10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

Commission File Number 001-16407

ZIMMER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware	13-4151777
(State or other jurisdiction of incorporation or organization)	(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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

As of October 24, 2008, 224,570,530 shares of the registrant’s $.01 par value common stock were outstanding.

ZIMMER HOLDINGS, INC.

INDEX TO FORM 10-Q

September 30, 2008

		Page
Part I — Financial Information
Item 1.	Financial Statements		3
	Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2008 and 2007		3
	Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007		4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007		5
	Notes to Interim Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		32
Item 4.	Controls and Procedures		32
Part II — Other Information
	There is no information required to be reported under any items except those indicated below.
Item 1.	Legal Proceedings		32
Item 1A.	Risk Factors		32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 5.	Other Information		34
Item 6.	Exhibits		34
Signatures			35
EX-10.2
EX-31.1
EX-31.2
EX-32

2

Part I — Financial Information

Item 1.   Financial Statements

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(In millions, except per share amounts, unaudited)

						Nine Months
	Three Months Ended					Ended
	September 30,					September 30,
	2008			2007		2008			2007
Net Sales	$	952.2		$	903.2	$	3,090.9		$	2,824.0
Cost of products sold		237.2			199.2		754.2			622.0
Gross Profit		715.0			704.0		2,336.7			2,202.0
Research and development		46.7			53.0		146.8			158.8
Selling, general and administrative		404.9			352.6		1,266.7			1,088.5
Certain claims (Note 12)		47.5			—		47.5			—
Settlement (Note 12)		—			169.5		—			169.5
Acquisition, integration and other expense		5.6			2.9		25.4			9.5
Operating expenses		504.7			578.0		1,486.4			1,426.3
Operating Profit		210.3			126.0		850.3			775.7
Interest and other, net		28.2			1.8		36.0			2.9
Earnings before income taxes and minority interest		238.5			127.8		886.3			778.6
Provision for income taxes		23.5			83.4		204.4			268.9
Minority interest		(0.3	)		0.1		(0.8	)		(0.3	)
Net Earnings	$	214.7		$	44.5	$	681.1		$	509.4
Earnings Per Common Share
Basic	$	0.96		$	0.19	$	2.98		$	2.16
Diluted	$	0.95		$	0.19	$	2.97		$	2.14
Weighted Average Common Shares Outstanding
Basic		224.7			234.9		228.5			236.3
Diluted		225.6			236.8		229.7			238.4

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

3

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except share amounts)

	September 30,			December 31,
	2008			2007
	(Unaudited)
ASSETS
Current Assets:
Cash and equivalents	$	542.4		$	463.9
Restricted cash		2.7			2.5
Accounts receivable, less allowance for doubtful accounts		691.6			674.3
Inventories, net		843.0			727.8
Prepaid expenses and other current assets		56.4			59.4
Deferred income taxes		197.2			154.8
Total current assets		2,333.3			2,082.7
Property, plant and equipment, net		1,188.0			971.9
Goodwill		2,649.2			2,621.4
Intangible assets, net		713.7			743.8
Other assets		194.6			213.9
Total Assets	$	7,078.8		$	6,633.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	165.6		$	174.1
Income taxes payable		48.2			85.1
Other current liabilities		624.7			489.4
Total current liabilities		838.5			748.6
Other long-term liabilities		284.4			328.4
Long-term debt		331.1			104.3
Total Liabilities		1,454.0			1,181.3
Commitments and Contingencies (Note 12)
Minority interest		3.5			2.8
Stockholders’ Equity:
Common stock, $0.01 par value, one billion shares authorized, 253.5 million shares in 2008 (252.2 million in 2007) issued		2.5			2.5
Paid-in capital		3,114.2			2,999.1
Retained earnings		4,218.0			3,536.9
Accumulated other comprehensive income		354.7			290.3
Treasury stock, 28.9 million shares in 2008 (19.3 million in 2007)		(2,068.1	)		(1,379.2	)
Total Stockholders’ Equity		5,621.3			5,449.6
Total Liabilities and Stockholders’ Equity	$	7,078.8		$	6,633.7

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

4

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions, unaudited)

	For the Nine
	Months
	Ended September 30,
	2008			2007
Cash flows provided by (used in) operating activities:
Net earnings	$	681.1		$	509.4
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		196.0			167.6
Gain on sale of other assets		(38.8	)		—
Share-based compensation		50.4			53.5
Income tax benefit from stock option exercises		10.6			39.6
Excess income tax benefit from stock option exercises		(6.5	)		(26.5	)
Changes in operating assets and liabilities:
Income taxes		(66.2	)		41.6
Receivables		(11.9	)		3.8
Inventories		(103.3	)		(66.4	)
Accounts payable and accrued expenses		141.3			(1.4	)
Other assets and liabilities		(21.5	)		(58.7	)
Net cash provided by operating activities		831.2			662.5
Cash flows provided by (used in) investing activities:
Additions to instruments		(186.5	)		(106.2	)
Additions to other property, plant and equipment		(189.2	)		(117.8	)
Proceeds from sale of other assets		54.9			—
Acquisitions, net of acquired cash		(18.6	)		(108.1	)
Net cash used in investing activities		(339.4	)		(332.1	)
Cash flows provided by (used in) financing activities:
Net borrowing under credit facilities		220.0			—
Proceeds from employee stock compensation plans		54.2			145.8
Excess income tax benefit from stock option exercises		6.5			26.5
Repurchase of common stock		(688.9	)		(460.6	)
Net cash used in financing activities		(408.2	)		(288.3	)
Effect of exchange rates on cash and equivalents		(5.1	)		5.2
Increase in cash and equivalents		78.5			47.3
Cash and equivalents, beginning of year		463.9			265.7
Cash and equivalents, end of period	$	542.4		$	313.0

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

5

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1.   Significant Accounting Polices

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 2007 Annual Report on Form 10-K filed by Zimmer Holdings, Inc. 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. The December 31, 2007 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Results for interim periods should not be considered indicative of results for the full year. Certain amounts in the three and nine month periods ended September 30, 2007 have been reclassified to conform to the current year presentation.

The words “we”, “us”, “our” and similar words refer to Zimmer Holdings, Inc. and its subsidiaries. Zimmer Holdings refers to the parent company only.

Revenue Recognition — We sell product through three principal channels: 1) direct to healthcare institutions, referred to as direct channel accounts, 2) through stocking distributors and healthcare dealers and 3) directly to dental practices and dental laboratories. The direct channel accounts represent approximately 80 percent of our net sales. Through this channel, inventory is generally consigned to sales agents or customers so that products are available when needed for surgical procedures. No revenue is recognized upon the placement of inventory into consignment as we retain title and maintain the inventory on our balance sheet. Upon implantation, we issue an invoice and revenue is recognized. Pricing for products is generally predetermined by contracts with customers, agents acting on behalf of customer groups or by government regulatory bodies, depending on the market. Price discounts under group purchasing contracts are generally linked to volume of implant purchases by customer healthcare institutions within a specified group. At negotiated thresholds within a contract buying period, price discounts may increase. Sales to stocking distributors, healthcare dealers, dental practices and dental laboratories account for approximately 20 percent of our net sales. With these types of sales, revenue is recognized when title to product passes, either upon shipment of the product or in some cases upon implantation of the product. Product is generally sold at contractually fixed prices for specified periods. Payment terms vary by customer, but are typically less than 90 days. In some cases sales incentives may be earned by a customer for purchasing a specified amount of our product. We estimate whether such incentives will be achieved and, if so, recognize these incentives as a reduction in revenue in the same period the underlying revenue transaction is recognized. Occasionally products are returned and, accordingly, we maintain an estimated sales return reserve that is recorded as a reduction in revenue. Product returns were not significant for the three and nine month periods ended September 30, 2008 and 2007.

6

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.   Comprehensive Income

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

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
	(In millions)						(In millions)
Net Earnings	$	214.7		$	44.5		$	681.1		$	509.4
Other Comprehensive Income (Loss):
Foreign currency cumulative translation adjustments		(102.9	)		80.9			27.0			86.5
Unrealized foreign currency hedge gains/(losses), net of tax		43.4			(33.6	)		(10.6	)		(46.0	)
Reclassification adjustments on foreign currency hedges, net of tax		10.3			5.0			45.5			11.8
Unrealized gains (losses) on securities, net of tax		(1.5	)		(0.9	)		24.0			(1.2	)
Reclassification adjustments on securities, net of tax		(18.4	)		—			(23.8	)		—
Prior service cost and unrecognized losses in actuarial assumptions, net of tax		0.6			0.3			2.3			4.6
Total Other Comprehensive Income (Loss)		(68.5	)		51.7			64.4			55.7
Comprehensive Income	$	146.2		$	96.2		$	745.5		$	565.1

The unrealized loss and gain on securities in the three and nine months ended September 30, 2008 relates primarily to an investment previously accounted for under the equity method that is now considered an available-for-sale investment and accounted for at fair value as we no longer exercise significant influence over the third party investee. During the three and nine month periods ended September 30, 2008, we sold this investment, and other less significant investments for proceeds of $42.9 million and $54.9 million, respectively, and recorded a gross realized gain in interest and other of $30.1 million and $38.8 million, respectively.

3.   Inventories

	September 30,		December 31,
	2008		2007
	(In millions)
Finished goods	$	652.1	$	564.2
Work in progress		62.9		50.3
Raw materials		128.0		113.3
Inventories, net	$	843.0	$	727.8

7

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.   Property, Plant and Equipment

	September 30,			December 31,
	2008			2007
	(In millions)
Land	$	21.3		$	19.4
Buildings and equipment		936.0			855.3
Capitalized software costs		132.1			98.7
Instruments		1,075.9			903.8
Construction in progress		145.0			98.7
		2,310.3			1,975.9
Accumulated depreciation		(1,122.3	)		(1,004.0	)
Property, plant and equipment, net	$	1,188.0		$	971.9

5.   Other Current Liabilities

	September 30,		December 31,
	2008		2007
	(In millions)
License and service agreements	$	198.2	$	149.9
Certain claims (Note 12)		45.8		—
Salaries, wages and benefits		94.0		59.3
Fair value of derivatives		21.8		50.0
Accrued liabilities		264.9		230.2
Total other current liabilities	$	624.7	$	489.4

6.   Fair Value Measurement of Assets and Liabilities

On January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements” (SFAS No. 157) as it relates to financial assets and liabilities recorded at fair value on a recurring basis. Financial Accounting Standards Board Staff Position (FSP) No. 157-2 has delayed the effective date of SFAS No. 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We do not expect that the full adoption of SFAS No. 157 will have a material impact on our consolidated financial statements or results of operations.

8

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following financial assets and liabilities are recorded at fair value on a recurring basis as of September 30, 2008 (in millions):

			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Recorded		Assets		Inputs		Inputs
	Balance		(Level 1)		(Level 2)		(Level 3)
Assets
Available-for-sale securities	$	0.8	$	0.8	$	—	$	—
Derivatives, current and non-current		14.2		—		14.2		—
	$	15.0	$	0.8	$	14.2	$	—
Liabilities
Derivatives, current and non-current	$	25.3	$	—	$	25.3	$	—
	$	25.3	$	—	$	25.3	$	—

Available-for-sale securities are valued using a market approach, based on quoted prices for the specific security from transactions in active exchange markets. Derivatives relate to foreign exchange forward contracts and foreign currency options entered into with various third parties. We value these instruments using a market approach based on foreign currency exchange rates obtained from active markets.

7.   Income Taxes

In September 2007, we reached a settlement with the United States Department of Justice to resolve an investigation into financial relationships between major orthopaedic manufacturers and consulting orthopaedic surgeons. Under the terms of the settlement, we paid a civil settlement amount of $169.5 million and we recorded an expense in that amount. At the time, no tax benefit was recorded related to the settlement expense due to the uncertainty as to the tax treatment. During the third quarter of 2008, we reached an agreement with the U.S. Internal Revenue Service (IRS) confirming the deductibility of a portion of the settlement payment. As a result, we recorded an estimated current tax benefit of $30.8 million.

The U.S. federal returns for years 2003 and 2004 are currently under examination by the IRS. On July 15, 2008, the IRS issued its examination report. We filed a formal protest on August 15, 2008 and requested a conference with the Appeals Office regarding disputed issues. Although the appeals process could take several years, we do not anticipate resolution of the audit will result in any significant impact on our results of operations, financial position or cash flows.

8.   Retirement and Postretirement Benefit Plans

We have defined benefit pension plans covering certain U.S. and Puerto Rico employees. The employees who are not participating in the defined benefit plans do receive additional benefits under our 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, we sponsor various non-U.S. pension arrangements, including retirement and termination benefit plans required by local law or coordinated with government sponsored plans.

9

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

The components of net pension expense for the three and nine month periods ended September 30, 2008 and 2007, for our U.S. and non-U.S. defined benefit retirement plans are as follows (in millions):

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
Service cost	$	6.3		$	6.7		$	18.9		$	20.3
Interest cost		4.5			4.5			13.5			11.5
Expected return on plan assets		(5.9	)		(6.8	)		(17.5	)		(15.7	)
Amortization of unrecognized prior service cost and actuarial loss		0.6			0.8			2.1			2.3
Settlement		0.1			—			2.7			—
Net periodic benefit cost	$	5.6		$	5.2		$	19.7		$	18.4

The components of net periodic benefit expense for the three and nine month periods ended September 30, 2008 and 2007, for our U.S. and Puerto Rico postretirement benefit plans are as follows (in millions):

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
Service cost	$	0.4		$	0.4		$	1.2		$	1.2
Interest cost		0.6			0.6			1.8			1.8
Amortization of unrecognized prior service cost		(0.1	)		(0.1	)		(0.3	)		(0.3	)
Amortization of unrecognized actuarial loss		0.1			0.2			0.3			0.6
Net periodic benefit cost	$	1.0		$	1.1		$	3.0		$	3.3

We contributed approximately $33 million during the nine month period ended September 30, 2008 to our U.S. and Puerto Rico defined benefit plans and do not anticipate making additional contributions for the remainder of 2008. We contributed approximately $9 million to our foreign-based defined benefit plans in the nine month period ended September 30, 2008 and expect to contribute an additional $3 million to these foreign- based plans during the remainder of 2008. Contributions for the U.S. and Puerto Rico postretirement benefit plans are not expected to be significant.

9.   Earnings Per Share

The following is a reconciliation of weighted average shares for the basic and diluted shares computations (in millions):

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2008		2007		2008		2007
Weighted average shares outstanding for basic net earnings per share		224.7		234.9		228.5		236.3
Effect of dilutive stock options and other equity awards		0.9		1.9		1.2		2.1
Weighted average shares outstanding for diluted net earnings per share		225.6		236.8		229.7		238.4

10

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the three and nine month periods ended September 30, 2008, an average of 11.4 million options and 10.0 million options, respectively, to purchase 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 stock. During the three and nine month periods ended September 30, 2007, an average of 2.5 million options and 1.2 million options, respectively, were not included.

In the three month period ended September 30, 2008, we repurchased approximately 0.7 million shares of our common stock at an average price of $67.50 per share for a total cash outlay of $48.6 million, including commissions. In the nine month period ended September 30, 2008, we repurchased approximately 9.6 million shares of our common stock at an average price of $72.25 per share for a total cash outlay of $688.9 million, including commissions. In April 2008, we announced that our Board of Directors authorized a $1.25 billion share repurchase program which expires December 31, 2009. Approximately $1.18 billion remains authorized under this plan.

10.   Segment Information

We design, develop, manufacture and market reconstructive orthopaedic implants, including joint and dental, spinal implants, trauma products and related orthopaedic surgical products which include surgical supplies and instruments designed to aid in orthopaedic surgical procedures and post-operation rehabilitation. We also provide other healthcare related services. Revenue related to these other healthcare related services currently represents less than 1 percent of our total net sales. We manage operations 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 our reportable segment information discussed below. Management evaluates operating segment performance based upon segment operating profit exclusive of operating expenses pertaining to global operations and corporate expenses, share-based compensation, certain claims, settlement expense, acquisition, integration and other 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, and human resource functions, and U.S. and Puerto Rico based manufacturing operations and logistics. Intercompany transactions have been eliminated from segment operating profit. Net sales and segment operating profit are as follows (in millions):

					Operating Profit
	Net Sales				Three Months
	Three Months Ended				Ended
	September 30,				September 30,
	2008		2007		2008			2007
Americas	$	563.3	$	547.0	$	291.2		$	285.8
Europe		251.0		226.0		87.6			79.7
Asia Pacific		137.9		130.2		55.5			60.7
Total	$	952.2	$	903.2
Share-based compensation						(11.0	)		(12.4	)
Inventory step-up						(1.4	)		0.1
Certain claims						(47.5	)		—
Settlement						—			(169.5	)
Acquisition, integration and other						(5.6	)		(2.9	)
Global operations and corporate functions						(158.5	)		(115.5	)
Operating profit					$	210.3		$	126.0

11

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Net Sales				Operating Profit
	Nine Months				Nine Months
	Ended				Ended
	September 30,				September 30,
	2008		2007		2008			2007
Americas	$	1,764.9	$	1,682.9	$	915.0		$	879.3
Europe		882.3		752.0		341.4			298.6
Asia Pacific		443.7		389.1		190.6			184.0
Total	$	3,090.9	$	2,824.0
Share-based compensation						(50.4	)		(53.5	)
Inventory step-up						(3.2	)		(0.2	)
Certain claims						(47.5	)		—
Settlement						—			(169.5	)
Acquisition, integration and other						(25.4	)		(9.5	)
Global operations and corporate functions						(470.2	)		(353.5	)
Operating profit					$	850.3		$	775.7

Beginning in 2008, our Hips product category sales, which are included in the Reconstructive implants product category in the table below, no longer include bone cement and accessory sales, which have been reclassified to our Orthopaedic Surgical Products and Other (“OSP and other”) product category. Amounts in the three and nine month periods ended September 30, 2007 related to sales of bone cement and accessory products have been reclassified to conform to the 2008 presentation. Product category net sales are as follows (in millions):

					Nine Months
	Three Months Ended				Ended
	September 30,				September 30,
	2008		2007		2008		2007
Reconstructive implants	$	782.9	$	729.9	$	2,558.5	$	2,304.1
Trauma		54.2		49.6		164.4		150.0
Spine		50.1		45.8		158.8		141.5
OSP and other		65.0		77.9		209.2		228.4
Total	$	952.2	$	903.2	$	3,090.9	$	2,824.0

11.   Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133” (SFAS No. 161). SFAS No. 161 will require increased disclosure of our derivative and hedging activities, including how derivative and hedging activities affect our consolidated statement of earnings, balance sheet and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. The adoption of SFAS No. 161 will increase the required disclosure of our derivative and hedging activities, but will not have any impact on our financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)), which is a revision of SFAS No. 141. SFAS No. 141(R) will change the way in which we account for business combinations. The statement introduces new purchase accounting concepts, expands the use of fair value accounting related to business combinations and changes the subsequent period accounting for certain acquired assets and liabilities, among other things. SFAS No. 141(R) will be applied prospectively on business combinations

12

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

with acquisition dates in fiscal years beginning on or after December 15, 2008, and therefore, this statement will not affect the accounting for business combinations that are completed prior to the effective date. For deferred tax assets and income tax reserves recorded as part of business combinations, these assets and liabilities will be accounted for under SFAS No. 109 and FIN 48 after the effective date of SFAS No. 141(R), regardless of the acquisition date. Therefore, if a remeasurement of those assets and liabilities is warranted after the effective date of this statement, it will not be reflected as an adjustment to purchase accounting and may affect our income tax expense in the period in which the remeasurement occurs.

In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51” (SFAS No. 160). SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. We do not expect that the adoption of SFAS No. 160 will have a material impact on our consolidated financial statements or results of operations.

12.   Commitments and Contingencies

Intellectual Property and Product Liability-Related Litigation

In July 2008, we announced that we were temporarily suspending marketing and distribution of the Durom^® Acetabular Component (Durom Cup) in the U.S. to allow us to update product labeling to provide more detailed surgical technique instructions to surgeons and implement a surgical training program in the U.S. Following our announcement, product liability lawsuits and other claims have been asserted against us, some of which we settled in the three month period ended September 30, 2008. There are a number of claims still pending and we expect additional claims will be submitted. We recorded a provision for certain claims of $47.5 million in the third quarter of 2008, which represents management’s estimate of liability to patients undergoing revisions associated with surgeries occurring before July 2008 and within two years of the original surgery date. These parameters are consistent with our data which indicates that cup loosenings associated with surgical technique are most likely to occur within that time period. Any claims received outside of these defined parameters will be managed in the normal course and reflected in our standard quarterly product liability accruals.

On February 15, 2005, Howmedica Osteonics Corp. (“Howmedica”) filed an action against us and an unrelated party in the United States District Court for the District of New Jersey alleging infringement of U.S. Patent Nos. 6,174,934; 6,372,814; 6,664,308; and 6,818,020. On June 13, 2007, the Court granted our motion for summary judgment on the invalidity of the asserted claims of U.S. Patent Nos. 6,174,934; 6,372,814; and 6,664,308 by ruling that all of the asserted claims are invalid for indefiniteness. On August 19, 2008, the Court granted our motion for summary judgment of non-infringement of certain claims of U.S. Patent No. 6,818,020, reducing the number of claims at issue in the suit to five. We continue to believe that our defenses against infringement of the remaining claims are valid and meritorious, and we intend to defend the Howmedica lawsuit vigorously.

In addition to certain claims related to the Durom cup discussed above, we are also subject to product liability and other claims and lawsuits arising in the ordinary course of business, for which we maintain insurance, subject to self-insured retention limits. We establish 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, liabilities in excess of those recorded, if any, from, these cases will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

13

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Government Investigations

In March 2005, the United States Department of Justice through the United States Attorney’s Office in Newark, New Jersey commenced an investigation of us and four other orthopaedic companies pertaining to consulting contracts, professional service agreements and other agreements by which remuneration is provided to orthopaedic surgeons. On September 27, 2007, we reached a settlement with the government to resolve all claims related to this investigation. As part of the settlement, we entered into a settlement agreement with the United States of America through the United States Department of Justice and on behalf of the Office of Inspector General of the Department of Health and Human Services (the “OIG-HHS”). In addition, we entered into a Deferred Prosecution Agreement (the “DPA”) with the United States Attorney’s Office for the District of New Jersey (the “U.S. Attorney”) and a Corporate Integrity Agreement (the “CIA”) with the OIG-HHS. We did not admit any wrongdoing, plead guilty to any criminal charges or pay any criminal fines as part of the settlement.

We settled all civil and administrative claims related to the federal investigation by making a settlement payment to the United States government of $169.5 million.

Under the terms of the DPA, the U.S. Attorney filed a criminal complaint in the United States District Court for the District of New Jersey charging us with conspiracy to commit violations of the Anti-Kickback Statute (42 U.S.C. § 1320a-7b) during the years 2002 through 2006. The court deferred prosecution of the criminal complaint during the 18-month term of the DPA. The U.S. Attorney will seek dismissal of the criminal complaint after the 18-month period if we comply with the provisions of the DPA. The DPA provides for oversight by a federally appointed monitor. Under the CIA, which has a term of five years, we agreed, among other provisions, to continue the operation of our enhanced Corporate Compliance Program, designed to promote compliance with federal healthcare program requirements, in accordance with the terms set forth in the CIA. We also agreed to retain an independent review organization (“IRO”) to perform annual reviews to assist us in assessing our compliance with the obligations set forth in the CIA to ensure that arrangements we enter into do not violate the Anti-Kickback Statute. Our obligation to retain an IRO is suspended during the 18-month term of the DPA. A material breach of the DPA or the CIA may subject us to further criminal or civil action and/or to exclusion by OIG-HHS from participation in all federal healthcare programs, which would have a material adverse effect on our financial position, results of operations and cash flows.

In November 2007, we received a civil investigative demand from the Massachusetts Attorney General’s office seeking additional information regarding the financial relationships we publicly disclosed pursuant to the DPA with a number of Massachusetts healthcare providers. We received a similar inquiry from the Oregon Attorney General’s office in October 2008. We are cooperating fully with the investigators with regard to these matters.

In September 2007, the Staff of the SEC informed us that it was conducting an informal investigation regarding potential violations of the Foreign Corrupt Practices Act in the sale of medical devices in a number of foreign countries by companies in the medical device industry. We understand that at least four other medical device companies received similar letters. We are fully cooperating with the SEC and the U.S. Department of Justice with regard to this informal investigation.

Derivative Actions and Class Actions

Following announcement of our entry into the DPA and CIA and commencement of the informal SEC investigation described above, two shareholder derivative actions were filed in Kosciusko Superior Court in Warsaw, Indiana. The first action, captioned Bottner v. Dvorak et al., was filed on October 16, 2007. The second action, captioned Capizzi v. Dvorak et al., was filed on October 30, 2007. On November 19, 2007, these two cases were consolidated under the caption In re Zimmer, Inc. Derivative Litigation. The plaintiffs sought to maintain the action purportedly on our behalf against five of our current directors and three former directors. On December 10, 2007, the plaintiffs filed a consolidated amended derivative complaint, which alleged, among other things, breaches of fiduciary duty by the individual defendants which allegedly allowed misconduct to occur, including alleged

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

illegal payments to doctors, and caused us financial harm, including the cost of the settlement with the federal government described above. The plaintiffs did not seek damages from us, but instead requested damages of an unspecified amount on our behalf. The plaintiffs also requested that the court order (i) disgorgement of profits, benefits and other compensation obtained by the individual defendants and (ii) certain matters of corporate governance be placed before our stockholders for a vote. On January 16, 2008, we and the individual defendants filed separate motions to dismiss the complaint and memoranda in support. We and the individual defendants also filed a joint motion to stay discovery pending a ruling on the motions to dismiss. The plaintiffs filed their opposition to these motions on February 26, 2008. We and the individual defendants filed joint reply briefs on March 11, 2008. On August 8, 2008, one of the plaintiffs, Savino Capizzi, filed a notice of voluntary dismissal of his action. On August 28, 2008, the Court entered an order granting the defendants’ motions to dismiss and ordering the dismissal of the consolidated amended derivative complaint. The plaintiffs did not pursue an appeal, and we consider the matter to be closed.

On April 24, 2008, a complaint was filed in the United States District Court for the Southern District of New York, Thorpe v. Zimmer, Inc., et al., naming us and two of our subsidiaries as defendants. The complaint relates to a putative class action on behalf of certain residents of New York who had hip or knee implant surgery involving Zimmer products during an unspecified period. The complaint alleges that our relationships with orthopaedic surgeons and others violated the New York deceptive practices statute and unjustly enriched us. The plaintiff requests actual damages or $50.00, whichever is greater, on behalf of each class member, a permanent injunction from our engaging in allegedly improper practices in the future and restitution in an unspecified amount. We believe this lawsuit is without merit, and we intend to defend it vigorously.

On August 5, 2008, a complaint was filed in the United States District Court for the Southern District of Indiana, Plumbers and Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., et al., naming us and two of our executive officers as defendants. The complaint relates to a putative class action on behalf of persons who purchased our common stock between January 29, 2008 and July 22, 2008. The complaint alleges that we and two of our executive officers engaged in violations of the Securities Exchange Act of 1934, as amended, by issuing false and misleading statements concerning our business and financial results during the relevant time period. The plaintiff seeks unspecified damages and interest, attorneys’ fees, costs and other relief. We believe this lawsuit is without merit, and we intend to defend it vigorously.

On August 15, 2008, a shareholder derivative action, Hays v. Dvorak et al., was filed in the United States District Court for the Southern District of Indiana. The plaintiff seeks to maintain the action purportedly on our behalf against all of our current directors, one former director and two non-director executive officers. The plaintiff alleges, among other things, breaches of fiduciary duties, abuse of control, unjust enrichment and gross mismanagement by the named defendants based on substantially the same factual allegations as the putative securities class action referenced above. The plaintiff does not seek damages from us, but instead requests damages of an unspecified amount on our behalf. The plaintiff also seeks appropriate equitable relief to remedy the individual defendants’ alleged misconduct, attorneys’ fees, costs and other relief.

13.   Subsequent Event

In October 2008, we completed the acquisition of Abbott Spine for a purchase price of approximately $360 million. The acquisition was funded by a combination of cash on-hand and new borrowings under existing credit facilities. This investment will add a number of innovative products and help build toward critical mass in the Spine product category. We also expect it will enhance our research and development capabilities in the Spine product category and will strengthen our sales coverage. We expect to record significant charges related to in-process research and development and other acquisition and integration costs as a result of this transaction in the fourth quarter of 2008.

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

Overview

We are a global leader in the design, development, manufacture and marketing of reconstructive orthopaedic implants, including joint and dental, spinal implants, trauma products and related orthopaedic surgical products (sometimes referred to in this report as “OSP”). We also provide other healthcare related services. 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 includes supplies and instruments designed to aid in predominantly orthopaedic surgical procedures and post-operation rehabilitation. We have operations in more than 25 countries and market products in more than 100 countries. We manage operations through three reportable geographic segments — the Americas, Europe and Asia Pacific.

Certain percentages presented in Management’s Discussion and Analysis are calculated from the underlying whole-dollar amounts and therefore may not recalculate from the rounded numbers used for disclosure purposes. Certain amounts in the 2007 consolidated financial statements have been reclassified to conform to the 2008 presentation.

Beginning in 2008, our Hips product category sales no longer include bone cement and accessory sales, which have been reclassified to our OSP and Other product category. Amounts in the three and nine month periods ended September 30, 2007 related to sales of bone cement and accessory products have been reclassified to conform to the 2008 presentation.

We believe the following developments or trends are important in understanding our financial condition, results of operations and cash flows for the three and nine month periods ended September 30, 2008 and our expected results for the remainder of 2008.

Demand (Volume and Mix) Trends

Increased volume and changes in the mix of product sales contributed 3 percentage points of sales growth during the three month period ended September 30, 2008, compared to 8 percentage points in the same 2007 period. The ongoing shift in demand to premium products, such as Longevity^® and Durasul^® Highly Crosslinked Polyethylenes, Trabecular Metal^TM Technology products, high-flex knees, knee revision products, porous hip stems and the introduction of gender based devices continues to positively affect sales growth.

We believe the market for orthopaedic procedure volume on a global basis continues to rise at mid single digit rates driven by an aging global population, obesity, proven clinical benefits, new material technologies, advances in surgical techniques and more active lifestyles, among other factors.

Pricing Trends

Global selling prices were flat for the three month period ended September 30, 2008, which is similar to the same 2007 period. Selling prices in the Americas were flat during the three month period ended September 30, 2008, compared to a 1 percent increase in the same 2007 period. In Europe, selling prices for the three month period ended September 30, 2008 were flat, which is similar to the same 2007 period. Asia Pacific selling prices decreased 4 percent for the three month period ended September 30, 2008, compared to flat selling prices in the same 2007 period. Japan and Australia each reported a 5 percent decrease in average selling prices as a result of scheduled reductions in government controlled reimbursement prices. Japan and Australia combined currently represent approximately 10 percent of our sales. With the effect of governmental healthcare cost containment efforts and pressure from group purchasing organizations, we expect global selling prices will remain flat in 2008.

16

Foreign Currency Exchange Rates

For the three month period ended September 30, 2008, foreign currency exchange rates had a positive 2 percent effect on sales. We estimate that an overall weaker U.S. Dollar will have a positive effect of approximately 3 percent on sales for the year ending December 31, 2008 using average exchange rates in effect at the end of September 2008. We address currency risk through regular operating and financing activities, and under appropriate circumstances and subject to proper authorization, through the use of forward contracts and foreign currency options solely for managing foreign currency volatility and risk. Changes to foreign currency exchange rates affect sales growth, but due to offsetting gains/losses on hedge contracts, which are recorded in cost of products sold, the effect on net earnings in the near term is expected to be minimal.

Compliance-Related Matters

On September 27, 2007, we and other major U.S. orthopaedic manufacturers reached a settlement with the United States government to resolve all claims related to an investigation into financial relationships between the industry and consulting orthopaedic surgeons. We paid a $169.5 million settlement amount and entered into a Deferred Prosecution Agreement (DPA) with the United States Attorney’s Office for the District of New Jersey. Under the DPA, we expect to remain subject to oversight by a federally appointed monitor through March, 2009.

We also entered into a Corporate Integrity Agreement (CIA) with the Office of the Inspector General of the U.S. Department of Health and Human Services, which has a term of 5 years. For more information regarding the settlement, see Note 12 to the consolidated financial statements included elsewhere in this Form 10-Q.

No tax benefit was recorded related the $169.5 million settlement expense when it was recorded in the three month period ended September 30, 2007. In the third quarter of 2008, we reached an agreement with the U.S. Internal Revenue Service confirming the deductibility of a portion of the settlement and recorded an estimated tax benefit of approximately $30.8 million, resulting in a decrease to the current period effective tax rate. For more information regarding the tax treatment of the settlement expense, see Note 7 to the consolidated financial statements included elsewhere in this Form 10-Q.

We are in the process of implementing an enhanced global compliance program which addresses areas such as product development, marketing, surgeon training and educational and charitable funding. The principles of this program meet or exceed the requirements of the DPA and CIA as they apply in most respects to all product segments and reach all worldwide operations. We currently estimate that the costs for complying with the DPA and CIA and implementing the enhanced compliance program in 2008 will be in a range of $50-$60 million, including the fees incurred for the federally appointed monitor.

Durom Acetabular Cup

In July 2008, we announced a temporary suspension of marketing and distribution of the Durom^® Acetabular Component (Durom Cup) in the U.S. to permit us to update product labeling to provide more detailed surgical technique instructions and implement a surgical training program in the U.S. We resumed marketing and distribution of the Durom Cup in the U.S. in August 2008. To date, we believe that approximately one-half of the U.S. surgeons who were actively using the Durom Cup prior to the suspension have completed the requisite training program.

17

Following our announcement, we received claims from a number of Durom Cup patients seeking reimbursement for costs and payments for pain and suffering and we expect to receive additional similar claims. We recorded a provision for certain claims of $47.5 million in the three month period ended September 30, 2008, which represents management’s estimate of liability to patients undergoing revision surgeries related to the Durom Cup. The estimate is limited to revisions associated with surgeries occurring before July 2008 and within two years of the original surgery date. Any claims received outside of these defined parameters will be managed in the normal course and reflected in our standard quarterly product liability accruals.

We estimate that we will lose approximately $20-$30 million in hip product sales during 2008, in large part, as a consequence of the events involving the Durom Cup. In addition, we expect that our entry into the growing U.S. hip resurfacing market may be hindered or delayed as the Durom Cup has been integral to our plans for entry into that market.

Orthopaedic Surgical Products (OSP) Actions

In April 2008, we initiated voluntary product recalls of certain OSP patient care products manufactured at the Dover, Ohio facility that we determined did not meet internal quality standards. We do not expect these recalls to affect our core hip and knee implants business. Additionally, we voluntarily and temporarily suspended production and sales of certain OSP products manufactured at the Dover facility. We expect to have a significant portion of these products back in production by the end of 2008, with the remainder of the products coming back into production in the first quarter of 2009. We expect these actions will adversely impact 2008 OSP revenues by $70-$80 million and 2008 diluted earnings per share by $0.18-$0.20, including $0.07 related to inventory charges, idle plant costs and other non-recurring charges.

As a result of the disruptive factors discussed above, including our temporary suspension of U.S. marketing and distribution of the Durom Cup, our voluntary recall and suspension of production of certain OSP patient care products, and the implementation of our enhanced global compliance program, we believe we suffered customer losses during the three month period ended September 30, 2008. We estimate, based on information currently available to us, that these customer losses reduced our base of knee and hip revenues by approximately 3 percent. We expect our sales growth to be at a rate slower than the market in the near term due to these disruptive factors.

Third Quarter 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
	September 30,							Volume/						Foreign
	2008		2007		% Inc			Mix			Price			Exchange
Americas	$	563.3	$	547.0		3	%		3	%		—	%		—	%
Europe		251.0		226.0		11			4			—			7
Asia Pacific		137.9		130.2		6			4			(4	)		6
	$	952.2	$	903.2		5			3			—			2

“Foreign Exchange” as used in the tables in this report 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
	September 30,							Volume/						Foreign
	2008		2007		% Inc (Dec)			Mix			Price			Exchange
Reconstructive
Knees	$	411.2	$	376.9		9	%		8	%		(1	)%		2	%
Hips		292.3		278.9		5			2			(1	)		4
Extremities		27.5		23.9		15			12			1			2
Dental		51.9		50.2		3			(1	)		2			2
Total		782.9		729.9		7			5			(1	)		3
Trauma		54.2		49.6		10			5			2			3
Spine		50.1		45.8		9			6			2			1
OSP and other		65.0		77.9		(17	)		(19	)		—			2
Total	$	952.2	$	903.2		5			3			—			2

The NexGen^® Complete Knee Solution product line, including Gender Solutions^tm Knee Femoral Implants, the NexGen LPS-Flex Knee, the NexGen CR-Flex Knee and the NexGen LCCK Revision Knee, led knee sales. In addition, the Zimmer^® Unicompartmental High-Flex Knee, the NexGen Rotating Hinge Knee and the Natural-Knee^® exhibited strong growth.

The continued conversion to porous stems, including the Zimmer M/L Taper Stem, the CLS^® Spotorno^® Stem from the CLS Hip System, and the Alloclassic^® Zweymüller^® Hip Stem, led hip stem sales, but were partially offset by weaker sales of cemented stems. Trabecular Metal Acetabular Cups and Longevity and Durasul Highly Crosslinked Polyethylene Liners also had strong growth. The temporary suspension of marketing and distribution of the Durom Cup in the U.S. negatively impacted hip sales growth in the quarter and we expect this trend to continue for the remainder of 2008. Additionally, with the lack of a hip resurfacing product within our U.S. hip portfolio, we expect to face a continuing challenge in hip sales growth with the adoption of hip resurfacing in the U.S. market.

The Bigliani/Flatow^® Complete Shoulder Solution and the Zimmer Trabecular Metal Reverse Shoulder System led extremities sales. Orthobiologicals and prosthetic implants, including the Tapered Screw-Vent^® Implant System, led dental sales. Zimmer Periarticular Locking Plates and the I.T.S.T.^tm Intertrochanteric/Subtrochanteric Fixation System led trauma sales. The Dynesys^® Dynamic Stabilization System and the Trinica^® Select Anterior Cervical Plate System led spine sales. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products, but these negative factors were partially offset by strong growth in PALACOS^{® 1} Bone Cement.

¹ Trademark of Heraeus Kulzer GmbH

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Americas Net Sales

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

	Three Months Ended September 30,
	2008		2007		% Inc (Dec)
Reconstructive
Knees	$	264.1	$	247.4		7	%
Hips		137.8		134.5		2
Extremities		20.3		16.9		19
Dental		28.3		28.9		(2	)
Total		450.5		427.7		5
Trauma		30.8		29.8		3
Spine		39.2		38.2		2
OSP and other		42.8		51.3		(17	)
Total	$	563.3	$	547.0		3

The NexGen Complete Knee Solution product line, including the Gender Solutions Knee Femoral Implants, NexGen LPS-Flex Knee, the NexGen LCCK Revision Knee and the NexGen CR-Flex Knee, led knee sales. The Zimmer Unicompartmental High-Flex Knee also made a strong contribution.

Growth in porous stems, including growth of the Zimmer M/L Taper Stem and the Zimmer M/L Taper Stem with Kinectiv^® Technology, led hip stem sales, but were partially offset by weaker sales of cemented stems. Trabecular Metal Acetabular Cups and Longevity Highly Crosslinked Polyethylene Liners also made a strong contribution. As noted above, the temporary suspension of marketing and distribution of the Durom Cup in the U.S. negatively impacted hip sales and we also expect that the adoption of hip resurfacing in the U.S. market will continue to adversely affect our hip sales growth.

The Bigliani/Flatow Shoulder Solution and the Zimmer Trabecular Metal Reverse Shoulder System led extremities sales. Negative sales growth for our dental business reflects disruptions caused by the implementation of our enhanced compliance model and overall weakness in the U.S. economy. Zimmer Periarticular Plates and the I.T.S.T. Intertrochanteric/Subtrochanteric Fixation System led trauma sales. The Dynesys Dynamic Stabilization System and the Trinica Select Anterior Cervical Plate System led spine sales. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products, but these negative factors were partially offset by strong growth in PALACOS Bone Cement.

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Europe Net Sales

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

	Three Months Ended September 30,
	2008		2007		% Inc (Dec)
Reconstructive
Knees	$	94.5	$	81.0		17	%
Hips		106.8		98.3		9
Extremities		5.7		5.2		9
Dental		15.3		13.4		14
Total		222.3		197.9		12
Trauma		12.2		9.9		26
Spine		8.4		6.7		27
OSP and other		8.1		11.5		(30	)
Total	$	251.0	$	226.0		11

Changes in foreign exchange rates positively affected both knee and hip sales by 8 percent. The NexGen Complete Knee Solution product line, including the NexGen LPS-Flex Knee, the NexGen LCCK Revision Knee and the NexGen CR-Flex Knee, experienced strong sales growth in our European region.

The continued conversion to porous stems, including the CLS Spotorno Stem and the Alloclassic Zweymüller Stem, led hip sales, but was offset by weaker sales of cemented stems. Longevity and Durasul Highly Crosslinked Polyethylene Liners, Trabecular Metal Acetabular Cups and the Allofit^® Hip Acetabular System also contributed to hip sales.

The Anatomical Shoulder^tm System and the Coonrad/Morrey Total Elbow led extremities sales. The Tapered Screw-Vent Implant System led dental sales. The Cable-Ready^® Cable Grip System and the NCB^® Plating System led trauma sales. The Dynesys Dynamic Stabilization System and the Optima^TM2 ZS Spinal Fixation System led spine sales. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products, but these negative factors were partially offset by strong growth in Surgical Equipment products.

² Trademark of U&i Corporation

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Asia Pacific Net Sales

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

	Three Months Ended September 30,
	2008		2007		% Inc (Dec)
Reconstructive
Knees	$	52.6	$	48.5		8	%
Hips		47.7		46.1		4
Extremities		1.5		1.8		(11	)
Dental		8.3		7.9		4
Total		110.1		104.3		6
Trauma		11.2		9.9		13
Spine		2.5		0.9		142
OSP and other		14.1		15.1		(6	)
Total	$	137.9	$	130.2		6

Changes in foreign exchange rates positively affected knee sales by 4 percent and hip sales by 7 percent. Reported decreases in average selling prices negatively affected knee sales by 6 percent and hip sales by 5 percent. The NexGen Complete Knee Solution product line, including the NexGen CR-Flex Knee and the NexGen LPS-Flex Knee, led knee sales. The Gender Solutions Knee Femoral Implant in Australia also contributed to knee sales for the period.

The continued conversion to porous stems, including the Fiber Metal Taper Stem from the VerSys^® Hip System and the Alloclassic Zweymüller Hip System, led hip stem sales. Sales of Longevity and Durasul Highly Crosslinked Polyethylene Liners, the Trilogy^® Acetabular System and Trabecular Metal Acetabular Cups also grew during the quarter.

Extremities sales were led by the Coonrad/Morrey Total Elbow. The Tapered Screw-Vent Implant System led dental sales. Trauma sales were led by the I.T.S.T. Intertrochanteric/Subtrochanteric Fixation System. The Dynesys Dynamic Stabilization System led spine sales. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products.

Gross Profit

Gross profit as a percentage of net sales was 75.1 percent in the three month period ended September 30, 2008, compared to 77.9 percent in the same 2007 period and 75.7 percent in the three month period ended June 30, 2008. The primary contributors to the decrease in gross profit margin were the increase in period over period hedge losses, idle plant costs at our Dover facility and an increase in excess inventory and obsolescence charges due to increased inventory levels. Under our hedging program, 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, and then recognized in cost of products sold when the hedged item affects earnings.

Operating Expenses

R&D as a percentage of net sales was 4.9 percent for the three month period ended September 30, 2008, compared to 5.9 percent in the same 2007 period. R&D expense decreased to $46.7 million for the three month period ended September 30, 2008, from $53.0 million in the same 2007 period, reflecting decreased spending on certain development, clinical and external research activities due to delays connected with our operational compliance with the DPA and CIA and implementation of our enhanced compliance program. Many of the delayed development and research activities have now resumed and we expect R&D spending to return to our historical average of 5-6 percent of sales.

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SG&A as a percentage of net sales was 42.5 percent for the three month period ended September 30, 2008, compared to 39.0 percent in the same 2007 period. SG&A expense increased to $404.9 million for the three month period ended September 30, 2008, from $352.6 million in the same 2007 period. Increased SG&A costs include monitor fees as well as consulting and legal fees associated with the implementation of our enhanced compliance program globally. Such costs resulted in an approximate $17 million increase over the same prior year period. Expenses related to other operating initiatives also caused an increase in SG&A as a percentage of net sales. Such operating initiatives include the planned implementation of a global IT system, improving quality systems at our Dover facility, and a new manufacturing facility in Ireland. Additionally, selling costs increased by 100 basis points in the three month period ended September 30, 2008 compared to the same 2007 period. This increase was caused by increased selling costs as a result of the ORTHOsoft acquisition, an increase in the headcount of our sales force in certain locations, increased commission incentives to sell certain key products and a change in the mix of commissions earned as a result of lower OSP sales. In a partial offset to these unfavorable items, SG&A expense related to share-based compensation was favorable by 20 basis points relative to the same prior year period due to a favorable adjustment as we recalculated estimated payouts on our three year performance-based equity incentive program taking into account recent operating performance.

Certain claims expense of $47.5 million is a provision for estimated claims of Durom Cup patients undergoing revision surgeries within specified times. Acquisition, integration and other expenses for the three month period ended September 30, 2008 were $5.6 million, compared to $2.9 million in the same 2007 period. These expenses pertain to current and prior period acquisitions, including facility consolidation costs, legal fees and retention and termination payments.

Operating Profit, Income Taxes and Net Earnings

Operating profit for the three month period ended September 30, 2008 increased 67 percent to $210.3 million, from $126.0 million in the same 2007 period. The significant increase in operating profit is due to the non-recurring settlement expense of $169.5 million that was recorded in the 2007 period. Excluding the impact of the settlement expense in the prior year, operating profit for the three month period ended September 30, 2008 would have been unfavorable compared to the same 2007 period as a result of lower gross margins, significant but temporary increases in SG&A costs attributable to the implementation of our enhanced compliance program and certain claims expense of $47.5 million.

Interest and other income for the three month period ended September 30, 2008 increased to $28.2 million, from $1.8 million in the same 2007 period. Interest and other income for the three month period ended September 30, 2008 includes a realized gain of $30.1 million related to the sale of certain marketable securities, partially offset by increased interest expense as a result of an increase in outstanding long-term debt.

The effective tax rate on earnings before income taxes and minority interest decreased to 9.8 percent for the three month period ended September 30, 2008, from 65.2 percent in the same 2007 period. The effective tax rate for the 2007 period reflects the effect of the $169.5 million settlement expense, for which no tax benefit had previously been recognized. In the third quarter of 2008, we recorded an estimated tax benefit of approximately $30.8 million, resulting in a decrease of 12.9 percent in the current period effective tax rate. The effective tax rate for the three month period ended September 30, 2008 was further reduced as a result of increased profits in lower tax jurisdictions.

Net earnings increased to $214.7 million for the three month period ended September 30, 2008, compared to $44.5 million in the same 2007 period. The increase is primarily due to the impact of the $169.5 million settlement expense recorded in the 2007 period. Excluding the effect of the settlement expense, net earnings would have increased slightly from the 2007 period, reflecting increased sales, realized gains on the sale of certain assets during the current period and a lower effective tax rate, partially offset by lower gross margins, planned increases in SG&A costs and certain claims expense. Basic earnings per share increased to $0.96, from $0.19 in the same 2007 period. Diluted earnings per share increased to $0.95, from $0.19 in the same 2007 period. The positive growth rate in earnings per share as compared with net earnings is attributed to the effect of 2007 and 2008 share repurchases.

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Nine Months 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):

	Nine Months
	Ended
	September 30,							Volume/						Foreign
	2008		2007		% Inc			Mix			Price			Exchange
Americas	$	1,764.9	$	1,682.9		5	%		4	%		—	%		1	%
Europe		882.3		752.0		17			6			—			11
Asia Pacific		443.7		389.1		14			7			(2	)		9
	$	3,090.9	$	2,824.0		9			5			—			4

Net Sales by Product Category

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

	Nine Months
	Ended
	September 30,							Volume/						Foreign
	2008		2007		% Inc (Dec)			Mix			Price			Exchange
Reconstructive
Knees	$	1,332.0	$	1,190.0		12	%		8	%		—	%		4	%
Hips		965.2		884.0		9			4			(1	)		6
Extremities		90.4		74.4		21			17			1			3
Dental		170.9		155.7		10			4			1			5
Total		2,558.5		2,304.1		11			7			(1	)		5
Trauma		164.4		150.0		10			4			1			5
Spine		158.8		141.5		12			7			3			2
OSP and other		209.2		228.4		(8	)		(12	)		—			4
Total	$	3,090.9	$	2,824.0		9			5			—			4

The NexGen Complete Knee Solution product line, including Gender Solutions Knee Femoral Implants, the NexGen LPS-Flex Knee, the NexGen CR-Flex Knee and the NexGen LCCK Revision Knee, led knee sales. In addition, the Zimmer Unicompartmental High-Flex Knee and the NexGen Rotating Hinge Knee exhibited strong growth.

The continued conversion to porous stems, including the Zimmer M/L Taper Stem, the Zimmer M/L Taper Stem with Kinectiv Technology, the CLS Spotorno Stem from the CLS Hip System, and the Alloclassic Zweymüller Hip Stem, led hip stem sales, but were partially offset by weaker sales of cemented stems. Trabecular Metal Acetabular Cups and Longevity and Durasul Highly Crosslinked Polyethylene Liners also had strong growth. The temporary suspension of marketing and distribution of the Durom Cup in the U.S. negatively impacted hip sales growth and we expect this trend to continue for the remainder of 2008. Additionally, with the lack of a hip resurfacing product within our U.S. hip portfolio, we expect to face a continuing challenge in hip sales growth with the adoption of hip resurfacing in the U.S. market.

The Bigliani/Flatow Complete Shoulder Solution and the Zimmer Trabecular Metal Reverse Shoulder System led extremities sales. Orthobiologicals and prosthetic implants, including strong growth of the Tapered Screw-Vent Implant System, led dental sales. Zimmer Periarticular Locking Plates and the I.T.S.T. Intertrochanteric/Subtrochanteric Fixation System led trauma sales. The Dynesys Dynamic Stabilization System and the Trinica Select Anterior Cervical Plate System led spine sales. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products, but these negative factors were partially offset by strong growth in PALACOS Bone Cement.

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Americas Net Sales

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

	Nine Months
	Ended
	September 30,
	2008		2007		% Inc (Dec)
Reconstructive
Knees	$	824.0	$	765.2		8	%
Hips		435.5		420.7		4
Extremities		65.3		53.1		23
Dental		87.5		88.4		(1	)
Total		1,412.3		1,327.4		6
Trauma		94.7		91.1		4
Spine		124.2		116.7		6
OSP and other		133.7		147.7		(9	)
Total	$	1,764.9	$	1,682.9		5

The NexGen Complete Knee Solution product line, including the Gender Solutions Knee Femoral Implants, NexGen LPS-Flex Knee, the NexGen LCCK Revision Knee and the NexGen CR-Flex Knee, led knee sales. The Zimmer Unicompartmental High-Flex Knee also made a strong contribution.

Growth in porous stems, including growth of the Zimmer M/L Taper Stem and the Zimmer M/L Taper Stem with Kinectiv Technology, led hip stem sales, but were partially offset by weaker sales of cemented stems. Trabecular Metal Acetabular Cups and Longevity Highly Crosslinked Polyethylene Liners also made a strong contribution. As noted above, the temporary suspension of marketing and distribution of the Durom Cup in the U.S. will continue to negatively impact hip sales and we also expect that the adoption of hip resurfacing in the U.S. market will continue to adversely affect our hip sales growth.

The Bigliani/Flatow Shoulder Solution and the Zimmer Trabecular Metal Reverse Shoulder System led extremities sales. Negative sales growth for our dental business reflects disruptions caused by the implementation of our enhanced business model and overall weakness in the U.S. economy. Zimmer Periarticular Plates and the I.T.S.T. Intertrochanteric/Subtrochanteric Fixation System led trauma sales. The Dynesys Dynamic Stabilization System and the Trinica Select Anterior Cervical Plate System led spine sales. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products, but these negative factors were partially offset by strong growth in PALACOS Bone Cement.

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Europe Net Sales

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

	Nine Months
	Ended
	September 30,
	2008		2007		% Inc (Dec)
Reconstructive
Knees	$	339.7	$	283.7		20	%
Hips		372.7		323.9		15
Extremities		19.8		16.4		21
Dental		58.7		44.9		31
Total		790.9		668.9		18
Trauma		35.4		28.8		23
Spine		27.7		21.0		32
OSP and other		28.3		33.3		(15	)
Total	$	882.3	$	752.0		17

Changes in foreign exchange rates positively affected knee sales by 12 percent and hip sales by 11 percent. The NexGen Complete Knee Solution product line, including the NexGen LPS-Flex Knee, the NexGen LCCK Revision Knee and the NexGen CR-Flex Knee, experienced positive sales growth in our Europe region.

Growth in porous stems, including the CLS Spotorno Stem, led hip stem sales. Longevity and Durasul Highly Crosslinked Polyethylene Liners, Trabecular Metal Acetabular Cups and the Allofit Hip Acetabular System also contributed to hip sales.

The Anatomical Shoulder System and the Coonrad/Morrey Total Elbow led extremities sales. The Tapered Screw-Vent Implant System led dental sales. The Cable-Ready Cable Grip System and the NCB Plating System led trauma sales, which were offset by weaker sales of our intramedullary fixation systems. The Dynesys Dynamic Stabilization System and the Optima ZS Spinal Fixation System led spine sales. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products, but these negative factors were partially offset by strong growth in Surgical Equipment products.

Asia Pacific Net Sales

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

	Nine Months
	Ended
	September 30,
	2008		2007		% Inc
Reconstructive
Knees	$	168.3	$	141.1		19	%
Hips		157.0		139.4		13
Extremities		5.3		4.9		9
Dental		24.7		22.4		10
Total		355.3		307.8		15
Trauma		34.3		30.1		14
Spine		6.9		3.8		80
OSP and other		47.2		47.4		—
Total	$	443.7	$	389.1		14

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Changes in foreign exchange rates positively affected knee sales by 9 percent and hip sales by 11 percent. Reported decreases in average selling prices negatively affected knee sales by 3 percent and hip sales by 4 percent. The NexGen Complete Knee Solution product line, the NexGen CR-Flex Knee and the NexGen LPS-Flex Knee led knee sales. The Gender Solutions Knee Femoral Implant in Australia also contributed to strong knee sales for the period.

The continued conversion to porous stems, including the Fiber Metal Taper Stem from the VerSys Hip System, the Alloclassic Zweymüller Hip System and the CLS Spotorno Stem, led hip stem sales. Sales of Longevity and Durasul Highly Crosslinked Polyethylene Liners, the Trilogy Acetabular System and Trabecular Metal Acetabular Cups also increased.

The Bigliani/Flatow Shoulder Solution and the Coonrad/Morrey Total Elbow led extremities sales. The Tapered Screw-Vent Implant System led dental sales. Trauma sales were led by the I.T.S.T. Intertrochanteric/Subtrochanteric Fixation System. The Dynesys Dynamic Stabilization System led spine sales. OSP sales were negatively affected by the patient care product recalls and related voluntary suspension of production of certain products.

Gross Profit

Gross profit as a percentage of net sales was 75.6 percent in the nine month period ended September 30, 2008, compared to 78.0 percent in the same 2007 period. The primary contributors to the decrease in gross profit margin were the increase in period over period hedge losses, idle plant costs at our Dover facility and an increase in excess inventory and obsolescence charges due to increased inventory levels. Under our hedging program, we temporarily record the effective portion of changes in fair value of derivatives which qualify as hedges of future cash flows in other comprehensive income, and then recognize the hedged item in cost of products sold when it affects earnings.

Operating Expenses

R&D as a percentage of net sales was 4.7 percent for the nine month period ended September 30, 2008, compared to 5.6 percent in the same 2007 period. R&D expense decreased to $146.8 million for the nine month period ended September 30, 2008, from $158.8 million in the same 2007 period, reflecting decreased spending on certain development, clinical and external research activities due to delays connected with our operational compliance with the DPA and CIA and implementation of our enhanced compliance and ethics initiatives. Many development and external research activities have now resumed and we expect R&D spending to return to our historical average of 5-6 percent of sales.

SG&A as a percentage of net sales was 41.0 percent for the nine month period ended September 30, 2008, compared to 38.5 percent in the same 2007 period. SG&A expense increased to $1,266.7 million for the nine month period ended September 30, 2008, from $1,088.5 million in the same 2007 period. Increased SG&A costs include monitor fees as well as consulting and legal fees associated with the global implementation of our enhanced compliance program. Such costs resulted in an approximate $47 million increase over the same prior year period. Expenses related to other operating initiatives also caused an increase in SG&A as a percentage of net sales. Such operating initiatives include the planned implementation of a global IT system, improving quality systems at our Dover facility, and a new manufacturing facility in Ireland. Additionally, selling costs increased by 90 basis points in the nine month period ended September 30, 2008 compared to the same 2007 period. This increase was caused by increased selling costs as a result of the ORTHOsoft acquisition, an increase in the headcount of our sales force in certain locations, increased commission incentives to sell certain key products and a change in the mix of commissions earned as a result of lower OSP sales. In a partial offset to these unfavorable items, SG&A expense related to share-based compensation was favorable by 20 basis points relative to the same prior year period due to a favorable adjustment as we recalculated estimated payouts on our three year performance-based equity incentive program taking into account recent operating performance.

Certain claims expense of $47.5 million is a provision for estimated claims of Durom Cup patients undergoing revision surgeries within specified times. Acquisition, integration and other expenses for the nine month period ended September 30, 2008 were $25.4 million, compared to $9.5 million in the same 2007 period. These expenses pertain to current and prior period acquisitions, including facility consolidation costs, legal fees and retention and termination payments.

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Operating Profit, Income Taxes and Net Earnings

Operating profit for the nine month period ended September 30, 2008 increased 10 percent to $850.3 million, from $775.7 million in the same 2007 period. The increase in operating profit is due to the non-recurring settlement expense of $169.5 million that was recorded in the same 2007 period. Excluding the impact of the settlement expense in the prior year, operating profit for the nine month period ended September 30, 2008 would have been unfavorable compared to the same 2007 period as a result of lower gross margins, significant but temporary increases in SG&A costs attributable to the implementation of our enhanced compliance program and certain claims expense of $47.5 million.

Interest and other income for the nine month period ended September 30, 2008 increased to $36.0 million, from $2.9 million in the same 2007 period. Interest and other income for the nine month period ended September 30, 2008 includes a realized gain of $38.8 million related to the sale of certain marketable securities, partially offset by increased interest expense as a result of an increase in outstanding long-term debt during the period.

The effective tax rate on earnings before income taxes and minority interest decreased to 23.1 percent for the nine month period ended September 30, 2008, from 34.5 percent in the same 2007 period. The effective tax rate for the 2007 period reflects the effect of the $169.5 million settlement expense, for which no tax benefit had previously been recognized. In the third quarter of 2008, we recorded an estimated tax benefit of approximately $30.8 million, resulting in a decrease of 3.5 percent to the current period effective tax rate. The effective tax rate for the nine month period ended September 30, 2008 was further reduced as a result of increased profits in lower tax jurisdictions.

Net earnings increased to $681.1 million for the nine month period ended September 30, 2008, compared to $509.4 million in the same 2007 period. The increase is primarily due to the impact of the $169.5 million settlement expense recorded in the 2007 period. Excluding the effect of the settlement expense, net earnings would have increased slightly from the 2007 period, reflecting increased sales, realized gains on the sale of certain assets during the current period and a lower effective tax rate, partially offset by lower gross margins, planned increases in SG&A costs and certain claims expense. Basic earnings per share increased to $2.98, from $2.16 in the same 2007 period. Diluted earnings per share increased to $2.97, from $2.14 in the same 2007 period. The higher growth rate in earnings per share as compared with net earnings is attributed to the effect of 2008 and 2007 share repurchases.

Liquidity and Capital Resources

Cash flows provided by operating activities were $831.2 million for the nine month period ended September 30, 2008, compared to $662.5 million in the same 2007 period. The principal source of cash was net earnings of $681.1 million. Non-cash items included in net earnings accounted for another $207.6 million of operating cash. All other items of operating cash flows reflect a use of $57.5 million of cash, primarily related to pension funding and working capital investments to support sales growth. Operating cash flows continued to be positively affected by delayed payments related to various contractual arrangements with healthcare professionals or institutions. In the nine month period ended September 30, 2008, we estimate this delay had a positive effect on operating cash flows of approximately $52 million.

We are currently in the process of evaluating alternative means of meeting certain of our contractual obligations with healthcare professionals and institutions. We anticipate making, and in certain cases have agreed to make, significant lump-sum payments to certain healthcare professionals or institutions in place of future royalty payments that otherwise would have been due under the terms of the original contractual arrangement. Such lump-sum payments are based upon a third party fair market valuation of the current net present value of the contractual arrangement. We expect to make significant payments over the next six months. Management believes that cash flows from operations will be sufficient to meet these cash needs.

We continue to focus on working capital management. At September 30, 2008, we had 59 days of sales outstanding in trade accounts receivable, which is similar to June 30, 2008 and favorable to September 30, 2007 by 1 day. At September 30, 2008, we had 321 days of inventory on hand, favorable to September 30, 2007 by 9 days and unfavorable to June 30, 2008 by 46 days. The third quarter increase in 2008 over second quarter reflects the pattern of seasonality in our reconstructive business.

28

Cash flows used in investing activities were $339.4 million for the nine month period ended September 30, 2008, compared to $332.1 million used in investing in the same 2007 period. Additions to instruments increased during the nine month period ended September 30, 2008 due to an increase in instrument deployments related to new product launches. Additions to other property, plant and equipment increased compared to the same 2007 period, reflecting investments in our planned infrastructure initiatives. Also included in investing activities for the nine month period ended September 30, 2008 was $54.9 million in proceeds received from the sale of equity securities. Cash payments related to acquisitions during the nine month period ended September 30, 2008 were $18.6 million, compared to $108.1 million in the same 2007 period. Cash payments related to acquisitions during the 2008 period relate to investments in the expansion of our global distribution network.

Cash flows used in financing activities were $408.2 million for the nine month period ended September 30, 2008, compared to $288.3 million used in financing activities in the same 2007 period. We borrowed approximately $220.0 million under our credit facilities during the nine month period ended September 30, 2008 to repurchase shares of our common stock. Our current share repurchase program can be financed in whole or in part with third party debt. For the nine months ended September 30, 2008, we purchased 9.6 million common shares for a total of $688.9 million, including commissions, under our stock repurchase programs authorized by our Board of Directors, compared to $460.6 million in the same 2007 period. Proceeds from our stock compensation plans have decreased in the nine month period ended September 30, 2008, compared to the same 2007 period due to a decrease in employee stock option exercises.

We have a five year $1,350 million revolving, multi-currency, senior unsecured credit facility maturing November 30, 2012 (the “Senior Credit Facility”). We had $331.1 million outstanding under the Senior Credit Facility at September 30, 2008, and, therefore, our available borrowings were $1,018.9 million. The Senior Credit Facility contains provisions whereby borrowings may be increased to $1,750 million and we may request that the maturity date be extended for two additional one-year periods.

We and certain of our wholly owned foreign subsidiaries are the borrowers under the Senior Credit Facility. Borrowings under the Senior Credit Facility are used for general corporate purposes and bear interest at a LIBOR-based rate plus an applicable margin determined by reference to our senior unsecured long-term credit rating and the amounts drawn under the Senior Credit Facility, at an alternate base rate, or at a fixed rate determined through a competitive bid process. The Senior Credit 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 we fall below an investment grade credit rating, additional restrictions would result, including restrictions on investments, payment of dividends and stock repurchases. We were in compliance with all covenants under the Senior Credit Facility as of September 30, 2008. Commitments under the Senior Credit Facility are subject to certain fees, including a facility fee and a utilization fee. The Senior Credit Facility is rated A- by Standard & Poor’s Ratings Services and is not rated by Moody’s Investors’ Service, Inc. Notwithstanding recent interruptions in global credit markets, as of the date of this report our access to our Senior Credit Facility has not been impaired.

We also have available uncommitted credit facilities totaling $72.7 million.

We may use excess cash or further borrow against our Senior Credit Facility to repurchase additional common stock under the $1.25 billion program which expires December 31, 2009.

In October 2008, we completed our acquisition of Abbott Spine for a purchase price of approximately $360 million in cash. The acquisition was funded by approximately $250 million of cash on-hand and approximately $110 million from new borrowings under the Senior Credit Facility. Each of the lenders under the Senior Credit Facility funded its portion of the new borrowings in accordance with its commitment percentage.

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

29

Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133” (SFAS No. 161). SFAS No. 161 will require increased disclosure of our derivative and hedging activities, including how derivative and hedging activities affect our consolidated statement of earnings, balance sheet and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. The adoption of SFAS No. 161 will increase the required disclosure of our derivative and hedging activities, but will not have any impact on our financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)), which is a revision of SFAS No. 141. SFAS No. 141(R) will change the way in which we account for business combinations. The statement introduces new purchase accounting concepts, expands the use of fair value accounting related to business combinations and changes the subsequent period accounting for certain acquired assets and liabilities, among other things. SFAS No. 141(R) will be applied prospectively on business combinations with acquisition dates in fiscal years beginning on or after December 15, 2008, and therefore, this statement will not affect the accounting for business combinations that are completed prior to the effective date. For deferred tax assets and income tax reserves recorded as part of business combinations, these assets and liabilities will be accounted for under SFAS No. 109 and FIN 48 after the effective date of SFAS No. 141(R), regardless of the acquisition date. Therefore, if a remeasurement of those assets and liabilities is warranted after the effective date of this statement, it will not be reflected as an adjustment to purchase accounting and may affect our income tax expense in the period in which the remeasurement occurs.

In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51” (SFAS No. 160). SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. We do not expect that the adoption of SFAS No. 160 will have a material impact on our consolidated financial statements or results of operations.

Critical Accounting Policies

Except as set forth below, there were no changes in the nine month period ended September 30, 2008 to the application of critical accounting estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2007.

Commitments and Contingencies — Accruals for product liability and other claims are established with internal and external legal counsel based on current information and historical settlement information for claims, related fees and for claims incurred but not reported. We use an actuarial model to assist management in determining an appropriate level of accruals for product liability claims. Historical patterns of claim loss development over time are statistically analyzed to arrive at factors which are then applied to loss estimates in the actuarial model. During the three month period ended September 30, 2008, in addition to our general product liability estimates, we recorded a provision for certain claims of $47.5 million representing management’s estimate of liability to Durom Cup patients undergoing revisions associated with surgeries occurring before July 2008 and within two years of the original surgery date. These parameters are consistent with our data which indicates that cup loosenings associated with surgical technique are most likely to occur within that time period. Any claims received outside of these defined parameters will be managed in the normal course and reflected in our standard quarterly product liability accruals.

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Forward-Looking Statements

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

•  competition;

•  pricing pressures;

•  dependence on new product development, technological advances and innovation;

•  reductions in reimbursement levels by third-party payors and cost containment efforts of health care purchasing organizations;

•  our compliance with the DPA through March 2009 and the CIA through 2012;

•  the costs of defending or resolving lawsuits, investigations or other proceedings resulting from our September 2007 settlement with the United States government;

•  the impact of our enhanced healthcare compliance global initiatives and business practices on our relationships with customers and consultants, our market share and our overall financial performance;

•  the success of our quality initiatives;

•  the outcome of the informal investigation by the U.S. Securities and Exchange Commission into Foreign Corrupt Practices Act matters announced in October 2007;

•  challenges relating to changes in and compliance with governmental laws and regulations affecting our U.S. and international businesses, including regulations of the U.S. Food and Drug Administration and foreign government regulators and tax obligations and risks;

•  retention of our independent agents and distributors;

•  changes in customer demand for our products and services caused by demographic changes or other factors;

•  changes in general domestic and international economic conditions, including interest rate and currency exchange rate fluctuations;

•  our ability to protect proprietary technology and other intellectual property and claims for infringement of the intellectual property rights of third parties;

•  product liability claims;

•  the impact of our recent temporary, voluntary suspension of U.S. marketing and distribution of our Durom Cup hip product on our revenues, our customer relationships, our entry into the U.S. hip resurfacing market and on product liability claims;

•  the costs of defending or resolving putative class action securities litigation;

•  the possible disruptive effect of additional strategic acquisitions and our ability to successfully integrate acquired companies;

•  our ability to form strategic alliances with other orthopaedic and biotechnology companies;

•  changes in prices of raw materials and products and our ability to control costs and expenses;

•  changes in general industry and market conditions, including domestic and international growth rates;

•  our dependence on a limited number of suppliers for key raw materials and outsourced activities; and

•  shifts in our product category sales mix or our regional sales mix away from products or geographic regions that generate higher operating margins.

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We discuss these and other important risks and uncertainties that may affect our future operations in Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K filed February 29, 2008. We updated that discussion in Part II, Item 1A — Risk Factors in our Quarterly Reports on Form 10-Q filed May 12, 2008 and August 5, 2008 and we further update it in Part II, Item 1A — Risk Factors in this report. Readers of this report are cautioned not to place undue reliance on these forward-looking statements. While we believe 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 our Annual Report on Form 10-K for the year ended December 31, 2007.

Item 4.   Controls and Procedures

We have established disclosure controls and procedures and internal controls over financial reporting to provide reasonable assurance that material information relating to us, including our consolidated subsidiaries, is made known on a timely basis to management and the Board of Directors. However, no control system, no matter how well designed and operated, can provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective.

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) that occurred during the quarter ended September 30, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 1A.   Risk Factors

Except as set forth below or in a previously filed Quarterly Report on Form 10-Q, there have been no material changes from the risk factors disclosed in Part I — Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.

The following risk factor should be added to “RISKS RELATED TO OUR BUSINESS” and updates the risk factors set forth in our previously filed Quarterly Reports on Form 10-Q for the periods ended March 31, 2008 and June 30, 2008:

Our recent temporary suspension of the U.S. marketing and distribution of one of our hip products has adversely affected sales, resulted in claims and may adversely affect our ability to compete in the growing hip resurfacing market in the U.S.

In July 2008, we announced that we temporarily suspended the marketing and distribution of our Durom Acetabular Component (Durom Cup) in the U.S. We believe this action adversely affected our hip product sales in the U.S. in the third quarter of 2008. Although we resumed U.S. marketing and distribution in August and more than 50 percent of the U.S. surgeons who were active users of the Durom Cup at the time of the suspension have completed the requisite surgical skills training on the product, we expect this trend will continue to have a negative impact through at least the end of 2008.

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Following our announcement, product liability lawsuits and other claims have been asserted against us by Durom Cup patients undergoing revision surgeries, and we expect additional similar claims will be asserted. These claims could have a material adverse affect on our business and reputation. We recorded a provision of $47.5 million in the third quarter of 2008, representing management’s estimate of these Durom Cup-related claims. The provision is limited to revisions within two years of an original surgery that occurred prior to July 2008. The assumptions management used to determine the amount of this provision may prove inaccurate and the claims and related costs that we ultimately may incur may exceed the provision.

We estimate that we will lose approximately $20-$30 million in hip product sales during 2008, in large part, as a consequence of the events involving the Durom Cup. In addition, we expect that our entry into the growing U.S. hip resurfacing market may be hindered or delayed as the Durom Cup has been integral to our plans for entry into that market.

The following risk factor under “RISKS RELATED TO OUR BUSINESS” has been revised as follows:

The implementation of our enhanced global compliance program is requiring us to devote substantial resources, is disruptive to normal business activities and may place us at a competitive disadvantage.

We are devoting substantial resources to meet our obligations under the DPA and CIA. Since entering into those agreements, we have worked to implement an enhanced Corporate Compliance Program applicable in most respects to all of our businesses on a global basis. Successful implementation of this enhanced program requires the full cooperation of our employees, distributors and sales agents and the healthcare professionals with whom they interact. These efforts not only involve expense, but also require management and other key employees to focus extensively on these matters, preventing them from devoting as much time as they otherwise would to other business matters.

In addition, implementation of our enhanced global compliance program may disrupt research and development activities, delay new product introductions and adversely affect our interactions with healthcare professionals. If our competitors do not make similar enhancements to their compliance programs, this may place us at a competitive disadvantage and adversely affect our results of operations.

The following two risk factors should be added to “RISKS RELATED TO OUR BUSINESS”:

We believe we have lost market share as a result of recent events. If we are not able to recover or grow our market share, our operating results could be materially adversely affected.

As a result of recent events, including our temporary suspension of U.S. marketing and distribution of the Durom Cup, our voluntary recall and suspension of production of certain OSP patient care products, and the implementation of our enhanced global compliance program, we believe we suffered customer losses during the three month period ended September 30, 2008. We estimate, based on information currently available to us, that these customer losses reduced our base of knee and hip revenues by approximately 3 percent. We may not be able to recapture market share lost due to these events and we may continue to lose customers due to these factors in the future, which could have a material adverse effect on our results of operations.

We are subject to a putative stockholder class action lawsuit that could be costly to defend and distracting to management.

We and two of our executive officers have been named as defendants in a putative stockholder class action lawsuit brought on behalf of persons who purchased our common stock between January 29, 2008 and July 22, 2008. The lawsuit alleges that we and two of our executive officers engaged in violations of the Securities Exchange Act of 1934, as amended, by issuing false and misleading statements concerning our business and financial results during the relevant time period. We believe this lawsuit is without merit, and we intend to defend it vigorously. We may incur significant expenses associated with the defense of this lawsuit, however, and the necessary participation of these executive officers could detract from their ability to devote their full time and attention to our business operations.

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Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes repurchases of common stock settled during the three month period ended September 30, 2008:

					Total Number of		Approximate
					Shares Purchased		Dollar Value of
					as Part of		Shares that May
	Total Number				Publicly		Yet Be Purchased
	of Shares		Average Price		Announced Plans		Under Plans
	Purchased		Paid per Share		or Programs*		or Programs
July 2008		620,400	$	67.45		28,777,400	$	1,189,240,073
August 2008		100,000		67.77		28,877,400		1,182,463,563
September 2008		—		—		28,877,400		1,182,463,563
Total		720,400	$	67.50		28,877,400	$	1,182,463,563

* Includes repurchases made under expired programs as well as the program announced in April 2008 authorizing $1.25 billion of repurchases through December 31, 2009.

Item 5.   Other Information

During the period covered by this report, the Audit Committee of our Board of Directors was not asked to, and did not, approve the engagement of PricewaterhouseCoopers LLP, our independent registered public accounting firm, to perform any non-audit services. 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:

2	.1	Stock Purchase Agreement dated as of September 4, 2008 (incorporated by reference to Exhibit 2.1 to the Registrants’ Current Report on Form 8-K filed September 4, 2008).
10	.1	Form of Indemnification Agreement with Non-Employee Directors and Officers (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 31, 2008)
10	.2*	Change in Control Severance Agreement with Mark C. Throdahl
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

*  Indicates management contract or compensatory plan or arrangement

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SIGNATURES

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

ZIMMER HOLDINGS, INC.

(Registrant)

By:  /s/  James T. Crines

James T. Crines

Executive Vice President, Finance and

Chief Financial Officer

Date: November 7, 2008

By:  /s/  Derek M. Davis

Derek M. Davis

Vice President, Finance and Corporate

Controller and Chief Accounting Officer

Date: November 7, 2008

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EX-10.2

Exhibit 10.2

CHANGE IN CONTROL SEVERANCE AGREEMENT

THIS AGREEMENT, dated as of May 19, 2008, is made by and between ZIMMER HOLDINGS, INC., a Delaware corporation (the “Company”), and Mark C. Throdahl (the “Executive”). The capitalized words and terms used throughout this Agreement are defined in Article XIII.

Recitals

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

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

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

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

Agreement

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

ARTICLE I

Term of Agreement

This Agreement will commence on the date stated above and will continue in effect through December 31, 2009. Beginning on January 1, 2010, and each subsequent January 1, the term of this Agreement will automatically be extended for one additional year, unless either party gives the other party written notice not to extend this Agreement at least 30 days before the extension would otherwise become effective or unless a Change in Control occurs. If a Change in Control occurs during the term of this Agreement, this Agreement will continue in effect for a period of 24 months from the end of the month in which the Change in Control occurs. Notwithstanding the foregoing provisions of this Article, this Agreement will terminate on the Executive’s Retirement Date.

ARTICLE II

Compensation other than Severance Payments

Section 2.01.  Disability Benefits.  Following a Change in Control and during the term of this Agreement, during any period that the Executive fails to perform the Executive’s full-time duties with the Company as a result of Disability, the Executive will receive short-term and long-term disability benefits as provided under short-term and long-term disability plans having terms no less favorable than 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 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 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 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, in accordance with Section 3.04, a lump sum severance payment, in cash, equal to two (or, if less, the number of years, including fractions, from the Date of Termination until the Executive reaches his Retirement Date), times the sum of (1) the higher of the Executive’s annual base salary in effect immediately prior to the event or circumstance upon which the Notice of Termination is based or in effect immediately prior to the Change in Control, and (2) if Severance Payments are triggered under Section 3.01(a), 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, or, if Severance Payments are triggered under Section 3.01(b), 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. 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

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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, in accordance with Section 3.04, a lump sum amount, in cash, equal to the sum of (1) any incentive compensation that has been allocated or awarded to the Executive for a completed calendar year or other measuring period preceding the Date of Termination (to the extent not payable pursuant to Section 2.02), and (2) a pro rata portion (based on elapsed time) to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the current calendar year or other measuring period under the Incentive Plan, the Award Plan, or any other compensation or incentive plans of the Company, calculated as to each such plan using the Executive’s annual target percentage under that plan for that year or other measuring period and as if all conditions for receiving that target award had been met.

(c) Options and Restricted Shares.  All outstanding Options will become immediately vested and exercisable (to the extent not yet vested and exercisable as of the Date of 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. Notwithstanding the foregoing, options and restricted Shares remain subject to any forfeiture or clawback claims under the applicable option plan or award agreement.

(d) Welfare Benefits.  Except as otherwise provided in this Section 3.02(d), for a 24-month period after the Date of Termination, the Company will arrange to provide the Executive with life insurance coverage substantially similar to that which the Executive is receiving from the Company immediately prior to the Notice of Termination (without giving effect to any reduction in that coverage subsequent to a Change in Control). Life insurance coverage otherwise receivable by the Executive pursuant to this Section 3.02(d) will be reduced to the extent comparable coverage is actually received by or made available to the Executive without greater cost to him than as provided by the Company during the 24-month period following the Executive’s termination of employment (and the Executive will report to the Company any such coverage 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(d) is not available from the Company’s group insurance carrier, cannot be procured from another carrier, and cannot be provided on a self-insured basis without adverse tax consequences to the Executive or his death beneficiary, then, in lieu of continued life insurance coverage, the Company will pay the Executive, in accordance with Section 3.04, a lump sum payment, in cash, equal to 24 times the full monthly premium payable to the Company’s group insurance carrier for comparable coverage for an executive employee under the Company’s group life insurance plan then in effect.

The Company will offer the Executive and any eligible family members the opportunity to elect to continue medical and dental coverage pursuant to COBRA. The Executive will be responsible for paying the required monthly premium for that coverage, but the Company will pay the Executive, in accordance with Section 3.04, a lump sum cash stipend equal to 24 times the monthly COBRA premium then charged to qualified beneficiaries for the same level of health and dental coverage the Executive had in effect immediately prior to his termination, and the Executive may, but is not required to, choose to use the stipend for the payment of COBRA premiums for any COBRA coverage that the Executive or eligible family members may elect. The Company will pay the stipend to the Executive whether or not the Executive or any eligible family member elects COBRA coverage, whether or not the Executive continues COBRA coverage for the maximum period permitted by law, and whether or not the Executive receives medical or dental coverage from another employer while the Executive is receiving COBRA continuation coverage. Payment of the stipend will not in any way extend or modify the Executive’s continuation coverage rights under COBRA or any similar continuation coverage law.

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(e) Matching and Fixed 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, in accordance with Section 3.04, a lump sum amount equal to the value of the unvested portion, if any, of the employer matching and fixed contributions (and attributable earnings) credited to the Executive under the Savings Plan.

(f) Outplacement Services.  For a period not to exceed six (6) months following the Date of Termination, the Company will provide the Executive with reasonable outplacement services consistent with past practices of the Company prior to the Change in Control or, if no past practice has been established prior to the Change in Control, consistent with the prevailing practice in the medical device manufacturing industry.

Section 3.03.  Gross-Up Payment.

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

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

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

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

(e) Notwithstanding the preceding provisions of this Section 3.03, the Company will not have any obligation to make the Gross-Up Payment unless the value of the Total Payments exceeds 110% of the maximum amount of parachute payments that could be paid to the Executive without any imposition of golden parachute excise taxes

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under Code sections 280G and 4999 (the “110% Amount”). In the event the value of the Total Payments does not exceed the 110% Amount, the value of the Total Payments will be reduced to the extent necessary so that, within the meaning of Code section 280G(b)(2)(A)(ii), the aggregate present value of the payments in the nature of compensation to (or for the benefit of) the Executive that are contingent on a Change in Control (with a Change in Control for this purpose being defined in terms of a “change” described in Code section 280G(b)(2)(A)(i) or (ii)), do not exceed 2.999 multiplied by the Base Amount. For this purpose, cash Severance Payments will be reduced first (if necessary, to zero), and all other, non-cash Severance Payments will be reduced next (if necessary, to zero). For purposes of the limitation described in the preceding sentence, the following will not be taken into account: (1) any portion of the Total Payments the receipt or enjoyment of which the Executive effectively waived in writing prior to the Date of Termination, and (2) any portion of the Total Payments that, in the opinion of the Accounting Firm, does not constitute a “parachute payment” within the meaning of Code section 280G(b)(2).

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

(g) Notwithstanding the foregoing, any payment under this Section 3.03 shall be made by March 15 of the year following the Executive’s Date of Termination.

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

(a) Subject to Section 3.04(d), no later than the fifth business day following the Date of Termination, the Company will pay to the Executive an estimate, as determined by the Company in good faith, of 90% of the minimum amount of the payments under Sections 3.02 and 3.03 to which the Executive is clearly entitled.

(b) Subject to Section 3.04(d), the Company will pay to the Executive the remainder of the payments due him under Sections 3.02 and 3.03 (together with interest at the rate provided in Code section 1274(b)(2)(B)) not later than the 30th business day after the Date of Termination.

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

(d) Notwithstanding any of the foregoing, if, as of the date of the Executive’s separation from service, the Executive is a “specified employee” under the Section 409A Standards, any and all payments under this Agreement that constitute deferred compensation under the Section 409A Standards shall be suspended until, and will be payable on, the date that is six (6) months after the Executive’s separation from service (or, if earlier, the date the Executive dies after separation from service).

Section 3.05.  Attorneys Fees and Expenses.  To the extent permissible under the Section 409A Standards, if the Executive finally prevails with respect to any bona fide, good faith dispute between the Executive and the Company regarding the interpretation, terms, validity or enforcement of this Agreement (including any dispute as to the amount of any payment due under this Agreement), the Company will pay or reimburse the Executive for all reasonable attorneys fees and expenses incurred by the Executive in connection with that dispute pursuant to the terms of this paragraph. Payment or reimbursement of those fees and expenses will be made within fifteen (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, but the Executive may not submit such a request until the dispute has been finally resolved by a legally binding settlement or by an order or judgment that is not subject to appeal or with respect to which all appeals have been exhausted. Any payment pursuant to this paragraph will be made no later than the end of the calendar year following the calendar year in which the dispute is finally resolved by a legally binding settlement or nonappealable judgment or order.

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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 pursuant to the preceding sentence shall be made within fifteen (15) business days after the delivery of the Executive’s written request for payment, accompanied by such evidence of fees and expenses incurred as the Company reasonably may require, but in no case later than the end of the calendar year following the calendar year in which the audit is completed or there is a final and nonappealable settlement or other resolution of the matter.

ARTICLE IV

Termination of Employment

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

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

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(d)) 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 with the Company; provided, however, that if the Executive has an existing noncompetition agreement with the Company, the Company, rather than entering into a new noncompetition agreement with the Executive, may instead, as a condition to entering into this agreement, require that the Executive acknowledge and affirm his continuing obligations under such existing noncompetition agreement and re-affirm his agreement to honor the obligations as set forth in that document.

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

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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 A. 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.

(a) In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no succession had occurred.

(b) Subject to Section 7.01(c), failure of the Company to obtain such an assumption and agreement under Section 7.01(a) 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 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.

(c) Payment of benefits under Section 7.01(b) shall be made on the deemed Date of Termination if, and only if, the succession resulted from a transaction that satisfies the definition of change in control under Section 409A of the Code. If the transaction does not satisfy the definition of change in control under Section 409A, payment of benefits due under Section 7.01(b) shall be made within 30 days of the Executive’s actual date of termination of employment, subject to the provisions of Section 3.04(d). No interest or earnings shall be paid due to any delay in payment under this Section 7.01(c).

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.

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ARTICLE VIII

Notices

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

To the Company:

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

To the Executive:

Mark C. Throdahl
38 Carteret Road
Allendale, NJ 07401

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. Except as provided in the following two sentences, the validity, interpretation, construction, and performance of this Agreement will be governed by the laws of the State of Indiana, to the extent not preempted by federal law. This Agreement will at all times be effected, construed, interpreted, and applied in a manner consistent with the Section 409A Standards, and in resolving any uncertainty as to the meaning or intention of any provision of this Agreement, the interpretation that will prevail is the interpretation that causes the Agreement to comply with the Section 409A Standards. In addition, to the extent that any terms of this Agreement would subject the Executive to gross income inclusion, interest, or additional tax pursuant to Code Section 409A, those terms are to that extent superseded by the applicable Section 409A Standards. All references to sections of the Exchange Act or the Code will be deemed also to refer to any successor provisions to those sections. Any payments provided for under this Agreement will be paid net of any applicable withholding required under federal, state, or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under Articles III, IV, and VI will survive the expiration of the term of this Agreement.

ARTICLE X

Validity

The invalidity or unenforceability of any provision or this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect.

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ARTICLE XI

Counterparts

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

ARTICLE XII

Settlement of Disputes; Arbitration

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

(b) “Award Plan” means any of the Zimmer Holdings, Inc. 2006 Stock Incentive Plan, the Zimmer Holdings, Inc. 2001 Stock Incentive Plan or the Zimmer Holdings, Inc. TeamShare Stock Option Plan.

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

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

(e) [RESERVED]

(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.

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

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

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

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

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

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

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

(j) “Code” means the Internal Revenue Code of 1986, as amended from time to time, and interpretative rules and regulations.

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

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

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

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

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

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

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(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 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 pension (including, without limitation, to the extent applicable to the Executive, 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.

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

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

(t) “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

(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) age 65, or (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) [RESERVED]

(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.

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(bb) “Section 409A Standards” means the standards for nonqualified deferred compensation plans established by Code Section 409A.

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

(dd) “Shares” means shares of the common stock, $0.01 par value, of the Company.

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

EXECUTIVE
	ZIMMER HOLDINGS, INC.
/s/  Mark C. Throdahl	By:	/s/  Chad F. Phipps
Mark C. Throdahl Group President, Global Businesses		Chad F. Phipps Senior Vice President, General Counsel and Secretary

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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, David C. Dvorak, 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; and

(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.

/s/  David C. Dvorak

David C. Dvorak

President and Chief Executive Officer

Date: November 7, 2008

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, James T. Crines, 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; and

(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.

/s/  James T. Crines

James T. Crines

Executive Vice President, Finance

and Chief Financial Officer

Date: November 7, 2008

EX-32

Exhibit 32

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

In connection with the Quarterly Report of Zimmer Holdings, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2008 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/  David C. Dvorak

David C. Dvorak

President and Chief Executive Officer

November 7, 2008

/s/  James T. Crines

James T. Crines

Executive Vice President, Finance

and Chief Financial Officer

November 7, 2008