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 JUNE 30, 2005

Commission File Number 001-16407

ZIMMER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

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 þ No o

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

At July 29, 2005, there were 247,343,674 shares outstanding of the registrant’s $.01 par value Common Stock.

ZIMMER HOLDINGS, INC.

INDEX TO FORM 10-Q

June 30, 2005

	Page
Part I — Financial Information
Item 1.
Financial Statements
Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2005 and 2004		3
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004		4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004		5
Notes to Interim Consolidated Financial Statements		6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.
Quantitative and Qualitative Disclosures About Market Risk		34
Item 4.
Controls and Procedures		35
Part II — Other Information
There is no information required to be reported under any items except those indicated below.
Item 1.
Legal Proceedings		36
Item 4.
Submission of Matters to a Vote of Security Holders		36
Item 5.
Other Information		36
Item 6.
Exhibits		37
Signatures		38
Change in Control Severance Agreement
Benefit Equalization Plan
Benefit Equalization Plan
First Amendment of Benefit Equalization Plan
Certification
Certification
Certifications

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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 June 30,					Six Months Ended June 30,
	2005			2004		2005			2004
Net Sales	$	846.8		$	737.4	$	1,675.3		$	1,479.6
Cost of products sold		188.8			201.9		379.1			421.4
Gross Profit		658.0			535.5		1,296.2			1,058.2
Research and development		43.6			38.2		85.7			78.0
Selling, general and administrative		328.5			297.3		650.1			595.1
Acquisition and integration		10.1			24.2		27.0			55.5
Operating expenses		382.2			359.7		762.8			728.6
Operating Profit		275.8			175.8		533.4			329.6
Interest expense		4.2			8.3		11.4			18.1
Earnings before income taxes and minority interest		271.6			167.5		522.0			311.5
Provision for income taxes		80.7			51.4		157.3			97.8
Minority interest		(0.2	)		0.2		(0.4	)		0.2
Net Earnings	$	190.7		$	116.3	$	364.3		$	213.9
Earnings Per Common Share
Basic	$	0.77		$	0.48	$	1.48		$	0.88
Diluted	$	0.76		$	0.47	$	1.46		$	0.87
Weighted Average Common Shares Outstanding
Basic		247.0			244.3		246.5			243.6
Diluted		249.9			247.9		249.5			247.2

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)

	June 30,		December 31
	2005		2004
	(unaudited)
ASSETS:
Current Assets:
Cash and equivalents	$	78.8	$	154.6
Restricted cash		16.6		18.9
Accounts receivable, less allowance for doubtful accounts		573.4		524.8
Inventories, net		568.0		536.0
Prepaid expenses		43.2		54.0
Deferred income taxes		212.2		272.6
Total current assets		1,492.2		1,560.9
Property, plant and equipment, net		676.6		628.5
Goodwill		2,434.2		2,528.9
Intangible assets, net		779.1		794.8
Other assets		169.4		182.4
Total Assets	$	5,551.5	$	5,695.5
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	141.8	$	131.6
Income taxes payable		16.9		34.2
Fair value of derivatives		17.2		72.8
Other current liabilities		438.0		434.9
Short-term debt		—		27.5
Total current liabilities		613.9		701.0
Other long-term liabilities		363.1		420.9
Long-term debt		268.1		624.0
Total Liabilities		1,245.1		1,745.9
Commitments and Contingencies (Note 12)
Minority interest		1.8		7.1
Stockholders’ Equity:
Common stock, $.01 par value, one billion shares authorized, 247.2 million in 2005 (245.5 million in 2004) issued and outstanding		2.5		2.5
Paid-in capital		2,569.9		2,485.2
Retained earnings		1,565.8		1,201.5
Accumulated other comprehensive income		166.4		253.3
Total Stockholders’ Equity		4,304.6		3,942.5
Total Liabilities and Stockholders’ Equity	$	5,551.5	$	5,695.5

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

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)

	For the Six Months
	Ended June 30,
	2005			2004
Cash flows provided by (used in) operating activities:
Net earnings	$	364.3		$	213.9
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		90.4			87.3
Inventory step-up		4.1			49.6
Changes in operating assets and liabilities, net of acquisitions:
Income taxes		79.9			93.6
Receivables		(66.6	)		(44.2	)
Inventories		(58.6	)		(14.3	)
Accounts payable and accrued expenses		(1.1	)		(27.0	)
Other assets and liabilities		(16.3	)		39.4
Net cash provided by operating activities		396.1			398.3
Cash flows provided by (used in) investing activities:
Additions to instruments		(90.6	)		(74.9	)
Additions to other property, plant and equipment		(42.2	)		(30.6	)
Centerpulse and InCentive acquisitions, net of acquired cash		—			(18.2	)
Implex acquisition, net of acquired cash		—			(103.7	)
Proceeds from note receivable		—			25.0
Investments in other assets		(9.7	)		(1.1	)
Net cash used in investing activities		(142.5	)		(203.5	)
Cash flows provided by (used in) financing activities:
Net proceeds (payments) on lines of credit		174.7			(239.4	)
Payments on term loan		(550.0	)		—
Proceeds from exercise of stock options		52.1			49.7
Debt issuance costs		(1.9	)		—
Equity issuance costs		—			(5.0	)
Net cash used in financing activities		(325.1	)		(194.7	)
Effect of exchange rates on cash and equivalents		(4.3	)		(0.7	)
Decrease in cash and equivalents		(75.8	)		(0.6	)
Cash and equivalents, beginning of year		154.6			77.5
Cash and equivalents, end of period	$	78.8		$	76.9

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 2004 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 statement 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 six month periods ended June 30, 2004 have been reclassified to conform to the current year presentation.

2. Stock Compensation

     At June 30, 2005, 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 2004 annual report on Form 10-K, an employee stock purchase plan and a restricted stock plan for certain key members of management. 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. For stock options that vest based upon service, no share-based compensation cost is reflected in net earnings, as the options granted under the plans had exercise prices equal to the market value of the underlying common stock on the date of grant. The Company also has performance-conditioned stock options issued in 2005 that require the Company to recognize an expense to the extent the market value of the stock exceeds the stock option exercise price on the measurement date. However, no compensation cost was recognized in the three and six month periods ended June 30, 2005, as the stock option exercise price exceeded the market value of the stock. No compensation cost is reflected in net income for the employee stock purchase plan under the provisions of APB 25, which allows a discounted purchase price under Section 423 of the Internal Revenue Code. Compensation cost related to restricted stock is recognized in earnings over the vesting period of the stock, which is generally five years. Compensation cost related to restricted stock was not significant for the three and six month periods ended June 30, 2005 and 2004. 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						Six Months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
Net earnings, as reported	$	190.7		$	116.3		$	364.3		$	213.9
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax		(10.8	)		(5.3	)		(25.8	)		(10.7	)
Pro forma net earnings	$	179.9		$	111.0		$	338.5		$	203.2
Earnings per share:
Basic — as reported	$	0.77		$	0.48		$	1.48		$	0.88
Basic — pro forma		0.73			0.45			1.37			0.83
Diluted — as reported		0.76			0.47			1.46			0.87
Diluted — pro forma		0.72			0.45			1.36			0.82

     In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which is a revision to SFAS No. 123, “Accounting for Stock Based Compensation”. SFAS 123(R) requires all share-based payments to employees, including stock options, to be expensed based on their fair values. The Company has disclosed the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123. SFAS 123(R) contains three methodologies for adoption: 1) adopt SFAS 123(R) on the effective date for interim periods thereafter, 2) adopt SFAS 123(R) on the effective date for interim periods thereafter and restate prior interim periods included in the fiscal year of adoption under the provisions of SFAS 123, or 3) adopt SFAS 123(R) on the effective date for interim periods thereafter and restate all prior interim periods under the provisions of SFAS 123. The SEC has amended the compliance dates of SFAS 123(R) requiring adoption in the first fiscal year beginning after June 15, 2005. The Company intends to adopt SFAS 123(R) on January 1, 2006.

3. Inventories

	June 30,		December 31,
	2005		2004
	(in millions)
Finished goods	$	428.8	$	420.5
Work in progress		51.1		42.0
Raw materials		87.1		70.2
Inventory step-up (primarily finished goods)		1.0		3.3
Inventories, net	$	568.0	$	536.0

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4. Property, Plant and Equipment

	June 30,			December 31,
	2005			2004
	(in millions)
Land	$	19.9		$	20.0
Buildings and equipment		684.9			677.1
Instruments		616.5			557.8
Construction in progress		57.5			57.9
		1,378.8			1,312.8
Accumulated depreciation		(702.2	)		(684.3	)
Property, plant and equipment, net	$	676.6		$	628.5

5. Goodwill and Other Intangible Assets

     The following table summarizes the changes in the carrying amount of goodwill for the six month period ended June 30, 2005 (in millions):

	Americas			Europe			Asia Pacific			Total
Balance at January 1, 2005	$	1,389.1		$	1,023.2		$	116.6		$	2,528.9
Change in preliminary fair value estimates of Centerpulse related to:
Integration liability		(0.2	)		(1.4	)		—			(1.6	)
Income taxes		0.2			0.5			—			0.7
Implex earn-out liability		14.5			—			—			14.5
Change in preliminary fair value estimates of Implex		0.2			—			—			0.2
Purchase of Allo Systems Srl minority interest		—			2.1			—			2.1
Currency translation		—			(107.3	)		(3.3	)		(110.6	)
Balance at June 30, 2005	$	1,403.8		$	917.1		$	113.3		$	2,434.2

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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 June 30, 2005:
Intangible assets subject to amortization:
Gross carrying amount	$	117.9		$	417.3		$	31.7		$	34.4		$	39.5		$	640.8
Accumulated amortization		(11.0	)		(45.9	)		(5.3	)		(2.0	)		(15.2	)		(79.4	)
Intangible assets not subject to amortization:
Gross carrying amount		—			—			217.7			—			—			217.7
Total identifiable intangible assets	$	106.9		$	371.4		$	244.1		$	32.4		$	24.3		$	779.1
As of December 31, 2004:
Intangible assets subject to amortization:
Gross carrying amount	$	117.9		$	417.3		$	31.7		$	34.4		$	34.1		$	635.4
Accumulated amortization		(8.0	)		(31.9	)		(3.8	)		(1.3	)		(13.7	)		(58.7	)
Intangible assets not subject to amortization:
Gross carrying amount		—			—			218.1			—			—			218.1
Total identifiable intangible assets	$	109.9		$	385.4		$	246.0		$	33.1		$	20.4		$	794.8

     Amortization expense for the three and six month periods ended June 30, 2005 was $10.4 million and $20.7 million, respectively. Amortization expense for the three and six month periods ended June 30, 2004 was $9.9 million and $18.5 million, respectively. Amortization expense was recorded as part of selling, general and administrative.

6. Integration Liability

     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. As of the Closing Date, the Company recorded a $75.7 million integration liability consisting of $53.1 million of employee termination and relocation costs and $22.6 million of sales agent and lease contract termination costs. In accordance with EITF 95-3 “Recognition of Liabilities Assumed in a Purchase Business Combination”, these liabilities were included in the allocation of the purchase price. Increases to the liability subsequent to the completion of the allocation period were expensed in the financial statements, and were not significant. Reductions in the liability subsequent to the completion of the allocation period were recorded as adjustments to goodwill.

     The Company’s integration plan covers all functional business areas, including sales force, research and development, manufacturing and administrative. Approximately 830 Centerpulse employees have been or will be involuntarily terminated through the Company’s integration plan. The Company began phasing-out production at its Austin, Texas manufacturing facility in 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

9

Austin facility will be sourced from the Company’s other manufacturing facilities. The Company has begun to hire additional manufacturing employees at its other manufacturing facilities to handle increased production schedules. The Austin phase out is expected to be completed in late 2005. As of June 30, 2005, approximately 540 Centerpulse employees had been involuntarily terminated. With a few exceptions, the Company’s integration plan is expected to be completed by the end of 2005. Reconciliation of the integration liability, as of June 30, 2005, is as follows (in millions):

	Employee
	Termination
	and Relocation			Contract
	Costs			Terminations			Total
Balance, Closing Date	$	53.1		$	22.6		$	75.7
Cash Payments		(20.7	)		(0.2	)		(20.9	)
Balance, December 31, 2003		32.4			22.4			54.8
Cash Payments		(20.5	)		(2.3	)		(22.8	)
Additions/(Reductions), net		3.7			(11.8	)		(8.1	)
Balance, December 31, 2004		15.6			8.3			23.9
Cash Payments		(4.4	)		(2.4	)		(6.8	)
Reductions		(0.3	)		(1.3	)		(1.6	)
Balance, June 30, 2005	$	10.9		$	4.6		$	15.5

7. Comprehensive Income

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

	Three Months					Six Months
	Ended June 30,					Ended June 30,
	2005			2004		2005			2004
	(in millions)					(in millions)
Net Earnings	$	190.7		$	116.3	$	364.3		$	213.9
Other Comprehensive Income (Loss):
Foreign currency cumulative translation adjustments		(97.8	)		1.1		(152.3	)		1.0
Unrealized foreign currency hedge gains, net of tax		35.2			1.7		47.3			2.9
Reclassification adjustments on foreign currency hedges, net of tax		11.9			4.9		19.5			8.0
Unrealized gains (losses) on securities, net of tax		0.1			—		(1.4	)		—
Minimum pension liability, net of tax		—			—		—			0.6
Total Other Comprehensive Income (Loss)		(50.6	)		7.7		(86.9	)		12.5
Comprehensive Income	$	140.1		$	124.0	$	277.4		$	226.4

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8. 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 cost of products sold when the hedged item affects earnings. The ineffective portion of a derivative’s change in fair value, if any, is reported in cost of products sold immediately. The net amount recognized in earnings during the three and six month periods ended June 30, 2005 and 2004, 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 June 30, 2005, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized loss of $14.7 million, or $6.6 million net of taxes, which is deferred in other comprehensive income, of which, $23.4 million, or $14.6 million, net of taxes, is expected to be reclassified to earnings over the next twelve months.

9. Retirement and Postretirement Benefit Plans

     The Company has defined benefit pension plans covering certain U.S. and Puerto Rico employees who were hired before September 2, 2002. Employees hired after September 2, 2002 are not part of the U.S. and Puerto Rico defined benefit plans, but do receive additional benefits under the Company’s defined contribution plans. 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.

     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. Employees hired after September 2, 2002 are not eligible for retiree medical and life insurance benefits. No similar plans exist for employees outside the U.S. and Puerto Rico.

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     The components of net pension expense for the three and six month periods ended June 30, 2005 and 2004, for the Company’s defined benefit retirement plans are as follows (in millions):

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
Service cost	$	5.0		$	5.7		$	10.2		$	11.5
Interest cost		2.5			2.2			5.2			4.4
Expected return on plan assets		(2.9	)		(3.5	)		(6.0	)		(7.1	)
Amortization of unrecognized actuarial loss		0.6			0.4			1.2			0.8
Net periodic benefit cost	$	5.2		$	4.8		$	10.6		$	9.6

     The components of net periodic benefit expense for the three and six month periods ended June 30, 2005 and 2004, for the Company’s postretirement benefit plans are as follows (in millions):

	Three Months				Six Months
	Ended June 30,				Ended June 30,
	2005		2004		2005		2004
Service cost	$	0.4	$	0.4	$	0.8	$	0.8
Interest cost		0.5		0.5		1.0		0.9
Amortization of unrecognized actuarial loss		0.1		—		0.2		—
Net periodic benefit cost	$	1.0	$	0.9	$	2.0	$	1.7

     The Company contributed $9.2 million during the six month period ended June 30, 2005, to its U.S. and Puerto Rico defined benefit plans and expects to contribute an additional $8 — $10 million to these plans during 2005. The Company contributed $4.3 million to its foreign based defined benefit plans in the six month period ended June 30, 2005, and expects to contribute an additional $4.8 million to these foreign based plans during 2005. Contributions for the U.S. and Puerto Rico postretirement benefit plans are not expected to be significant.

10. Earnings Per Share

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

	Three Months				Six Months
	Ended June 30,				Ended June 30,
	2005		2004		2005		2004
	(in millions)				(in millions)
Weighted average shares outstanding for basic net earnings per share		247.0		244.3		246.5		243.6
Effect of dilutive stock options		2.9		3.6		3.0		3.6
Weighted average shares outstanding for diluted net earnings per share		249.9		247.9		249.5		247.2

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At June 30, 2005 options to purchase 2.7 million shares of common stock were not included in the computation of diluted earnings per share as the exercise prices of these options were greater than the average market price of the common shares. There were no anti-dilutive securities outstanding at June 30, 2004.

11. Segment Information

     The Company designs, develops, manufactures and markets reconstructive orthopaedic implants, including joint and dental, spinal implants, and trauma products and orthopaedic surgical products which include surgical supplies and instruments designed to aid in orthopaedic surgical 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 Europe and includes 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 asset amortization expense. Global operations include research, development, engineering, medical education, brand management, corporate legal, finance, human resource functions, and U.S. and Puerto Rico based operations and logistics. Intercompany transactions have been eliminated from segment operating profit.

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

	Net Sales				Operating Profit
	Three Months Ended				Three Months Ended
	June 30,				June 30,
	2005		2004		2005			2004
Americas	$	494.7	$	432.2	$	258.8		$	226.1
Europe		228.1		197.7		75.7			66.9
Asia Pacific		124.0		107.5		54.8			44.8
Total	$	846.8	$	737.4
Inventory step-up						(2.1	)		(18.6	)
Acquisition and integration						(10.1	)		(24.2	)
Global operations and corporate functions						(101.3	)		(119.2	)
Operating profit					$	275.8		$	175.8

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	Net Sales				Operating Profit
	Six Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005			2004
Americas	$	975.1	$	854.9	$	509.0		$	441.1
Europe		462.7		412.8		165.0			144.4
Asia Pacific		237.5		211.9		106.7			89.4
Total	$	1,675.3	$	1,479.6
Inventory step-up						(4.1	)		(49.6	)
Acquisition and integration						(27.0	)		(55.5	)
Global operations and corporate functions						(216.2	)		(240.2	)
Operating profit					$	533.4		$	329.6

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

	Net Sales				Net Sales
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Reconstructive implants	$	704.9	$	607.8	$	1,394.3	$	1,219.1
Trauma		44.4		43.4		89.8		88.4
Spine		41.1		33.8		79.4		67.3
Orthopaedic surgical products		56.4		52.4		111.8		104.8
Total	$	846.8	$	737.4	$	1,675.3	$	1,479.6

12. 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 June 28, 2005, the claims administrator has received 4,137 likely valid claims for hips (cut-off date June 5, 2003) and knees (cut-off date November 17, 2003) and 201 claims for reprocessed shells (cut-off date September 8, 2004). The Company believes the litigation liability recorded as of June 30, 2005 is adequate to provide for any future claims regarding the hip and knee implant litigation.

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     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 Patent”). The Company’s Trilogy® Acetabular System was specifically accused of infringement, as well as Centerpulse’s Converge® and Allofit^™ Acetabular Systems. BTG’s complaint sought 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. During May of 2005, the Company and BTG reached a final settlement with respect to all active litigation. The settlement fully resolved the patent infringement actions in the United States and Germany relating to the ‘559 Patent and the other two-part hip cup patents, as well as cases filed by the Company against BTG in Germany and in the State of Indiana. The Company’s reserves recorded for this matter were adequate to provide for the terms of the settlement of this lawsuit. The difference between the reserves and the settlement resulted in a decrease to costs of products sold.

     On February 15, 2005, Howmedica Osteonics Corp. (“Howmedica”) filed an action against the Company and an unrelated party in the United States District Court for the District of New Jersey alleging infringement by the defendants of U.S. Patent Nos. 6,174,934; 6,372,814; 6,664,308; and 6,818,020. Howmedica’s complaint seeks unspecified damages and injunctive relief. On April 14, 2005, the Company filed its answer to the complaint denying Howmedica’s allegations. The Company believes that its defenses are valid and meritorious and the Company intends to defend the Howmedica lawsuit vigorously.

     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 continuing to fully cooperate with the Securities and Exchange Commission in this matter.

     On March 31, 2005, the Company received a subpoena from the United States Department of Justice through the United States Attorney’s Office in Newark, New Jersey, requesting that the Company produce documents for the period beginning January 2002 through March 2005 pertaining to consulting contracts, professional service agreements and other agreements by which the Company may provide remuneration to orthopaedic surgeons. The Company has produced documents in response to the subpoena. The Company is cooperating fully with federal authorities with regard to this matter. The Company understands that similar inquiries were directed to at least four other companies in the orthopaedics industry.

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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 (sometimes referred to herein as “OSP”). Reconstructive orthopaedic 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. OSP include supplies and instruments designed to aid in orthopaedic surgical procedures. With operations in more than 24 countries and products marketed in more than 100 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, results of operations and cash flows for the three and six month periods ended June 30, 2005.

Acquisition of Centerpulse

     The Company continues to make progress on the integration of Centerpulse. As of June 30, 2005, the Company has completed over 73 percent of the 3,522 scheduled milestones required to execute the entire integration plan. Remaining integration milestones relate primarily to the completion of the manufacturing integration plan, including the shut-down of manufacturing operations in Austin, Texas. In addition to the remaining manufacturing integration milestones, other integration activities still to be completed include the establishment of common information technology systems and certain warehouse consolidations, which the Company expects to complete by the end of 2006.

     Net synergies associated with the acquisition and integration of Centerpulse are currently expected to approximate $66 million in 2005, compared to an original estimate of $56 million. The Company defines net synergies as expense synergies less operating profit reductions resulting from integration related sales losses and increases in operating expenses directly resulting from the acquisition. As anticipated, only modest expense synergies have been recognized in cost of products sold during the first and second quarters of 2005. More significant cost of products sold synergies are expected to be recognized late in 2005 and 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 synergies, principally in selling, general and administrative expenses, have exceeded the Company’s original expectations, reflecting more rapid than expected execution and achievement of operational efficiencies. However, these expense synergies were partially offset by integration related sales losses, also anticipated. Net

16

synergies for 2006 are currently expected to be in excess of $100 million compared to the Company’s original estimate of $70 to $90 million.

     The Company incurred $10.1 million and $27.0 million of Centerpulse acquisition and integration expenses during the three and six month periods ended June 30, 2005, respectively, and expects to incur an additional $18.8 million of Centerpulse acquisition and integration expenses during the remainder of 2005.

Acquisition of Implex

     The Company completed the acquisition of Implex Corp. on April 23, 2004. The acquisition was a culmination of a distribution and strategic alliance agreement relating to the development and distribution of reconstructive implant and trauma products incorporating Trabecular Metal^™ Technology. Pursuant to the former distribution and strategic alliance agreement, the Company sold products incorporating Trabecular Metal Technology, which represented over 90 percent of Implex sales.

     Gross profit margins on sales of Company products incorporating Trabecular Metal Technology are expected to improve throughout the balance of 2005 as the Company begins to sell a greater mix of products manufactured post acquisition. Sales of products manufactured post acquisition include a manufacturing and distribution profit margin, compared to only a distribution margin on sales of products purchased from Implex pursuant to the former distribution and strategic alliance agreement. In addition, due to increased demand for products incorporating Trabecular Metal Technology, the Company has tripled its Trabecular Metal Technology manufacturing capacity.

Demand (Volume and Mix) Trends

     Volume and mix improvements contributed 12 and 10 percentage points of sales growth during the three and six month periods ended June 30, 2005, respectively, compared to 9 percentage points of growth in the same 2004 periods. 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^™ (MIS^™) 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 Technology products, high flex knees, knee revision products and porous hip stems, continue to positively affect sales growth. For the three month period ended June 30, 2005, primary porous hip stems accounted for 60 percent of all primary hip stem units sold, compared to 58 percent of total primary hip stem units sold for the year ended December 31, 2004.

     The Company believes innovative surgical approaches will continue to significantly impact the orthopaedics industry. The Company has made significant progress in the development and introduction of MIS Procedures and Technologies. During the six month period ended June 30, 2005, The Zimmer Institute and its satellite locations trained approximately 1,150 surgeons on advanced techniques, including over 1,000 surgeons on MIS Techniques, approximately double the number of surgeons trained in the same period last year. In addition, during the first quarter

17

of 2005, the Company launched a new procedure for minimally invasive joint replacement, the Zimmer® MIS Anterolateral Hip Replacement Procedure, and began training surgeons on this procedure at The Zimmer Institute and its satellite locations. Also, in June 2005 the Company fully released the first modular stemmed tibial prosthesis that can be assembled within the patient, making it more conducive to minimally invasive procedures. The NexGen® MIS Tibial Component was cleared for use in the United States and achieved $1.2 million of sales for the quarter. During the three month period ended June 30, 2005, the Company estimates that 50 percent of all Zimmer U.S. hip and 43 percent of all Zimmer U.S. knee procedures performed with a legacy Zimmer implant utilized an MIS Procedure and/or Technology.

Pricing Trends

     Price increases contributed 1 percentage point of sales growth during both the three and six month periods ended June 30, 2005, compared to 2 percentage points in the same 2004 periods. The reduced benefit from average selling price increases is primarily attributed to the Americas operating segment. The Americas experienced a 1 and 2 percent increase in average selling price during the three and six month periods ended June 30, 2005, respectively, compared to a 4 percent increase in the same 2004 periods. The Company believes the slower growth in average selling prices was primarily due to hospital cost containment efforts. In Europe, average selling prices for the three and six month periods ended June 30, 2005 were consistent with the same 2004 periods. Within Europe, Germany has experienced a 6 percent decrease in average selling prices for both the three and six month periods ended June 30, 2005, as a result of reductions in government implant reimbursement rates. The decline in Germany was offset by increased average selling prices in other European markets. Asia Pacific average selling prices were flat during the three month period ended June 30, 2005, compared to a 3 percent decline in the same 2004 period. Effective April 1, 2004, the Japanese government reduced reimbursement rates. Therefore, this decrease has been fully anniversaried and in Japan average selling prices increased by 1 percentage point in the second quarter of 2005 compared to a decrease of 5 percentage points in the same 2004 period. For the six month period ended June 30, 2005, Japan average selling prices have decreased 2 percentage points as the first quarter of 2005 would have been impacted by the April 1, 2004 reduction. The next Japanese reimbursement change is not expected until April 1, 2006, and therefore Japanese average selling prices are not expected to decline through the first quarter of 2006 compared to the same periods in the prior year. Pressure from governmental healthcare cost containment efforts, group purchasing organizations and potential gain sharing arrangements between surgeons and hospitals may negatively affect the Company’s ability to realize global price increases.

Foreign Currency Exchange Rates

     A weakened U.S. dollar versus most currencies during the three and six month periods ended June 30, 2005, compared to the same 2004 period, contributed 2 percentage points of sales growth. 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 simple forward contracts solely for managing foreign currency volatility and risk. Therefore, while changes to foreign currency exchange rates may affect sales growth, the impact on net earnings in the near term is usually minimal.

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New Product Sales

     New products, which management defines as products introduced within the prior 36-month period, accounted for 20 percent, or $171 million, of the Company’s sales during the three month period ended June 30, 2005. Adoption rates for new technologies are a key indicator of industry performance. Company sales have grown with the introduction of new products, such as Trabecular Metal Modular Acetabular Cups. Introduced to the U.S. market in the second half of 2003, Trabecular Metal Modular Acetabular Cups represented approximately 40 percent of all U.S. acetabular cup sales for the three month period ended June 30, 2005. Adoption rates for the Company’s new products should continue to favorably affect the Company’s operating performance.

Second Quarter Results of Operations

Three Month Results of Operations

Net Sales by Operating Segment

     The following table presents net sales by operating segment and the components of the percentage changes (dollars in millions):

	Three Months Ended June 30,							Volume/						Foreign
	2005		2004		% Inc			Mix			Price			Exchange
Americas	$	494.7	$	432.2		15	%		13	%		1	%		1	%
Europe		228.1		197.7		15			11			—			4
Asia Pacific		124.0		107.5		15			11			—			4
	$	846.8	$	737.4		15			12			1			2

     “Foreign Exchange” as used in the tables herein represents the effect of changes in foreign exchange rates on sales growth.

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Net Sales by Product Category

     The following table presents net sales by product category and the components of the percentage changes (dollars in millions):

	Three Months Ended June 30,							Volume/						Foreign
	2005		2004		% Inc			Mix			Price			Exchange
Reconstructive
Knees	$	353.4	$	294.2		20	%		17	%		1	%		2	%
Hips		294.3		267.7		10			7			—			3
Dental		40.2		31.4		28			26			—			2
Extremities		17.0		14.5		17			12			3			2
Total		704.9		607.8		16			13			1			2
Trauma		44.4		43.4		2			(3	)		3			2
Spine		41.1		33.8		22			20			1			1
OSP		56.4		52.4		8			5			1			2
Total	$	846.8	$	737.4		15			12			1			2

     Knee sales were led by the NexGen Complete Knee Solution product line including the NexGen LPS-Flex Knee, NexGen Trabecular Metal Tibial Components, the NexGen CR-Flex Knee, the NexGen Rotating Hinge Knee and the NexGen LCCK Revision Knee. In addition, the Innex^™ Total Knee System and the Zimmer Unicompartmental High Flex Knee exhibited strong growth.

     Hip sales were led by growth in porous stems, including significant combined growth of the VerSys® Fiber Metal and Zimmer M/L Taper Stems, Trabecular Metal Acetabular Cups, Durom® Hip Resurfacing Products internationally, and Longevity and Durasul Highly Crosslinked Polyethylene Liners. The CLS® Spotorno® Taper Stem also had strong growth.

     Dental sales were led by biologicals and prosthetic implants, including strong growth of the Tapered Screw-Vent® Implant System. Extremities sales were led by the Bigliani/Flatow® Complete Shoulder Solution and the Anatomical Shoulder^™ System. Trauma sales were led by sales of Zimmer Periarticular Plates and ITST^™ Intertrochanteric/Subtrochanteric Fixation. Spine sales were led by the Dynesys®¹ Dynamic Stabilization System and Spinal Trabecular Metal Spacers. OSP sales were primarily driven by the continued growth of the OrthoPAT®² Autotransfusion System and wound management and drainage products.

¹ The Dynesys Dynamic Stabilization Spinal System is cleared in the United States for use as an adjunct to fusion. The Dynesys Dynamic Stabilization Spinal System is also currently in an investigational device study for a non-fusion application and is limited by U.S. federal law to investigational use only. ² Trademark of Haemonetics Corporation

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Americas Net Sales

     The following table presents Americas net sales (dollars in millions):

	Three Months Ended June 30,
	2005		2004		% Inc (Dec)
Reconstructive
Knees	$	225.6	$	186.4		21	%
Hips		137.6		126.7		9
Dental		23.2		18.6		24
Extremities		11.7		10.0		17
Total		398.1		341.7		17
Trauma		26.2		26.9		(2	)
Spine		32.8		27.3		20
OSP		37.6		36.3		4
Total	$	494.7	$	432.2		15

     Growth in the Americas was led by strong knee and hip sales. Knee sales were led by the NexGen Complete Knee Solution product line, including the NexGen LPS-Flex Knee, NexGen Trabecular Metal Tibial Components, the NexGen LCCK Revision Knee and the NexGen CR-Flex Knee. Prolong^™ Highly Crosslinked Polyethylene and the Zimmer Unicompartmental High Flex Knee also made strong contributions.

     Hip sales were led by growth in porous stems, including significant combined growth of the VerSys Fiber Metal and Zimmer M/L Taper Stems, Trabecular Metal Acetabular Cups and Longevity and Durasul Highly Crosslinked Polyethylene Liners.

     Dental, Extremities and Spine also experienced double digit percentage growth compared to the prior year quarter. Dental sales were led by the Tapered Screw-Vent Implant System. Extremities sales were led by the Bigliani/Flatow Complete Shoulder Solution. Spine sales were led by the Dynesys Dynamic Stabilization System.

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Europe Net Sales

     The following table presents Europe net sales (dollars in millions):

	Three Months Ended June 30,
	2005		2004		% Inc (Dec)
Reconstructive
Knees	$	84.6	$	71.9		18	%
Hips		106.4		95.9		11
Dental		11.6		9.2		27
Extremities		3.7		3.0		24
Total		206.3		180.0		15
Trauma		8.5		7.5		13
Spine		6.7		5.7		18
OSP		6.6		4.5		47
Total	$	228.1	$	197.7		15

     Growth in Europe was led by strong knee and hip sales, primarily the NexGen Complete Knee Solution product line and the Innex Total Knee System. Hip sales growth was negatively impacted by reduced average selling prices in Germany and contemplated sales losses related to the Centerpulse integration. Hip sales were driven by Longevity and Durasul Highly Crosslinked Polyethylene Liners, Durom Hip Resurfacing, Trabecular Metal Acetabular Cups and the CLS Spotorno Taper Stem.

     Dental, Extremities, Trauma, Spine and OSP also experienced double digit percentage growth compared to the prior year quarter. Dental sales were led by the Tapered Screw-Vent Implant System. Extremities sales were led by the Bigliani/Flatow Complete Shoulder Solution and the Anatomical Shoulder System. Trauma sales were led by cable products. Spine sales were led by the Dynesys Dynamic Stabilization System. OSP sales were led by wound management products.

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Asia Pacific Net Sales

     The following table presents Asia Pacific net sales (dollars in millions):

	Three Months Ended June 30,
	2005		2004		% Inc
Reconstructive
Knees	$	43.2	$	35.9		20	%
Hips		50.3		45.1		12
Dental		5.4		3.6		53
Extremities		1.6		1.5		7
Total		100.5		86.1		17
Trauma		9.7		9.0		7
Spine		1.6		0.8		106
OSP		12.2		11.6		6
Total	$	124.0	$	107.5		15

     Growth in Asia Pacific was led by strong knee and hip sales. Knee sales were driven by NexGen Trabecular Metal Tibial Components, the NexGen CR Knee and the NexGen LPS-Flex Knee. Hip sales were driven primarily by the continued conversion to porous stems, including the VerSys Hip System, the Alloclassic® (Zweymueller®) Hip System and the CLS Spotorno Stem and sales of Longevity Highly Crosslinked Polyethylene Liners.

     Dental and Spine also experienced double digit percentage growth compared to the prior year quarter. Dental sales were led by the Tapered Screw-Vent Implant System and the Tapered SwissPlus® Implant System. Spine sales were led by the ST360°^TM Spinal Fixation System.

Gross Profit

     Gross profit as a percentage of net sales was 77.7 percent in the three month period ended June 30, 2005, compared to 77.0 for the three month period ended March 31, 2005. The primary difference between the first and second quarters of 2005 is attributed to approximately $6.5 million of pre-tax income reflected in costs of products sold related to the favorable resolution of certain legal and other matters, including the BTG settlement described in Note 12 to the interim consolidated financial statements. These items contributed 0.8 percent to gross profit margin and approximately $0.02 to diluted earnings per share.

     Gross profit as a percentage of net sales was 72.6 percent in the three month period ended June 30, 2004. Inventory step-up costs in the three month period ended June 30, 2005 decreased to $2.1 million, or 0.3 percent of sales, compared to $18.6 million, or 2.5 percent of sales, in the same 2004 period. Other primary contributors to the improvement in gross profit margin were reduced excess and obsolete inventory expense due to improved inventory management, favorable resolution of certain legal and other matters, including the BTG settlement described in Note 12 to the interim consolidated financial statements, favorable product category mix,

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reduced royalties and integration related synergies. Product category mix had a positive effect on gross margins due to higher sales growth of more profitable reconstructive implants and spinal products compared to trauma and OSP products, and the continued shift to premium products. Royalty expenses as a percentage of sales declined due to the expiration of certain royalty contracts and reductions in certain contractual royalty rates.

Operating Expenses

     R&D as a percentage of net sales was 5.1 percent for the three month period ended June 30, 2005, compared to 5.2 percent in the same 2004 period. R&D increased to $43.6 million for the three month period ended June 30, 2005 from $38.2 million in the same 2004 period, reflecting increased spending on active projects focused on areas of strategic significance, including, but not limited to biologics. The Company targets R&D spending to the high end of what management believes to be an average of 4-6 percent for the industry. The Company expects to increase the total number of development projects to more than 170 and expand the number of external technology relationships, which may increase R&D spending to approximately 5.5 percent to 6 percent of sales.

     SG&A as a percentage of net sales was 38.8 percent for the three month period ended June 30, 2005, compared to 40.3 percent for the same 2004 period. The decrease was primarily due to sales growth and realized expense synergies. The Company expects to pursue additional synergy opportunities. In addition, low cost increases in internal and external general and administrative expenditures and controlled general and administrative spending reduced SG&A as a percentage of sales.

     Acquisition and integration expenses for the three month period ended June 30, 2005, were $10.1 million compared to $24.2 million for the same 2004 period, and included $2.6 million of employee severance and retention expenses, $2.0 million of sales agent contract termination expenses, $1.8 million of costs related to integrating the Company’s information technology systems, $1.1 million of integration consulting expenses, $0.8 million of personnel expenses and travel for full-time integration team members, $0.7 million of facility and employee relocation expenses and $1.1 million of other miscellaneous acquisition and integration expenses.

Operating Profit, Income Taxes and Net Earnings

     Operating profit for the three month period ended June 30, 2005, increased 57 percent to $275.8 million from $175.8 million in the same 2004 period. Operating profit growth was driven by increased sales, improved gross profit margins, realized operating expense synergies, controlled operating expenses and decreased acquisition and integration expenses.

     The effective tax rate on earnings before income taxes and minority interest decreased to 29.7 percent for the three month period ended June 30, 2005, from 30.7 percent for the same period in 2004. The reasons for the decrease in the effective tax rate were the implementation of several European restructuring initiatives, the successful negotiation of a lower ongoing Swiss tax rate (from approximately 24 percent to 12.5 percent) and the continued expansion of operations in lower tax jurisdictions.

     Net earnings increased 64 percent to $190.7 million for the three month period ended June 30, 2005, compared to $116.3 million in the same 2004 period. The increase was primarily due

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to higher operating profit, decreased interest expense due to a lower average outstanding debt balance and a lower effective tax rate. Basic and diluted earnings per share increased 60 percent and 62 percent to $0.77 and $0.76, respectively, from $0.48 and $0.47 in the same 2004 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 asset amortization expense. Global operations include research, development, engineering, medical education, brand management, corporate legal, finance, human resource functions, and U.S. and Puerto Rico based operations and logistics. Intercompany transactions have been eliminated from segment operating profit. For more information regarding the Company’s segments, see Note 11 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 periods ended June 30, 2005 and 2004:

Percent of net sales

	Three Months Ended June 30,
	2005			2004
Americas		52.3	%		52.3	%
Europe		33.2			33.8
Asia Pacific		44.3			41.7

     In the Americas, operating profit as a percentage of sales remained consistent.

     European operating profit as a percentage of net sales declined. Operating margins decreased due to a slight decline in average selling prices and increased inventory obsolescence charges as a percentage of sales. This decline was partially offset by the realization of expense synergies related to the elimination of redundant functions and controlled selling, general and administrative spending.

     Asia Pacific operating profit as a percentage of net sales increased primarily due to a slight increase in average selling prices, favorable geographic sales mix as a result of strong growth in the Japan and Australia markets and lower royalty expenses as a percentage of sales.

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Six Month Results of Operations

Net Sales by Operating Segment

     The following table presents net sales by operating segment and the components of the percentage changes (dollars in millions):

	Six Months Ended June 30,							Volume/						Foreign
	2005		2004		% Inc			Mix			Price			Exchange
Americas	$	975.1	$	854.9		14	%		12	%		2	%		—	%
Europe		462.7		412.8		12			7			—			5
Asia Pacific		237.5		211.9		12			9			(1	)		4
	$	1,675.3	$	1,479.6		13			10			1			2

Net Sales by Product Category

     The following table presents net sales by product category and the components of the percentage changes (dollars in millions):

	Six Months Ended June 30,							Volume/						Foreign
	2005		2004		% Inc			Mix			Price			Exchange
Reconstructive
Knees	$	701.1	$	587.0		19	%		16	%		1	%		2	%
Hips		586.5		543.3		8			5			—			3
Dental		73.1		59.2		24			20			2			2
Extremities		33.6		29.6		14			8			4			2
Total		1,394.3		1,219.1		14			11			1			2
Trauma		89.8		88.4		1			(2	)		2			1
Spine		79.4		67.3		18			16			1			1
OSP		111.8		104.8		7			4			1			2
Total	$	1,675.3	$	1,479.6		13			10			1			2

     Knee sales were led by the NexGen Complete Knee Solution product line including the NexGen LPS-Flex Knee, NexGen Trabecular Metal Tibial Components, the NexGen CR-Flex Knee, the NexGen Rotating Hinge Knee and the NexGen LCCK Revision Knee. In addition, the Innex Total Knee System and the Zimmer Unicompartmental High Flex Knee exhibited strong growth.

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     Hip sales were led by growth in porous stems, including significant combined growth of the VerSys Fiber Metal and Zimmer M/L Taper Stems, Trabecular Metal Acetabular Cups, Durom Hip Resurfacing Products internationally, and Longevity and Durasul Highly Crosslinked Polyethylene Liners. The CLS Spotorno Taper Stem also had strong growth.

     Dental sales were led by biologicals and prosthetic implants, including strong growth of the Tapered Screw-Vent Implant System. Extremities sales were led by the Bigliani/Flatow Complete Shoulder Solution and the Anatomical Shoulder System. Trauma sales were led by sales of Zimmer Periarticular Plates and ITST Intertrochanteric/Subtrochanteric Fixation. Spine sales were led by the Dynesys Dynamic Stabilization System and Spinal Trabecular Metal Spacers. OSP sales were primarily driven by the continued growth of the OrthoPAT Autotransfusion System and wound management and drainage products.

Americas Net Sales

     The following table presents Americas net sales (dollars in millions):

	Six Months Ended June 30,
	2005		2004		% Inc (Dec)
Reconstructive
Knees	$	447.9	$	368.9		21	%
Hips		269.9		248.0		9
Dental		42.1		35.0		21
Extremities		23.3		20.6		14
Total		783.2		672.5		17
Trauma		52.4		54.6		(4	)
Spine		64.5		56.0		15
OSP		75.0		71.8		5
Total	$	975.1	$	854.9		14

     Growth in the Americas was led by strong knee and hip sales. Knee sales were led by the NexGen Complete Knee Solution product line, including the NexGen LPS-Flex Knee, NexGen Trabecular Metal Tibial Components, the NexGen LCCK Revision Knee and the NexGen CR-Flex Knee. Prolong Highly Crosslinked Polyethylene and the Zimmer Unicompartmental High Flex Knee also made strong contributions.

     Hip sales were led by growth in porous stems, including significant combined growth of the VerSys Fiber Metal and Zimmer M/L Taper Stems, Trabecular Metal Acetabular Cups and Longevity and Durasul Highly Crosslinked Polyethylene Liners.

     Dental, Extremities and Spine also experienced double digit percentage growth compared to the prior year six month period. Dental sales were led by the Tapered Screw-Vent Implant System. Extremities sales were led by the Bigliani/Flatow Complete Shoulder Solution. Spine sales were led by the Dynesys Dynamic Stabilization System.

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Europe Net Sales

     The following table presents Europe net sales (dollars in millions):

	Six Months Ended June 30,
	2005		2004		% Inc
Reconstructive
Knees	$	173.1	$	148.6		17	%
Hips		218.2		205.0		6
Dental		22.0		17.8		23
Extremities		7.1		6.1		17
Total		420.4		377.5		11
Trauma		17.0		14.8		15
Spine		12.1		10.0		20
OSP		13.2		10.5		26
Total	$	462.7	$	412.8		12

     Growth in Europe was led by strong knee sales, primarily the NexGen Complete Knee Solution product line and the Innex Total Knee System. Hip sales growth was negatively impacted by reduced average selling prices in Germany and contemplated sales losses related to the Centerpulse integration. Hip sales were driven by Longevity and Durasul Highly Crosslinked Polyethylene Liners, Durom Hip Resurfacing, Trabecular Metal Acetabular Cups and the CLS Spotorno Taper Stem.

     Dental, Extremities, Trauma, Spine and OSP also experienced double digit percentage growth compared to the prior year six month period. Dental sales were led by the Tapered Screw-Vent Implant System. Extremities sales were led by the Bigliani/Flatow Complete Shoulder Solution and the Anatomical Shoulder System. Trauma sales were led by cable products. Spine sales were led by the Dynesys Dynamic Stabilization System. OSP sales were led by wound management products.

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Asia Pacific Net Sales

     The following table presents Asia Pacific net sales (dollars in millions):

	Six Months Ended June 30,
	2005		2004		% Inc
Reconstructive
Knees	$	80.1	$	69.5		15	%
Hips		98.4		90.3		9
Dental		9.0		6.4		40
Extremities		3.2		2.9		9
Total		190.7		169.1		13
Trauma		20.4		19.0		8
Spine		2.8		1.3		120
OSP		23.6		22.5		5
Total	$	237.5	$	211.9		12

     Growth in Asia Pacific was led by strong knee and hip sales. Knee sales were driven by NexGen Trabecular Metal Tibial Components, the NexGen CR Knee and the NexGen LPS-Flex Knee. Hip sales were driven primarily by the continued conversion to porous stems, including the VerSys Hip System, the Alloclassic (Zweymueller) Hip System and the CLS Spotorno Stem, and sales of Longevity Highly Crosslinked Polyethylene Liners.

     Dental and Spine also experienced double digit percentage growth compared to the prior year six month period. Dental sales were led by the Tapered Screw-Vent Implant System and the Tapered SwissPlus Implant System. Spine sales were led by the ST360° Spinal Fixation System.

Gross Profit

     Gross profit as a percentage of net sales was 77.4 percent in the six month period ended June 30, 2005, compared to 71.5 in the same 2004 period. Inventory step-up costs in the six month period ended June 30, 2005 decreased to $4.1 million, or 0.2 percent of sales, compared to $49.6 million, or 3.4 percent of sales, in the same 2004 period. Costs of products sold was reduced by approximately $6.5 million, or 0.4 percent of sales and approximately $0.02 diluted earnings per share, due to the favorable resolution of certain legal and other matters, including the BTG settlement described in Note 12 to the interim consolidated financial statements. Other primary contributors to the improvement in gross profit margin were favorable operating segment and product category mix, reduced royalties and integration related synergies. Operating segment mix and product category mix both had a positive effect on gross margins due to higher sales growth in the more profitable Americas segment compared to Europe and Asia Pacific, higher sales growth of more profitable reconstructive implants and spinal products compared to trauma and OSP products, and the continued shift to premium products. Royalty expenses as a

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percentage of sales declined due to the expiration of certain royalty contracts and reductions in certain contractual royalty rates.

Operating Expenses

     R&D as a percentage of net sales was 5.1 percent for the six month period ended June 30, 2005, compared to 5.3 percent in the same 2004 period. R&D increased to $85.7 million for the six month period ended June 30, 2005 from $78.0 million in the same 2004 period, reflecting increased spending on active projects focused on areas of strategic significance, including, but not limited to biologics. The Company targets R&D spending to the high end of what management believes to be an average of 4-6 percent for the industry. The Company expects to increase the total number of development projects to more than 170 and expand the number of external technology relationships, which may increase R&D spending to approximately 5.5 percent to 6 percent of sales.

     SG&A as a percentage of net sales was 38.8 percent for the six month period ended June 30, 2005, compared to 40.2 percent for the same 2004 period. The decrease was primarily due to sales growth and realized expense synergies. The Company expects to pursue additional synergy opportunities. In addition, low cost increases in internal and external general and administrative expenditures and controlled general and administrative spending reduced SG&A as a percentage of sales.

     Acquisition and integration expenses for the six month period ended June 30, 2005, were $27.0 million compared to $55.5 million for the same 2004 period, and included $11.5 million of sales agent contract termination expenses, $4.6 million of employee severance and retention expenses, $4.4 million of costs related to integrating the Company’s information technology systems, $2.3 million of integration consulting expenses, $1.7 million of personnel expenses and travel for full-time integration team members, $1.3 million of facility and employee relocation expenses and $1.2 million of other miscellaneous acquisition and integration expenses.

Operating Profit, Income Taxes and Net Earnings

     Operating profit for the six month period ended June 30, 2005, increased 62 percent to $533.4 million from $329.6 million in the same 2004 period. Operating profit growth was driven by increased sales, improved gross profit margins, realized operating expense synergies, controlled operating expenses and decreased acquisition and integration expenses.

     The effective tax rate on earnings before income taxes and minority interest decreased to 30.1 percent for the six month period ended June 30, 2005, from 31.4 percent for the same period in 2004. The reasons for the decrease in the effective tax rate were the implementation of several European restructuring initiatives, the successful negotiation of a lower ongoing Swiss tax rate (from approximately 24 percent to 12.5 percent) and the continued expansion of operations in lower tax jurisdictions.

     Net earnings increased 70 percent to $364.3 million for the six month period ended June 30, 2005, compared to $213.9 million in the same 2004 period. The increase was primarily due to higher operating profit, decreased interest expense due to a lower average outstanding debt balance and a lower effective tax rate. Basic and diluted earnings per share both increased 68 percent to $1.48 and $1.46, respectively, from $0.88 and $0.87 in the same 2004 period.

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Operating Profit by Segment

     The following table sets forth operating profit as a percentage of sales by segment for the six month periods ended June 30, 2005 and 2004:

Percent of net sales

	Six Months Ended June 30,
	2005			2004
Americas		52.2	%		51.6	%
Europe		35.7			35.0
Asia Pacific		45.0			42.2

     In the Americas, operating profit as a percentage of sales increased due to the effective control of operating expenses, including realized expense synergies and controlled general and administrative spending.

     European operating profit as a percentage of net sales improved due to the realization of expense synergies related to the elimination of redundant functions and controlled selling, general and administrative spending. This increase was offset slightly due to a change in geographic mix and a slight decrease in average selling prices.

     Asia Pacific operating profit as a percentage of net sales increased primarily due to favorable geographic sales mix as a result of strong growth in the Japan and Australia markets and lower royalty expenses as a percentage of sales.

Liquidity and Capital Resources

     Cash flows provided by operating activities were $396.1 million in the six month period ended June 30, 2005 compared to $398.3 million in the same 2004 period. The principal source of cash for the three month period ended June 30, 2005 was net earnings of $364.3 million. The Company experienced $79.9 million of positive cash flow related to income taxes in the six month period ended June 30, 2005. The Company has been able to utilize acquired Centerpulse U.S. net operating loss carryforwards to reduce U.S. federal income tax payments. Operating cash flows from working capital decreased compared to the same 2004 period as a result of sales growth and resolution of certain legal matters, including the BTG settlement described in Note 12 to the interim consolidated financial statements.

     Working capital management continues to be a key focus. At June 30, 2005, the Company had 61 days of sales outstanding in accounts receivable, favorable to June 30, 2004 by 4 days and favorable to March 31, 2005 by 1 day. The decrease in days compared to June 30, 2004 is primarily due to improved receivable collections in Europe and Asia Pacific. At June 30, 2005, the Company had 271 days of inventory on hand, unfavorable to June 30, 2004 by 30 days. Inventory step-up charges and the resolution of certain legal and other matters, including the BTG settlement described in Note 12 to the interim consolidated financial statements, has impacted the components of this calculation by increasing net inventory levels by $6.2 million and decreasing cost of products sold by $4.4 million ($6.5 million related to the favorable

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resolution of certain legal and other matters offset by $2.1 million of inventory step-up costs). The Company estimates these charges increased days of inventory on hand by 9 days.

     Cash flows used in investing activities decreased to $142.5 million in the six month period ended June 30, 2005, compared to $203.5 million in the same 2004 period. In the six month period ended June 30, 2004, the Company had cash outflows of $103.7 million related to the Implex acquisition and $18.2 million related to the Centerpulse acquisition. Additions to instruments during the six month period ended June 30, 2005 were $90.6 million compared to $74.9 million in the same 2004 period. Increases in instrument purchases were primarily to support new product launches and sales growth. During 2005 the Company expects purchases of instruments to approximate $145 million as the Company continues to invest in instruments to support new products, sales growth and MIS Procedures. Additions to other property, plant and equipment during the six month period ended June 30, 2005, were $42.2 million compared to $30.6 million in the same 2004 period. Increases were primarily related to facility expansions in Warsaw, Indiana; Ponce, Puerto Rico; and Parsippany, New Jersey. During 2005 the Company expects purchases of other property, plant and equipment to approximate $125 million to $135 million, as a result of ongoing facility expansions in Warsaw, Indiana; Ponce, Puerto Rico; Winterthur, Switzerland; and Parsippany, New Jersey. Facility expansions are due to increased demand, the transfer of production to other Company manufacturing sites as a result of the closure of the Austin, Texas facility and the tripling of Trabecular Metal Technology production capacity.

     Cash flows used in financing activities were $325.1 million for the six month period ended June 30, 2005, compared to $194.7 million in the same 2004 period. The Company repaid $375.3 million of debt, net, in the six month period ended June 30, 2005, utilizing cash on hand, cash generated from operating activities and $52.1 million in cash proceeds received from the exercise of Company stock options.

     On March 31, 2005, the Company amended and restated its revolving credit and term loan agreement dated as of May 24, 2004 into a five year $1,350 million amended and restated credit agreement (the “Amended and Restated Facility”). The Amended and Restated Facility is a revolving, multi-currency, senior unsecured credit facility maturing March 31, 2010. Available borrowings under the Amended and Restated Facility at June 30, 2005, were approximately $1,082 million. The Amended and Restated Facility contains a provision whereby borrowings may be increased to $1,750 million.

     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 Amended and Restated Facility. Borrowings under the Amended and Restated Facility are used for general corporate purposes and bear interest at a LIBOR-based rate plus an applicable margin determined by reference to the Company’s senior unsecured long-term credit rating and the amounts drawn under the Amended and Restated Facility, at an alternate base rate, or at a fixed rate determined through a competitive bid process. The Amended and Restated Facility contains customary affirmative and negative covenants and events of default for an unsecured financing arrangement, including, among other things, limitations on consolidations, mergers and sales of assets. Financial covenants include a maximum leverage ratio of 3.0 to 1.0 and a minimum interest coverage ratio of 3.5 to 1.0. If the Company falls below an investment grade credit rating, additional restrictions would result, including restrictions on investments and payment of dividends. The Company was in compliance with all covenants under the Amended and

32

Restated Facility as of June 30, 2005. Commitments under the Amended and Restated Facility are subject to certain fees, including a facility and a utilization fee. The Amended and Restated Facility is rated BBB+ by Standard & Poor’s Ratings Services and is not rated by Moody’s Investors’ Service, Inc.

     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, including $51.9 million of payments already made, to be in a range from $120 to $160 million. The Company expects to pay future earn-out payments, if any, with cash flows from operations and borrowings available under the Amended and Restated Facility.

     The Company had $78.8 million in cash and equivalents, $16.6 million in restricted cash and total debt of $268.1 million as of June 30, 2005. The Company expects cash on hand to be in excess of total outstanding debt by December 31, 2005, absent any cash requirements for acquisitions.

     Management believes that cash flows from operations, together with available borrowings under the Amended and Restated 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.

Recent Accounting Pronouncements

     In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which is a revision to SFAS No. 123, “Accounting for Stock Based Compensation”. SFAS 123(R) requires all share-based payments to employees, including stock options, to be expensed based on their fair values. The Company has disclosed the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123. SFAS 123(R) contains three methodologies for adoption: 1) adopt SFAS 123(R) on the effective date for interim periods thereafter, 2) adopt SFAS 123(R) on the effective date for interim periods thereafter and restate prior interim periods included in the fiscal year of adoption under the provisions of SFAS 123, or 3) adopt SFAS 123(R) on the effective date for interim periods thereafter and restate all prior interim periods under the provisions of SFAS 123. The SEC has amended the compliance dates of SFAS 123(R) requiring adoption in the first fiscal year beginning after June 15, 2005. The Company intends to adopt SFAS 123(R) on January 1, 2006.

     In December 2004, the FASB issued FASB Staff Position (“FSP”) 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (the “Act”)”. FSP 109-2 provides accounting and disclosure guidance for repatriation provisions included under the Act. FSP 109-2 was effective upon issuance. As a result of the Act, the Company may repatriate earnings of foreign subsidiaries at reduced U.S. tax rates. The Company believes the effect of such repatriation will not have a material effect on its financial position, results of operations or cash flows and expects to complete its evaluation by December 31, 2005.

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     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” to clarify the accounting for abnormal amounts of idle facility expense. SFAS No. 151 requires that fixed overhead production costs be applied to inventory at “normal capacity” and any excess fixed overhead production costs be charged to expense in the period in which they were incurred. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company does not expect SFAS No. 151 to have a material effect on its financial position, results of operations, or cash flows.

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 six month periods ended June 30, 2005 to the application of critical accounting estimates as described in the Company’s 2004 annual report on Form 10-K.

Forward Looking Statements

     This quarterly report contains statements that are forward-looking statements within the meaning of federal securities laws including statements with respect to future sales, earnings, capital expenditures and debt repayment. When used in this report, the words “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,” “potential,” “project,” “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 Department of Justice investigation announced in March 2005 and 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, 2004.

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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 June 30, 2005. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2005, 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 12 to the interim consolidated financial statements included in Part I of this report.

Item 4. Submission of Matters to a Vote of Security Holders

     The annual meeting of the stockholders of the Company was held on May 2, 2005. The matters submitted to the stockholders for a vote included:

• the election of one director to the Board of Directors;

• the approval of a proposed amendment to the Zimmer Holdings, Inc. TeamShare Stock Option Plan;

• ratification of the selection of PricewaterhouseCoopers LLP (“PwC”) as the Company’s independent registered public accounting firm for 2005; and

• a stockholder proposal relating to auditor independence.

			Number of
			Votes				Number of
	Number of		AGAINST or		Number of		BROKER
Matter	Votes FOR		WITHHELD		ABSTENTIONS		NON-VOTES
Election of J. Raymond Elliott as director		205,735,936		6,649,885		0		0
Amendment to the Zimmer Holdings, Inc. TeamShare Stock Option Plan		140,728,937		38,238,101		2,167,147		31,251,636
Ratification of PwC as the Company’s independent registered public accounting firm for 2005		209,465,193		1,420,560		1,500,068		0
Stockholder proposal relating to auditor independence		20,114,668		158,343,582		2,675,935		31,251,636

     Following are the directors, other than the director elected at the annual meeting, whose terms of office as directors continued after the annual meeting: Stuart M. Essig, Larry C. Glasscock, John L. McGoldrick and Augustus A. White, III, M.D., Ph.D.

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 PwC, the Company’s independent registered

36

public accounting firm, to perform certain non-audit services related to certain 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 Cheryl R. Blanchard
10.2	Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Savings and Investment Program
10.3	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
10.4	First Amendment of Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliate Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan
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

37

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: August 9, 2005	By: /s/ Sam R. Leno
	Sam R. Leno
	Executive Vice President, Corporate Finance
	and Operations and Chief Financial Officer
Date: August 9, 2005	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 January 5, 2004, is made by and between ZIMMER HOLDINGS, INC., a Delaware corporation (the “Company”), and Cheryl R. Blanchard (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:

2

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 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

3

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

4

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 twelve (or, if less, the number of months, including fractions, from the Date of Termination until the Executive reaches his Retirement Date), times

5

the sum of (1) the higher of the Executive’s monthly 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) one-twelfth 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.

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     (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 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) 12 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);

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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 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 12-month period after the Date of Termination, the Company will arrange to provide the Executive with life insurance benefits substantially similar to those that the Executive is receiving from the Company immediately prior to the Notice of Termination (without giving effect to any reduction in those benefits subsequent to a Change in Control). Life insurance benefits otherwise receivable by the Executive pursuant to the preceding sentence 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 12-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

8

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 12 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.

     The Company will offer the Executive and any eligible family members the opportunity to elect to continue medical and dental coverage pursuant to the continuation coverage requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”). The Executive will be responsible for paying the required monthly premium for that coverage, but the Company will pay the Executive a lump sum cash stipend equal to 12 times the monthly premium then charged to qualified beneficiaries for full family COBRA continuation coverage under the Company’s medical and dental plans, which the Executive may choose to use for the payment of COBRA premiums. The Company will pay the stipend to the Executive whether or not the Executive or anyone in his family elects COBRA continuation coverage, whether or not the Executive continues COBRA coverage for a full 12 months, and whether or not the Executive receives health coverage form another employer while the Executive is receiving COBRA continuation coverage.

     (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.

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     (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. Limitation on Severance Payments.

     (a) Notwithstanding anything contained in this Agreement to the contrary, 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 an Excise Tax, then 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).

     (b) For purposes of this Section 3.03, the determination of whether any portion of the Total Payments would be subject to an Excise Tax will be made by an Accounting Firm selected by the Company and reasonably acceptable to the Executive. For purposes of that

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determination, 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, payments provided for in that Section 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 Section 3.02 to which the Executive is clearly entitled.

     (b) The Company will pay to the Executive the remainder of the payments due him under Section 3.02 (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

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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 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

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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.

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

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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 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

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(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 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

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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:

Cheryl Blanchard
1618 South Woodfield Trail
Warsaw, IN 46580

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

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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 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

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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 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.

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     (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 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

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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

     (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

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     (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 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.

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     (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 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

22

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 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

23

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 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.

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     (t) “Incentive Plan” means the Company’s Executive Performance Incentive Plan.

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

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

     (w) “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.

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

     (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

25

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

     (y) “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.

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

     (aa) “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.

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

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

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

EXECUTIVE	ZIMMER HOLDINGS, INC.
/s/ Cheryl R. Blanchard Cheryl R. Blanchard	By: /s/ David C. Dvorak David C. Dvorak EVP, Corporate Services & Chief Counsel

EX-10.2

Exhibit 10.2

BENEFIT EQUALIZATION PLAN
OF
ZIMMER HOLDINGS, INC. AND ITS SUBSIDIARY OR
AFFILIATED CORPORATIONS PARTICIPATING IN THE
ZIMMER HOLDINGS, INC. SAVINGS AND INVESTMENT PROGRAM
(effective as of August 6, 2001)

I. Purpose of the Plan

     The purpose of this Plan is to provide benefits for certain participants in the Zimmer Holdings, Inc. Savings and Investment Program (the “Savings and Investment Program” or “Program”) whose funded benefits are or will be limited by application of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”). The Plan is intended to be an “excess benefit plan” as that term is defined in Section 3(36) of ERISA with respect to those participants whose benefits under the Program have been limited by Section 415 of the Code, and a “top hat” plan meeting the requirements of Sections 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of ERISA with respect to those participants whose benefits under the Program have been limited by Section 401(a)(17) of the Code.

     This Plan is a successor plan to the Benefit Equalization Plan of Bristol-Myers Company and Its Subsidiary or Affiliated Corporations Participating in the Bristol-Myers Company Savings and Investment Program, as in effect on January 1, 1996 and as amended thereafter (the “Prior Plan”). Participants in the Prior Plan who as of the Effective Date are employed by a corporation participating in the Program (a “Participating Employer”) shall as of the Effective Date become participants in this Plan and shall not participate or be entitled to benefits under the Prior Plan. As of the Effective Date, each such participant shall have an account balance under this Plan that is equal to the participant’s account balance as of the Effective Date under the Prior Plan, and this Plan assumes the liabilities for all benefits payable under the Prior Plan with respect to such participants.

II. Administration of the Plan

     The Benefits Committee (the “Committee”) appointed by the Board of Directors of Zimmer Holdings, Inc. (the “Company”) to administer the Savings and Investment Program shall also administer this Plan. The Committee shall have full authority to determine all questions arising in connection with the Plan, including its interpretation, may adopt procedural rules, and may employ and rely on such legal counsel, such actuaries, such accountants and such agents as it may deem advisable to assist in the administration of the Plan. Decisions of the Committee shall be conclusive and binding on all persons.

III. Participation in the Plan

     Each participant in the Savings and Investment Program who is employed by a Participating Employer (which term also includes the Company) shall be eligible to participate in this Plan whenever (a) the allocation to his account under the Savings and Investment Program, as from time to time in effect, would exceed the limitations on benefits and contributions

imposed by Section 415 of the Code calculated from and after September 2, 1974 or (b) amounts of his compensation would be excluded from his “Annual Benefit Salary or Wages” determined under the Program by reason of the application of Section 401(a)(17) of the Code.

IV. Equalization Benefits Related to the Savings and Investment Program

     A. A participant shall be entitled to equalization benefits under this Plan only for those plan years in which (a) he has elected to have a percentage of his Annual Benefit Salary or Wages contributed on his behalf to the Program and (b) he also has in effect an election, made prior to the year with respect to which such contributions relate, to defer a specified percentage of his Annual Benefit Salary or Wages and to have such amount credited to this Plan in the manner described in paragraphs B and C of this Article IV.

     B. The Participating Employer that employs a participant meeting the requirements of paragraph A for a plan year shall credit, or shall cause to be credited, a book account to record the amount of such participant’s Annual Benefit Salary or Wages that he has elected to have credited to this Plan, commencing at the time such participant is precluded from having additional contributions made to his accounts under the Savings and Investment Program because of the limitations of Section 415 of the Code, and continuing through the end of the plan year. Such Participating Employer shall also credit, or cause to be credited, a book account to record the amount of “Employing Company contributions”, if any, that would have been contributed on such participant’s behalf for such plan year to the Program pursuant to the terms of the Program had the amount of the participant’s Annual Benefit Salary or Wages credited pursuant to this paragraph B been instead contributed to the Program.

     C. The Participating Employer that employs a participant meeting the requirements of paragraph A for a plan year shall also credit, or cause to be credited, a separate book account to record the amount of such participant’s Annual Benefit Salary or Wages that he has elected to have credited to this Plan, commencing at the time such participant is precluded from having additional contributions made to his accounts under the Savings and Investment Program because of the limitations of Section 401(a)(17) of the Code, and continuing until the end of the plan year or, if sooner, the time amounts begin to be credited to the participant’s book account under the Plan pursuant to the first sentence of paragraph B for such plan year. No participant may earn credits under both this paragraph C and under paragraph B at the same time; whenever possible, credits shall be made pursuant to paragraph B prior to this paragraph C. Such Participating Employer shall also credit, or cause to be credited, a book account to record the amount of “Employing Company contributions”, if any, that would have been contributed on such participant’s behalf for such plan year to the Program pursuant to the terms of the Program had the amount of the participant’s Annual Benefit Salary or Wages credited pursuant to this paragraph C been instead contributed to the Program.

     D. The election to have amounts credited to this Plan may be suspended at the participant’s option during any period of time that the participant establishes to the satisfaction of the Committee that he is undergoing a financial hardship as defined in Article VI of this Plan.

     E. Each participant’s account shall be deemed to be invested in any one or a combination of the investment funds offered under the Savings and Investment Program (other

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than the Zimmer Stock Fund and the Bristol-Myers Stock Fund) in 1% increments. On any business day the participant may, pursuant to telephonic notification with the administrative agent of the Committee (the “Administrative Agent”), (i) elect to have future credits to his account under this Article IV deemed to be invested, in 1% increments, among such funds established under the Savings and Investment Program (other than the Zimmer Stock Fund and the Bristol-Myers Stock Fund) effective as of the first day of the next payroll period (or as soon as practicable thereafter) and (ii) elect that the credits to his account under this Article IV representing any type of investment under the Plan be deemed to be reduced to cash (in 1% increments) and that such deemed cash be invested in such other funds which the participant shall designate in such election, effective as of the next business day (or as soon as practicable thereafter). Any investment election given by a participant shall continue in effect until changed by the participant. To the extent a participant makes no election, all such credits shall be deemed to have been invested in the same manner and in the same proportion as elected by the participant with respect to allotments credited to his account under the Savings and Investment Program (and any changes in such investment elections), except that any election (or change in election) to invest in the Zimmer Stock Fund and the Bristol-Myers Stock Fund shall not be honored and such credits shall be deemed invested in equal amounts in such other funds unless the participant has not elected to have any amounts invested in such other funds, in which case such credits shall be deemed invested in the Fixed Income Fund established under such Program. Such book accounts shall be revalued each business day as if they had been so invested. For purposes of this Plan, “telephonic notification” shall include any form of communication acceptable to the Administrative Agent, including, telephone, telegraph, satellite or other wireless communication. A “business day” shall mean any day the New York Stock Exchange is open for business.

     F. Each Participating Employer shall distribute to each participant in this Plan employed by it for whom it maintains book accounts or his beneficiary designated under this Plan or, if no such designation is made, under the Savings and Investment Program, upon the termination of employment of such participant an amount in cash equal to (i) the value of his book accounts attributable to credits to his account respecting allotments and deemed earnings and appreciation thereon and (ii) the same percentage of the value of his book accounts attributable to the deemed contributions of the Participating Employer as the percentage of his account balance under the Savings and Investment Program which is vested at the time of termination of his employment less (iii) the amount of any distribution for financial hardship made pursuant to Section VI (the participant’s “Account Balance”). Distribution to participants who, as of the date of termination, have not attained age 55 with 10 or more years of service, shall be paid their Account Balance in the form of a single lump sum. Distribution to participants who, as of the date of termination, have attained age 55 with 10 or more years of service, shall be paid their Account Balance in the form of a single lump sum payment unless, in any calendar year prior to a participant’s termination of employment, but not less than 90 days prior to such termination, such participant irrevocably elects, in writing, to receive such distribution at a later date or in annual installments over a period of 2 to 15 years consisting of an amount approximately equal to his Account Balance divided by the number of installments then remaining (including the installment in question) each year payable commencing as of the end of the month designated for commencement of such payment and as of the end of the same month in each year thereafter until payment of all such installments is made (the “Installment Payment”). Notwithstanding the foregoing, where the participant’s Account Balance on the date

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of his termination of employment does not exceed $15,000, the participant or his beneficiary shall receive payment of such Account Balance in the form of a single lump sum payment.

     G. Notwithstanding the foregoing, no election under clause (ii) of paragraph C of this Article IV and no distribution or withdrawal pursuant to paragraph G of this Article IV will be processed during the period beginning on the Effective Date and ending on or about August 13, 2001 (or as soon as practicable thereafter).

V. Designation of Beneficiaries in the Event of Death

     A participant may designate a beneficiary or beneficiaries to receive all or part of the amount of his account in case of his death if such beneficiary or beneficiaries shall be living at the time of his death. A participant may, subject to the preceding sentence, change or revoke a designation of beneficiary and such designation, change or revocation shall be on a form to be provided for the purpose and shall be signed by the participant and delivered to his employing corporation prior to his death. In case of the death of the participant, the amount of his account with respect to which a designation of beneficiary has been made (to the extent it is valid and enforceable under applicable law) shall be distributed in accordance with this Plan to the surviving designated beneficiary or beneficiaries. The amount in the participant’s account distributable upon death and not subject to such a designation, or if no beneficiary shall be living at the time of the participant’s death, shall be distributed following his death to the person or persons in the first of the following classes of successive preference:

          1. The participant’s surviving spouse.

          2. To such one or more of the participant’s surviving children as the Committee shall determine and in such proportions as the Committee determines.

          3. The participant’s surviving parents, equally.

          4. To such one or more of the participant’s surviving brothers and sisters as the Committee shall determine and in such proportions as the Committee determines.

          5. The participant’s executors or administrators.

     Payment to one or more of such persons shall completely discharge the Plan with respect to the amount so paid. Notwithstanding the above, if the participant has designated a beneficiary under the Savings and Investment Program, such designation shall be deemed a designation for purposes of this Plan unless a separate beneficiary designation is made under this Plan in accordance with the foregoing.

VI. Distribution for Financial Hardship

     If a participant shall establish to the satisfaction of the Committee in accordance with principles and procedures established by the Committee which are applicable to all persons similarly situated that a withdrawal to be made by him pursuant to this Article VI is to be made by reason of an extreme financial hardship, the Participating Employer shall distribute to the participant the amount necessary to meet such financial hardship but not more than the value credited to his book accounts under Article IV hereof.

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VII. Miscellaneous

     This Plan may be terminated at any time by the Board of Directors of the Company, in which event the rights of participants to their book accounts established under this Plan shall become non-forfeitable. The Company or any Participating Employer may terminate this Plan with respect to its employees participating in the Savings and Investment Program, in which event the rights of participants to their book account established under this Plan and payable by such terminating corporation shall become non-forfeitable.

     If the Plan is terminated, no distribution shall be made to a participant or beneficiary which is attributable to the termination during the 90-day period following such termination. Thereafter, providing the Company is not subject to an insolvency or bankruptcy proceeding, all amounts then accrued on behalf of a participant shall be distributed to him (or his beneficiary) within 60 days after the end of such 90-day period. If the Company is subject to an insolvency or bankruptcy proceeding, distribution of such amounts shall be suspended subject to the pendency of such proceeding.

     No right to payment or any other interest under this Plan may be alienated, sold, transferred, pledged, assigned, or made subject to attachment, execution, or levy of any kind.

     Nothing in this Plan shall be construed as giving any employee the right to be retained in the employ of any Participating Employer. Each Participating Employer in the Plan expressly reserves the right to dismiss any employee at any time without regard to the effect which such dismissal might have upon him under the Plan.

     This Plan may be amended at any time by the Board of Directors of the Company or the Committee, except that no such amendment shall deprive any participant of the amount then credited to his book account established under this Plan.

     Benefits payable under this Plan shall not be funded and shall be made out of the general funds of the Participating Employers or any grantor trust established by the Company for this purpose. The Participating Employers shall not be required to segregate any contributions made by participants under this Plan. They shall become a part of the general funds of the Participating Employers. To the extent that a grantor trust is established by the Company, the Committee may from time to time reserve unto itself the right to vote any shares of equity securities or mutual funds held in any investment fund thereunder or may permit such other committee, or Investment Manager or Managers as it may designate to exercise such responsibility.

     This Plan shall be construed, administered and enforced according to the substantive internal laws (and not the conflict of laws provisions) of the State of Indiana.

VIII. Effective Date

     This Plan shall be effective as of August 6, 2001 (the “Effective Date”).

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EX-10.3

Exhibit 10.3

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

(effective as of August 6, 2001)

I.   Purpose of the Plan

     The purpose of this Plan is to provide benefits for certain participants in the Zimmer Holdings, Inc. Retirement Income Plan (the “Retirement Income Plan”) or the Zimmer Puerto Rico Retirement Income Plan (the “Puerto Rico Plan”) (referred to herein collectively as the “Retirement Plans”) whose funded benefits under the Retirement Plans are or will be limited by application of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”). The Plan is intended to be an “excess benefit plan” as that term is defined in Section 3(36) of ERISA with respect to those participants whose benefits under the Retirement Plans have been limited by Section 415 of the Code, and a “top hat” plan meeting the requirements of Sections 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of ERISA with respect to those participants whose benefits under the Retirement Plans have been limited by Section 401(a)(17) of the Code.

     This Plan is a successor plan to the Benefit Equalization Plan of Bristol-Myers Company and Its Subsidiary or Affiliated Corporations Participating in the Bristol-Myers Company Retirement Income Plan or the Bristol-Myers Company Puerto Rico, Inc. Retirement Income Plan, as in effect on January 1, 1996 and as amended thereafter (the “Prior Plan”). Participants in the Prior Plan who as of the Effective Date are employed by a corporation participating in either Retirement Plan (a “Participating Employer”) shall as of the Effective Date become participants in this Plan. This Plan shall recognize all service covered under the Retirement Income Plan or the Puerto Rico Plan. Benefits payable under the Prior Plan shall continue to be payable under the Prior Plan by Bristol-Myers Squibb Company, the sponsor of the Prior Plan (“Bristol-Myers Squibb”) and shall not be assumed by or become obligations of Zimmer Holdings, Inc., the sponsor of this Plan (the “Company”) or any other Participating Employer. As of the Effective Date, each participant under this Plan shall be entitled to a benefit that will be reduced by the amount of the benefit that the participant is entitled to under the Prior Plan.

II.  Administration of the Plan

     The Benefits Committee (the “Committee”) appointed by the Board of Directors of the Company to administer the Retirement Plans shall also administer this Plan. The Committee shall have full authority to determine all questions arising in connection with the Plan, including its interpretation, may adopt procedural rules, and may employ and rely on such legal counsel, such actuaries, such accountants and such agents as it may deem advisable to assist in the administration of the Plan. Decisions of the Committee shall be conclusive and binding on all persons.

III. Participation in the Plan

     Each member of the Retirement Income Plan or the Puerto Rico Plan who is employed by a Participating Employer (which term also includes the Company) shall be eligible to participate in this Plan whenever (a) his benefit under the applicable Retirement Plan, as from time to time in effect, would exceed the limitations on benefits and contributions imposed by Section 415 of the Code calculated from and after September 2, 1974, (b) amounts of his compensation would be excluded from his “Final Average Compensation” determined under the Retirement Plan by reason of the application of Section 401(a)(17) of the Code or (c) he participates in the Zimmer Holdings, Inc. Executive Performance Incentive Plan (the “Performance Incentive Plan”).

IV. Equalization Benefits Related to the Retirement Plan

     A. Each participant in this Plan or his beneficiaries shall be entitled to receive under this Plan a supplemental pension benefit equal to the excess of (1) the benefit that would have been payable to such participant or his beneficiaries under the applicable Retirement Plan determined (a) without regard for any provision therein incorporating limitations imposed by Section 415 of the Code, and (b) by deeming as “compensation” for purposes of determining Final Average Compensation under such Retirement Plan amounts elected to be deferred under the Zimmer Holdings, Inc. Savings and Investment Program (“Savings and Investment Program”) but which due to Section 415 limitations were, in accordance with the participant’s election, credited to the Benefit Equalization Plan of Zimmer Holdings, Inc. and Its Subsidiary or Affiliated Corporations Participating in the Zimmer Holdings, Inc. Savings and Investment Program (the “Savings and Investment BEP”), over (2) the actual benefit payable to such participant or his beneficiaries under the applicable Retirement Plan.

     B. Each participant whose compensation under the applicable Retirement Plan is limited by Section 401(a)(17) of the Code or who participates in the Performance Incentive Plan shall be entitled to receive an additional supplemental pension benefit under this Plan equal to the amount, if any, by which the supplemental pension benefit determined under paragraph A of this Article IV would be greater if the hypothetical benefit calculated under clause (1) of such paragraph were determined (a) by disregarding, in addition to Section 415 limitations, any limitations on such participant’s Final Average Compensation imposed by reason of Section 401(a)(17) of the Code, (b) by including in his “annual rate of compensation” for purposes of determining Final Average Compensation under such Retirement Plan amounts elected to be deferred under the Savings and Investment Program but, due to Section 401(a)(17) limitations, were, in accordance with such participant’s election, credited to the Savings and Investment BEP and (c) by recalculating his “annual rate of compensation” for each year used in determining Final Average Compensation under such Retirement Plan, by substituting for the cash award paid under the Performance Incentive Plan during such calendar year the cash award earned by such participant under the Performance Incentive Plan for such calendar year. For purposes of clause (c) of the preceding sentence, any performance incentive award for the calendar year in which the participant retires or otherwise terminates employment shall be assumed to be fully earned as though all performance goals and other conditions to full payment had been attained as of such retirement or termination date.

     C. Each participant in this Plan in grade levels E07 and above or his beneficiaries

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shall be entitled to receive a supplemental pension benefit equal to the excess of the benefit that would have been payable to such participant or his beneficiaries under the applicable Retirement Plan determined without limiting his total years of service to 40 years.

     D. The supplemental pension benefits payable to a participant under paragraphs A, B and C of this Article IV shall be calculated utilizing the same actuarial assumptions used to compute the participant’s Retirement Plan benefit payments or such other assumptions as may be determined by the Committee from time to time, shall be reduced by the amount of the benefit that the participant is entitled to under the Prior Plan, and shall be payable to the participant (or his beneficiary) upon his election in either:

          (i) a lifetime benefit, 50% joint and survivor, 100% joint and survivor, or the Variable Retirement Income annuity forms of payment as provided under the applicable Retirement Plan, commencing within 60 days after the earlier of (1) his retirement entitling him to receive payments under the applicable Retirement Plan, (2) his death, (3) his total disability as defined in the applicable Retirement Plan, or (4) if the participant’s employment terminates prior to the date he is entitled to receive payments under the applicable Retirement Plan, the date he attains his Early Retirement Date under such Retirement Plan. Such election shall be made, in writing, concurrent with the participant’s benefit election under the applicable Retirement Plan and shall become irrevocable as of the retirement date; or

          (ii) a lump sum provided that one year prior to retirement, the participant irrevocably elects, in writing, to receive supplemental pension benefits in such form, which payment shall be made within 60 days after his retirement entitling him to receive payments under the applicable Retirement Plan, except that, in the case of a participant who is eligible to retire under the applicable Retirement Plan who has an involuntary termination or unplanned retirement and who irrevocably elects, in writing, 90 days prior to retirement to receive supplemental pension benefits in such form, such payment shall be made on the first anniversary of his retirement.

     Any other provision of this Article IV to the contrary notwithstanding, if upon a participant’s termination of employment or retirement the present value of the amount of the supplemental pension benefits determined under paragraphs A, B and C of this Article IV is not more than $5,000 (or if payments would be less than $50 per month), such benefit shall be paid in cash to the participant in a single sum at the time of such termination or retirement.

     Each participant’s supplemental pension benefits under this Plan shall be paid by his Participating Employer. If the participant was employed by more than one such Participating Employer, the proportion to be paid by each such Participating Employer shall be in the ratio which the “Credited Service” (as defined in the applicable Retirement Plan) of the participant with a Participating Employer bears to the total Credited Service of such participant with all Participating Employers.

V. Designation of Beneficiaries in the Event of Death

     Upon the death of a participant prior to receipt of all or part of the amount on his account, the balance remaining on his account shall be paid as follows: If the participant has designated a

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joint annuitant or beneficiary under the applicable Retirement Plan, such person shall be deemed the joint annuitant or beneficiary for purposes of this Plan. If the participant has not designated a joint annuitant or beneficiary under such Retirement Plan, or if no such joint annuitant or beneficiary is living at the time of the participant’s death, the amount in the participant’s account that is distributable upon his death shall be distributed to the same person or persons who would otherwise be entitled to receive a distribution of the participant’s Retirement Plan benefits. Payment to one or more of such persons shall completely discharge the Plan with respect to the amount so paid.

VI. Miscellaneous

     This Plan may be terminated at any time by the Board of Directors of the Company, in which event the rights of participants to their accrued supplemental pension benefits under this Plan shall become non-forfeitable. The Company or any Participating Employer may terminate this Plan with respect to its employees participating in the Retirement Plans, in which event the rights of participants to their accrued supplemental pension benefits under this Plan and payable by such terminating corporation shall become non-forfeitable.

     If the Plan is terminated, no distribution shall be made to a participant or beneficiary which is attributable to the termination during the 90 day period following such termination. Thereafter, providing the Company is not subject to an insolvency or bankruptcy proceeding, all amounts then accrued on behalf of a participant shall be distributed to him (or his beneficiary) within 60 days after the end of such 90-day period. If the Company is subject to an insolvency or bankruptcy proceeding, distribution of such amounts shall be suspended subject to the pendency of such proceeding.

     No right to payment or any other interest under this Plan may be alienated, sold, transferred, pledged, assigned, or made subject to attachment, execution, or levy of any kind.

     Nothing in this Plan shall be construed as giving any employee the right to be retained in the employ of any Participating Employer. Each Participating Employer in the Plan expressly reserves the right to dismiss any employee at any time without regard to the effect which such dismissal might have upon him under the Plan.

     This Plan may be amended at any time by the Board of Directors of the Company or the Committee, except that no such amendment shall deprive any participant of his supplemental pension benefit accrued at the time of such amendment.

     Benefits payable under this Plan shall not be funded and shall be made out of the general funds of the Participating Employers or any grantor trust established by the Company for this purpose. The Participating Employers shall not be required to segregate any contributions made by participants under this Plan. They shall become a part of the general funds of the Participating Employers. To the extent that a grantor trust is established by the Company, the Committee may from time to time reserve unto itself the right to vote any shares of equity securities held in a Pension Trust Fund or may permit such other committee, or Investment Manager or Managers as it may designate to exercise such responsibility.

     This Plan shall be construed, administered and enforced according to the substantive

4

internal laws (and not the conflict of laws provisions) of the State of Indiana.

VII. Effective Date

     This Plan shall be effective as of August 6, 2001 (the “Effective Date”) for retirements or other terminations of employment on and after such date.

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EX-10.4

Exhibit 10.4

FIRST AMENDMENT OF BENEFIT EQUALIZATION

PLAN OF ZIMMER HOLDINGS, INC. AND ITS SUBSIDIARY

OR AFFILIATE CORPORATIONS PARTICIPATING IN THE

ZIMMER HOLDINGS, INC. RETIREMENT INCOME PLAN OR

THE ZIMMER PUERTO RICO RETIREMENT INCOME PLAN

               This First Amendment of Benefit Equalization Plan of Zimmer Holdings, inc. and Its Subsidiary or Affiliate Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan (the “Plan”) is adopted by Zimmer Holdings, Inc. (the “Company”).

Background

               A. The Plan was established by the Company effective August 6, 2001.

               B. The Company now wishes to amend the Plan.

Amendment

               1. Effective January 1, 2003, Article III of the Plan is amended to read as follows:

               III. Participation in the Plan

              Each member of the Retirement Income Plan or the Puerto Rico Plan who is employed by a Participating Employer (which term also includes the Company) shall be eligible to participate in this Plan whenever (a) his benefit under the applicable Retirement Plan, as from time to time in effect, would exceed the limitations on benefits and contributions imposed by Section 415 of the Code calculated from and after September 2, 1974, (b) amounts of his compensation would be excluded from his “Final Average Compensation” determined under the Retirement Plan by reason of the application of Section 401(a)(17) of the Code, (c) he participates in the Zimmer Holdings, Inc. Executive Performance Incentive Plan (the “Performance Incentive Plan”), or (d) he qualifies for Rule of 70 benefits under paragraph F of Article IV of this Plan.

               2. Effective January 1, 2003, subparagraph IV.D.(ii) of the Plan is amended to read as follows:

        (ii) a lump sum, provided that, at least one year prior to retirement, the participant has elected, in writing, to receive supplemental pension benefits in a lump sum, which payment shall be made within 60 days after his retirement

entitling him to receive payments under the applicable Retirement Plan; except that, in the case of a participant who is eligible to retire under the applicable Retirement Plan, who has an involuntary termination or unplanned retirement, and who elects, in writing, 90 days prior to retirement to receive supplemental pension benefits in a lump sum, such payment shall be made on the first anniversary of his retirement. A Participant’s election of a lump sum under this subparagraph (ii) is revocable, but it must be made on or before the applicable one year or 90-day deadline set forth above to be effective.

               3. Effective as of the date this supplemental pension benefit was adopted by the Compensation and Management Committee of the Board of Directors of the Company, a new paragraph IV.E. is added to the Plan to read as follows:

        E. For purposes of calculating the pension benefits of J. Raymond Elliott (“Elliott”) from the Company, Elliott will be entitled to receive an additional supplemental pension benefit under this Plan equal to the excess of (1) the benefit that would have been payable to Elliott under the Retirement Income Plan if (a) Elliott was entitled to the Retirement Income Plan’s early retirement subsidies when he commences his Retirement Income Plan benefits on or after age 55, and (b) Elliott was credited with ten years of service and ten years of credited service with the Company as of August 6, 2001, and service accrued with the Company by Elliott subsequent to August 6, 2001 was added to the ten years of service and ten years of credited service as of August 6, 2001, over (2) the actual benefit payable to Elliott or his beneficiaries under the Retirement Income Plan. In addition, the amount of any additional supplemental pension benefits that Elliott is entitled to receive under paragraphs A, B, or C of this Article IV will be determined as if Elliott were entitled to the Retirement Income Plan’s early retirement subsidies and was credited with ten years of service and ten years of credited service with the Company as of August 6, 2001. The supplemental pension benefits granted to Elliott pursuant to this paragraph E of Article IV will be reduced by the benefits paid to Elliott by Bristol-Myers Squibb pursuant to the letter agreement between Bristol-Myers Squibb and Elliott dated May 1, 2001 and shall be payable to Elliott (or his beneficiary) pursuant to his election under Section D of this Article IV.

               4. Effective January 1, 2003, a new paragraph IV.F. is added to the Plan to read as follows:

        F. If a member of the Retirement Income Plan or the Puerto Rico Plan terminates from active service with a Participating Employer but has not attained age 55, and is thus not otherwise eligible to retire, he will be eligible for “Rule of 70” benefits under this Plan if: (1) on the date of his termination, the sum of his combined whole and partial years of age and service, rounded up to the next

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higher whole number, equals at least 70; (2) on the date of his termination, he has completed a minimum of ten years of service as defined in the Retirement Plan; and (3) he timely executes and does not timely revoke a general release in a form acceptable to the Company and, if the Company so requires, he also executes a covenant not to compete and/or a covenant not to solicit in a form acceptable to the Company.

        Rule of 70 benefits under this paragraph F will not be payable to participants: (1) who, although otherwise eligible for Rule of 70 benefits, leave the employ of the Company prior to a scheduled termination date or (2) whose service with the Company is terminated for any of the following reasons:

               (i) Voluntary termination of employment.

               (ii) Mandatory retirement from employment in accordance with Company policy or statutory requirements.

               (iii) Willful misconduct or activity deemed detrimental to the interests of the Company. This may include, but is not limited to: dishonesty, violation of Company policies (such as those relating to alcohol or drugs, etc.), violation of safety rules, disorderly conduct, discriminatory harassment, unauthorized disclosure of Company confidential information, or conviction of a crime.

               (iv) The willful failure or refusal by the employee substantially to perform his or her duties with the Company (other than any such failure resulting from incapacity due to disability).

               (v) Refusal by the employee to accept a transfer to a position (for which he or she is qualified by reason of knowledge, training and experience) at a new work location that is less than 50 miles farther from the employee’s residence than was his or her work location immediately prior to the proposed transfer.

               (vi) The sale of all or part of the Company’s business assets if the employee is offered employment by the acquirer of those assets.

               (vii) Retirement under a Company disability plan.

               (viii) The employee’s position is outsourced and, within four weeks from the date that his or her employment with the Company terminates, the employee is offered any type of employment with the entity, or any agent or affiliate thereof, that will provide the outsourced services of the Company. For purposes of this Plan, an employee’s position will be considered to have been “outsourced” if the Company has arranged for a third party to provide to the Company the services that the employee had been performing immediately prior to the outsourcing.

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               If a participant is eligible under these “Rule of 70” provisions, the participant or his beneficiaries shall be entitled to receive under the Plan a supplemental pension benefit to offset the difference between the individual’s actual Retirement Plan benefits as a vested terminated employee versus what his benefit would have been as an early retiree. This amount will be determined (a) without regard for any provision in the Retirement Plan incorporating limitations imposed by Section 415 of the Code, in the manner set forth in clause (1) of paragraph A of this Article IV, and (b) by disregarding any limitations on the participant’s Final Average Compensation imposed by reason of Section 401(a)(17) of the Code (if it produces a greater benefit), in the manner set forth in paragraph B of this Article IV.

               Any Rule of 70 benefits to which a participant or his beneficiary is entitled under this paragraph F will be reduced by the amount of any Rule of 70 benefits to which the participant is entitled under the Zimmer Holdings, Inc. Severance Plan and shall be payable to the participant (or his beneficiary) pursuant to his election under Section D of this Article IV.

                      Zimmer Holdings, Inc. has caused this First Amendment to Benefit Equalization Plan of Zimmer Holdings, inc. and Its Subsidiary or Affiliate Corporations Participating in the Zimmer Holdings, Inc. Retirement Income Plan or the Zimmer Puerto Rico Retirement Income Plan to be signed by its duly authorized officers this ___day of December, 2003.

ZIMMER HOLDINGS, INC.
By:	/s/ Sam R. Leno
	(Signature)
	Sam R. Leno
	(Printed)
	Senior Vice President and Chief Financial Officer
By:	/s/ Renee Rogers
	(Signature)
	Renee Rogers
	(Printed)
	Vice President of Human Resources

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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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	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;
(d)	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 the 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: August 9, 2005

/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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	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;
(d)	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 the 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: August 9, 2005

/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 June 30, 2005 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
August 9, 2005

/s/ Sam R. Leno                       

Sam R. Leno
Executive Vice President, Corporate Finance
and Operations and Chief Financial Officer
August 9, 2005