property which is in the possession, custody, or control of Employee such as Confidential Information, documents, hard copy files, copies of documents and electronic information/files.

     6. Obligations to Other Entities or Persons. Employee warrants that Employee is not bound by the terms of a confidentiality agreement or any other legal obligation which would

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either preclude or limit Employee from disclosing or using any of Employee’s ideas, inventions, discoveries or other information or otherwise fulfilling Employee’s obligations to Company. While employed by Company, Employee shall not disclose or use any Confidential Information belonging to an entity or other person.

     7. Conflict of Interest and Duty of Loyalty. During Employee’s employment with Company, Employee shall not engage, directly or indirectly, in any activity, employment or business venture, whether or not for remuneration, that is i) competitive with Company’s business; ii) deprives or potentially could deprive Company of any business opportunity; iii) conflicts or potentially could conflict with Company’s business interests; or iv) is otherwise detrimental to Company, including but not limited to preparations to engage in any of the foregoing activities.

     8. Non-Competition Covenants. Company and Employee acknowledge and agree that the following non-competition covenants are reasonable and necessary to protect the legitimate interests of Company, Parent and Affiliates, including, without limitation, the protection of Confidential Information, and Inventions. Employee further acknowledges and agrees that such covenants are an essential part of and consideration for Company’s promises contained in this Agreement. Employee agrees to, and covenants to comply with, each of the following separate and divisible restrictions:

(A) Definitions.

1. “Competing Product” is defined as any orthopaedic product, process, or service and any dental reconstructive implant, spine implant, and trauma product; and/or any new product formulation, product modification, and/or product improvement which Company, Parent and/or Affiliate researched, developed, manufactured, marketed, distributed, and/or sold at the time of Employee’s termination and which Employee worked in conjunction with or obtained technical knowledge of during the last two years of Employee’s employment.

2. “Competing Organization” is defined as any organization that researches, develops, manufactures, markets, distributes and/or sells one or more Competing Products or has plans to research, develop, manufacture, market, distribute, and/or sell one or more Competing Products. A “Competing Organization” is diversified if it controls or is in common control of entities which conduct business in an industry other than the orthopaedic products industry or the dental reconstructive, spine implant or trauma products industries.

3. “Same or Similar Capacity” is defined as: i) the same or similar capacity or function in which the Employee worked for Company at any time during the last two years of Employee’s employment; ii) any executive or managerial capacity; and/or iii) any other capacity in which Employee’s knowledge of Confidential Information and/or Inventions

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would render Employee’s assistance to a Competing Organization a competitive advantage.

4. “Restricted Geographic Area” is defined as the following: i) Switzerland; ii) the continental United States; iii) Canada; iv) Mexico; v) Japan; vi) all countries of the European Union; and vii) all other countries, territories, or states in which a) Company is doing business or is selling its products at the time of termination of Employee’s employment with Company; and b) the Parent is doing business or is selling its products at the time of termination of Employee’s employment with Company.

5. “Non-Competition Period” is defined as the date Employee executes this Agreement, continuing through the twelve (12) months after the Employee’s last day of employment with Company unless otherwise extended by Employee’s breach of this Agreement.

6. “Customer” is defined as any distributor, health care dealer, hospital, hospital system, university practitioner, surgeon, dentist, health care purchasing organization, or surgical group with whom Employee had a business relationship on behalf of Company during the last two years of Employee’s employment with Company, and/or any distributor, health care dealer, hospital, hospital system, university practitioner, surgeon, dentist, health care purchasing organization, or surgical group with whom Company had a business relationship during the last two years of Employee’s employment with Company.

7. “Potential Customer” is defined as any entity that Employee identified, marketed to, and/or held discussions with regarding the research, development, manufacture, distribution, and/or sale of one or more Competing Products during the last two years of Employee’s employment with Company, and/or any entity that Company identified, marketed to, and/or held discussions with regarding the research, development, manufacture, distribution, and/or sale of one or more Competing Products during the last two years of Employee’s employment with Company.

(B) Restrictive Covenants. During the Non-Competition Period, Employee agrees to be bound by each of the following independent and divisible restrictions:

1. Employee will not seek or obtain employment, work for, consult with, or lend assistance to any Competing Organization in a Same or Similar Capacity in the Restricted Geographic Area.

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2. Employee will not seek or obtain employment, work for, consult with, or lend assistance to any Competing Organization in a Same or Similar Capacity or in any capacity if it is likely that as part of such capacity, Employee would inevitably use and/or disclose any of Company’s Confidential Information and/or Inventions.

3. Employee may accept employment, work for, consult with, or lend assistance to any Competing Organization provided that: i) the Competing Organization’s business is diversified; ii) the part of the Competing Organization’s diversified business with which Employee will be affiliated is not the same part of Company’s business with which Employee was affiliated during the last two years of Employee’s employment with Company; iii) the Employee’s affiliation with the Competing Organization does not involve any Competing Products; iv) Employee provides Company with a written description of Employee’s anticipated activities on behalf of the Competing Organization which includes, without limitation, an assurance satisfactory to Company that Employee’s affiliation with the Competing Organization does not constitute a Same or Similar Capacity; v) Employee’s affiliation with the Competing Organization would not likely cause Employee to inevitably use and/or disclose any Confidential Information and/or Inventions; and vi) Employee’s affiliation with the Competing Organization has no competitive purpose.

4. Employee will not seek or obtain employment, work for, consult with, or lend assistance to any Customers or Potential Customers in the Restricted Geographic Area in a competitive capacity or for a competitive purpose.

5. Employee will not provide, sell, market, or endeavor to provide, sell, or market one or more Competing Products to any Customer, or otherwise solicit or communicate about any Competing Products in a competitive capacity or for a competitive purpose with any Customer in the Restricted Geographic Area.

6. Employee will not provide, sell, market, or endeavor to provide, sell, or market one or more Competing Products to any Potential Customer, or otherwise solicit or communicate about any Competing Products in a competitive capacity or for a competitive purpose with any Potential Customer in the Restricted Geographic Area.

7. Employee will not adversely interfere with past, present, or prospective business relationships between Company and any of its Customers, Potential Customers, suppliers, distributors, agents, sales representatives, employees, independent contractors, or other persons or entities with which Company, Parent and/or Affiliates deal.

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8. Employee will not employ, engage in personal service or favor (whether or not compensated), solicit for employment, advise or recommend to any other person or entity that such person or entity employ, or solicit for employment, any individual now or hereafter employed by Company, or otherwise induce or entice any such employee to leave Employee’s employment with Company to work for, consult with, or lend assistance to any Competing Organization.

9. Employee agrees to refrain from making any disparaging or derogatory statements about Company, its products, Parent and any of the Affiliates, together with their past, present and future officers, directors, employees, attorneys and agents. Disparaging or derogatory statements include, but are not limited to, negative statements regarding Company’s business or other practices.

10. Employee agrees that the divisible covenants contained in this Agreement prohibit Employee from engaging in the restricted activities directly or indirectly, whether on Employee’s behalf or on behalf of or for the benefit of any other person or entity, including for Employee’s benefit, and that all of the covenants restrict him from engaging in activities for a competitive purpose.

11. The Non-Competition Period shall not expire during any period in which Employee is in violation of any of the restrictive covenants set forth herein, and all restrictions shall automatically be extended by the period Employee was in violation of any such restrictions.

     9. Reasonableness of Terms. Employee acknowledges and agrees that the restrictive covenants contained in this Agreement are reasonably necessary to protect Company’s, Parent’s and Affiliates’ legitimate interests in Confidential Information, Inventions, and goodwill. Additionally, Employee acknowledges and agrees that the restrictive covenants are reasonable in all respects, including, but not limited to, temporal duration, scope of prohibited activities and geographic area. Employee further acknowledges and agrees that the restrictive covenants set forth in this Agreement will not pose any hardship on Employee and that Employee will reasonably be able to earn an equivalent livelihood without violating any provision of this Agreement.

     10. Non-Competition Period Payments. In the event Company terminates Employee and it is a “Termination for Cause” (as defined below), the payment provisions of this section 10 shall not apply. Following a termination of employment other than a Termination for Cause, to the extent Employee is unable to obtain employment consistent with Employee’s training and education solely because of the provisions of this Agreement, the following terms will apply upon expiration of any severance benefits to which Employee is otherwise eligible to receive: i) Company will make payments to Employee equal to Employee’s monthly base pay at the time of Employee’s termination plus bonus paid at target for each month of such

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unemployment through the end of the Non-Competition Period; ii) to the extent Employee is able to obtain employment which does not violate this Agreement, but solely because of this Agreement, the monthly base pay including the pro-rata bonus payment for the replacement employment is less than Employee’s monthly base pay including the pro-rata bonus payment at the time of Employee’s termination, Company agrees to pay the difference for each such month through the end of the Non-Competition Period; and iii) on the 15th day of each month of such unemployment, Employee will give Company a detailed written account of Employee’s efforts to obtain employment and an explanation exclusively attributing Employee’s inability to obtain replacement employment to the provisions of this Agreement. To the extent that Employee breaches any provision of this Agreement during the Non-Competition Period and/or fails to timely submit the written account required by this Section 10, Company reserves the right to cease making any payments pursuant to this Section 10. In the event of Employee’s breach, Employee agrees that Employee will still be bound by all of the provisions set forth in this Agreement, including, but not limited to, the non-competition, non-solicitation, non-disparagement and non-disclosure covenants, until the end of the Non-Competition Period. Further, Company reserves the right to release Employee from Employee’s obligations set forth in this Agreement at any time during the Non-Competition Period, at which time Company’s payment obligations under this Section 10 shall cease immediately and Employee shall not be entitled to any Non-Competition Period Payments or other compensation.

Furthermore, except in the event of a Termination for Cause, the Employee is entitled to all contractual pension, insurance, benefits contributions for the duration of the Non-Competition Period or until the Employee is able to obtain employment, whatever happens first.

“Termination for Cause” means if Employee: (a) is convicted of or pleads guilty or nolo contendere to any felony or to any crime or offense causing substantial harm to the Company or any of its affiliates (whether or not for personal gain) or involving acts of theft, fraud, embezzlement, moral turpitude or similar conduct; (b) is grossly negligent or exercises willful misconduct in the performance of the duties of Employee; (c) fails or refuses to comply with policies or directives of the President, Chairman, CEO, or Board of Directors which are consistent with the nature of Employee’s duties hereunder and the provisions of this Agreement; (d) materially breaches any obligation of Employee set forth in this Agreement or in any other agreement between employee and the Company; or (e) commits any act or omission which reflects adversely on the Company. In the event of Termination for Cause, (i) the Company shall not have any further liability or obligation to Employee other than any unpaid base salary, to the extent already earned or accrued as of his termination date, minus any liabilities that Employee may have to the Company; (ii) Employee shall not be entitled to receive any incentive compensation or bonus for that year or any portion of that year during which the Termination for Cause occurs; and (iii) all previously granted stock options will terminate and not be exercisable.

     11. Severability, Modification of Restrictions: The covenants and restrictions in this Agreement are separate and divisible, and to the extent any clause, portion or section of this Agreement is determined to be unenforceable or invalid for any reason, Company and Employee acknowledge and agree that such unenforceability or invalidity shall not affect the enforceability or validity of the remainder of the Agreement. If any particular covenant, provision or clause of this Agreement is determined to be unreasonable or unenforceable for any reason, including,

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without limitation, the temporal duration, scope of prohibited activity, and/or geographic area covered by any non-competition, non-solicitation, non-disparagement or non-disclosure covenant, provision or clause, Company and Employee acknowledge and agree that such covenant, provision or clause shall automatically be deemed reformed such that the contested covenant, provision or clause will have the closest effect permitted by applicable law to the original form and shall be given effect and enforced as so reformed to whatever extent would be reasonable and enforceable under applicable law. The parties agree that any court interpreting the provisions of this Agreement shall have the authority, if necessary, to reform any such provision to make it enforceable under applicable law.

     12. Remedies. Employee acknowledges that a breach or threatened breach by Employee of this Agreement will give rise to irreparable injury to Company and that money damages will not be adequate relief for such injury. Accordingly, Employee agrees that Company shall be entitled to obtain injunctive relief, including, but not limited to, temporary restraining orders, preliminary injunctions and/or permanent injunctions, without having to post any bond or other security, to restrain or prohibit such breach or threatened breach, in addition to any other legal remedies which may be available. In addition to all other relief to which it shall be entitled, Company shall be entitled to cease all payments to which Employee would otherwise be entitled under Section 10 hereto; continue to enforce this Agreement; recover from Employee all payments made under Section 10 to the extent attributable to a time during which Employee was in violation of the covenants for which payment was made; and recover from Employee all litigation costs and attorneys’ fees incurred by Company in any action or proceeding relating to this Agreement in which Company prevails, including, but not limited to, any action or proceeding in which Company seeks enforcement of this Agreement or seeks relief from Employee’s violation of this Agreement.

     13. Survival of Obligations. Employee acknowledges and agrees that Employee’s obligations under this Agreement, including, without limitation, Employee’s non-disclosure and non-competition obligations, shall survive the termination of Employee’s employment with Company, whether or not such termination is with or without cause or whether or not it is voluntary or involuntary. Employee further acknowledges and agrees that Employee’s non-disclosure, non-disparagement, non-solicitation and non-competition covenants set forth in Sections 3 and 8 of this Agreement shall be construed as independent covenants and that no breach of any contractual or legal duty by Company shall be held sufficient to excuse or terminate the Employee’s obligations under Sections 3 and 8 of this Agreement or to preclude Company from obtaining injunctive relief or other remedies for Employee’s violation or threatened violation of such covenants.

     14. Successors and Assigns. Company shall have the right to assign this Agreement, and, accordingly, this Agreement shall inure to the benefit of, and may be enforced by, any and all successors and assigns of Company, including without limitation by asset assignment, stock sale, merger, consolidation or other corporate reorganization, and shall be binding on Employee, Employee’s executors, administrators, personal representatives or other successors in interest. The services to be provided by Employee to Company are personal to the Employee, and Employee shall not have the right to assign Employee’s duties under this Agreement.

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     15. Modification. This Agreement may not be amended, supplemented, or modified except by a written document signed by both Employee and a duly authorized officer of Company.

     16. No Waiver. The failure of Company to insist in any one or more instances upon performance of any of the provisions of this Agreement or to pursue its rights hereunder shall not be construed as a waiver of any such provisions or the relinquishment of any such rights.

     17. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but both of which when taken together will constitute one and the same agreement.

     18. Entire Agreement. This Agreement, including Recitals, constitutes the entire agreement of the parties with respect to the subjects specifically addressed herein, and supersedes any prior agreements, understandings, or representations, oral or written, on the subjects addressed herein, excluding the Employment Agreement Employee executed when Employee’s employment commenced. Notwithstanding the foregoing, to the extent the employee has an existing non-competition, confidentiality, and/or non-solicitation agreement in favor of Company and has breached or violated the terms thereof, Company may continue to enforce its rights and remedies under and pursuant to such existing agreement.

     Employee’s signature below indicates that Employee has read the entire Agreement, Employee understands what Employee is signing, and is signing it voluntarily. Employee agrees that Company advised Employee to consult with an attorney prior to signing the Agreement.

Date: September 30, 2004

	“COMPANY”
`	Zimmer GmbH
	By:
	Printed Name:
	Title:
	“EMPLOYEE”

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EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, J. Raymond Elliott, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Zimmer Holdings, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2004

/s/ J. Raymond Elliott

J. Raymond Elliott

Chairman, President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Sam R. Leno, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Zimmer Holdings, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2004

/s/ Sam R. Leno Sam R. Leno

Executive Vice President, Corporate Finance and

Operations and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Zimmer Holdings, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ J. Raymond Elliott J. Raymond Elliott

Chairman, President and Chief Executive Officer

November 8, 2004

/s/ Sam R. Leno Sam R. Leno

Executive Vice President, Corporate Finance

and Operations and Chief Financial Officer

November 8, 2004